ECONOMY MAGAZINE


 1.      What are the challenges faced by auditors and accountants in the recent years especially after the global financial crisis of year 2008?

We believe that the last decade has brought numerous challenges to accountants and especially to auditors as society has lost a significant portion of its trust in financial statements and auditors’ reports. Our profession is facing the difficult task of restoring its reputation by proving that the ethical principles that are its foundation are not abandoned and service quality represents a top priority. This will not be easy. A lot of efforts and focused work at all levels are needed – by each professional accountant in a specialised accounting and audit company followed by the professional organisation and finally by the oversight body.

The 2008 crisis also led to the gradual implementation of a new regulatory framework in the legislation of many countries. Public finances, the tax system, independent financial audit, financial accounting and reporting, fight against the shadow economy and money laundering have to function within this framework. At the same time the requirements of this framework presume a period of adaptation thereto – with new knowledge and qualification, placing ethics as a driving force in the accounting and audit work, with a wider scope of our responsibilities. Finally, the importance of the profession of accountants and auditors for the economy led to the idea of its regulation by the public.

 

2.      What are the prospects for development of the profession?

The recent development of mankind and the economy reached levels challenging the accounting and audit profession. We mean the following:

In the first place, the growth and complexity of business itself and of business operations especially in the field of finance. This naturally leads also to more complicated accounting and reporting rules and techniques and most of all to wider use of estimates and assumptions by entity management. The more sophisticated reporting frameworks complicate and overburden on the one hand the use of information and the understanding of financial statements by their common users and on the other hand – the technology and achieving of the required assurance in the audit of financial statements.

In the second place, a widespread implementation of new integrated technologies is observed and the functioning of business becomes more and more dependent thereon. This leads to changes both in the accountancy and in the approach and technology of the audit itself. In practice, the expectations from and the requirements to accountants and auditors become even higher.

These circumstances place the acquisition of new knowledge and skills as serious challenge to accountants and auditors and this is in areas that have been so far considered as distant and atypical for them.

And yet another important issue is to attract and retain young and talented people to the profession and to ensure good perspectives for their career development.

 

3.      What is the effect from the regulation of the activities of accountants and auditors?

The financial and economic crises and accounting scandals observed in the recent 15 years in various regions of the world have resulted in a deep substantive change in the profession of accountants and auditors. From being an entirely self-regulated profession it turned into increasingly externally regulated profession. This is probably an irreversible process and the accountants and auditors should get accustomed to it. It is very important to understand that the introduction of a specific form of external regulation represents on the one hand the means for restoring and even increasing confidence in the accountants and auditors quality of work and on the other hand – an instrument that maintains the balance between the expectations of financial information users and those who generate and check this information. This is a goal to be pursued by the society in every state and not another purely formal control by a new member of the chain. At the same time, society should have full understanding of its own responsibility for the imposed form of regulation, its adequacy and the results achieved against the set expectations.

 

Has the appropriate formula been found? It is difficult to say 'yes' especially taking into account the continuing problem cases with the quality of financial statements and respectively, the quality of the issued auditor's reports. On the other hand, the external regulation has a definitely strong disciplinary effect. It is clear that the search for new solutions regarding its improvement continues and these solutions will vary by country depending on their traditions, resources, needs and the maturity of the business environment and the accounting and audit profession.

 

At this stage, in Bulgaria only the activities of registered auditors are subject to regulation. Individuals exercising the profession of accountant and preparers of financial statements in particular, are outside the scope of any regulation and no control is exercised on the quality of services provided thereby.

 

4.      What is the position of the audit profession in Bulgaria in the specific political and economic situation? Has there been improvement in the business environment over the recent years or is the trend opposite?

The audit profession in Bulgaria is relatively young. It was restored in 1991 (after a suspension of more than 43 years) with the assistance of representatives of some of the largest professional organisations in Europe – The French and the English Institute. We can say that there have been about 20 years of new active history of the profession – from the establishment of the Institute of Certified Public Accountants (ICPA), which is at present the only professional organisation in Bulgaria recognised by the International Federation of Accountants (IFAC). Its activities are focused only on the work of registered auditors.

Has the environment improved? It is difficult to perform the audit profession in Bulgaria. We cannot say that the environment has improved in recent years. There are a lot of reasons for that.

Firstly, the economic and financial crisis and all factors that impede the recovery of economic growth. Also, the lack of clear understanding of the essence of audit, the product of audit and auditors' responsibility, as opposed to that in countries where modern accounting and audit have originated. We can say that often there is misunderstanding and irrelevant expectations.

Secondly, the economic structures and relations are missing the level of development that makes natural the need for audit and sophisticated financial statements.

Thirdly, managers and owners often lack understanding as of the added value and usefulness of auditor's work. Small and medium-sized enterprises are prevailing in Bulgaria and they are most of all owned by families or a limited group of individuals. The adoption of rules, standards and regulations, developed and applicable mainly for public and large companies, makes the implementation of International Financial Reporting Standards and International Standards on Auditing very difficult for the entities of sizes that prevail in Bulgaria.

Therefore, the solution should be sought in the development of the environment, society and the profession in Bulgaria.

 

5.      What is your opinion about the idea for licensing of financial statements preparers?

Before discussing this issue, we have to clarify the difference between individuals exercising the profession of accountant, professional accountant and auditor. In Bulgaria, every person with appropriate secondary or university economic education (preferably with 'Accounting' and 'Finance' background) may exercise the profession of 'accountant' but in order to be a 'preparer' of financial statements a person should satisfy certain requirements for university degree and experience. In both cases, this is an 'accountant' and not a 'professional accountant'. The latter applies to a person who after the university degree has acquired additional professional qualification under the auspices of a professionally recognised organisation (such as ICPA) by sitting for particular exams and gaining practical experience. At this stage, our country has no requirement for the preparers of financial statements to be professional accountants.

 

The quality of entity's financial statements is a key issue for achieving good management and ensuring reliable information to all users regardless of whether they are public or not. And this is still a serious issue for Bulgaria. Therefore, it is necessary to focus our efforts on improving the qualification of preparers and strengthening the requirements to them. In this context, the idea for licensing part of the preparers is that they should acquire the qualification of professional accountants within the meaning of IFAC requirements and definitions. This means that they should be organised or united under the auspices of a professional organisation under the rules of IFAC. This would result in organizing the accounting profession under new rules, significant improvement of the qualification of practicing accountants, of their knowledge and skills with regard to complex reporting frameworks (such as IFRS), in other ethics, and in enhanced quality of accounting services. This would also result in a higher level of financial reporting and respectively, increasing the confidence in it.

In this sense, a possible licensing should not be considered as a formal registration or mass examinations. Good European and global practices and traditions could be adapted. Of course, careful consideration should be given to the transitional period and the impact on the individuals concerned in order to ensure the fair, gradual and adequate to the conditions establishment of a professional organisation not only of auditors but also of the entire professional accountants community.

The most significant issue is that users of financial statements, the market and the society as a whole shall have the understanding that preparers should be professional accountants at least for designated range of entities. This is particularly valid for the entities for which the quality of financial statements is of crucial importance – the public interest entities. It is important to make this deliberately and not just imposed by regulations.

 

On its part, ICPA should convince the public in the level of knowledge and professional skills, which it guarantees with regard to its members – and this is a strategic task for the Institute.

 

6.      Is there a shortage of qualified staff as accountants and auditors? What are the problems with the human factor for this profession?

At present, the accounting education is topical and preferred. Our universities produce a large number of students completing graduate-level accounting education. However, a lot of them do not choose to work in the field of accountancy or audit. And those who start, face a lot of difficulties inherent to the profession but also resulting from the still rather theoretical and far from the practice university education. It is difficult for the young people who have just completed their education to find work because they have no experience. The good thing is that in Bulgaria we have a number of audit and accounting firms that accept as their mission to invest in young people who wish to start their professional career as accountants and auditors, regardless of the fact that this is not a small investment, especially taking into account that after the acquisition of certain professional experience, the young professionals decide to pursue another career.

As in many other spheres, there is a shortage of well-qualified staff. It is still a problem to find the proper persons for the positions of chief accountant, finance controller, finance manager, internal auditor and external auditor.

 

What is the solution? In our opinion, the solution is to upgrade the professional qualification by acquiring new knowledge with some of the professional organisations – ICPA, IIA, foreign institutions such as АССА, CFA, ICAEW active in Bulgaria, etc. This means that the highly qualified specialists in the field of accounting or audit shall have mandatorily professional upgrading qualification in addition to their university education and specialised practical experience for a definite number of years. The real development in the profession is related with a significant personal investment, a very heavy workload, non fixed working hours, stress, patience, and ongoing accumulation of knowledge in the area in which they work. At the same time, in the environment of lost confidence and prestige of the accounting and audit profession in the recent years, it becomes even more difficult to keep and motivate the young and talented people. On its part, this becomes a problem for the accounting and audit firms, especially for the smaller practices, with a direct impact on the quality of services as well.

 

7.      How should we consider the responsibilities of the individual members of the financial reporting chain, including in the context of the banking sector events in Bulgaria in the recent 6 months?

This is a matter of principle, which should be discussed in depth and publicly by our society. The comments and opinions expressed by various groups of specialists in the public domain make it clear that there are incorrect ideas implanted in the society. This was confirmed also by the banking sector events in Bulgaria that occurred in the recent 6 months.

 

What do we have in mind? The responsibility for the quality, for the true and fair presentation in the financial statements shall be born by a line of people and this is in a particular sequence. The direct (first-line) responsibility is that of each entity's management (and also of the owners where they actively participate in company's governance) and financial statement preparers. This of course is normal since these are the persons who have taken all decisions referring to the accounting policies, to the proper and unbiased treatment of performed business transactions, to the completeness and objectivity of presentation of the information in the financial statements. Their responsibility is with biggest weight as they are direct participants both in the business and business solutions as well as in the reporting process and reporting-related decisions. It is not by chance that there is an explicit article in the Commercial Act and the Accountancy Act regarding this responsibility.

Internal auditors occupy a specific place with their responsibility to monitor and react to weaknesses found in the systems and processes operation, including with regard to the reporting process, controls, compliance with legislation, etc.

 

They are followed by the auditors who have audited the financial statements and have issued and auditor's report thereon. We have to point out that their responsibility is indirect as far as they are accountable for the expressed opinion in their report, i.e. how they have performed the audit in order to gain assurance as to the credibility and integrity of the financial statements. In practice, they are responsible for the quality of the conducted audit, which on its part is a guarantee for the quality of the financial statements on which the users rely.

The responsibility of the regulators comes after that or rather in parallel. They are liable for the external oversight of a particular entity and its operations, the style of governance and functioning in line with specific legal requirements and regulations in order to guarantee public interests or at least the interest of a particular group of stakeholders. They have a key role for public interest risk management and therefore, they have significant powers, including the right of regulatory reporting.

The existence of deficiencies in the whole line, especially with regard to public interest entities, may affect a large number of persons. For this reason, the public should be aware of the responsibilities of various participants and take a critical view of the performance of each of them.

 

8.      What are the important things to expect with regard the accounting and audit in Bulgaria?

The forthcoming year is very important for our profession because of the pending adoption of two laws – the Accountancy Act and the Independent Financial Audit Act. We can say that they are predominantly new because with them we will adopt the new European Directives in the field of accounting and audit as well as the Regulation on the statutory audit of public interest entities.

Why are these two laws so important? Because in the course of their drawing we should reflect the lessons learnt in the recent 10-12 years. An important lesson in the accounting filed is the general imposing of International Financial Reporting Standards in Bulgaria – with all problems, errors, wrong notions and expectations. This framework is rather complex, expensive and distant from our accounting traditions and way of thinking. Now is the time to limit its application to the reasonable and useful level.

A number of significant changes (a lot of them being mandatory by virtue of the Regulation) are expected also in the field of audit, including: audit fee rates, auditors rotation, new assurance services, permitted non-audit services, the role of audit committees, the contents of the auditor's report, the regulation of auditors and the scope of powers of the oversight body.

 

The changes in legislation as well as the global trends in the profession suggest that the Institute of CPA should also undertake and implement a lot of changes in its activities – starting with the work for strengthening the good reputation of professional accountants and auditors, convincing the public in their important role for its economic growth. The latter presumes a significant improvement in the training system and the system for quality control on our work.

 

Our oversight body, the Commission for Public Oversight of Statutory Auditors (CPOSA), faces no less tasks. It is a rather new body and has to accumulate experience, to recruit highly qualified staff, to establish adequate organisation of operation and communications with the profession.

 

The other two strategic issues include training and implementation of modern accounting standards in the public sector. The accounting community has a significant need for systematic training – not only highly specialised training related to the applicable accounting frameworks and taxation but also in completely different spheres as required by the present day – in the area of technologies, governance, statistics and analysis, law, macro-economics, valuation, etc. The implementation of modern accounting standards in the public sector represents a global issue that should be resolved by the accounting profession. It is a key prerequisite for achieving transparency and efficiency in public finance management. There is a significant imbalance in Bulgaria between the quality of accountancy in the private and the public sector and its overcoming will be pending in the next 5-7 years. The experience of accountants and auditors gained in the course of IFRS and ISA implementation would be of great assistance in this process.

 

9.      What has to be changed in order to improve the efficiency of accounting and audit activities?

This is a broad issue. As in many other areas, a lot of changes should be made. In our opinion, the most significant of them include:

Firstly, the legislation to be passed should be harmonised with European law, but at the same time it should be adequate to the specifics of our country and not a direct adoption of rules, requirements and practices that are difficult to apply.

Secondly, the reporting culture and knowledge of the public should be improved, including that of managers and owners as well as of all other users of financial information. The ultimate objective is to create conditions, including a change in the economic environment,  giving rise to an actual need and demand for high-quality financial statements and audits. This should not be only legally imposed.

Thirdly, a strong professional organisation of accountants and auditors shall be developed, which to produce and maintain highly competent specialists as well as to control and support the accounting and audit practices, to require and regulate the use of adequate resources in the performance of audits and relevant fees for the provided professional services. Of course, this also includes a well functioning oversight body working jointly with ICPA.

Fourthly, training in and promotion of good reporting practices, adequacy of professional behaviour, opposing bad practices and bad examples.

Fifthly, modern technology for optimisation of both the reporting process and the audit work.

And last but not least – adequate remuneration. It is not possible for the users of accounting and audit services to expect high quality of services for minimum remuneration. To our regret, this is often the case with audits of projects under operational programs. The high quality and responsibility requirements to the work of auditors presume a relevant payment. If we think about it, we would realise that such a discrepancy in remuneration leads to critical worsening not only of our services but also of the services in many other areas – healthcare, education, etc., including due to the existing risk for good quality human resources to be unable to ensure funds and conditions to invest in new knowledge and skills, which, as we have already pointed out, underlies the quality of services provided.