Adopting and Implementing EU Ethics and Independence Requirements- Lessons learned in Poland Maria Rzepnikowska Deputy Chairman The National Chamber of Statutory Auditors Poland
Progress of Implementation of EC Recommendations in Poland In Poland, no steps have been undertaken aimed at the implementation of EC Recommendations on certified auditor’s independence, due to the following: • Recommendations were published on 16 May 2002, and Poland was not a Member State at that time • New amendments of the Accounting Act and the Act on Certified Auditors, • Regulator’s reluctance to introduce new changes • A new Auditor Code of Ethics adopted at the Extraordinary National Meeting of Auditors held on 30 June 2002 (change required by the amended Accounting Act and Act on Certified Auditors – no time to introduce amendments as per Recommendations) • In cases not provided for by the Code of Ethics, IFAC Code of Ethics provisions apply, which allows for principle-based approach to independence. • Expected amendment of the 7th Directive and the need to harmonize the law upon Poland’s accession to the EU
Statutory regulations applicable to audit profession The Act on Certified Auditors and their Self-RegulatoryBody • of 13 October 1994 • amended in 2000
Provisions of the Act The Act provides for: • procedures for appointment and functioning of Self-regulatory Body in the form of National Chamber of Certified Auditors and its bodies • qualification proceedings and auditor certification • rules of auditor profession • auditor continuing education policies • auditor supervision policy • auditor disciplinary and criminal liability
Self-regulatory body subordination National Council of Certified Auditors and other bodies of the Chamber are appointed by the Certified Auditors Meeting for a 4-year term The Minister of Finance supervises the Chamber activities in the following respect: • control of resolution compliance with applicable regulations or the Chamber’s Statute
Entities authorized to audit financial statements Financial statements can be audited by the following entities only: • self employed certified auditors, • civil partnerships, general partnerships, partnerships or limited partnerships with certified auditors as sole shareholders • legal persons that meet all of the following: • employ certified auditors for audit of financial statements, • most of the Management Board members are represented by certified auditors, and if the Management Board consists of not more than 2 people, one of them must be a certified auditor, • most members of the supervisory body are certified auditors, and if there is no such body – the majority of votes must be held by partners or shareholders, who are also certified auditors • opinions and audit (review) reports on financial statements is signed on behalf of the entity authorized to audit financial statements by those members of the management board, who are also certified auditors.
Scope of business activity of entities authorized to audit financial statements admitted by the law Beside audit of financial statements, the authorized entities can conduct the following activities only: • bookkeeping and tax record keeping services, • reviews of financial statements • expert and economic-financial opinions • tax advisory • accounting organization and computerization • liquidation and bankruptcy proceedings • publishing and education in the field of accounting
Provisions on ethics are provided for, in particular: • The Accounting Act of 29 September 1994 • The Act on Certified Auditors and their Self-Regulatory Body • Certified Auditor Code of Ethics • The Ordinance of the Minister of State Treasury introducing “principles for owner supervision over entities with the State Treasury as a shareholder and other state owned legal persons” • Code of Best practices of listed companies
Approach presented in existing regulations Although there is a rule-based approach in practice,however, according to clause 2 item 1 of the Code of Ethics: “In cases not regulated herein, the IFAC Code of Ethics is recommended”, which allows for principle-based approach to be applied in practice.
Ethics issues regulated in the Accounting Act Pursuant to Article 66: Independence and impartiality of a certified auditor • Financial statements shall be audited by a certified auditor, who meets the requirement of impartial and independent opinion issuance • Impartiality and independence shall be compromised, if certified auditor: • holds shares or other titles in an entity or an associated entity, holding company, subsidiary or co-subsidiary, except for shares in a housing co-operative, • in the past 3 years has acted as a legal representation (proxy), member of supervisory or management bodies or worked for an entity or an associated entity, holding company, subsidiary or co-subsidiary, • in the past 3 years has participated in bookkeeping and preparation of financial statements being audited, • over the past 5 years, has at least once generated at least 50% percent of annual revenues due to services rendered for the benefit of a given entity, holding entity, associated entities, subsidiaries or co-subsidiaries. This shall not apply to the first year of certified auditor’s activity, • is married, related by blood or by marriage in straight line up to second-line or related as a care giver, adoption or custody with the manager or member of a supervisory body or employs such persons during audit proceedings, • cannot provide impartial and independent opinion for any other reason.
Ethics issues regulated in the Accounting Act cont. • The impartiality and independence principle referred to in clause 2 apply accordingly to entities authorized to audit financial statements and members of management board and supervisory bodies of these entities or other persons, who participate in the audit of such financial statements. • The entity referred to in clause 3 is selected by the body authorizing financial statements of the entity, unless the statute, articles of association or other by-laws binding to the entity provide otherwise.
Example of issues not covered by the Polish regulations Neither the Accounting Act, Act of Certified Auditorsnor the Code of Ethics provide for issues related to services rendered to a given client from a group of entities with capital or personnel ties
Examples of issues provided for in regulations other than Recommendations • there are no restrictions as to tax advisory inany form • audit of financial statements is prohibited, if in the last 3 years, an entity has participated in bookkeeping services or financial statements preparation, regardless of the nature of such services
Examples of issues provided for in similar manner • long-term certification services rendered for the same entity – a rational rotation approach should be applied to certified auditors authorized to audit financial statements as well as their supervisors – Clause 7.8 of the Code of Ethics (maximum term has not been indicated) • intimate relations – certified auditor’s independence as well as that of the entity might be questioned, if certified auditor, his close ones or the entity have accepted from the client goods or services of value exceeding the customary hospitality or courtesy – clause 7.7 of the Code of Ethics • conditional remuneration – the independence rule requires that price of certification services rendered by the entity or certified auditor remuneration be not conditional and not depend on the result of services rendered – clause 7.6 of the Code of Ethics
Compliance of main principles Regardless of location and type of employment, while performing activities defined by the law and the provisions contained herein, shall observe the following principles: • fairness and impartiality • professional competency • professional secret and in case of certification services, the independence principle shall also be observed.
Specific independence guarantee due to limited area of business activity The list of business activity areas available to certified auditors excludes such activities, as legal services, appraising services, etc.
The ethics-propagation activities of the National Chamber of Certified Auditors • The Ethics Committee appointed by the NCCA • IFAC Code of Ethics of November 2001 translated into Polish and published in the information bulletin No. 51 of 20 June 2002, • EC Recommendations on independence of certified auditors in the EU of 16 May 2002 translated and published in the NCCA bulletin and in Accounting magazine No. 8/2003 • obligatory training on ethics: “Code of Professional Ethics, including professional independence, remuneration, internal relations and information”., • during annual, national conferences of certified auditors, lectures organized on ethics issues; e.g. two lectures given during 3rd Annual Auditing Conference, 27-29 November 2002: • Independence as the main ethical requirement in certified auditor profession • Ethics – compliance with IFAC Code • annual conference of certified auditors organized in September 2006 to cover 7th Directive and ethics-related issues.
Ethics problem solving • Ethics Commission addresses inquiries of individual certified auditors • issues of more general nature are discussed in NCCA bulletin and on website, • in case of conflict between the Chamber members: • seeking solution in the regional branch, • if problem cannot be solved – it is presented to the National Council of Certified Auditors • if case remains unresolved, it is presented to the disciplinary spokesman.
Position of the self-regulatory body on planned amendments • all auditor-related issues should be provided for in the Act on Certified Auditors and their self-regulatory body • all ethics-related issues should be provided for in the Code of Ethics, • Code of Ethics for Certified auditors should be based directly on IFAC Code of Ethics adapted to Polish realia • cooperation with the Minister of Finance and Sejm Commissions during works on amendments/new regulations, through: • discussion on changes related to the 7th Directive • appointment of a Standing Commission to cooperate with regulators (Ministry of Finance, the Sejm)
Is the co-existence of rule-based approach provided for in legal regulations and principle-based approach provided for in the Code of Ethics possible? • According to the position of regulator representatives from different countries presented at the IFAC Ethics Forum on 11 October 2005 in Brussels, such co-existence is necessary, since regulators are not about to recognize principle-based approach • to a certain degree, it is safe for the certified auditors, since strict prohibitions provided for by the rule-based approach are also present in the principle-based approach, although as an ultimate guarantee only