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BUSINESS FOCUS - TWO AUDITING EXPERTS DISCUSS SLOVAKIA'S TAX FUTURE: WHAT IT WILL BRING AND HOW TO PREPARE FOR IT

Investors have a right to know

INVESTORS have the right to reliable and complete financial information upon which to base their decisions. The auditing profession, both globally and in Slovakia, is now focused on providing independent assurance to financial statements users, partners of the audit and professional services firm Ernst & Young told The Slovak Spectator in an interview. Peter Chrenko, Country Managing Partner and Head of Tax Services, and Mark Dobson, Head of Assurance and Advisory Business Services of Ernst & Young, are certain that a high quality, independent audit is a fundamental part of sound corporate governance.


Peter Chrenko
photo: Courtesy of Ernst & Young

INVESTORS have the right to reliable and complete financial information upon which to base their decisions. The auditing profession, both globally and in Slovakia, is now focused on providing independent assurance to financial statements users, partners of the audit and professional services firm Ernst & Young told The Slovak Spectator in an interview. Peter Chrenko, Country Managing Partner and Head of Tax Services, and Mark Dobson, Head of Assurance and Advisory Business Services of Ernst & Young, are certain that a high quality, independent audit is a fundamental part of sound corporate governance.


The Slovak Spectator (TSS): Is accounting in Slovakia currently compatible with European Union standards?

MD: Yes, accounting in Slovakia is broadly consistent with the standards applied in the EU, more so following the changes in accounting legislation that came into effect on January 1, 2003. However, it would be a mistake to think that accounting standards within the European Union countries are fully homogeneous, as each country's accounting standards are determined by its national legislation and its standard-setting bodies, just as is the case here in Slovakia.


Mark Dobson
photo: Courtesy of Ernst & Young


TSS: Considering globalisation, is it important for Slovakia to have its accounting principles cognate, or similar to those of neighbouring countries?

MD: The rapid development of global financial markets has increased the need for global consistency in accounting principles, and this is particularly true for Slovakia at a time when, with EU accession approaching, there are significant opportunities for attracting further foreign investment.


TSS: Slovak firms have had to keep two different accounts - one for taxation purposes and one for keeping track of their economic performance. Will Slovak legislation solve this problem in the future? Do other countries have similar problems?

PCH: I believe that, historically, financial statements in Slovakia were produced primarily to allow the recording of accounting transactions for tax purposes and to provide a basis for preparing the tax return. However, tax is just one item among the financial statements and, therefore, the primary purpose of financial accounting should not be to compute the tax charge... What we see now, and this is also a standard in other OECD countries, is that accounting is distinct from "tax computing", as they both serve different users (stakeholders) - accounting serves regulators, investors, owners, creditors, etc, and tax computing serves the fiscal authorities.

MD: There have been significant changes in Slovak accounting legislation over the last five years. Slovak Generally Accepted Accounting Practices (GAAP) financial statements (which include a statement of cash flows and relevant footnotes) now provide the reader with a more complete picture of a company's financial performance and position and do not serve only as a basis for computing the annual tax charge. That said, the existing legislation is somewhat inflexible in terms of financial statement presentation. This is an area where we believe that further changes are desirable, possibly through fully implementing the principles of International Financial Reporting Standards (IFRS).


TSS: Will the tax reform in Slovakia influence the accounting and audit sphere?

PCH: I think tax reform should not directly influence accounting or auditing; these will be primarily influenced by developments in IFRS. Tax reform itself has two major drives. Firstly, to harmonise indirect taxes (VAT and excise taxes) with the directives and regulations of the EU, which is a requirement from the date of accession. Secondly, direct taxes (CIT, IIT, property taxes) remain within the full sovereignty of the Slovak government with only limited harmonisation, to achieve a free flow of capital and profits within the enlarged EU, but still with some boundaries, which are governed by basic freedoms and rights envisaged by EU treaties and interpreted by the European court of Justice (e.g. freedom of establishment, non-discrimination, freedom of movement, etc). Therefore, Slovakia is trying to maximise its attractiveness among other "accession countries" within those defined boundaries.


TSS: How are Slovak firms prepared for these changes and how can audit firms assist them?

PCH: There is no simple answer to this question. We can see different levels of preparation by different firms. Some of them will be affected more than others. Some changes relate to the way they do their business, while some relate to new processes and to reporting related to VAT compliance. As there is not a universal checklist of solutions, only of issues, the best way Ernst & Young can assist - and actually is already assisting its clients - is by organising private client workshops tailored to their specific business and industry needs, with subsequent assistance during the transition.


TSS: Will firms be given enough time to adjust their operations to the new tax legislation? Are they prepared for the transition? What could cause them the most serious problems?

PCH: Timing is a critical issue. Much of the "new" legislation, which should already be in place, has still not been passed. It is not uncommon for tax legislation to be approved at the last minute. This, of course, does not help and it is very difficult for businesses to plan bigger transactions properly as they do not know exactly what the legal framework of the new tax will be. As for indirect tax reform, most of the issues are understood, as the EU already regulates them. Therefore, anyone who is interested can get a reasonable overview of the new system with the specifications to be "announced" later through the new VAT and excise tax regulations. I do not expect "significant" problems with the transition, if the transition process itself is managed effectively.


TSS: What other laws are necessary to make the audit more effective in Slovakia?

MD: To make auditing more effective in Slovakia, the rigid application of International Standards on Auditing (ISA) should be secured without modification. In addition, all future ISAs and International Federation of Accountant's (IFAC) Guidelines and Recommendations concerning auditing and the auditor's code of professional ethics should be adopted here. ISAs have recently been translated to Slovak and this will assist in this process. The Slovak Chamber of Auditors (SKAU) should continue to have overall responsibility for audit regulation in Slovakia, providing its membership with practical implementation guidelines and training on the ISA and IFAC codes of professional conduct, and overseeing audit work performed by its members.


TSS: Do you think that the current business environment is healthy and transparent in terms of auditing?

PCH: With the recent legislative changes in the US (Sarbanes-Oxley) and other European countries (e.g. France), I think that the auditing profession is now focused on providing independent assurance to financial statements users. The separation of audit and consultancy services for publicly traded companies should lead to more transparency. Independence and quality are of paramount importance and, when selecting an auditor, I believe that local decision-makers should focus on these key issues - rather than putting too much emphasis on the fee.

MD: Investors have the right to reliable and complete financial information upon which to base their decisions. Capital markets can only function properly if investors have confidence in the corporate world. Boards of directors, audit committees, and independent auditors have a joint responsibility to ensure that this confidence is maintained.

Ernst & Young was the first major accounting firm to deliberately divest its consulting business, in 2000. Furthermore, we were the first audit firm to implement and communicate our strategy of separating business development between audit clients and non-audit clients. Professional standards prohibit independent auditors from owning securities issued by any audit client. Ernst & Young was the first firm to develop an on-line reporting system that facilitates compliance with these standards and requires partners and staff to immediately report any changes in their securities portfolios and to confirm all holdings each quarter.


TSS: Ernst & Young is one of the so-called "Big4" leading providers of professional advisory services in the areas of audit & assurance, tax and transaction support services. Is there anything special that the company offers to its clients? Is there any service to help your clients prepare for the impact of EU accession?

PCH: Ernst & Young is well positioned to steer businesses of all sizes through all the issues, challenges, and opportunities that are certain to arise with regard to the enlargement of the European Union. Our major task is to help our clients assess the risks and opportunities arising from accession, and develop and implement strategies to deal with them. Therefore, we have not only expanded our service offerings to include EU accession services, but have also organised a series of client seminars and meetings at which our professionals address the most important implications of assuming full EU membership in the areas of taxes, customs & international trade, and IFRS.

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