ADOPTION AND IMPLEMENTATION OF A PROFESSIONAL CODE OF

ADOPTION AND IMPLEMENTATION OF A PROFESSIONAL CODE OF ETHICS IN MOLDOVA Marina Shelaru, Executive Director, Association of Professional Accountants and Auditors of the Republic of Moldova (ACAP RM) REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 1

AGENDA I. Accounting Profession in Moldova: ACAP Overview II. Legal Framework on Auditing - Current status III. Implementation of Ethics Code in Moldova IV. Difficulties & solutions V. Future Actions, Developments & Issues to Consider REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 2

I. ACCOUNTING PROFESSION in MOLDOVA § ACAP - Association of Professional Accountants and Auditors of Moldova, est. 1996, IFAC member 1998, CIPA based full membership. Acting as NGO. (Over 800 members: coverage ≈ 14% of accountants and 15% of licensed auditors ) § AFAM - Association of Audit Organizations of Moldova, est. 1997, around 30 audit firms, Mo. F approved auditors; acting as trade association. (Coverage ≈ 30% of audit firms) § AACM – Association of Auditors & Consultants in Management, est. 2003, individuals (43) & NGOs (2); acting as NGO. Conclusion: Coverage is very low. No market demand. REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 3

ASSOCIATION OF PROFESSIONAL ACCOUNTANTS AND AUDITORS OF THE REPUBLIC OF MOLDOVA – UPDATE: August, 1996 - March, 2006 MISSION ACAP RM • To grant the assistance in developing the professional accounting and auditing in the Republic of Moldova, to provide its members with information and guidance, as well as to render services at the highest professional level • ACAP commonly shared goal: “ The development of a sustainable accounting and auditing profession in the Republic of Moldova” REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 4

ACAP MEMBERSHIP Four categories: (760 members as of February, 2006) Student member (144) Associate member (500) * Full member* (114) Honoree member (2) Full member is CIPA based Note: Coverage ≈ 20% REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 5

MEMBER SERVICES Certification program various training programs, social and educational events, the exclusive distribution of specialized literature (members of ACAP are offered substantial discounts), editions of information and normative bulletins, affinity program, rich library and the legislative database REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 6

ACAP PERMANENT COMMITTEES CERTIFICATION, EDUCATION AND TRAINING PUBLIC RELATIONS & PUBLICATIONS MEMBERSHIP, NOMINATIONS AND REGIONAL DEVELOPMENT LEGISLATION & STANDARDS FINANCE & TREASURY ETHICS COMMITTEE REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 7

ACAP STRATEGY Today’s Accounting Professionals ACAP International best practices Based Standards Tomorrow's Accounting Professionals Universities REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 8

ACAP Relationships MINISTRY OF EDUCATION MINISTRY OF FINANCE ENTERPRISES AWG SROs ASWG SCSM AWG - Accounting Working Group SRO –Self Regulatory Organizations (IFAC, ECCAA, SEEPAD, CECCAR, UFPA, , etc. ) ASWG - Auditing Standards Working Group SCSM - State Commission for Securities Market NB - National Bank NBM UNIVERSITIES & COLLEGES

ACAP ACCOMPLISHMENTS • • • Increased membership of ACAP from 33 on 1996 to over 1900 members in 2002 International Federation of Accountants (IFAC) accepted ACAP as an Associate (1998) and then as an Full Member (2004). ACAP Chair -member of IFAC Developing Nations Permanent Task Force (DNPTF) Full Membership with South Eastern Partnership on Accountancy development (SEEPAD) and Eurasian Council of Certified Accountants and Auditors (ECCAA), IFAC Regional Grouping Organized the Three National Conferences of Professional Accountants and Auditors (1998 -2000) Completed the Enterprise Manual, which facilitated the conversion to NAS of an estimated 20, 000 enterprises, the Tax Manual, the Financial Accounting Manual (in partnership with Academy of Economic Studies of Moldova) Prepared for approval 36 National Standards on Auditing based on ISA, Code of Ethics REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 10

ACAP ACCOMPLISHMENTS (CONT. ) • • • Implemented national and international (CIPA) certification programs and exams for accountants based on IFAC education standards (88 CAPs, 1 CIPA) Assisted in strengthening partnership with the University of Nebraska at Omaha (UNO) in developing new accounting curriculum and exchanges of professors (2001 -2003) Held over 400 seminars in various accounting disciplines which were attended by 6, 900 participants in past three years Held Training Sessions for over 80% of the licensed audit firms in the Audit of Financial Statements According to the National Standards on Auditing (in Fall 2000) Held Roundtables on IFAC IES, on discussions of new drafts on Accounting and Auditing Laws, on CIPA Program Promotion, etc. REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 11

ACAP GOALS & PERSPECTIVES: • One of the main goal: to cover substantial number of accountants in the country; Increase Active Membership Rolls • Enrich and Expand The Accountant//Auditor Certification Program • Work on implementation of IFAC Statements of Membership Obligations • Inform Members, Firms and All Others Involved in Accountancy Education about IFAC IES • Work towards Implementation of IFAC Ethics and Quality control requirements even without Direct Responsibility • To achieve the role as the influencer in accounting profession’ development in Moldova and as the good standing representative of Moldova’s accounting and auditing professionals, • Dedicate substantial efforts to eliminating its dependency on external funding sources. REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 12

POSITION OF IFAC MEMBER BODY § Code of Ethics for Licensed auditors and professional accountants should be based directly on IFAC Code of Ethics (June 2005) § Cooperation with the Ministry of Finance on new regulations and AA reform implementation § New Law on Auditing should provide a comprehensive regulatory framework for a significant improvement in the audit practice § Understanding of benefits for professional membership at least with one of existing professional organizations. (e. g. UK, Romania, Russia, etc. ) REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 13

II. THE LEGAL FRAMEWORK on AUDITING CURRENT STATUS § The Law on Auditing dates back to 1996. § Regulations on certification of auditors and licensing of auditing activity approved by the Ministry of Finance – certification is done by Attestation Commission under Mo. F. § 37 National Standards on Auditing and 7 National Auditing Practice Statements approved by the Ministry of Finance and published by 2005. § Code of Professional Conduct for Auditors and Accountants of the Republic of Moldova – issued by MOF. Conclusion: Major problem in current legal framework – no effective enforcement mechanisms. REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 14

THE NSA, CODE OF PROFESSIONAL CONDUCT, AND LAW ON AUDIT DEVELOPMENT PROCESS • Joint effort by MOF, SROs, audit practitioners, accountancy academia • The Working Group on the Development of NSA under the auspices of MOF renewed • NSAs and the Code of Professional Conduct are published in the Monitorul Oficial Government Newspaper REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 15

CURRENT STATUS § National Standards on Auditing (NSA) are Based on ISA (1999 and 2000 IFAC technical pronouncements) § NSAs are effective for audits of financial statements covering periods beginning on January 1, 2001 § The new Draft Law on Audit is being debated by the Government with subsequent submission to the Parliament and approval till end of 2006 – is trying to comply with the current best practices REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 16

REVISED DRAFT OF NEW AUDIT LAW § Subject to be approved by the Parliament in 2006 § Shall Became in force since 2008 § General Provisions: ü PIOB creation ü Annual Meeting of Auditors ü Written qualification exam with content largely compliant with IFAC education guidelines, (by State) ü CPD requirements – 40 hours per year ü Accreditation of CPD providers, (by State) REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 17

CODE OF PROFESSIONAL CONDUCT OF AUDITORS AND ACCOUNTANTS OF THE REPUBLIC OF MOLDOVA § The Code is based on IFAC Code for Professional Accountants as revised in January 1998 § Approved by the Ministry of Finance and published on March 15, 2001 § The Code is effective January 1, 2002 REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 18

CODE’ S STRUCTURE § Part A – framework applies to professional accountants in public practice and employed professional accountants unless otherwise specified (all professional accountants) § Part B – professional accountants in public practice § Part C – employed professional accountants (professional accountants in business) REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 19

FUNDAMENTAL PRINCIPLES: 1. INTEGRITY 2. OBJECTIVITY 3. PROFESSIONAL COMPETENCE AND DUE CARE 4. CONFIDENTIALITY 5. PROFESSIONAL BEHAVIOR 6. TECHNICAL STANDARDS REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 20

TO WHOM CODE IS APPLY? April 1, 2004 February 1, 2006 Certified Auditors 173 130 Including those employed with audit firms 125 75 8 5 Audit firms 117 101 Listed companies 25 26 Sole practitioners Accountants in business - 5, 800 industrial entities REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 21

III. IMPLEMENTATION OF THE ETHICS CODE in MOLDOVA CURRENT STATUS § Auditing Act does not provide for abiding by a Code of ethics § Neither the Mo. F nor any professional bodies effectively monitor auditors’ compliance with Auditing Standards and the ethics code § Quality control for audit work, which appears to be applied mainly only by the audit firms within international network § Auditing practices tend to depart from the standards in several areas (e. g. third- party confirmation of debtors & creditors; inquiries of subsequent events and the appropriateness of management’s use of the going concern assumption; ) § Professional continuing education & development is not mandatory to retain a certificate of auditor and is only carried out by audit firms whose internal policies set such requirements (Note. Currently certificates are issued for a term of 5 years) § The professional examination required for the issuance of the auditor certificate does not comply with related IFAC Education Standards and EU 8 th Directive. REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 22

EXPERIENCE OF IMPLEMENTATION OF THE ETHICS CODE IN MOLDOVA 4 years of experience shows: As of February 1, 2006: 101 audit firms, including 4 of Big Four; 5 sole individuals 73 licensed auditors Only 3 cases of suspension of audit organizations’ licenses and 1 case of revocation in 2005 REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 23

ETHICS CODE’ S ENFORCEABILITY § The code is not legally enforceable § No Ethics problem solving mechanism § No enforcement procedures’ existence - no disciplinary committee or sanctions to apply § No requests from public § “Expectations Gap” § Lack of knowledge by companies’ management related to ethics Conclusion – no effective implementation of the code is possible without effective monitoring/enforcement mechanisms that would cover at least accountants in public practice REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 24

ENFORCEMENT ACTIVITY by ACAP Provisions of ACAP Strategic Plan for 2003 -2008 regarding : --- Code of professional conduct: • Monitoring of observance of the Code of professional conduct, • Appling disciplinary measures to the members --- Quality control and disciplinary activities: • • committee on quality control of observance of professional standards and ethics, and also to develop its internal procedures for realization of control activity. Protection of the legal rights and assertion’ professional interests of members of the association in the solution of disputable andor conflict issues. carry out regular discussions of demands and blames from organizations concerning the members of the association. observation the honour and objective approach in the solving of disputes and to follow precisely the legislation while making disciplinary decisions. Note. It is one of the most complex and non-realized issues related to public and state recognition of profession REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 25

IFAC CODE OF ETHICS (as of JUNE 2005) § Became in force June 30, 2006 for ACAP RM members § Decision subject to be made by ACAP Annual Membership meeting in April 2006 (around 800 members, from which 88 CAPs, 1 CIPA, 2 CPA, 23 licensed auditors) § plans to be submitted to the Mo. F Working Group for further discussions and approval for all accountants and auditors REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 26

IV. DIFFICULTIES & SOLUTIONS Issues: - no government regulation of the AA Profession exists - no professional regulation of accounting profession exists Gap of expectations: - understandings of Independence rule - publicity / disclosures - advertisements - companies management and corporate governance culture: luck of understanding regard ethics and audits REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 27

FACTORS EXPLAINS THE DIFFICULTIES § Lack of understanding of the audit process by economic entities § Governance structures among the companies are limited § Lack of practical experience and technical expertise for applying Standard on Audit and enforcing Code of Ethics § Absence of monitoring and effective sanctions and remedies § Market does not recognize and does not understand (and does not encourage) benefits for accountants to be part of professional organization REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 28

WHAT PROFESSION COULD BENEFIT FROM ACAP RM § Certification Program in line with IFAC and EU requirements - CIPA § CPD Programs, including SEEPAD Regional seminars § IFAC Publications & updates; other relevant library resources § Training Programs (Mo. Ed Licensed) § Exchange of information (e. g. from international partnerships) § Relatively Low cost membership – for high quality services REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 29

V. ACTIONS TO BE TAKEN § Approval of New Audit Law § An independent PIOB of auditors should be established § Develop guidelines § Implementing the quality control based on international standards principles § JEEP – Joint Ethics Enforcement Procedures § Strengthen of the professional education & training, Continue Professional Development § Encourage that accountant in public practice to be part of one professional organization REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 30

FUTURE DEVELOPMENTS § Development of guidelines to support the new Audit law certification and CPD guidelines § Development of the full blown Manual on Auditing & Ethics § Establishment of a system where all newly approved ISAs and revisions thereof become effective in Moldova without a lengthy leucocratic adoption process § Delegation of some costly activities to professional organizations - e. g. certification, training, drafting and translating standards with subsequent approval by Government body, etc. § Establishing an effective enforcement mechanism – Public Oversight Body and active participation of professional organizations in enforcement REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 31

ISSUES TO BE CONSIDERED IN FUTURE* Compliance & Enforcement Strengths IFAC Standards Are Adopted * Source: Weaknesses Mismatch Between the Law, Rules, Regulations & Capacity to Comply Capacity Issues are To Be Expected Considering the Short Times Involved Puts Added Burden on Accelerating Capacities on: Educators Regulators Users Preparers & Auditors Dr. Gert Karreman, Carana Corp. : GAEB - GLOBAL ACCOUNTANCY EDUCATION BENCHMARKING FOR SEEPAD REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 32

Compliance & Enforcement (continued) Strengths Disciplinary Committees Established Weaknesses Framework for Disclosure of Substandard Work or Unethical Behavior Is Not In Place or Functioning Due Process Procedures for Discipline Are Not Developed Sanctions Are Generally Inadequate Peer Reviews Have Started No Public Forum to Announce Sanctions REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 33

CPD Strengths Weaknesses More CPD Courses are Offered To A Wider Audience Short on Capacity of Facilities, Trainers and Course Content Ethics Courses Offered Teaching of Ethics & Values Must Start Early in Schools Mismatch Between Demands of the Market and Capacity to Deliver Organized, Functioning and Assisting Members “Branding” of the Professional Bodies Outputs Has Not Been Accomplished Certain Segments of the Market Prefers “Certificate” of Imported Brands International Recognition is Lacking REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 34

Strengths vs. Weaknesses • Quote from Michael Hammer: “. . . The formulas for yesterday’s success are almost guaranteed to be formulas for failure tomorrow. ” • Chinese Proverb “Tell me … I’ll forget. Show me … I may remember. Involve me… then I’ll understand. ” • Educate Me and I Will Perform! THANK YOU FOR YOUR ATTENTION! Contacts: ACAP RM E-mail: info@acap. md, mselaru@acap. md Tel. : (+ 373 22) 541 -412, 543 -408, 541 -495 REPARIS Vienna Workshops "Ethics in the Accountancy Profession" March 14 -15, 2006 35