Why do we need an audit reform?
Inadequate regulation of the audit market in Ukraine has led to problems with quality and reliability of financial reports of enterprises and banks. In turn, this increases the risk of bankruptcy of such enterprises and banks and reduces the level of trust from the potential investors and from the population, and also creates barriers to attracting investments to the national economy as a whole.
In addition, the existing system of regulation of audit activity contradicts European legislation.
In accordance with clause 1 of paragraph 47 of chapter 13 of the Plan of measures for the implementation of Section V (“Economic and industrial cooperation”) of the Association Agreement between Ukraine, on the one hand, and the European Union, the European Atomic Energy Community and their Member States, on the other hand, for 2017-2019, approved by the Order of the Cabinet of Ministers of Ukraine dated 09/17/2014 No. 847, the Ministry of Finance of Ukraine was designated as the main executor responsible for implementation of the measure to fulfill the provisions of the Directive of the European Parliament and the EU Council of 17.05.2006 No. 2006/43 / EC on the statutory audit of annual accounts and consolidated accounts, the indicator of which is the adoption of the Law of Ukraine “On Audit of Financial Reporting and Auditing Activities”.
Given the need for a comprehensive reform of the audit institutions in Ukraine, taking into account the provisions of the European legislation in the field of auditing, which complies with the fulfillment of commitments undertaken by Ukraine in accordance with the Association Agreement, which came into force on 01.09.2017, the Ministry of Finance of Ukraine developed a draft Law of Ukraine “On the Audit of Financial Statements and Audit Activities” (Reg. No. 6016 dated February 3, 2017).
What is the essence of the reform?
The Ministry of Finance of Ukraine developed a model for reforming the system of regulation of audit activity in Ukraine in accordance with international standards and best international practices, the essence of which is embodied in the draft Law of Ukraine “On Audit of Financial Reporting and Audit Activity”.
The purpose of the legislation is to bring the norms of national legislation in the area of audit activity in line with the legislation of the European Union, in particular with the provisions of Directive 2006/43 / EC and Regulation (EC) 537/2014.
The Law proposes an optimally balanced system of public oversight and self-regulation of audit activity which is supported by international organizations, regulators, and representatives of the profession.
In particular, the draft law provides for the establishment of a public oversight body for audit work, which consists of the Audit Public Oversight Body and the Quality Assurance Supervision Council and provides supervision and is responsible for overseeing:
1) registration of auditors and subjects of audit activity;
2) the implementation of international auditing standards;
3) control over the attestation of auditors and continuous training of auditors who carry out a mandatory audit of financial statements;
4) control of the quality of audit services of the auditors involved in the statutory audit of financial statements;
5) disciplinary proceedings against auditors and auditors performing a statutory audit of financial statements;
6) application of penalties.
The Supervisory Board consists of seven persons (one representative from the central executive body, which provides for the formation and implementation of the state policy in the field of accounting and auditing, the National Bank of Ukraine, the National Commission on Securities and Stock Market, the National Financial Services Commission, and three persons from among non-practitioners).
The financing mechanism is provided for both the Audit Public Oversight Body and the Audit Chamber of Ukraine.
Also, the bill defines the requirements for the certification of auditors in the light of international practice (education, methodological support, qualification exams, practical experience, qualification improvement, etc.).
The proposed model of registration of auditors and audit entities involves keeping the Register, which information is submitted by the Audit Chamber of Ukraine. The registry consists of the following sections: auditors; subjects of audit activity; subjects of audit activity who have the right to conduct a statutory audit of financial statements; subjects of audit activity who are entitled to conduct a statutory audit of financial statements of enterprises of public interest.
The draft law provides for mandatory audit and audit of enterprises of public interest, and additional requirements for the preparation of the report.
The quality control of the audit services of the subjects of audit activity will be carried out by carrying out the audit of the quality of audit services of the subjects of audit activity in order to comply with international standards of audit, the principle of independence, the effectiveness of the internal system of quality control of audit services, compliance with the requirements of this Law.
It is assumed that the quality control system for audit services will consist of policies and procedures developed and implemented by audit entities in accordance with international auditing standards.
Also, the bill establishes disciplinary measures for auditors and audit entities, which will be applied in the event of non-compliance with the law and the commission of professional misconduct.
Professional self-governance of auditors will be carried out through the Audit Chamber of Ukraine.
The general principles of audit profession regulation and auditing outlined in the draft law are broadly in line with pan-European tendencies – these are the increased requirements for the independence of auditors, their objectivity and organization of work, the application of international auditing standards, standardization of audit report requirements, a clear audit register, as well as increased requirements for socially significant economic entities. ”
What can be expected to be the result of reform?
Taking into account that the harmonization of the legislation in the field of audit to European standards is one of the guiding principles of Ukraine within the framework of the Ukraine-2020 strategy and a direct obligation under the Association Agreement, the implementation of the reform of the audit activity in Ukraine will contribute to the positive investment climate in Ukraine, increase of investor confidence level in the financial statements of domestic enterprises; increasing the level of trust in the activities of national auditors; make it impossible to provide poor-quality audit services, and will promote the transparency and reliability of financial statements of securities issuers, banks, insurance companies, other public companies, including state-owned enterprises, and will open access to European markets for Ukrainian auditors.
Creating a clear and perfect legislative framework is the first and very important step towards building an effective audit regulatory framework that should improve the quality of the audit of financial reporting in the public interest. In turn, building an effective audit engagement system will require responsible decision-makers in charge of public oversight bodies and inspectors who will audit the quality control system of audit services.
The draft law developed by the Ministry of Finance of Ukraine with the participation of the EU project EU-FINSTAR, the World Bank, the National Commission on Securities and Stock Market, the National Bank of Ukraine, the National Financial Services Commission, and the Parliamentary Committee on Tax and Customs Policy, received positive conclusions from the European the International Independent Audit Forum (IFIAR), the UK Financial Reporting Board, and the Audit Supervisory Commission of the Federal Republic of Germany.
Verkhovna Rada of Ukraine adopted the Law of Ukraine dated 21.12.2017 No. 2258-VIII “On the Audit of Financial Statements and Audit Activities”, which came into force on 02.07.2018 and came into effect on 10/01/2018.