№1(12)(2013)

The new year starts with the new changes in fiscal and accounting legislation, as well as in the laws governing the activities of the stock market.

The National Securities and Stock Market Commission of Ukraine (hereinafter - NSSMCU) by Decision № 1519 of 25.10.2012 adopted the new Procedure for maintaining the Register of audit firms that may conduct audits of professional securities market participants. With the adoption of Decision № 1519 SCSSM's Decision from 09.11.2006 № 1271 loses effect.

Let us presently note that the innovation will become effective from 01.01.2013, but not before the day of official publication, except for subparagraph "E" of paragraph 2 of section 4 of the Order, which comes into force on 1 January 2014, which will be discussed further.

The official publication of the Ministry of Justice of - Newsletter "Official Herald of Ukraine" published Decision of NSSMCU № 1519 from 25.10.2012 on 15.01.2013. Therefore Procedure № 1519 is officially valid from this date.

So, what is new about Procedure № 1519? The main changes are as follows.

New term "professional participants of the stock market" is introduced instead of "financial institutions operating in the securities market" contained in the previous Procedure № 1271. Professional stock market participants are designated legal entities set up as joint stock companies or limited liability companies under license from NSSMCU conducting professional activity at stock market, whose types are determined by laws of Ukraine.

Procedure № 1519 completely excluded the possibility of application and inclusion in the Register of Auditors rendering audit services individually (para 2 Section 1 Procedure 1519). That is, only an audit firm can now be the applicant that may submit to the NSSMCU documents for inclusion in the Register. It also states that audit firms have the right to conduct audits of professional participants of the securities market only in the presence of current Certificate and after their introduction into the Register (para 6, Section 1 Procedure 1519).

Also, the procedure for introducing audit firms into the Registry is changed: now main requirements for audit firms that may conduct audits of professional participants of the securities market (Paragraph 1 of Section 4) are as follows:

compliance with the requirements of Art. 5 of the Law of Ukraine "On Auditing"[1];

a current certificate of inclusion in the register of audit firms and auditors issued by the Audit Chamber of Ukraine (hereinafter - ACU);

staff of the firm must include a minimum of three auditors, each of whom should have:

auditor's certificate;

document confirming completed training under the program approved by the APU and agreed with the NSSMCU (shall take effect on 01.01.2014).

Procedure № 1519 also altered list of documents that the audit firm must provide for inclusion in the Register. To previously required documents the following are added:

Application for inclusion in the register;

Registration card;

Copy of certificate on inclusion in the register of auditors and audit firms from ACU;

copies of certificates of auditors (of the manager and employees of the firm) who directly conduct audits of professional participants of the securities market;

audit firms should also submit the following documents:

copy of the certificate of conformity of quality control system issued by the ACU (while earlier the document was submitted only if applicable, now it is mandatory for each audit firm that wants to conduct audits of professional participants of the securities market);

Copies of documents confirming getting appropriate training through the program approved by the ACU and agreed with the NSSMCU, by the head and the employees of the firm that will conduct audits of professional securities market participants;

copies of work records of the head and firm employees directly engaged in the audits;

copy of the audit firm's personnel schedule;

questionnaire of business reputation of audit firm's head (employees);

information on audit firm's related parties;

electronic documents, including electronic files.

Under the Procedure, all copies must be certified by the signature of the firm's Director and the seal of the audit firm (previously requirement included a mandatory notarized copy of the certificate for inclusion in the register of audit firms and auditors rendering audit services individually issued by the ACU).

Also Procedure supplemented grounds for amending the Register and submitting relevant information to the NSSMCU:

in the event of changes in the audit firm's staffing (in the case of dismissal or hiring of Certified Auditors);

in the event of changes in information on the audit firm's related parties.

In addition, a new requirement is introduced regarding the terms for informing NSSMCU when changing the data being the basis for modifying the registry. Thus, the audit firm shall within 30 days submit to NSSMCU appropriate documents on changes that have occurred.

 The deadline for the decision to amend the registry of the NSSMCU is determined within 30 days after receiving the relevant documents. Previously, these deadlines were not legislatively fixed.

New order № 1519 contains no provisions on renewal of the certificate of inclusion in the Register (as opposed to the previous version), but it states that when changing the information contained in the certificate, the applicant together with other documents must submit original certificates. And in the case of a change in the audit firm's name or number, series, date of issue of the certificate of the registration of audit firms and auditors issued by the ACU, the applicant receives a new certificate, while the previous is canceled (para 4.5 of Section 5 of the Procedure ). That is, as the certificate is issued for the period of validity of the certificate issued by the ACU, it is probable, that in case of extension of the validity period of the ACU certificate, certificate of the NSSMCU will be automatically prolonged.

The list of grounds for NSSMCU to make a decision to exclude the audit firm from the Register has also changed. Now the reasons are the following:

Application for exclusion from the Register;

NSSMCU's discovering unreliable statements of professional stock market participants, confirmed by an audit report (subpara 1.2 paragraph 1 Section 7 of the Procedure);

non-compliance of the audit report with International Standards on Quality Control, Auditing, Review, other assurance and related services (subpara 1.3 paragraph 1, Section 7 of the Procedure);

non-compliance of the audit report with the laws of Ukraine, as well as NSSMCU's regulations on the procedure for preparing audit report by an audit firm (subpara 1.4 paragraph 1 Section 7 of the Procedure);

receiving information from the ACU or authorities on violations of the laws of Ukraine, including regulations governing the audit activities (subpara 1.5 paragraph 1 Section 7 of the Procedure);

violation of procedure for amending the Registry (subpara 1.8 paragraph 1 Section 7 of the Procedure).

NSSMCU will exclude a firm from the Register due to unreliability of confirmed by audit firms reporting, and discovering inconsistency in conclusions after proper inspection by the ACU of the audit firm and establishing the fact of improper performance of professional duties.

What follows?

Firstly, auditors and audit firms, that were included in the Register under the old Procedure № 1271, have the right to confirm annual financial statements of professional participants of the securities market in 2012 under § 3 of Decision 1519.

Therefore, you may quite rightly confirm the statements for 2012 under old certificates.

Secondly, only audit firms included in the Register under new Procedure № 1519 and bearing a certificate of inclusion in the register of audit firms allowed to conduct audits of professional securities market participants have the right to confirm the financial statements of professional participants of the securities market in the first quarter 2013.

For this purpose all audit firms that are willing to audit professional stock market participants will need to fulfill the following conditions:

valid certificate of inclusion in the register of audit firms and auditors issued by the ACU;

at least three certified auditors on staff;

documentary evidence of training the auditors per the appropriate program approved by the ACU and agreed with NSSMCU (after 01.01.2014);

certificate of quality control system compliance issued by the ACU.

As to passing the quality control, there is no such requirement among those to audit firms that may be included in the Register (p 1 4 Section of Procedure 1519).

But to be included in the Register an audit firm shall submit this document (subpara "e" paragraph 2 Procedure № 1519). Now there is no clause "if available," as in the old Procedure № 1271. The reasons for making the decision by NSSMCU to refuse to include in the Register are:

discrepancy in filed documents with the requirements of the Procedure;

inaccurate or incomplete information in the submitted documents;

submission of documents not in full.

So, as you can imagine, this requirement is mandatory.

Summarizing, we can say in full confidence that under new procedure № 1519 the range of audit firms allowed to conduct audits of professional securities market participants, will be significantly smaller due to enhanced requirements by the NSSMCU for inclusion of such firms in the Register.

And while, according to NSSMCU, as of 25.12.2012 the Register of Audit Firms includes 761 audit firms and auditors, according to data on the website ACU's, as of 01.01.2013 the List of audit firms that meet the criteria for statutory audit contains only about 140 (those audit firms that have at least three staff certified auditors, have passed quality control and whose activities are insured). That is, to date, only 18% of audit firms that entered in the Register in accordance with the old Procedure, can be included in the new Register.

Yet, comparing the adopted Procedure with Project № 679 of 15.05.2012, which was discussed in the spring of 2012, we may say that the NSSMCU excluded the following:

audit firm has at least five certified auditors on staff;

auditors should have a three-year professional experience;

mandatory advanced training auditors through a typical curriculum approved by NSSMCU;

certification in the manner specified by NSSMCU;

submission of documents confirming knowledge of IFRS and ISA by each auditor;

exclusion from the Register if an audit firm has not conducted audit of issuers and professional participants of the stock market during a year,

Considering the above, the new Procedure №1519 is more lenient to audit firms and leaves the possibility to perform audits of professional stock market participants, albeit not to all willing, but to the 140 lucky ones.

We hope that these legislative innovations are introduced solely for the purpose of obtaining more transparent and reliable financial statements of the stock market participants, as well as for improving the quality of audit services in accordance with the current legislation of Ukraine and with International Standards on Quality Control, Auditing, Review, and provision of other related services.

[1]Article 5 of the Law of Ukraine of 22.04.1993 № 3125-XII “Audit Firm is a legal entity created in accordance with legislation which performs exclusively audit activities. The right to perform audit activities have audit firms included in the Register of auditors and audit firms. The total share of founders (participants) of the audit firm who are not auditors, in the share capital may not exceed 30 percent. only the auditor may be the head of an audit firm"