Various regulatory provisions, existing and proposed, both within an EU and a global context, will affect the local accountancy profession.
These legislative provisions will affect the future of public sector accounting, trigger off the process of auditor rotation among public interest entities, affect international tax developments, and bring about new reporting practices for small and medium-sized entities.
Taking on each of these legislative measures it is envisaged that by 2020 the European Union will install the first set of harmonised European Public Sector Accounting Standards (EPSAS) that will be adopted by member states.
Such standards will realise the dream of national governments using accruals based accounting.
Ensuring the independence of auditors among public-interest entities (PIEs) will be further enhanced by the implementation of obligatory audit rotation. With regards to international tax, given the recent revelations that most multinational enterprises (MNEs) such as Amazon and Starbucks managed to circumvent tax rules both the OECD and the EU are concurrently identifying new measures to avoid a repeat of such tax dodging practices.
Although no MNEs are quoted on our local stock exchange, such new provisions will necessitate that our tax authorities and regulatory institutions to be more vigilant as we ponder further establishing Malta as a financial hub in the Mediterranean.
However, it is the fourth topic mentioned that needs greater thought and discussion. The new Accounting Directive approved by the EU parliament is now in the process of being transposed into member states’ legislation. Apart from having some odd 90 options that member states can opt in or out of, the bottom line is that registered companies file a mere five page set of accounts. In other words this Accounting Directive is synonymous with much fewer disclosures than those any interested user of financial statements would fetch in a set of abridged accounts currently filed with MFSA as per our Companies Act, 1995.
Without any inhibitions, this worries me not only as a member of the accountancy profession but also as a Maltese citizen. It is time about that our Companies Act gets a major overhaul.
Primarily, it is necessary to eliminate the incidence of under-capitalised companies by increasing the minimum amount any new company can be instituted with. Secondly, to safeguard better the interests of trade creditors, I strongly believe that the private exempt clause should be further restricted if not abolished.
The private exempt clause should be further restricted if not abolished
With a set of abridged accounts, only a balance sheet is filed. A balance sheet represents a snapshot of the resources, obligations and capital of any business. One still needs to assess performance and the ability to generate future cash flows. To do that one needs a profit and loss account and a statement of cash flows.
In accordance with the prescribed criteria to identify whether a company falls under the small or medium strata, 98 per cent of the 19,000 registered would land themselves in that category. With the new Accounting Directive there is going to be much less disclosure apart from the imminent implementation of an audit threshold. Moreover, it is also a reality that company directors are opting to pay fines rather than filing their audited financial statements. While appreciating the argument that the notion behind such measures is to minimise the costs of regulation I strongly believe that it is bound to have a worse outcome in the local scenario.
Trade creditors would be worst hit since the other major users, namely, banks and tax authorities, have the privilege of requiring a full blown set of financial statements. All in all there is a stark contrast between such an approach and the rigorous Asset Quality Review (AQR) conducted by the ECB our commercial banks had to survive through.
Whatever happens within the legislative framework, the new provisions will have a direct effect on our capabilities as a nation in attracting new Foreign Direct Investment (FDIs). The local accountancy profession has a very important role to play not only in voicing its concerns about any proposed changes but to continue to assist any new investors in setting up shop in Malta. Our economic well-being will depend on our ability to attract the much needed FDIs not only in the traditional industries but also in other sectors such as ICT and aircraft maintenance.