Auditing Standards As Designed And As Practiced

Auditing Standards As Designed And As Practiced

53. 
    The auditors belonging to international networks are subject to internal quality assurance reviews and are required by their global headquarters to apply international standards. Audit opinions on all annual accounts produced under IFRS or SNCRF normally state that the audit has been conducted in accordance with standards and guidelines of Portuguese Order of Accounts Reviewers (Ordem dos Revisores Oficiais de Contas) or ISA.
    

54. 
    Without local auditing standards, ISA is considered the de facto auditing requirement for Cape Verde. In practice, ISA application differs among the various audit firms and audit engagements. To assess actual auditing practices, the ROSC team interviewed practicing auditors and senior leaders of the auditing profession. It appears that auditors associated with international accounting firm networks generally tend to follow internationally recognized auditing standards. Nevertheless, there were instances where some of these firms apparently had difficulties in complying with some auditing standards “in substance”. Due to scarcity of well-trained senior audit practitioners, the trainees in many cases do not receive adequate level of supervision. The local audit firms, which do not have any relationship with an international accounting firm network, carry out auditing activities in accordance with self-developed procedures that do not seem to be comparable with any internationally recognized auditing standards.
    

55. 
    The lack of practical training adversely affects quality of audit. In conventional audit practices, the audit team is made up of a hierarchy of complimentary professional accountants. Audit trainees who are usually under a training contract occupy the lowest level. The trainees usually have a basic accounting qualification and undergo several years of on-the-job training as well as professional development and examination leading to certification. In Cape Verde, however, professional firms are under no obligation to employ audit trainees. While most staff of these audit firms do not undergo systematic training, coaching, and mentoring once hired, training provided to accounting/audit staff relates primarily to the firms’ audit methodology and practices and availability of other generalized training. Training is dependent upon availability of learning materials translated into Portuguese to benefit the majority who are non-English speaking staff. The quality of audit work, just from the structure of the audit practice, is unlikely to match that of accounting practices made up of the full complement of trainee, partly qualified, and fully qualified accountants for each assignment. This is more visible in the context of the implementation of SNCRF and IFRS, as the proportion of persons with the right training remains low.
    

5. Perceptions on the Quality of Financial Reporting

56. 
    There is a general perception that financial statements are prepared in Cape Verde primarily for tax purposes. Demand for high-quality financial reporting is low. If the tax authority is satisfied with the annual financial statements, nobody questions whether the enterprise had complied with high-quality accounting standards. Many companies of various sizes are not subject to the audit of financial statements. There is no tradition of financial analysis in the country (except within the financial institutions when issuing credit), and no credit-rating agencies. The banks do not place any reliance on corporate financial statements; generally, the lenders manage credit risks using collaterals. With exception of a few large entities with foreign participation, companies in Cape Verde are still largely family owned, and the business community generally sees limited interest in external financial reporting. In fact, some businesses issue two distinct financial statements: one for tax purposes and the other to raise loans from the banks. Issues of specific concern to interviewed stakeholders with respect to corporate financial reporting include (a) the dichotomy between auditors and accountants, (b) the difficulty in identifying registered auditors from quacks, (c) the existence of the old generation book-keepers who had been operating as auditors, and (d) the fact that only financial institutions are required to prepare IFRS-based financial statements. To place reliance on financial statements, financial institutions make recourse to its acceptance by the tax authorities.
    

57. 
    There is a general perception that financial statements audited by large firms belonging to the international network of accounting firms have high-quality financial information. Interviews and discussions with various stakeholders, including relevant regulators, revealed that they place a high reliance on the financial statements audited by the members of international accounting firm networks. Contrary to that position, some stakeholders thought in most cases that an audit does not add value but is only a requirement for the company to satisfy the tax authorities.
    

6. Policy Recommendations

58. 
    The main objective of this ROSC review is to assist the Government and other stakeholders in strengthening the corporate sector’s accounting, financial reporting, and auditing practices as a means to facilitate the Government’s goal of expediting economic development. Implementation of these recommendations will help in the following ways:
    

• 
  Enhancing the investment climate and bolstering domestic and foreign direct investment in the private sector;
  
• 
  Stimulating growth of the small and medium-size enterprises by facilitating their access to credit from the formal financial sector by shifting gradually from collateral-based lending decisions to lending decisions based on the financial performance of the prospective borrower;
  
• 
  Supporting the development of the banking sector and mitigating the risk of crises due to loan collection problems and helping mobilize domestic savings; and
  
• 
  Achieving greater financial transparency in the corporate sector, both state and private owned, thus allowing shareholders and other interested parties to assess corporate performance.
  

59. 
    The policy recommendations in this section are mutually supportive requiring holistic, multi-disciplinary approaches for implementation. Implementation will require the cooperation of Government, regulators, academics, accounting and auditing profession, and other stakeholders. The Government, policymakers, and development partners should work together to secure the resources in order to achieve a strong financial reporting infrastructure in Cape Verde. Due to the lack of local capacity among professional accountants and auditors currently in Cape Verde, support from the development partners will be required to implement the following policy recommendations.
    

60. 
    Establish a multidisciplinary steering committee to coordinate the accountancy reform and development activities. The steering committee should advise policymakers and regulators regarding implementation of the ROSC recommendations. Based on the successful experience of capacity-building activities in other countries, the ROSC team recommends that the steering committee develop a detailed country action plan that sets clearly sequenced key actions and allocates responsibilities for implementing the necessary reforms. The country action plan should form the basis for capacity-building activities for strengthening the underpinnings of accounting and auditing practices in Cape Verde.
    

A. Modernize the Statutory Framework on Accounting and Auditing

61. 
    Modernize the legal framework on accounting and auditing by taking the following steps:
    

• 
  Extend mandatory IFRS application in totality to all public interest entities in Cape Verde.⁶ The public interest entities should be defined in law through an analysis of the business structure in country. Where the tax authorities and the financial institutions regulators need additional information for tax and prudential supervision purposes, this should come up by topping up IFRS.
  
• 
  The capital market authority should build capacity to analyze and review IFRS-based published financial statements.
  

• 
  Mandate obligatory preparation of consolidated financial statements for group companies fulfilling the criteria of public interest entities.
  
• 
  Provide regulators with adequate authority to sanction appropriately against violations of applicable accounting and auditing standards and rules for ensuring effective monitoring and enforcing actions.
  
• 
  Mandate appropriate requirements for filing of financial statements for all entities that are subject to annual statutory audit. Also, develop an arrangement for easy public access to the public interest entities’ financial statements.
  
• 
  Harmonize legislation on general purpose financial reporting by corporate entities with the tax framework. Also, give guidance on how to reconcile the accounting profit/loss with the taxable profit/loss. In absence of guidance, entities often mingle tax reporting requirements and general purpose financial reporting requirements when preparing financial statements.
  
• 
  Mandate auditing requirements in accordance with specific threshold and require the use of ISAs in the audit of financial statements.
  

62. 
    Provide legal backing to establish an arrangement for independent oversight of the auditing profession including audit practice review. In order to improve the legal framework of corporate financial reporting, enact a Financial Reporting Act with focus on all regulatory aspects of accounting and auditing. The National Commission of Accounting Regulation (CNNC) should transform into the Financial Reporting Council and empowered to monitor and enforce compliance with IFRS and ISA, in addition to its current role of preparing SNCRF. The SNCRF are local standards adapted from IFRS and prepared for use by all entities exempted from full IFRS. Align the provisions of the Code of Commercial Enterprises with the requirements of the new Financial Reporting Act. Thereafter, it will be easy to update accounting, auditing, and financial reporting requirements from time to time by simply amending the single Financial Reporting Act.
    

63. 
    Mandate the Financial Reporting Council to establish systematic, institutionalized, monitoring and enforcement mechanisms to ensure compliance with accounting and auditing requirements. The quality of corporate financial statements cannot be ensured by only formally mandating the application of IFRS and ISA since many compliance gaps may nevertheless exist in practice. Invariably, quality depends on designing and implementing a proper monitoring and enforcement system. There are three parties directly involved in the process of ensuring compliance with the applicable standards, and each must be strengthened:
    

• 
  Company directors with legal obligations to prepare the financial statements must employ capable accountants and ensure that they comply with applicable standards.
  
• 
  Audit service providers must possess adequate technical knowledge, put in place appropriate quality control arrangements, and discharge their professional responsibilities independently in order to provide assurance that financial statements comply with all applicable standards and portray “true and fair” view of enterprises’ positions and performances.
  
• 
  The OPACC and the statutory regulators must ensure compliance with the standards and consistently take actions against violators. To ensure effective monitoring and enforcement, the regulators need adequate capacity, authority, and independence. In addition, OPACC will need to develop specific activities to further assist its members with the implementation of the standards. These activities may include updating pre- and post-qualification program in accordance with new and revised standards, and developing implementation guidance to ensure its members have a good understanding of the standards they are required to follow.
  

The oversight will include monitoring and enforcement of auditing requirements, through audit practice review, investigation, and disciplinary actions. The audit oversight unit should develop a partnership arrangement with the OPACC in order to carry out monitoring and enforcement activities with efficiency and effectiveness. Moreover this unit could take steps to draw expertise from bilateral partners while gradually building Cape Verde's capacity for undertaking independent oversight of auditors. The OPACC can learn from other professional bodies within the Association of Accountancy Bodies in West Africa (ABWA) and the Pan-African Federation of Accountants (PAFA).

64. 
    Approve a new legal framework for a functional supreme audit institution aligned with international standards. It is urgent to put in place an effective, fully functional, supreme audit institution that will scrutinize the use of public funds managed by any public institution in the country, including decentralized levels of government, autonomous institutions, public enterprises, and public–private partnerships, and will have clear jurisdiction over all government entities. The supreme audit institution should be granted access to SIGOF, the IT integrated management system, for posting and receiving all documentation necessary to carry out its review. No restrictions should be imposed on the publication of the court findings. The “accounting officer” should be formally and publicly responsible (and held accountable) for implementing all recommendations emanating out of external audits.
    

B. Strengthening Institutional Capacity and Academic Curriculum of the Accountancy Profession

65. 
    Strengthen capacity of OPACC through a twinning arrangement for a period of five years. The twinning arrangement should be developed with a reputable member of the IFAC that could provide assistance with advice on carrying out the preparatory work for empowering the institution; preparation of by-laws, policies, procedures, and other documentation; improvement of governance and development of strategic plan; guidance on operational activities; and other necessary assistance to put in place arrangements for sustainable growth. The twinning partner could also help the OPACC to set its membership requirements and education standards in line with the International Education Standards (IES) and start its own professional accountancy qualification examination, professional learning and practical training arrangements, professional accreditation, audit practice certification, Continuous Professional Development, and related activities in line with international good practice. This will help the OPACC to start functioning as a modern professional accountancy body with the capability to play an efficient and effective role in financial management education and training. Some specific areas of assistance by the twinning partner include:
    

• 
  Prepare and implement a strategic plan for development of the accountancy profession in line with recent international developments;
  
• 
  Design and implement strong governance and functioning arrangements for enhancing organizational effectiveness of the professional body;
  
• 
  Strengthen professional practice standards by assisting to implement internationally comparable professional education, qualifying examination, and practical training arrangements;
  
• 
  Put in place arrangements for enhancing continuing professional development of the practicing accountants and auditors;
  
• 
  Develop the technical department capable of providing support for proper implementation of IFRS in public interest entities and consider using IFRSs for SMEs for the preparation of financial statements of non-public interest entities and to consider whether specific standards could be used for the preparation of financial statements of micro-entities. and ;
  
• 
  Assist audit firms to build capacity for implementing ISA and improving the quality of audit;
  
• 
  Take appropriate steps for adopting the Code of Ethics of the International Ethics Standards Board for Accountants (IESBA);
  
• 
  Establish mechanisms for investigating and disciplining its members for misconduct and breach of the rules;
  
• 
  Take appropriate steps to join and participate in the ABWA Accounting Technicians Scheme West Africa (ATSWA) in order to benefit from existing capacity within the region;
  
• 
  Assist small audit firms to develop capacity for providing quality audit and assurance services, and also to take necessary steps to develop viable audit practices through merger; and
  
• 
  Take necessary steps for full compliance with the IFAC Statements of Membership Obligations (SMOs) in facilitating full IFAC membership of the OPACC.
  
• 
  Make the professional indemnity a condition for granting a license and for license renewal every year to auditors.
  

The professional body could have a public sector section with a separate membership stream and additional qualification requirements. An arrangement should enable the existing government accountants and auditors to complete a learning program — both theoretical and practical — for obtaining professional (public sector section) membership.

66. 
    Enhance academic curriculum and training. The accounting curriculum should include practical application of IFRS to best prepare accountants (rather than bookkeepers) for careers in Cape Verde. A panel of experts should review and update the accounting curriculum in order to incorporate IFRS and IESBA Code of Ethics in the curriculum. The ethical dimensions of business management, corporate finance, and accounting and auditing should be taught with case studies in undergraduate programs. Adequate learning materials in Portuguese should be provided in a functioning library, and these should include electronic learning tools. To improve the quality of training, the universities offering accounting and auditing courses in Cape Verde should collaborate with a reputable international training institution.
    

67. 
    Implement a training-of-trainers program to develop capacity to prepare and audit IFRS financial statements. Design and implement a program to prepare a core group of IFRS experts who would facilitate the development of a sustainable arrangement for continuing implementation of IFRS in Cape Verde. The group of experts should make the commitment to (a) take active part in lecturing at the higher educational institutions and in continuing professional development programs under the auspices of the OPACC and (b) write and disseminate guidance notes on proper implementation of IFRS under local context. Under the training-of-trainers program, international consultants should develop a collaboration arrangement with a leading university and the OPACC. The master trainers should be capable of developing a sustainable arrangement for development of IFRS learning materials in Portuguese to impart knowledge to the practicing and non-practicing accountants and auditors, university students, trainee accountants, and other interested parties.
    

C. Improve the quality of financial reporting and establishing oversight arrangements

68. 
    Mandate IFRS for all public interest entities in Cape Verde. For small businesses, which constitute 95 percent of the entities, consider using IFRSs for SMEs for the preparation of financial statements of non-public interest entities and to consider whether specific standards could be used for the preparation of financial statements of micro-entities.. Cape Verde needs to build capacity of public interest entities and SMEs to improve their financial reporting.
    

69. 
    Enhance capacity of the banking regulator and ensure coordination of all regulators. The Bank of Cape Verde needs to build its capacity and expertise to handle IFRS issues relating to financial institutions. Implementation of prudential regulations in financial institutions closely interacts with IFRS issues. Unless there is adequate understanding of IFRS issues by both the regulator and the banks and other financial institutions, difficulties will arise in reconciling IFRS and regulatory requirements.
    

70. 
    Develop capacity of the Stock Exchange to review IFRS-based financial statements. The Stock Exchange itself should be IFRS compliant. There is need to recruit professional accountants with relevant training and experience in IFRS; and there is need to acquire an appropriate IFRS-compliant accounting package for the Exchange and for the review of the accounts of the listed companies.
    

71. 
    Empower the Office of the Registrar of Companies to require all registered companies to render annual returns. It is imperative that all records are digitalized and the Office of the Registrar must build its capacity to review the financial statements submitted. Other stakeholders should be able to make searches on all registered companies by making enquiries, upon payment of a specified amount, to the Office of the Registrar.
    

72. 
    Upgrade government accounting system from budgetary to patrimonial system. The Office of the Accountant General should be able to capture all incomes and expenditures of Government and adequately prepare financial statements that will show the true position of government finances and to consider the adoption of IPSAS.
    

73. 
    Implement the new state accounting system, including the rules of accrual accounting for receipts and expenditure. When the accrual system is implemented, periodical (at least monthly) control by comparing the data of the budget system (budget execution) and those of the accounting system should be put in place. The revenue expected from the management of the property of the state should be accounted for on an accrual basis (i.e., as soon as the receivable is identified, it needs to be recorded in order to better manage the collection of revenue).
    

74. 
    Build capacity of the Office of the Auditor General so that it can audit all government ministries and review the accounts of all state-owned enterprises. It is also critical to increase the number of staff of the Court of Accounts and to develop their technical skills to enable them to express professional opinion(s) on the state accounts and the state-owned enterprises.
    

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