House approves amendments to Accountancy Act

The House of Representatives yesterday unanimously approved the second reading of a Bill to amend the Accountancy Act, which would bring it in line with an EU directive regarding auditors and accountants who are now shouldering heavier responsibilities.

Introducing the Bill, Finance Minister Tonio Fenech said the role of the auditors had become very important, especially so when companies go public and are quoted on the Stock Exchange. Their role also has a bearing not only on shareholders but also on third parties such as banks and creditors.

The EU directive, which is already the backbone of the Maltese legislation, differentiates between the role of an accountant and an auditor. In fact, an accountant might not have the practising certificate to act as an auditor. This is gained only after three years' experience.

The auditor has a responsibility towards the shareholders and the EU directive provides for a clear-cut separation between the accountant and the auditor.

Mr Fenech said certain international incidents have revealed the importance of the profession and the Bill emphasises the new obligations which the EU directive imposes on the auditor.

Until a few years ago, Maltese companies were smaller and the shareholder (or the owner) was also the managing director or manager, the operating officer and the company's cashier. Then, one could not comprehend the importance of audited accounts.

The scenario has changed. Many Maltese have shares and bonds and there has now been a natural separation between the shareholder and the management who takes day-to-day decisions. At the end of the day, the shareholder must have the peace of mind that his interests are being safeguarded and this comes only through an independent audit of the company's accounts.

The profession is so important that the government issues a warrant to auditors and this could be withdrawn if the auditor fails to comply with the law.

The technical base of accountants and auditors is the same but not all accountants can serve as auditors because their three years' experience must also be in the audit sphere and not just in accountancy. The accountant's relation is with the board of directors and the management while the auditor verifies what the accountant has reported.

Mr Fenech referred to the Enron and Parmalat cases in the US and Italy respectively, where speculation left millions bankrupt and thousands unemployed. The Enron case led to the segregation of the consultancy and verification sectors because it was only through this separation that there was independence from the management. Mr Fenech said that there hardly were cases in which work of the members of the Maltese profession were questioned.

The minister pointed out that on an EU level, the directive provides a stronger basis to supervise the auditor. The Quality Assurance Unit within the Accountancy Board has the important role to go to audit firms to check and seek evidence that it works according to international standards.

The amendments strengthen the quality of audits in the whole of Europe. An auditor must have continuous professional education through an annual number of hours of training. The Bill also safeguards ethics.

Mr Fenech said that the independence of the auditor was of paramount importance. The law was also protecting the same auditor, who now cannot be sacked because of differences he might have with the management. And if an auditor is changed, the new one must consult with him to see why he was dismissed.

Turning to the proposed amendments, Mr Fenech said that directive provides for an independent authority to supervise the profession. The Bill provides a Quality Assurance Team within the Accountancy Board, the composition of which is being changed so that the majority of members are either not members of the profession or were certified audit practitioners but are no longer active.

Audit firms must be recognised by the Accountancy Board. Not all partners of an audit firm must have the certificate of a practising auditor. A different structure of these firms is being proposed but a number of conditions are being imposed. The most important condition is that 60 per cent of the voting rights would be in the hands of individuals who have audit practice certificates.

Because there would now be mutual recognition between audit firms and practitioners within the EU, the Accountancy Board would have a register containing all the relevant information on certified professionals. All EU member states must ensure that practitioners follow the code of ethics. In Malta this code reaches all requirements.

Mr Fenech said that it is an advantage that the local accountancy profession always worked according to obligatory international auditing standards. This gave local firms the edge with US firms who need to carry out audits on American firms in Malta.

There is a formal procedure to be followed when audits of firms are carried out. Penalties could be imposed, and the firm or practitioner asked to affect necessary changes. If they do not comply, their warrant could be withdrawn.

The composition of the public oversight board, which carries out the regulatory function, is being expanded to nine members, ensuring that the majority is in the hands of those not practising.

Special treatment would be afforded to public interest entities to ensure that ethics are observed and their independence safeguarded.

The accountancy profession is not against these amendments. Local firms and practitioners are not limited to work in Malta but are also recognised in the whole of the EU and on an international basis and the compliance with this EU directive would instil faith in the profession.

Concluding, Mr Fenech said that Malta's accountants, who number 1,400, are giving a valuable contribution to the economic sector. The profession was developing at such a fast rate that the government had chosen it as one of the six pillars in its 2015 vision.

Leader of the Opposition Charles Mangion said the Bill attempted to "discipline" the accounting profession, one of the largest, self-regulated professions in Malta. But it was not meant to criticise the situation. Despite the already competent self-regulation, various governments felt the need to create a board with the aim of supervising the profession. There was also the need for quality assurance and it was also imperative to keep up to date with ever-changing situations through continuous training.

An important point was the auditor's independence. Although the auditor would be appointed and paid by the client, his job was not to keep the client happy. All reports must be objective and give a clear picture.

The profession has thrived and despite the considerable number of graduates from the university and those having their ACCA, the success of the accounting profession was closely linked to Malta's progress in the financial sector. Since 1995, the sector has grown and has potential to expand further.

Despite the fact that the sector was competitive on an international level, Malta made a name for itself for three specific reasons. The regulatory aspect of the financial sector was built on strong foundations, with effective rules and an administration which did away with bureaucracy, and most importantly, as from its initial stages matters have always been kept up to date. The practitioners also gave reasonable and competitive prices. Nowadays, he said, Malta complained of not having enough people to work in the area.

The sector was booming and rendering a profit. Government earnings came primarily from related sectors.

Although the GDP registered a 3.5 per cent increase in the past three months, one notes that this development was based mostly on Government expenditures, a 16 per cent increase to that of the past year. This was four times as much as the economic development when there should be a balance between the two.

He said that the main growth came from inventories which was worrying since these were simply unsold stock. One had to keep in mind also that investment was down by 5.4 per cent, as did the export of goods and services.

The Financial Services were doing well. It was time to look into other sectors and question why they were not growing in the same way. Could it be that skills were not being used adequately?

When people speak of competitiveness, the first thing that comes to mind is automatically the salaries. However, he said, over the past four years there have been no major increases in the wages of Maltese workers. Germany's exports had exploded and their wages were higher than those of Malta - €35 per hour to the Maltese worker's €8 or €9. Therefore salaries were not the reason. Admittedly, he said, there was room for improvement in the productivity sector.

The profits of companies operating from Malta grew. So, he asked, why did exports decrease?

Dr Mangion said that it was time to look seriously at factors such as bureaucracy. There had long been promises to do away with bureaucracy but, so far, nothing has changed.

How much investment had been made in the machinery? he asked. Some countries with low wages and a strong labour force had no need to invest in machinery. With Malta, it was a different story. Turning to the quality of education, he said that it was necessary to address the worrying low percentage (43 per cent) of children who left school with a minimum level of education.

It was becoming very hard indeed to find the necessary qualified people. He went on to commend the introduction of the BA Hons in computing at the same time as the opening of SmartCity. Value added, he said, could only grow if Malta had the necessary resources.

Parliamentary Secretary Jason Azzopardi said the Bill was transposing an EU directive into local legislation. This was a directive that was adding to the already existing obligations of the accountancy profession. Because of their public role, it was important for accountants to be independent and for their independence to be safeguarded.

Dr Azzopardi said that since investors relied a lot on the accounts of a company they wanted to invest in, it was important that accountants were independent.

The Bill was addressing three main objectives - ensuring robust public oversight in the European Union while respecting all the existing cultures; adequate, internal quality controls; and the auditor's independence.

He said that the country faced a shortage of accountants, accounting technicians and clerks. Students were being signed on contract by companies when they were still in the second year of their university course. This was the result of a serious education system that was providing accountants and accounting technicians of a very high calibre.

The Bill was ensuring that people in such a crucial profession were continuously kept up to date. Malta already had an accountancy board to establish regulations for accountants and auditors to get their warrants and to be kept up to date with developments.

The directive, Dr Azzopardi said, wanted member states to have their auditors go through an aptitude test, and have a register of auditors which would be online and continuously updated.

A new provision was that fees charged by audit firms could not be influenced by the possibility that they would get more work. So they could not be based on any form of contingency.

Another provision was that auditors had to be subject to quality assurance and there had to be adequate resources for this.

He noted that the Bill was substantially increasing fines that could be imposed in case of abuse. Those breaching professional secrecy were subject to between one and five years' imprisonment as well as a fine not exceeding €58,000.

Winding up, Mr Fenech said that the Bill would continue strengthening the independence of the profession so that it could carry out its duties in a globalised economy. It was positive that many more women than men were getting warrants in this profession.

He said the economy's need for many more accountants was clear. In the financial sector, activity was growing by 30 per cent.

The Malta Financial Services Authority organised courses for guidance teachers to help them appreciate the opportunities being offered by the industry and encourage young people to opt for this profession.

Mr Fenech said accountancy was not an easy profession. The Bill was introducing certain responsibilities which were not just ethical or of self-regulation but responsibilities towards society in general. The profession had to be independent and there were structures to effectively ensure this.

No one could expect auditors to be bloodhounds. Their role was to be that of a watchdog.

The primary responsibility for the correct operation of a company remained with the company's directors. No one could expect auditors to go through every single transaction. However, they had to carry out their duties according to international standards.

The Bill was unanimously approved.