Proposals of the Auditing Profession for Amendments to the Audit Act

Following the call from the Ministry of Finance, the Croatian Chamber of Auditors, together with representatives of relevant regulatory bodies and other stakeholders, participated in a working group on amendments to the Audit Act, where it presented its positions and proposals for changes and amendments to the Act.

The Chamber, as a professional organization of the auditing profession in the Republic of Croatia, continuously monitors the situation, recognizes the challenges and interests of all participants in the field of statutory auditing and the provision of auditing services. The Chamber’s proposals stem from the experiences of certified auditors in practicing the profession, key issues for auditors and entrepreneurs related to the application of the existing Audit Act, and knowledge of best practices from European Union countries.

– The Ministry of Finance accepted most of the Chamber’s proposals, recognizing in them efforts for further enhancement of auditor independence and the quality of the auditing profession that serves the public interest by strengthening business and investment confidence in the Republic of Croatia, attracting foreign investments, and developing economic entities and the competitiveness of the Croatian economy as a whole – emphasizes Berislav Horvat, president of the Croatian Chamber of Auditors.

The most significant proposals of the Chamber included in the Draft Law on Amendments to the Audit Act relate to the earlier appointment of auditors and the stipulation of a minimum duration for the initial engagement of statutory audits, extending the rotation period of auditing firms, and abolishing the legal obligation to contract joint audits.

To increase independence and reduce external influence on auditors in conducting audits and forming opinions, the Chamber proposed earlier appointment of auditors and contracting audits in the sense that entities subject to statutory audits appoint an auditing firm no later than three months before the end of the business year preceding the business year for which the annual financial statements are subject to the audit contract, and stipulating a minimum duration for the initial engagement of statutory audits of two years. The adoption of these amendments would allow for better planning of auditing resources and the implementation of auditing activities, as well as monitoring the audited entity throughout the entire period to which the financial statements relate. Establishing a more permanent business relationship facilitates continuous communication between the auditor and the audited entity and creates preconditions for implementing the auditor’s recommendations, significantly improving the quality of financial statements.

Most EU countries have adopted a system of rotation of auditing firms for public interest entities of ten years. Existing experiences indicate that a shorter rotation period of auditing firms does not affect the increase in independence and quality of the conducted audit, but that the rotation of the audit partner is a more effective mechanism for protecting auditor independence. Large enterprises with parent companies outside the Republic of Croatia have adopted the practice of appointing auditors at the group level, and the obligation to change auditors solely at the level of the Republic of Croatia represents an additional organizational and financial burden. Therefore, the Chamber proposed extending the rotation period of auditing firms when conducting statutory audits for public interest entities from seven to ten years.

Furthermore, the Chamber proposes abolishing the contracting of statutory audits with multiple auditing firms for public interest entities. The number of entities subject to joint audits in the Republic of Croatia is extremely small and mostly relates to infrastructure entities owned by the state, along with a certain number of privately owned entities. Considering that the obligations of joint audits are exempt for entities of the same size but with parent companies outside the Republic of Croatia, this requirement imposes additional regulatory obligations and costs on Croatian entrepreneurs, reducing the competitiveness of the Croatian economy. In addition to the Republic of Croatia, among EU countries, only Bulgaria and France have the legal obligation to contract joint audits, while Denmark abolished this obligation in 2004 after assessing that the additional costs of joint audits outweigh their benefits. Global research on the impact of joint audits on increasing quality and reducing market concentration is without consensus on positive effects. In the Republic of Croatia, there are no published data on achieving the expected goals of joint audits, which are a positive impact on macroeconomic policy, strengthening the independence and objectivity of auditors, enhancing auditors’ technical knowledge, and increasing audit quality.

All proposed amendments to the Audit Act are aimed at improving auditing practices in the Republic of Croatia and strengthening public trust in the auditing profession. The Chamber welcomes the accepted proposals and remains open to constructive cooperation with the Ministry of Finance and all relevant stakeholders to jointly contribute to better, more transparent, and more effective regulation of the auditing sector in our country.