M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Working Group for Chapter 6 – Company Law Bilateral screening: Chapter 6 PRESENTATION OF MONTENEGRO Brussels, 22 November 2012

M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Working Group for Chapter 6 – Company Law Poglavlje 25 Nauka i istraživanje Bilateral screening: Chapter 6 Presentation of Montenegro Brussels, 22 November 2012 Chapter 6: Company Law

Chapter 6: Company Law Statutory Audits Poglavlje 25 Nauka i istraživanje Chapter 6: Company Law Danko Dragović Advisor, Ministry of Finance M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union

M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Celex: 32006L0043 Relevant acquis Chapter 6: Company Law Chapter 6: Company Law

M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Poglavlje 25 Nauka i istraživanje Law on Accounting and Auditing Law on Amendments to the Law on Accounting and Auditing was adopted in July Since the changes in 2008 the step has been made towards harmonization of accounting and auditing regulatory framework with EU legislation. Following changes have been made concerning auditing: ‐ the conditions for granting and revoking a license of an authorized auditor have been defined more precisely ‐the deadline for deciding on application for issuing a work permit has been shortened ‐changes in management and ownership structures of the audit firms have been made ‐inspection tasks were entrusted to the Tax Administration, and the range of penalty provisions was expanded Chapter 6: Company Law Chapter 6: Company Law

M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Poglavlje 25 Nauka i istraživanje Auditing of financial statements This Law clearly defines the conditions for conducting audits (Article 13), the audit firm (Article 15), as well as for the manner of conducting audits (Article 16). In the part relating to Breach of professional conduct rules the conditions under which the license of an authorized auditor can be revoked have been determined (Article 17). Full compliance with the conditions of the Directive 2006/43, which prescribe the manner of granting work approval to authorized auditors and audit firms, mutual recognition and withdrawal of approval is achieved through these articles of the Law. Chapter 6: Company Law Chapter 6: Company Law

M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Poglavlje 25 Nauka i istraživanje Education and Practical Training The Institute of Certified Accountants (ISRCG) is responsible for certifying accountants. The Ministry of Finance as the competent authority delegated powers to the Institute through The Decree on entrusting of affairs of the public administration bodies competent for accounting and auditing. The holder of the title "Certified Accountant" gains the right to become the auditor after fulfillment of certain conditions. The main requirement relates to practical training, i.e. at least three years spent performing audit activities under the supervision of an authorized auditor. Therefore, each auditor must pass a certification process and, according to the current legislation, the license can not be acquired only through long-term practical experience. In addition to practical experience, continuing education enables maintaining the quality of certified accountants’ work. Chapter 6: Company Law Chapter 6: Company Law

M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Poglavlje 25 Nauka i istraživanje Registration - Public Register The Ministry of Finance has established a register of auditors and a register of audit firms. Registers are published on the official website The data in the register of authorized auditors refer to the information about number and date of the decision on issuing (and revoking) license, its serial number, the name of the audit firm where the auditor is engaged and information about its activities. The data in the register of auditing firms relate largely to the organizational and ownership structure of the company, as well as to the information about the engaged auditor / auditors. Concerning the registration, Article 16l of the Law on Accounting and Auditing prescribes: “Authorized auditors and auditing firms shall be obliged to inform the Competent Authority on changes of information entered in the register of authorized auditors and register of auditing firms, no later than seven days as of the day the change occurred.” Chapter 6: Company Law Chapter 6: Company Law

M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 6: Company Law Chapter 6: Company Law It is regulated by the Law on Accounting and Auditing that financial statements shall be “submitted only once and to only one institution." Financial statements and the auditor's reports shall be submitted to the Tax Administration. Tax Administration as well as regulatory agencies to which public interest entities also submit financial statements have access to all audit reports. Tax Administration inspector has the authority to verify the statements, therefore their objectivity and independence. In the part relating to the penalty provisions penalties for certain violations are defined. Inspector of Tax Administration is required to check whether the audit report was submitted (Article 18, paragraph 3), and the Ministry of Finance has the right to revoke the operating license of the audit firm if their work violates the provisions of the Act and if they fail to remove "the violation" within the prescribed period (Article 18b ).

M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Public interest companies Chapter 6: Company Law Chapter 6: Company Law Companies that are usually classified as public interest entities are an exception to the rule "once and to only one institution” when submitting financial statements, as they are also obliged to report to the regulatory agencies: ‐banks shall submit their reports to the Central Bank -a joint stock company and other legal entity issuing securities and other financial instruments traded on an organized market, as well as a parent legal entity obliged to compile consolidated financial statements, shall be obliged to compile and submit to the Securities Commission in paper and electronic form the annual and quarterly financial statements ‐insurance companies shall submit their financial statements to the Insurance Supervision Agency. Article 12 of the Law on Accounting and Auditing states : 1) The audit of financial statements shall be obligatory for joint stock companies, large legal entities, and parent legal entities that jointly with the subsidiary legal entities meet the requirements to be classified in the large legal entity category. 2) The audit of financial statements shall also be obligatory for insurance companies, banks, and other financial institutions, the Central Depositary Agency (CDA), authorized participants on the securities markets, investment funds, and other collective investment schemes..

M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Poglavlje 25 Nauka i istraživanje AUDITING BOARD Under the current law, a large legal entities must have the Auditing Board of at least three members. The auditing board shall: - monitor the financial reporting procedure; - monitor the effectiveness of internal control of the company and internal audit; - monitor statutory audit of annual and consolidated financial statements; - monitor the independence of engaged authorised auditors or the auditing firms carrying out audits - give recommendations to the general shareholders meeting of the company or to the founders with regard to the selection of the authorised auditor or auditing firm; - discuss plans and annual report of the internal control, as well as other issues related to financial reporting and audit. In this part of the Law there is partial conformity with the Directive. Chapter 6: Company Law Chapter 6: Company Law

M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Poglavlje 25 Nauka i istraživanje Public oversight -Public oversight system -The need for public oversight body -Quality control -Operational body -Possible practical problems -The council for accounting and auditing - establishment - composition and the term of office - scope of operation - administrative-technical affairs Chapter 6: Company Law Chapter 6: Company Law

M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Poglavlje 25 Nauka i istraživanje Continued reforms Chapter 6: Company Law Chapter 6: Company Law New Law on Accounting and Auditing is planned for Local stakeholders will be involved with all their capacities in its elaboration. Also, be reminded that the whole process of reforms is conducted in cooperation with the World Bank’s Centre for Financial Reporting Reforms. In the Center, World Bank’s expert is responsible for monitoring of the reform process in Montenegro and, above all, contribute with his expertise the drafting of new legal solutions. Montenegro is part of regional programme REPARIS, which includes process of accounting reforms in South-East Europe countries.

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