Ph. D., Chief Assistant
University of National and World Economy
AUDIT COMMITTEES IN BULGARIA – IMROVING CORPORATE GOVERNANCE AND TRANSPERENCY
In order corporate governance to be effective, all involved parties – management board members and senior management, internal auditors, audit committee (AC) and external auditors, should participate actively and collaborate. For AC, in particular, collaboration and integrity is crucial for its effective and efficient functioning. AC oversees the financial reporting process, internal control, involved risks.
The separation of ownership and control creates a conflict of interest due to the limited ability of the principal or shareholder to directly observe decisions by the agent or manager (Jensen and Meckling, 1976). AC has evolved as a mechanism, which enhance the reliability of the external financial reports, improve internal control and increase auditor activity. Hence principle`s trust is improved (Pincus, Rusbarsky and Wong, 1989; Dalton and Dalton, 2005) and lessen the principle-agent conflict.
Within European Union member states Directive 2006/43/ EU introduces and defines the role of the audit committee for successful corporate governance. Additionally, legislation on statutory audits is upgraded and enhanced through the publication of Regulation (Regulation 537/2014) and Directive (Directive 2014/56/EU). In both legislative acts, new requirements for audit committees are enacted.
In Bulgaria, ACs are enshrined in law in 2008 with amendments to the Law on Independent Financial Audit (LIFA). New requirement is applicable to all public-interest entities (PIEs). PIEs as per Directive 2014/56/EU include credit institutions, insurers, pension insurance companies and pension funds, investment intermediaries, UCITS/ investment companies, among others.
Main functions of the AC are: oversee the financial reporting processes in the PIEs; oversee the effectiveness of the internal control; oversee the effectiveness of risk management in the enterprise; oversee the independent financial audit in the enterprise; review the independence of the auditor of the enterprise in accordance with the law and the Code of Ethics for Professional Accountants.
As of Dec. 15 Law on Independent Financial Audit (LIFA) is amended as there is no amendment in AC functions, requirements. New draft of Law on Independent Financial Audit is prepared, where rights and requirements of AC are enhanced as additional harmonization issues are addressed. Hence, Audit committee (AC) is responsible for the selection procedure of the statuary auditor and informs management and supervisory body on the results of the statutory audit and explains how the statutory audit contributed to the reliability of financial reporting and the role of the AC in this process.
New moments also include – AC approval for additional services beyond the statutory financial audit services provided by statuary auditor. AC prepares and submits to the Commission for Public Oversight of Statutory Auditors an annual report on its activities. New Draft of Law on Independent Financial Audit aims at strengthening the independence of audit committee and enhances its competence by introducing new requirements for members and the composition of the audit committee. The general meeting of shareholders or partners approves the status of audit committee, as its rights and obligations are clearly specified.
Broader involvement of all stakeholders (shareholders, owners, auditors, professional association, etc.) is expected, which to enable systematic approach, taking into consideration local specifics, possible effects, along with EU-wide requirements.
In summary, over the past years Bulgarian legal framework is evolving, which improves the perspective of audit committee as a key element of corporate governance. It is worth mentioning that in Bulgaria, PIEs are adhering to the legal requirements. Formally, ACs are structured, members selected, reports are prepared. General conclusion for audit committees is that transparency of the decisions, members` professional experience and background, along with independence are major issues. Guidelines, educational seminars and form of best practices are possible decision, as for independence stricter rules and member requirements should be applied.
- Charri, Massarra, Mattias Hamberg, and Daniel Johanson, Voluntary adoptions of audit committees in Europe
- Dalton, C. M. and Dalton, D. (2005) Boards of directors: Utilizing empirical evidence in developing practical prescriptions. British journal of management, vol. 16, supplement 1, 91-97
- Directive 2014/56/EU of the European Parliament and the Council of 16 April 2014 amending Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts
- Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC (Text with EEA relevance)
- Independent Financial Audit Act, Last amendment - SG No. 95 as of 08.12.2015
- Jensen, M.C. and Meckling, W. (1976) Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of financial economics, vol. 3 (4), 303-431
- Regulation (EU) No 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC Text with EEA relevance
- Pincus, K., Rusbarsky, M. and J. Wong (1989) Voluntary formation of corporate audit committees among NASDAQ firms, Journal of accounting and public policy, vol. 8 (4), 239-323
- Salvioni, Daniela M., et al. The Audit Committee in the EU Emerging Countries
Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts
Salvioni, Daniela M., et al. "The Audit Committee in the EU Emerging Countries."
Regulation (EU) No 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities
Directive 2014/56/EU of the European Parliament and the Council of 16 April 2014 amending Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts