Poland - Report on the Observance of Standards and Codes (ROSC) on accounting and auditing : update

Report No: AUS2389 Standard Disclaimer: This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Copyright Statement: The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail pubrights@worldbank.org. Contents Main Abbreviations and Acronyms ...................................................................................... ii Acknowledgements ................................................................................................................. ii Executive summary ................................................................................................................ iii I. Introduction ..................................................................................................................... 1 II. Institutional Framework ................................................................................................. 6 A. Statutory Framework ................................................................................................... 6 B. The Profession ........................................................................................................... 11 C. Professional Education and Training ........................................................................ 15 D. Setting Accounting and Auditing Standards ............................................................. 17 E. Enforcing Accounting and Auditing Standards......................................................... 18 III. Accounting Standards as Designed and as Practiced................................................. 25 IV. Auditing Standards as Designed and as Practiced ..................................................... 28 V. Perception of the Quality of Financial Reporting ...................................................... 30 VI. Areas for Consideration and Consultation ................................................................. 32 A. Principal Findings.......................................................Error! Bookmark not defined. B. Developing Recommendations.................................................................................. 33 Annex A: Status of Implementation of the 2005 ROSC A&A Policy Recommendations ................................................................................................................. 34 Annex B: Financial Reporting Technical Assistance Programme (FRTAP) 2010 – 2016......................................................................................................................................... 38 Poland – ROSC Accounting & Auditing i Main Abbreviations and Acronyms A&A Accounting and Auditing ACCA Association of Chartered Certified Accountants CFRR World Bank Centre for Financial Reporting Reform EC European Commission CPD Continuing Professional Development EFRAG European Financial Reporting Advisory Group FDI Foreign Direct Investment FRTAP Financial Reporting Technical Assistance Program GDP Gross Domestic Product GoP Government of Poland IAASB International Assurance and Auditing Standards Board IASB International Accounting Standards Board IFAC International Federation of Accountants IFRS International Financial Reporting Standards IPD Initial Professional Development ISA International Standards on Auditing KIBR Chamber of Auditors of Poland KKN National Supervisory Committee KNA Audit Oversight Commission KNF Financial Supervision Authority KRBR National Council of Statutory Auditors KRD National Disciplinary Spokesperson KRS Court Register KSD National Disciplinary Court KSR Accounting Standards Committee KZBR National Assembly of Statutory Auditors MoF Ministry of Finance Polish GAAP Accounting Law, Decrees and Standards PIE Public Interest Entity PNB Polish National Bank ROSC Report on the Observance of Standards and Codes SAD EU Statutory Audit Directive (2006/43) SKWP Association of Accountants SME Small and Medium Enterprises SMOs IFAC Statements of Membership Obligations SMP Small and Medium Practices WSE Warsaw Stock Exchange CURRENCY: POLISH ZLOTY 1 USD = 3.02 PLN as of December 31, 2013 Poland – ROSC Accounting & Auditing ii Acknowledgements This report was prepared by a team from the World Bank Centre for Financial Reporting Reform based on the findings of a diagnostic review carried out in Poland between July 2012 and July 2013. The World Bank team was led by Alexander Fawcett, Sr. Financial Management Specialist, and included Iwona Warzecha, Sr. Financial Management Specialist, and consultants Waldemar Majek, Piotr Pyziak, Robert Patterson, Ana Cristina Hirata Barros, Anna Czarniecka, and Jamil Sopher. Henri Fortin, Head of the CFRR, provided guidance to the team. The team wishes to thank Joanna Grochalska, Deputy Chief, Safeguards Assessments Division, International Monetary Fund; Robert Gilfoyle, Sr. Financial Management Specialist, EASFM; Szymon Radziszewicz, Sr. Technical Manager, International Federation of Accountants; and Isfandyar Khan, Sector Leader, ECSPF for their comments on the draft report. Similarly, the team expresses thanks to Ismail Radwan, Country Program Coordinator, Central/South Europe and Baltics, for his guidance and support provided. The team acknowledges the extensive cooperation and assistance received from the staff of the Ministry of Finance, the Statutory Chamber of Auditors, the Association of Accountants, as well as other national organizations that provided inputs to the ROSC review. The report was cleared for publication by the Ministry of Finance on August 5, 2015. Regional Vice President: Laura Tuck Country Director: Mamta Murthi Practice Director: Samia Msadek Practice Manager/Head of CFRR: Soukeyna Kane/Henri Fortin Task Team Leader: Alex Fawcett Poland – ROSC Accounting & Auditing ii Executive summary This third Report on the Observance of Standards and Codes Accounting and Auditing (ROSC A&A) for Poland provides an updated assessment of the financial reporting requirements and practices in the country’s enterprise and financial sectors from the 2002 and 2005 ROSC A&A. It was conducted under the Financial Reporting Technical Assistance Program (FRTAP) managed by the Centre for Financial Reporting Reform (CFRR), with funding provided to the Government of Poland by the Swiss Enlargement Contribution. The Polish Government understands that high-quality accounting, auditing and corporate governance, aligned with the requirements of the European Union, contributes to enhanced international trade and investment. Based on the Government’s past performance with the 2005 ROSC A&A, we are confident that it will address issues identified by this Update; thus, to provide scope for the government to develop its own solutions, this report refrains from making explicit recommendations. Strong economic fundamentals, sound macroeconomic policies, coupled with limited external imbalances, allowed Poland to avoid a recession despite the 2008 global economic crisis. Poland is the only European Union (EU) country that has grown continuously over the last four years. Countercyclical policies and the floating exchange rate regime, together with ample international reserves and the precautionary Flexible Credit Line arrangement with the International Monetary Fund (IMF), helped insulate the economy and supported confidence. The years of 2006 – 2011 were the first period of the financial supervisory authority (KNF) and during that period no collapse of any financial institution was reported. Throughout the global crisis on financial markets, a secure and stable financial sector has remained the stronghold of the Polish Economy1. The ROSC acknowledges that many of the issues raised in this report are being actively worked on through the nine components of FRTAP (see Appendix B) by a system of annual planning with the Ministry of Finance and the other beneficiaries. The progress of the matters identified in the report is not however entirely the responsibility of the FRTAP as we need to recognise that a willingness to embrace suggestions and good practice regionally and globally remain a key driver of success. This report 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. A key pillar of transparency is the public’s right to have Company financial easy access to company financial statements. In Poland, statements are accessible such access is possible but the system is labour and time by the public but online intensive and generally not user friendly. For Poland, being access is burdensome very advanced in the area of information technology connected country, improved electronic access to the financial statements registry should be possible. 1 Polish Financial Supervision Authority, Five Years of Activity, www.knf.gov.pl Poland – ROSC Accounting & Auditing iii  In Poland, IFRS are required for consolidated financial IFRS are required for statements of the banks (except cooperative banks) and listed consolidated financial companies. IFRS are permitted for consolidated and legal statements of banks and entity financial statements if the entity is a subsidiary (direct listed companies. or indirect) of a parent preparing its consolidated financial statements in accordance with IFRS as adopted by the EU (Endorsed IFRS) or a branch of a foreign enterprise preparing its financial statements in accordance with IFRS as adopted by the EU. IFRS for SMEs is prohibited. The Accounting Act is the primary piece of legislation The Accounting Act applies regulating accounting and financial reporting, and also sets to all other companies. forth a number of requirements pertaining to statutory audit. It is largely based on the Fourth and Seventh EU Company Law Directives, and applies to all companies, including SMEs. Companies not required to apply IFRS must apply the requirements of the Accounting Act. Following the publication of the new EU Accounting Directive in 2013, the authorities are currently in process of developing proposals to revise the Accounting Act accordingly. Poland has fully aligned its legal framework with the EU Poland’s legal framework acquis communautaire as it relates to accounting and for accounting and auditng auditing and implemented most of the recommendations of is fully aligned with the the previous ROSC A&A. The country has now acquis with the creation of implemented the IAS Regulation requiring EU-endorsed the Audit Oversight IFRS for the preparation of consolidated financial statements Commission (KNA) of companies whose securities are admitted to trading on a regulated market of any Member State. In 2009, the Act on Auditing established an Audit Oversight Commission (KNA), responsible for overseeing statutory auditors, audit firms and the operations of the Chamber of Auditors of Poland (KIBR) that related to matters of the audit oversight. Whilst the form of the oversight has been legally established, KNA is moving through the functioning substance of the activity remains in need of a settling-in period with increased capacity to move KNA to a fully-fledged early stage challenges to independent body operating in the public interest. Significant the oversight function operational weaknesses remain with the reporting function which is overly compliance-based and strong tensions exist between the organisations most closely associated with audit oversight with the result that the current trialogue (KNA, KRBR and National Supervisory Committee - KKN) seems insufficient to identify possible improvements. The income tax base and profits for financial reporting Polish GAAP and the purposes are related but can involve multiple and income tax base are linked burdensome adjustments, particularly for SMEs. but requires simplification The Polish Constitution enshrines and protects the concept The accounting profession and legal status of self-governing professions in public trust. has been contracting, a There are two accounting professional bodies: the positive trend which Association of Accountants (SKWP) and KIBR, both of reflects greater emphasis on quality assurance. Poland – ROSC Accounting & Auditing iv which are members of the International Federation of Accountants (IFAC); KIBR is considered a self-governing professional body in public trust, whilst SKWP is regarded as an ordinary association. Whilst KIBR is broadly compliant with IFAC’s SMOs, some improvements are needed as well as changes to its business model with 2011 and 2012 having been years of loss-making. Finally, it continues to lag behind the Government in terms of reforms in the financial reporting arena with outstanding reform issues from the 2005 ROSC report remaining unfinished at best and untouched at worst. SKwP, as an Association of Accoutants, is not recognised by the Act on Statutory Auditors and although a full member of IFAC, has a market recognition issue for its qualification offerings and as a consequence is perceived as mainly a training provider. The Audit Quality Inspection Unit within KIBR (KKN) Significant efforts were made significant efforts in order to enhance its quality made in order to enhance assurance system by expanding its staff. The quality its quality assurance assurance systems are supervised by KNA. The first system but challenges challenge of the quality assurance team was to complete a remain particularly with cycle of reviews, i.e. on a 3 year cycle for firms performing urgent need to modernise the audits of public interest entities to December 31, 2012. the QA methodology The current methodology for inspections is heavily compliance-based and is undergoing refom and recommendations with the support of FRTAP (see Appendix B). The impending EU Audit Directive with changes to audit regulation, particularly in the area of quality assurance, will bring additional burdens on a system that is currently undergoing significant upgrading. University curricula are not in line with the needs of the There is limited integration profession (as proxied by the professional examination). between the profession and There is a need to ensure greater consistency between the academia curriculum at the university level and the content of the professional examination. Matching the supply of highly educated graduates with the demand for professional services is a key component of sustainability for the profession. International qualification providers in Poland are pursuing this route vigorously with, for example, record exemption levels being achieved between universities and the ACCA. This level of competiton is likely to increase as demand for accounting services is driven by outsourcing organisations moving to Poland. KIBR issues a list of approved continuing professional Whilst CPD requirements development (CPD) courses on an annual basis. CPD are in line with good providers must be approved by and registered with KIBR; international practice, only those courses taken from such approved training CPD course offerings are providers count towards CPD requirements. The list of limited approved courses is quite limited, in part because competition is limited among CPD providers, as well as being closely regulated under the Audit Law, preventing an open and competitve market for CPD provision based upon individual member needs. As a result, accounting professionals are restricted from having a wide choice of topics and providers to suit their own CPD needs. The Accounting Standards Committee (ASC) sets Polish The standard setting accounting standards, and the Chamber of Auditors sets process for accounting and auditing standards could be strengthened Poland – ROSC Accounting & Auditing v auditing standards. In ten years of existence the ASC has produced seven standards and 4 positions as at the date of this report, based upon IFRS. The accounting standard-setting process requires modernisation with a development vision or strategy published for stakeholder consultation. The Chamber has issued three auditing standards since 2010 and despite overwhelming support for ISA-adoption from other organisations such as the KNA, this process has not been completed. Neither body follows an openly transparent process in issuing standards. A single agency, the KNF, is responsible for supervising The integrated financial listed companies, banks, insurance companies, and other supervision authority, KNF financial institutions. Public interest entities under KNF reports annually on supervision are subject to similar requirements. There is no compliance issues with formal link between KNF and KIBR’s CPD Committee IFRS and comments on where issues identified by the regulator can be translated auditing issues into education and training for auditors with a cascade to preparers. The review of a sample of IFRS-based financial statements Listed companies IFRS- by the ROSC team indicates that companies whose securities based financial statements are listed on a regulated market implemented IFRS to a high are generally of high quality standard. The team noted that a substantive effort quality but the role of audit was made by most of the companies to avoid boiler-plate committees needs to be language and to link disclosures to their transactions. The reinforced role of audit committees within listed companies needs to be reinforced to ensure timely and reliable financial reporting for investors and ensure the integrity of Poland’s capital market. The annual report of KNF, produced by the Accounting KNF and KNA annual Division of the Public Offerings and Financial Information reports provide useful Department of the KNF, reports on the compliance of the information but their financial statements of security issuers other than investment usefulness would be funds with the applicable reporting framework, particularly enhanced if they conveyed with the requirements of IFRS. KNF reports are legalistic in a better sense of the design by listing issues and lack any impact analysis that impacts of the issues would allow the reader to quickly understand the financial reported effect of the issues raised on the financial statements. The KNA reports are also legalistic and provide little information on the progress being made by the profession towards improving the quality of auditing. Poland – ROSC Accounting & Auditing vi  I. Introduction 1. Reports on the Observance of Standards and Codes (ROSC) Accounting and Auditing (A&A) assess accounting and auditing practices in participating countries. They form part of a joint initiative that is implemented by the World Bank and the International Monetary Fund to review the quality of implementation of twelve internationally recognized core standards (the ROSC Program). These standards and their related codes are relevant to economic stability, and private and financial sector development. The program was developed at the end of the 1990s, in the wake of financial crises that affected many countries in several regions of the world. In the case of the ROSC A&A for Poland, the international standards used as benchmarks are (i) relevant portions of European Union legislation (also called the acquis communautaire), (ii) International Financial Reporting Standards (IFRS),2 (iii) clarified International Standards on Auditing (ISA),3 (iv) the International Federation of Accounts (IFAC) Code of Ethics, and (v) other international good practice in the field of accounting and auditing regulation. 2. This is the third ROSC A&A for Poland. The first two were conducted in 2002 and 2005. This report updates the findings of the 2005 report, and assesses the extent to which prior recommendations have been implemented. Since its inception in the early 2000s, the ROSC A&A program has concluded evaluations in more than one hundred countries around the world. ROSC A&A reports have been produced for all countries of the Europe and Central Asia region, except the Russian Federation. 3. Poland has been a member state of the European Union since 2004; it has not adopted the Euro. Poland is in central Europe, with a coastline on the Baltic Sea in the north. It is shares its borders with numerous countries: Germany, Czech Republic, Slovakia, Ukraine, Belarus, Lithuania, and Russia. The capital and largest city is Warsaw. Poland has a stable population of about 38.2 million. Its 2012 Gross Domestic Product (GDP) per capita was US$12,708;4 almost double what it was when Poland acceded to the EU (US$6,620 in 2004). This is still lower than most of its peer countries from the EU85 (average: US$ 15,909), and significantly below the EU average of US$ 32,677; however this gap has narrowed significantly in recent years.6 4. Poland is the largest economy in Central Europe; it has performed well in a challenging environment, growing at an average real rate of 3.4 percent over the period 2008-12.7 2 In this report, IFRS refers to the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), the International Accounting Standards (IAS) issued by IASB’s predecessor the International Accounting Standards Committee (IASC), and the applicable interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC). 3 ISAs are issued by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC). 4 GDP per capital in current US$. Source: World Development Indicators, World Bank. 5 The EU8 are the group of eight former World Bank client countries that acceded to the European Union in May 2004: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic and Slovenia. Poland’s GDP per capita is lower than all its EU8 peers, except Hungary. Slovenia leads the group, at US$ 22,001. 6 In 2004, Poland’s GDP per capita at was only 25% the EU average. In 20 12, that figure climbed to 39%. Source: World Development Indicators, World Bank. 7 Source: Economist Intelligence Unit’s Country Forecast for Poland. November 2013. Poland – ROSC Accounting & Auditing 1  Strong economic fundamentals, sound macroeconomic policies, coupled with limited external imbalances, allowed Poland to avoid a recession despite the 2008 global economic crisis. Poland is the only European Union (EU) country that has grown continuously over the last four years. Countercyclical policies and the floating exchange rate regime, together with ample international reserves and the precautionary Flexible Credit Line arrangement with the International Monetary Fund (IMF), helped insulate the economy and supported confidence. 5. Nonetheless, the economy has slowed recently, reflecting a combination of external factors and weaker domestic demand. GDP growth slowed to 1.9 percent in 2012 and further decelerated in early 2013 as renewed turmoil in the Euro zone weakened business’ and consumers’ confidence, leading to a drop in investment and stagnation in private consumption. The deceleration is further amplified by the negative impact of the ongoing fiscal consolidation effort, and by negative growth of real wages. Prospects for future economic growth will depend on developments in the Euro zone, as the Polish economy is closely linked to the EU through trade and financial flows. Due to the difficult external environment, Poland’s real GDP was expected to grow by 1.3 percent in 2013, and prospects beyond 2013 largely depended on developments in the Euro zone. Growth projections were at 2.4 percent in 2014 should the external environment strengthen and investment increase (in the context of the new EU financial perspective). The unemployment rate was expected to further increase until 2014 and may start to decline only in 2015 if growth accelerates. 6. Poland’s financial system appears to be resilient. Poland’s financial system has been expanding rapidly and is dominated mostly by foreign-owned banks. Total financial system assets grew from 86 percent of GDP in 2005 to 124 percent of GDP in 2012. Banks account for about 70 percent of financial assets, and foreign-owned banks control about 63 percent of the banking sector’s total assets. The state owns controlling shares in four banks, which together account for about 23 percent of banking sector assets, including Poland’s largest commercial bank, with a market share of 16 percent. The banking system is not highly concentrated: the top five banks account for about 44 percent of system assets. Credit unions and cooperative banks constitute a small segment of the banking system, but the latter are growing rapidly. Pension and mutual funds are the main non-bank players in the financial system. 7. Poland is the second-largest insurance market in Central and Eastern Europe, after the Russian Federation, although it is still small, about half the size of mature European markets (insurance premiums account for 3.5 percent of GDP in Poland). The Polish insurance industry recovered in 2010-12, following a sharp contraction in the slump year of 2009. Gross premiums reached US$ 19.1 billion in 2012, a 9 percent increase from the previous year. Life insurance accounts for just under half of all premiums (48 percent). PZU, a domestic firm, is the country's largest insurance company, with a market share of around 30 percent. Insurance companies may be state-owned or private, and many are controlled by international insurers. Foreign owners control the bulk of both life and non-life insurance firms. 8. The Warsaw Stock Exchange (WSE) is the dominant exchange in Central and Eastern Europe, and ranks second only to the London Stock Exchange in the number and value of initial public offerings in Europe. There are 438 listed companies, totalling EUR 177 Poland – ROSC Accounting & Auditing 2  billion in market capitalization (equivalent to 36.3 percent of GDP). 8 Warsaw has led European stock exchanges in terms of new listings – it had 105 initial public offerings in 2012 on its main market and its New Connect alternative market for smaller companies, accounting for 40 per cent of all new listings in Europe. However, the value of those companies was small, EUR 731 million, compared with the EUR 5.1 billion in new listings on the London Stock Exchange, for example. Vienna, in contrast, had no new listings in 2012, while Budapest had one and Prague, three.9 9. This ROSC A&A serves three main objectives: (i) to support Poland’s development strategy, particularly regarding the enhancement of economic competitiveness, (ii) to assess progress achieved under the Financial Reporting Technical Assistance Program (FRTAP), and (iii) to update the findings of the 2005 ROSC A&A. The FRTAP is a Swiss-funded program aimed at strengthening accounting and auditing practices in Poland through the implementation of high quality standards in these areas. Objective 1: Supporting Poland’s development strategy 10. The World Bank is supporting Poland’s national development priorities through the Country Partnership Strategy of FY2014-17; in particular, the ROSC A&A supports the first pillar, on economic competitiveness. The CPS rests on four strategic engagement areas, which are aligned with the "Europe 2020" strategic agenda of smart, sustainable, and inclusive growth as well as with the country’s overall national development strategy. The most relevant pillar for the ROSC A&A is the first one, on economic competitiveness. Although Poland improved its business environment ranking between 2011-12 more than any other country worldwide much still remains to be done. Poland is ranked 55th in the Doing Business 2013 Report, below the EU average (40th). The Government has made it a priority to improve competitiveness in the coming years. During the CPS period, the World Bank will provide continued support, with a focus on (i) reducing unnecessary regulatory burdens for private sector development, (ii) further strengthening the financial sector, and (iii) enhancing financial auditing, accounting and reporting.10 11. The ROSC A&A contributes to each of these focus areas specifically.  Appropriate regulatory requirements and reduction of unnecessary burdens: The ROSC A&A looks at the accounting, audit, and reporting requirements applicable to most types of companies, including public interest entities (PIEs), and small and medium-sized enterprises (SMEs) to ascertain whether the requirements are appropriate and necessary. While PIEs have fiduciary responsibilities to depositors, shareholders, or the public at large, this is not true for most SMEs. Smaller companies need a simplified accounting and financial reporting framework, with requirements commensurate with their size, the types of transactions they conduct, and their limited range of stakeholders. It is important that they are not hampered with unnecessary or unduly complex regulations, as many SMEs lack the capacity or resources to comply. 8 Source: Economist Intelligence Unit’s Industry Report on Financial Services for Poland, June 2013. 9 Source: “Stock exchanges: Sound of overtures in Warsaw and Vienna.