Transparency and enhance of trust of the legal auditor profession according to the public interest

During the months of the 2024 summer season, the Ministry of Finance, with the aim of “improving financial reporting in accordance with international standards and good practices, with the support of the World Bank (WB), presented for public consultation[1] a draft law, which revises almost all the current law on statutory audit and the approved accountant strengthening the functions of the audit oversight  and the rules regarding the definition of businesses that are obliged to perform statutory audit according to the criteria determined by the government.”

According to the report of the draft law “An important element that comes as innovation, based on the EU directives regarding the legal and accounting audit of the private sector, is the inclusion of the legal obligation for the legal auditors to provide assurance for sustainability reporting (according to the relevant accounting directive, the report will be prepared by large economic entities, entering into force gradually until 2028). Currently, such reporting in our country is partially included in the law no. 25/2018 “On accounting and financial statements”.

At first glance, the draft law has its object with the changes that are proposed in:

• Alignment of legislation with that of the EU, in order to fulfill the requirements defined in Chapter 6 of the acquis communautaire;
• Clearer definition of the units that are obliged to perform the legal audit;
• Improving the further implementation of the law, improving and strengthening the rules for conducting the legal audit of public interest entities (PIE);
• Determination of the obligation to provide security on sustainability reporting by audit companies;
• More complete clarification regarding the implementation of some basic work procedures that must be performed by legal auditors, in support of the provisions and the relevant directive; as well as
• Clarifying the relevant terminologies where problems have been encountered, with the aim of unifying and improving the applicability of this law.

The realization of these objectives, within the framework of the relevant changes, will make it possible to increase the quality and responsibility of legal auditors and audit companies, strengthening the internal governance of economic entities with public interest, improving the work of legal auditors, creating in thus a more professional and transparent legal audit market.

But, beyond the clarifications and the context on which the Ministry of Finance has been encouraged to improve the legal auditor profession, according to the model of consultations with interest groups, it seems that it has not aroused further interest in clarifications beyond those proposed by the government, and which has pushed this legal initiative outside the approved calendar for 2024.

From this it is understood that the main need for the proposal of the law comes simply from the fact that it is time to completely harmonize the rules of auditing for the preparation of statements and financial reporting, as required by Chapter 6 of the acquis communautaire “Commercial legislation”.

But, before this law reformats not only the function of legal auditors, but also of the Public Oversight Board itself, it is necessary to have an analysis regarding the challenges that still do not create the premises for which this function was created.

In the days that business and the Albanian economy as a whole are experiencing, accountants and auditors of the public and private sector are facing very specific ethical issues.

These are mainly conflicts of interest, especially in central government, where old and autocratic work cultures actually discourage talking about ethical issues. However, the biggest ethical challenges come from political pressure.

Government strategy is often driven to achieve political goals and is decided by people who are not experts in the field. The pressure to show policy achievements in a successful light not only flows down the reporting line from the institution, but arises from public expectations raised by policy statements.

In such circumstances, there can be expectations from all businesses and citizens, that with the change of a law and especially when the alignment with the EU standards is mentioned, the performance obligations declared publicly will be fulfilled, thus leading to moments optimism related to a more complete certainty of fairness when setting budgets, cost programs or evaluating the financial performance of businesses based on these principles.

In fact, beyond the text of the law, which seems to be an adaptation of European practices related to the strengthening of the role of the Public Supervisory Board, it seems that the role that the legal auditor should primarily influence the cleaning of informal declarations of financial statements by first requesting a verification (vetting) of the legal auditors who for years have had the role of certifiers of financial reporting and the growth of a transparent economy and in accordance with national and international standards.

The statutory auditor’s mission must be measured against increasing public confidence

In the reality we live in, it seems that this very important mission of legal auditors and private and public institutions that monitor their professional and moral integrity has not had the required fulfillment[2].

What would be considered the tasks they have undertaken to fulfill would have a direct effect on curbing the trend of informality by orienting businesses for statements that truly reflect their activities.

On the other hand, the weight of statutory auditors would be considered a fulfillment of professional ethics if there was also inhibition of informal money laundering in the financial statements, which is achieved by a correct application of the law in force on auditing, but also the laws implemented by businesses and subject to audit.

Meanwhile, the model of political patronage that has accompanied the annual testing processes of auditors, as well as rumors about violating the ethical integrity of testing and monitoring institutions, naturally do not coincide with the public interest and have helped to reduce financial vigilance.

In this sense, the adoption of the new law should require more guarantees from those in charge of law enforcement (from the public and private sector), to increase the quality and requirements for a re-dimensioning of the role of the legal auditor, not simply as a certifier of financial statements, but as an intelligent observer in accordance with the requirements of the profession to analyze the phenomena of informality, money laundering and fiscal evasion precisely from the manipulation and concealment of financial data of the businesses they certify.

An assistance from auditors with integrity and professional experience can prevent and curb possible illegal actions that can have an indirect material effect (fraud with data, with customers, etc.) on the financial statements of the economic entity, simply by applying the procedures audit procedures specifically designed to ascertain whether such activity has occurred.

If the legal auditors were in these positions, then the microcredit scandal, or the VAT frauds, as well as other financial crime actions that occur daily in Albania will have a minimal damaging effect, both for the citizens, but also also for the budget. On the other hand, they also directly affect the fight against corruption, since the financial audit affects the tendencies to launder the money of politicians and officials who try to do so by not applying the financial reporting standards.

The Albanian Parliament should probably request an assessment of the financial impact of policy measures on financial institutions and the cost of providing this law also from interest groups and independent opinion of business organizations.

Today, an audit is no guarantee that the financial statements are safe from any fraud or informal money hiding. All the more to serve as a powerful point of influence in the fight against economic crime and the prevention of money laundering from corruption and evasion and illegal traffic.

We believe that a successful response to financial crime depends on a joint effort by all relevant parties, including business leaders, the accounting profession, regulators, standard setters and the financial sector.

In our analysis, we suggest a coordinated approach by all the main actors to achieve tangible but also exhaustive results at the consultation level beyond the rush to adopt a new law. The cooperation and willingness of the parties to adapt to the economic and financial environment is essential and should prevail over political interventions as well as the tendencies to capture the profession by narrow short-term interests in opening the precious profession of the legal auditor to the public interest.

[1] https://konsultimipublik.gov.al/Konsultime/Detaje/741

[2] https://www.researchgate.net/publication/323833672_The_Role_of_Auditors_Against_Money_Laundering-_Albania_Case