Law on Accounting and Audit

The Law on Accounting and Audit organizes conditions and manners of business books’

maintenance, the composition of and presentation of financial reports, and the conditions and manners of conducting the auditing process. This law applies to all legal entities

budget or extrabudgetary funds. The law was declared on November 15, 2005. This law has been effective since November 26, 2005, excluding Article 15, point two,¹ which has been effective since April 15, 2006. The law is in accordance with relevant interna-tional standards such as IAS (Internainterna-tional Accounting Standards), ISA (Internainterna-tional Standards of Auditing), IFRS (International Financial Reporting Standards), and ICEPA (International Code of Ethnics for Professional Accountants).

The basic provisions, explanation, and adjustment of certain expert terminology are explained in the first chapter of the law. The following chapter on Financial Statements and Standards deals with adjustment to all necessary international standards, and prescribes how to conduct, audit, and present financial reports. The third chapter on Accounting and Bookkeeping prescribes how to maintain business books, when to use the principle of invoice realization and the principle of cash realization, certification of accountings, and other relevant issues for this part of the law. Article 2, as a part of chapter one, gives definitions of important terms. Two of these are quite important:

the Principle of Cash Realization, and the Principle of Invoice Realization. The first principle is defined as an accounting base in which transactions are ascertained in the reporting period in which they have occurred. The second principle is defined as an accounting method in which transactions are ascertained in the period in which money and money-equivalents have been paid or received, regardless of when they occurred.

The financial result, according to this principle, is determined as the difference between money inflow and outflow. In chapter three, Article 4 prescribes that business books (diary, main book, and additional evidence) are maintained based on a double-accounting basis. In the same chapter, Article 5 prescribes usage of the two realization principles.

The principle of cash realization is being used by legal entities that have an annual income lower than EUR 500,000; while legal entities with annual income higher than that have to apply the principle of invoice realization. In Article 6, point 1, the law obliges legal entities to prepare financial reports with the balance on December 31 of the business year, and to deliver the same to the commercial court by June 30 of following year for the previous one. Point 3 of the same article obliges legal entities to prepare and deliver financial reports for the financial year and for even shorter periods on the request of state agencies and organizations.

In Article 9, the law predicts the necessity of delivering financial reports in hard copy on request of state agencies. This article doesn’t provide the possibility of delivering such reports in electronic form. This raises the question as to why, especially when law on electronic signature has already been enacted.

Article 10 (point 1) prescribes the obligation to keep annual wage accounts or original payment lists, with no time limit. The same article, in point 2, prescribes that the financial statements’ (annual accounts’), main book and diary must be kept for at least 10 years, while attendant books and financial statements for shorter periods must be kept for at least five years. On the other hand this article comprehends even point

3 which is about keeping business info there is abstruseness regarding keeping sale and control blocks. This line requires keeping these blocks for at least three years. However, this may prove to be demanding for retailers, catering, and similar services.

Article 11 prescribes that an authorized professional accountant may become a certified accountant if he or she passes certain exams determined by the proper body, according to the IFAC training standards.

Article 12, point 1, defines “audit” as an investigation of financial reports, regarding property, capital and balance of obligations, as well as business results (applying the International Standards of Auditing and International Code of Ethnics), with the aim of giving an opinion about their sincerity and fairness. When it comes to the necessity of audit, Article 12, point 2, states that it is obligatory for the INC but also for the LLC if they meet following criteria:

• Total resources above EUR 2 million,

• Annual income above EUR 4 million,

• The average number of employees is above 50 during the business year.

The question is: why is it obligatory when it comes to LLCs? These legal entities aren’t public and don’t affect public issues. They can also be managed under the provi-sions of criminal law. This isn’t the fault of this law, which was drafted according to the international standards. This is more of a moral and ethical question concerning private entrepreneurship and property rights. When it comes to the state companies, they should fall under this provision, though they are, or at least should be, under provision of the Law on State Audit Institution.

Point 3 of the same article prescribes audit as being mandatory for insurance companies and other financial institutions, the Central Deposit Agency, authorized participants of the capitals market, investment funds, and other collective investment schemes. This also goes for INCs as per point 2 of the article.

Article 13 prescribes who shall conduct the audit. The auditor can hire external help under the condition that those companies that are conducting the audit process are under the auditor’s supervision. This article states who is ineligible to conduct the audit, as follows:

• shareholders, members, or founders of any legal entity from Article 12, point 2 (INCs and LLCs) that is the object of revision;

• any entity which conducts accounting and counseling affairs to the legal entity that is under audit;

• other cases as determined by Code of Ethics.

Article 14 deals with the issuing of license to the auditor. The auditor needs to adhere to the following criteria:

• he/she is already a certified accountant;

• they have been conducting auditing of INCs and LLCs for at least 24 months under supervision of an auditor;

• they haven’t been convicted for any charge that makes him or her ineligible for conducting accounting and auditing affairs.

The audit company has to have at least one auditor employed full-time, in order to be successfully established. Article 15, point 2 is about mandatory insurance regarding possible damage that the auditor or auditing company may introduce to the legal entity which is under the audit process. The same article, however, states that insurance sums are under the competent state agency. It is important to explain the criteria upon which these sums can be established, and which is competent body (is it the State Audit Institution, Ministry of Finance, or another). Article 18 also identifies the competent organ relating to the surveillance of this law’s enactment. In the same article, there is a provision about the possible transfer of this law’s enactment to the professional organi-zation. Although this is a good idea, and may be more efficient and economical, there must be some kind of identification of which kind of companies might be considered as “professional organizations.”

Overall, this law offers good solutions which are in accordance with international standards. Certain issues are not defined by the law, but by the sub-regulations, which may cause difficulties in their interpretation.