Colombia - Report On The Observance Of Standards And Codes (ROSC) : accounting and auditing

REPORT ON THE OBSERVANCE OF STANDARDS AND CODES (ROSC) Colombia ACCOUNTING AND AUDITING July 25, 2003 Contents Executive Summary I. Introduction II. Institutional Framework III. Accounting Standards as Designed and as Practiced IV. Auditing Standards as Designed and as Practiced V. Perception of the Quality of Financial Reporting VI. Policy Recommendations Executive Summary In the recent past, the Colombian government, with the approval of Congress, has embarked on new strategies to advance structural economic reforms and macroeconomic stability, reform the regulatory institutions and systems of control, and improve law and order. One of the government's reform proposals involves a project to improve the corporate financial reporting regime. This project includes enacting a new law to reform and develop the accounting profession, fully adopting International Accounting Standards (IAS) and International Standards on Auditing (ISA), implementing international best practice on a professional accountants' code of ethics, and establishing an internationally comparable arrangement to license public accountants. This report is prepared on the basis of the findings of a review of accounting and auditing standards and practices in Colombia. The review exercise focused mainly on the strengths and weaknesses of the institutional framework that supports a corporate financial reporting system in the country. The current legal and regulatory requirements on accounting have led to issuance of conflicting accounting standards from multiple sources. Legal arrangements that gave various regulatory bodies the right to determine the accounting requirements for entities falling under their jurisdiction have led to the predominance of special-purpose financial reporting. In practice, there is no operational concept of general-purpose financial reporting. The legislative requirements on auditing contradict the modern concept of financial statements audit. In reality, there is no external financial statements audit requirement in Colombia. There are sufficient problems with the capacity and regulation of the accountancy profession that the existing profession cannot be the basis for the independent financial statements audit function. This report provides policy recommendations to improve accounting and auditing practices, including strengthening enforcement mechanisms to ensure compliance with accounting and auditing requirements and a professional code of ethics for auditors. In this context, it is recommended that a statutory regulatory body be established. Other policy recommendations include the creation of a Higher Council that would be responsible for issuing IAS and ISA as local mandatory requirements for public interest entities; establishment of a new professional organization for auditors of financial statements; reformation of accounting curriculum and significant improvements in teaching capacity of accounting instructors at universities; and organization of training programs on practical aspects of IAS and ISA for accountants, auditors, and others. This report was prepared by M. Zubaidur Rahman (OPCFM) and Luis Schwarz (LCR) of the World Bank on the basis of the findings from a diagnostic review carried out in Colombia in April and May 2003. The review was led by the country authorities, and was conducted through a participatory process that involving various stakeholders.  I. INTRODUCTION 1. The review of accounting and auditing practices in Colombia is a part of the World Bank and the International Monetary Fund (IMF) joint initiative on Reports on the Observance of Standards and Codes (ROSC). The review focused on the strengths and weaknesses of the accounting and auditing environment that influences the quality of corporate financial reporting, and covered both requirements and actual practices. It used the International Accounting Standards (IAS)1 and the International Standards on Auditing (ISA) as benchmarks. 2. Colombia has a broad mineral and agricultural resource base, an educated and skilled labor force, a modern manufacturing and consumer economy, and a democratic political system. Over 400 multinational companies in Colombia are successfully expanding their businesses, despite insurgencies and armed conflict. Of the 139 companies listed in the Colombian Stock Exchange, 109 are equity and debt issuers, and 30 are debt issuers only. The volume of trading is approximately US$2 million per day, with a total capitalization of about US$17 billion; however, market liquidity is a major concern. The 1997-99 recession, which came after more than 40 years of steady growth, was the worst in 70 years. Colombia's economy was hit hard, but today it has largely recovered. 3. Despite its problems, Colombia ranks solidly among the countries that are committed to implementing international best practices to strengthen the underpinnings of their market economies To reactivate the economy, gain public confidence in the capital markets, and attract domestic and foreign investors, the current government with the approval of Congress has embarked on new strategies to advance structural economic reforms and macroeconomic stability, reform the regulatory institutions and systems of control, and improve law and order. One of the government's reform proposals involves a project to improve the corporate financial reporting regime; it includes enacting a new law to reform and develop the accounting profession, fully adopting international accounting and auditing standards, implementing international best practice on a professional accountants' code of ethics, and establishing internationally comparable arrangements to license public accountants. 1 In this report, the term International Accounting Standards refers to all standards and related interpretations issued by the former International Accounting Standards Committee (IASC) and the International Financial Reporting Standards (IFRS), and related interpretations issued by IASC's successor body, the International Accounting Standards Board (IASB). Colombia