1. Rahandusministeerium Adopting, Implementing, and Enforcing the Aquis Communautaire Relating to Auditing – Lessons Learned Veiko Tali 14.06.2005

2. Rahandusministeerium Topics Current system Problems and lessons learned –Scope of mandatory audit –Quantity vs quality of auditors –Design of oversight system –Responsibility and sanctions The 8th Directive - Our concerns

3. Rahandusministeerium Estonia Area 45 227 km 2 Population 1 347 000 GDP (2004) 139 bn Kr (8,9 bn EUR) GDP per capita (2004) 102 th Kr (6,5 th EUR) State budget (2005) 53 bn Kr (3,4 bn EUR)

4. Rahandusministeerium History of regulating the auditing in Estonia 1990 – The Temporary Regulation on Auditing in Estonia The Auditing Council 1995 – The Commercial Code 1999 – The Auditing Act; The Board of Auditors 2000 – The auditing standards (MoF) 2006? – the draft of the new Auditing Act

5. Rahandusministeerium The Scope of mandatory audit From 01.01.1991 until 01.01.1995 –Not obligatory in practice From 01.01.1995 until 01.01.2003 –Net turnover 1M Kr (64 th EUR) From 01.01.2003 Until 01.01.2005 –Net turnover 6M Kr (383 th EUR) –Balance sheet total 3M Kr (192 th EUR) –Employees 5

6. Rahandusministeerium The Scope of mandatory audit (2) From 01.01.2005 * –Net turnover 10M Kr (639 th EUR) –Balance sheet total 5M Kr (320 th EUR) –Employees 10 *Same thresholds were also introduced for drawing up the consolidated accounts *The public limited companies (6 132) and some other institutions have all the obligation of auditing

7. Rahandusministeerium The Scope of mandatory audit (3) According to the annual accounts of 2002 –The thresholds for auditing that were in force until 01.01.2005 were exceeded by 6 854 legal entities –The thresholds for auditing that are in force from 01.01.2005 would have been exceeded by 4 368 legal entities At 01.05.2005 the total number of business associations in our Business Registry was 69 984

8. Rahandusministeerium The Scope of mandatory audit (4) According to the 4th directive –Net turnover 114M Kr (7 300 th EUR) –Balance sheet total 57M Kr (3 650 th EUR) –Employees 50

9. Rahandusministeerium The scope of mandatory audit (5) The scope of auditing –Financial accounts or the whole financial report Additional services –To allow or to prohibit –In which extent? Efficiency vs clear principles of integrity

10. Rahandusministeerium Main lessons from scope of auditing Low initial thresholds Continuous increase of auditing culture Developing auditing culture gives opportunity to raise the thresholds for mandatory auditing The optimal points for changes?

11. Rahandusministeerium Quantity vs quality of auditors At 31.05.05 the total number of issued certificates to auditors was 521 Among these auditors: –384 are currently active, from which  254 Female  130 Male –116 have retired from auditing –21 are currently suspended from auditing

12. Rahandusministeerium Quantity vs quality of auditors (2)

13. Rahandusministeerium Quantity vs quality of auditors (3)

14. Rahandusministeerium Quantity vs quality of auditors (4) The optimal number of auditors? The quality of auditing vs the sufficient quantity of audits Oversight over the auditors could become complicated The quality control of the acting auditors (reporting, assessment)

15. Rahandusministeerium The Current Oversight System Ministry of Finance Board of Auditors Qualifications Committee

16. Rahandusministeerium The Functions Ministry of Finance –Legislation –Oversight over the Board of Auditors Qualifications Committee –Approval of the statutory auditors –Carrying out the auditor exams –Approval of certain disciplinary decisions of the Board of Auditors – withdrawal or suspending and restoring the approval of the auditor –Funded from the State Budget (the examination fees)

17. Rahandusministeerium The Functions (2) The Board of Auditors –Public legal entity –Self regulatory institution –Membership is mandatory for all auditors –Main bodies: General (annual) meeting Management Board (9 members) Revisal Commission –Funded mainly from the membership fees

18. Rahandusministeerium The Functions (3) The Board of Auditors functions: –Oversight over the auditors (carried out by the management Board) –Organizing the continuous education of auditors –Holding and maintenance of the list of auditors –Issuing methodical instructions for the auditors

19. Rahandusministeerium The Possible Options of Oversight Full self regulation? Full public oversight? Self regulation + public oversight? Different system for the auditors of PIEs?

20. Rahandusministeerium Oversight issues and lessons The role of practitioners in oversight? Funding of the Oversight system! Differentiation between the auditors of the PIEs and and the auditors of other companies? The hybrid-structure with dispersal of decisionmaking has not proved to be effective If possible and reasonable – choose the full public oversight from the scratch (Norway)

21. Rahandusministeerium Possible new Oversight System? Ministry of Finance + + rights Board of Auditors + + rights 3+2 members FSA E thics Committee Qualifications committee

22. Rahandusministeerium The Functions FSA –Oversight over the independence of the auditors of the subjects of financial supervision Qualifications Committee –Carrying out the auditor exams Ethics Committee –Resolving the disciplinary decisions, such as withdrawal or suspending and restoring the approval of the auditor

23. Rahandusministeerium The Functions (2) Both committees are funded from the Budget of the Board of Auditors The rules of procedure for both committees are endorsed by the Minister of Finance

24. Rahandusministeerium Responsibility and sanctions Administrative or civil liability What kind of sanctions to apply –Criminal/civil penalties –Disciplinary measures –Retaking the examination Which bodies should have which powers? The body that performs the supervision should have sufficient powers!

25. Rahandusministeerium Independence Ensuring the independence of the auditor Rotation of the auditors –Internal vs external rotation –Period of the rotation? Providing other services to the clients?

26. Rahandusministeerium A need for information The reliable data is essential for creating the adequate regulatory and supervisory framework!! The information on the field is limited –Competition? (market shares?) –Volumes and profitability in different sectors? –Development trends? The optimal number of auditors? Perhaps implement reporting requirements?

27. Rahandusministeerium International Standards As a small country we try to adopt the international standards as largely as possible –The IAS/IFRS as well as the ISA –The costs for future adoption are lower –The comparability is better

28. Rahandusministeerium The ROSC Report In 2004 the Report on the Observance of Standards and Codes was conducted in Estonia by the World Bank The main issues that came up in auditing: –Significantly low thresholds for auditing –Volatile quality of auditing depending on the auditor –Strengthening the quality control and oversight –Need for additional independence requirements

29. Rahandusministeerium The 8th directive Estonia is mainly in line with the requirements of current directive In new directive we are more concerned with the issues of: –Interpretation of the requirements on designing the Public Oversight system –The obligation for PIEs to have an Audit Committee (the SMEs issue) –The publication of fees of auditors

30. Rahandusministeerium The interpretation of new 8th directive Art 31 3. The system of public oversight must be governed by non- practitioners who are knowledgeable in the areas relevant to statutory audit. Member States may however allow a minority of practitioners to be involved in the governance of the public oversight system. Persons involved in the governance of the public oversight system must be selected under an independent and transparent nomination procedure. 4. The system of public oversight must have the ultimate responsibility for the oversight of : (a) the approval and registration of statutory auditors and audit firms, and (b) the adoption of standards on ethics, internal quality control of audit firms and auditing, and (c) continuous education, quality assurance and investigative and disciplinary systems.

31. Rahandusministeerium General Lessons Take into account your own situation –Don’t create any artificial models –What’s effective in some country, might not work in another Only integrated measures are working –Accounting and auditing system within the legal framework is a complete set and should be treated as so Economic efficiency vs clear legal principles of integrity

32. Rahandusministeerium Thank you for your attention!