Executive Summary of the 2007 A&A ROSC for Croatia
This report provides an updated assessment of accounting, financial reporting, and auditing requirements and practices within the enterprise and financial sectors in Croatia. It uses International Financial Reporting Standards (IFRS), International Standards on Auditing (ISA), and the relevant portions of European Union (EU) law (also known as the acquis communautaire) as benchmarks.
Regulatory and Institutional Framework
Croatia has made considerable progress in developing its regulatory framework for corporate sector financial reporting and auditing since the publication of the first A&A ROSC 2002 (see Table 1). The alignment of the revised regulatory framework with the acquis communautaire has been significantly improved and lays the basis for reinforcing the institutional capacity for financial reporting and auditing. However, not all requirements of the relevant acquis have been introduced and further work is needed to achieve full compliance. For example, the reporting lay-outs required by the accounting Directives have not been implemented. There are no requirements on annual management reports, the rules governing consolidated accounts are not fully covered, and the types of audit opinions and the responsibility of a group auditor are not fully addressed. In addition, recent changes to the acquis communautaire on financial reporting, such as the amended Fourth, Seventh and Eighth Company Law Directives, need to be incorporated. However, the government is committed to achieving full compliance with the relevant portions of the acquis communautaire in a very short timeframe.
According to the Accounting Act as of 2005, Croatia has replaced the required use of IFRS for the financial statements of all companies with a requirement that only large, listed andfinancial sector companies (Public Interest Entities, or PIEs) must apply IFRS. However, the IFRS translation process in Croatia was disrupted between 2000 and 2004, and the formal adoption of IFRS in the Official Gazette in December 2006 related to IFRS as at 2004, without supporting pronouncements such as IFRICs. As a result, Croatia mandates the use of a translation of out of date standards and therefore does not apply IFRS (since the standards are neither current nor complete). Narrowing the scope of required application of IFRS from all companies to PIEs implements one of the major recommendations from the A&A ROSC 2002 and is more proportionate to the institutional capacity for properly applying IFRS. All other companies may choose to use either IFRS or accounting standards to be issued by the Croatian Financial Reporting Council (FRC). However, at present the financial reporting requirements for Small and Medium-sized Enterprises (SMEs) are still the same as in 2002 and will only change once the FRC has issued the accounting standards for SMEs, based on IFRS and the EU Accounting Directives. The financial reporting framework in Croatia is not up-to-date and not complete and lacks alignment with the set of IFRS (and IFRICs) endorsed by the European Commission. Furthermore, differences between the Croatian financial reporting framework and extant IFRS may confuse foreign investors.
The Croatian institutional framework has undergone several important changes. However, further capacity building relating to monitoring, enforcing, and strengthening supervision (except for banks) is needed to ensure proper application of IFRS and national accounting standards. At the beginning of 2006, the Croatian Securities Commission, the Insurance Companies Supervisory Authority and the Agency for Supervision of Pension Funds and the Insurance were merged into a single integrated regulator, the Croatian Financial Services Supervisory Agency (HANFA). This merger should help to avoid overlaps and supervisory gaps. In March 2007, the Varaždin Stock Exchange (VSE) was merged with the Zagreb Stock Exchange (ZSE), creating one single stock exchange in Croatia. The FRC and the new Chamber of Auditors were established in 2006 on the basis of the new accounting and audit acts.
Corporate Sector Financial Reporting and Auditing in Practice
Public availability of legally mandated financial statements for companies - other than banks - is limited. This seriously undermines the value added of the financial reporting function in the Croatian market economy and partially reflects a general lack of user demand for financial statements. Due to problems with obtaining financial statements, the ROSC team was not able to review as many financial statements as intended. Although the Accounting Act enacted in 2005 requires all joint stock companies to publish their financial statements, the current requirements on filing and publication are not fully in line with the requirements of the acquis communautaire (First, Fourth, and Seventh Company Law Directives and the Transparency Directive) and international best practices. Moreover, the new Accounting Act does not foresee sanctions for companies that do not comply with filing and publication obligations.
The financial statements reviewed as part of this assessment relate to the 2005 financial reporting year and therefore do not reflect the impact of the new Accounting Act or the IFRS adopted in December 2006. The reviewed financial statements of Croatian banks were generally of good quality. This can largely be attributed to the intensive on- and off-site supervision by the Croatian National Bank (HNB) as well as the transfer of knowledge and expertise of foreign owned private banks. The quality of financial statements of insurance undertakings could not be assessed because of difficulties in obtaining these financial statements. The review of financial statements of real sector companies and of pension and investment funds showed a number of non-compliance issues.
Except for banks, there is at present no systematic enforcement of the quality of financial statements besides the statutory audit function. The HANFA regulates and supervises listed companies and the non-banking financial sector, including insurance undertakings, leasing,
Furthermore, there is no system of external quality assurance to ensure the quality of statutory audits in practice. The newly established Chamber of Auditors is currently developing an effective system of quality assurance. In addition, audit committees, which are required by the Audit Act for public interest entities, are expected to positively impact the audit quality in the future. The new Audit Act establishes public oversight of the Chamber of Auditors by the Ministry of Finance. Although the new EU Eighth Company Law Directive requires a system of oversight without making fixed rules on infrastructure, it may be difficult to meet some other requirements of the Directive, such as finding a majority of non-practitioners knowledgeable in the area of statutory audit.
Pascal Frèrejacque, is a financial reporting specialist at the CFRR. Pascal has led Accounting and Auditing Report on the Observance of Standards and Codes assessments in a number of countries and advises governments on the design and implementation of corporate financial reporting reforms.
He brings to the Bank 18 years of international experience in accounting and auditing in the banking sector, having worked at the IMF and international accounting firms. As a former audit lead manager for large banking groups and having managed corporate finance assignments at Arthur Andersen and Ernst & Young, Pascal has an in-depth understanding of the financial sector. He started his career working for a private consultancy, conducting valuation and M&A due diligences for large corporations.
Pascal holds a post-Master's degree in accounting, finance and business administration and a Master's degree in economics from the University of Paris II. He speaks French and English.
Croatia Country Office
For information on other World Bank activities in Croatia contact the World Bank Country office: