Ayiti: Yon Revizyon Pratik Kontablite ak Odit

November 2007 Document of the World Bank Report No. AAA30 - HT Haiti A Review of Accounting and Audit Practices Report on the Observance of Standards and Codes (ROSC) Financial Management Unit, Operations Services Department Carribbean Country Management Unit Latin America and the Caribbean Region Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Haiti ROSC – Main Abbreviations and Acronyms ii CURRENCY: HAITI GOURDE (HTG) 1 US$ = 36 HTG as of August 15, 2007 MAIN ABBREVIATIONS AND ACRONYMS A&A Accounting and Auditing AAN Airport Management Company ( Autorité Aéroportuaire Nationale ) APN Port Management Company ( Autorité Portuaire Nationale ) BRH Bank of the Republic of Haiti (central bank) CAMEP Haiti’s main water utility CAP Country Action Program CEM Country Economic Memorandum CMEP Council for the Modernization of Public Enterprises CONACO National Accounting Standard-setting Body CPD Continuing Professional Development CSCCA Haiti’s Supreme Audit Institution DGI Tax Administration EDH National Electrical Utility FDI Foreign Direct Investment FIDEF International Federation of Francophone Accountants FSAP Financial Sector Assessment Program GAAP Generally Accepted Accounting Principles GDP Gross Domestic Product GoH Government of Haiti IAS International Accounting Standards IASB International Accounting Standards Board IFAC International Federation of Accountants IFRS International Financial Reporting Standards ISA International Standards on Auditing MoF Ministry of Finance OCPAH Institute of Licensed Professional Accountants of Haiti PCN National Accounting System ( Plan Comptable National) ROSC Report on the Observance of Standards and Codes SME Small and Medium Enterprise Teleco National Telecommunications Company Vice-President Pamela Cox Country Director Yvonne Tsikata Sector Director Stefan Koeberle Sector Manager Roberto Tarallo Task Manager Henri Fortin Co-Task Manager Fily Sissoko Haiti ROSC – Table of Contents iii A Review of Accounting and Audit Practices in Haiti Report on the Observance of Standards and Codes (ROSC) TABLE OF CONTENTS MAIN ABBREVIATIONS AND ACRONYMS............................................................. ii EXECUTIVE SUMMARY ............................................................................................. iv I. BACKGROUND ...................................................................................................... 1 II. INSTITUTIONAL FRAMEWORK FOR CORPORATE ACCOUNTING AND AUDITING .............................................................................................................. 4 A. S TATUTORY F RAMEWORK ..................................................................................... 4 A1. Private Enterprise Sector...................................................................................... 4 A2. Financial sector .................................................................................................... 6 A3. Public enterprises ................................................................................................. 8 B. T HE A CCOUNTING AND A UDIT P ROFESSION ....................................................... 10 C. P ROFESSIONAL E DUCATION AND T RAINING ....................................................... 14 D. A CCOUNTING AND A UDITING S TANDARD -S ETTING ............................................ 15 E. E NFORCEMENT OF A CCOUNTING AND A UDITING S TANDARDS ........................... 16 III. ACCOUNTING AND AUDITING STANDARDS AS DESIGNED AND AS PRACTICED................................................................................................................... 17 A. A CCOUNTING ........................................................................................................ 17 B. A UDITING .............................................................................................................. 20 C. O VERVIEW OF THE S ITUATION OF P UBLIC E NTERPRISES .................................. 21 D. P ERCEPTIONS ON THE Q UALITY OF C ORPORATE F INANCIAL R EPORTING ........ 22 IV. RECOMMENDATIONS....................................................................................... 23 A. S HORT -T ERM P RIORITY A CTIONS ....................................................................... 24 B. M EDIUM - TO -L ONG -T ERM O BJECTIVES .............................................................. 28 A NNEX – S UMMARY OF R ECOMMENDATIONS ................................................................. 30 November 2007 ACKNOWLEDGEMENTS This report was prepared by Henri Fortin and Fily Sissoko of the World Bank (LCSFM), on the basis of a diagnostic review carried out in June and September 2007, as part of the joint World Bank-IMF Financial Sector Assessment Program in Haiti. The review was conducted through a participatory process involving various in-country stakeholders with the support of the Central Bank of Haiti (BRH), the World Bank Country Management Unit (LCC3C) in Port-au-Prince and Washington, and the Inter-American Development Bank. Comments and suggestions were received from Mathurin Gbetibouo, Erik Van der Plaats, Aquiles Almansi and Alfred Borgonovo (CGA Canada). The task team gratefully acknowledges the support received. The report was cleared for publication by the Ministry of Economy and Finance on September 30, 2008. Haiti ROSC – Executive Summary iv EXECUTIVE SUMMARY The current Haitian administration of President Préval has emphasized the importance of fostering economic growth through private investment. Haiti is the poorest country in the Latin America and Caribbean region and, over the past 20 years, Haiti’s gross domestic product per capita has declined by an average of 2 percent annually. Recent efforts to foster economic growth and reduce crime and violence are significant, positive steps for the country—improving public security is a prerequisite for a more enabling business environment. Haiti also enjoys a large flow of remittances from Haitians residing in the US or Canada that could be channeled more toward investment rather than consumption. Accurate and timely corporate financial reporting is essential to instill confidence in the local economy and encourage would-be investors to invest in private enterprises on a long-term basis. Furthermore, Haiti’s state-owned enterprises are large and lacking in financial accountability and transparency. Sound financial reporting in public enterprises would serve as incentives for financial discipline, provide scope to improve service delivery to the Haitian public, and help the Government of Haiti to assign a more accurate value to these enterprises in the event they seek some amount of private investment. This report analyzes corporate financial reporting and auditing practices in Haiti. It supports the Government’s efforts to (a) improve financial sector stability and development; (b) encourage a business climate conducive to private investment and local companies’ access to credit and long-term finance; and (c) enhance the governance and accountability of public enterprises. For the purpose of this study, the benchmarks that have been used include the International Financial Reporting Standards (IFRS) and the International Standards on Auditing (ISA). The report also draws on international experience and good practice in accounting and auditing, particularly in Latin America and the Caribbean. Haiti’s corporate sector accounting and auditing are still at an incipient stage of development, and they require significant strengthening as part of a broader effort to improve the investment climate. The statutory framework governing corporate accounting and auditing standards is incomplete and loosely enforced. The accounting profession faces a number of serious challenges, owing to the long and severe crisis from which the country has recently emerged. Furthermore, Haiti’s accounting standards have not been updated in more than two decades—the standard that exists, while legally required, is now widely ignored. There have been some recent steps forward with respect to corporate financial reporting. For instance, a tax decree published in October 2005 significantly strengthened accounting and audit requirements and aimed to bring the country more in line with international good practice. Moreover, banks are now subject to more stringent regulations governing accounting and auditing, and they must have their annual financial statements audited by an approved audit firm. This latter provision is in line with international good practice. These reforms demonstrate that political will exists to move the country closer to international standards for financial reporting, although much work remains to be done. Haiti ROSC – Executive Summary v One of the major problems facing Haiti’s accounting and auditing regime is that the National Accounting System ( Plan Comptable National or PCN) is out of date and conflicts in many important respects with IFRS, which have constantly evolved since they were initially developed in the 1970s. In fact, representatives of the accounting profession expressed the view that the PCN is not adapted to current circumstances, and they do not appear to follow it, in spite of what the law dictates. Few companies and practitioners appear even to have a copy of the PCN. Another significant weakness in the legal framework is that Haitian enterprises (except banks) are not required to publish their financial statements or publicly disclose their financial standing. This severely limits the role that accounting information plays in the economy. Further, the lack of a mechanism to monitor enterprise accounting and auditing creates an environment in which compliance with accounting obligations is low. This state of affairs hampers the level of financial transparency in the private sector and is, therefore, detrimental to Haiti’s investment climate. The Institute of Licensed Professional Accountants of Haiti ( Ordre des Comptables Professionnels Agréés d’Ha ї ti , or OCPAH), which represents the country’s accounting and auditing profession, needs to be strengthened in order to perform effectively its role of promoting high quality accounting and auditing practices. Although OCPAH is a member of the International Federation of Accountants (IFAC), it does not comply with several of the Statements of Membership Obligations, including those regarding quality assurance, entry requirements, continuing professional education, and IFAC’s code of ethics. The weakness of the professional body is exacerbated by a number of factors, including a severe “brain drain” over the last five years, a poor image vis-à-vis the business community, divisions within the profession, and, especially, OCPAH’s severe lack of resources. Improving accounting and auditing standards to achieve the necessary level of corporate sector financial transparency will take time and effort, particularly to develop the required technical capacity among the accounting and audit profession. Implementing these recommendations is expected to require significant assistance from the donor community. Any reform program must necessarily be incremental in nature and provide for appropriate sequencing of actions. In that regard, this report recommends the following: (a) Short-term priority actions include (i) adopt an accounting system that is both simple and easily enforceable while being broadly consistent with IFRS; (ii) clarify which accounting standards apply to which type of business entity and only subject large companies to the audit requirement; (iii) update the bylaws of OCPAH especially on all aspects involving the licensing of professionals, including by considering the introduction of an intermediate professional title of “accounting technician”; (iv) seek a twinning arrangement between OCPAH and a Francophone accountancy body; and, (v) move toward full IFRS adoption in the banking sector in the medium term. Haiti ROSC – Executive Summary vi (b) Medium-to-long-term objectives include (i) take steps to develop competition in the audit sector; (ii) develop a basic accounting and auditing framework for non- bank financial institutions; (iii) enhance professional education and training in line with IFAC’s education standards; (iv) mandate and enforce continued professional education; and, (v) put into place measures that promote financial transparency and accountability in state-owned enterprises. These actions should pave the way for addressing other longer-term challenges such as transforming OCPAH into a dynamic organization focused on quality service delivery and leveraging sound financial reporting practices to improve access to credit for small and medium enterprises. In the immediate and short term, Haiti should develop a detailed Country Action Program (CAP) with assistance from international organizations. The CAP should consist of a limited number of achievable outcomes to support the objectives of (i) modernizing the country’s statutory accounting and auditing framework and creating a regulatory and professional environment conducive to the observance of sound financial reporting practices; (ii) strengthening the country’s accounting and auditing profession; and, (iii) helping to develop a cadre of adequately trained accountants and auditors who will contribute substantially to public enterprises’ accountability and transparency. A Steering Committee should be established under the aegis of the MoF and the BRH to oversee the preparation and implementation of the CAP. Within the framework of the CAP, OCPAH should design its own medium-term strategic plan to address issues of improving OCPAH’s internal governance and compliance with its membership obligations vis-à-vis IFAC. Additionally, the strategic plan should focus on identifying solutions to ensure that OCPAH has adequate human resources and sufficient revenues to fulfill its role. The attached table summarizes the short-term priority actions recommended by this ROSC as input for the preparation of the CAP. Haiti ROSC – Executive Summary vii S UMMARY OF R ECOMMENDED S HORT -T ERM P RIORITY A CTIONS Objective Recommended Action and Institutional Arrangements Leading Institution(s) Ref. Establish up steering committee to oversee the preparation of a Country Action Program (CAP) Seek support of donors to fund the preparation of the CAP Retain experts to assist in preparing and implementing initial of phase of the CAP BRH and MoF (technical support provided by OCPAH) Para. 72-73 Develop a comprehensive strategy to improve accounting and audit practices in Haiti Develop a strategic plan for OCPAH and the accounting and audit profession identifying key reforms and sources of income. Consider the introduction of an intermediate professional title of “accounting technician” OCPAH Para. 79-80 Amend the 2005 tax decree clarifying which accounting standards apply to which type of business entity MoF Para. 75-76 Improve and update the statutory framework for A&A Revamp the regulations governing the accounting profession OCPAH Para. 77 Adopt an IFRS-compatible accounting system that is both simple and easily enforceable MoF (with OCPAH’s support) Para. 74 Implement an accounting system adapted to Haiti’s current needs Seek the support of fellow francophone accountancy bodies OCPAH Para. 81 Conduct a comprehensive study for aligning BRH rules on loan loss provisions with IFRS Build capacity in banks on IFRS and internal controls Require banks to publish electronically their audited financial statements in full Introduce a standardized form for banks to publish their annual financial statements Adopt IFRS in full in the banking sector Require bank boards and managements to certify their financial statements BRH, Banking Association Para. 78 Haiti ROSC – Background 1 I. BACKGROUND 1. A review of corporate sector accounting and audit practices in Haiti has been carried out in connection with the Financial Sector Evaluation Program (FSAP) of the World Bank and the International Monetary Fund, as part of the Reports on the Observance of Standards and Codes (ROSC) initiative. The main focus of the review is the institutional framework and professional environment that underpin private sector accounting and audit practices. The review also entails a comparison of accounting and auditing standards mandated by the local legislation with the International Financial Reporting Standards (IFRS 1 ) and the International Standards on Auditing (ISA 2 ), which are the benchmarks normally used for the reviews. The review does not cover government accounting standards and practices and the corresponding auditing issues. 3 2. With a population of 8.3 million, Haiti is the poorest country in the Latin America and Caribbean region and among the poorest in the world. Located on the western side of Hispaniola, the country’s recent history has been plagued by prolonged political conflict and violence, poor economic governance, cycles of high external assistance followed by withdrawal of economic support, and natural disasters. Gross domestic product (GDP) per capita has declined on average by 2% annually over the past 20 years. As noted in the World Development Report, Haiti's pattern of socioeconomic development has been characterized by marked inequalities in access to productive assets and public services. 3. Even though much progress has been achieved since 2007, insecurity remains pervasive and plays as a deterrent against young graduates’ embracing a professional career in Haiti. In the context of continuing insecurity over a long period, many of these graduates chose to leave for Canada or the US. This brain drain has significantly hindered the supply of professionals, including auditors. Moreover, for the case of the audit profession, a compounding factor has been Haiti’s weak rule of law, which creates an environment of increased uncertainty and risk for practicing auditors. Ongoing efforts to tackle insecurity, corruption and advance the rule of law under the administration of President Préval will need to be sustained over a long period in order for Haiti to reverse past trends and fully restore its ability to retain local talents. 4. Consistent with the country’s low level of development overall, Haiti’s private sector is largely underdeveloped. The current Haitian administration of President Préval has emphasized the importance of fostering economic growth through private investment, which requires improving the business climate significantly. Improving public security is a prerequisite in that regard, and recent efforts to tackle 1 IFRS correspond to the pronouncements of the International Accounting Standards Board (IASB) and the International Accounting Standards (IAS) issued by its predecessor, the International Accounting Standards Committee, or amended by the IASB, as well as related interpretations. 2 ISA are issued by the International Auditing and Assurance Standards Board, an independent board within the International Federation of Accountants (IFAC). 3 These issues were reviewed under the Public Expenditure Management and Financial Accountability Review conducted jointly by the World Bank and the Inter-American Development Bank. Haiti ROSC – Background 2 crime and violence are significant, positive steps. However, as outlined in the June 2006 World Bank Country Economic Memorandum (CEM) for Haiti, efforts will need to be made to improve the enabling environment for business. This could help channel part of the large flow of remittances from Haitians residing in the US or Canada (estimated at US$2 billion annually) into investment instead of just consumption. Accurate and timely corporate financial reporting is an essential ingredient of the confidence that would-be investors place in the local economy, and therefore of their willingness to invest on a long-term basis. What makes this even more important in a country like Haiti, is that judicial remedies are currently limited and/or difficult. Indeed, entrepreneurs and financiers are only ready to assume the significant risks of an investment in a foreign country if they can monitor performance in, and thus make informed business decisions related to, their investment. 5. Haiti’s public (i.e. state-owned) enterprises are large, and they present serious risks and issues for the Government of Haiti (GoH). A number of these state- owned enterprises currently operate as monopolies. 4 The 2006 Haiti CEM underscores that these entities lack financial accountability and transparency, and recommends that further efforts be made to strengthen financial reporting by these public enterprises, so as to foster a basic level of financial discipline. As a by-product of financial discipline, the quality of the delivery of public services could be expected to improve, and the contingent liability these entities impose on the state’s budget would correspondingly be reduced. 5 Moreover, as it plans to privatize these loss-making and underperforming public enterprises, it is essential for GoH and potential investors to know accurately the financial situation of these enterprises. This will help GoH to maximize the proceeds from each privatization, and to anticipate the potential residual liabilities related to its privatization program. Improving financial management and achieving a minimum level of financial transparency and accountability in these public enterprises require that each has basic processes in place to keep current and accurate accounts, which comply with minimum standards (i.e., not necessarily as demanding and precise as IFRS, but adequate to provide financial information of sufficient quality for management and Government authorities overseeing these public enterprises). 6. The 2006 Haiti CEM notes that “the tax burden is not a constraint on private sector activity in Haiti as taxes are low”. On the contrary, revenue collection needs to be strengthened to mobilize public resources for much needed social and infrastructure investments. It further notes that corporate income tax ( impôt sur les sociétés ) accounts for only 0.85% of GDP as compared with a regional average of 2%, due to numerous exemptions and, presumably, tax evasion. With a view toward modernizing the country’s 4 The five largest public enterprises are: (i) Autorité Aéroportuaire Nationale (AAN), which operates Haiti’s airports; (ii) Autorité Portuaire Nationale (APN), the port management company; (iii) Compagnie Autonome Métropolitaine d’Eau Potable (CAMEP) the water distribution and sewage systems; (iv) Electricité d’Haïti (EDH), the electricity generation, transmission and distribution; and (v) Compagnie Nationale de Télécommunications (Teleco), the company with monopoly over telephone land lines. Another significant state-owned, commercial entity is Service National pour l’Eau Potable . 5 The audit of the main public enterprises is highlighted as a key objective under the World Bank’s Economic Governance Reform Operations. Haiti ROSC – Background 3 tax system, GoH issued a decree in September 2005 on personal and corporate income tax, which contained a series of provisions, to be implemented from 2007 to 2009, aimed at strengthening accounting and financial reporting requirements from the largest corporate taxpayers. While reducing tax evasion is not a direct objective of a financial statement audit, a competently conducted audit can contribute to stricter compliance with domestic tax laws by local companies and thereby improve tax collections. 7. More than 80% of Haiti’s public investment projects during the 2004-06 period have been financed through donor assistance. Virtually all external assistance projects in Haiti are audited by private firms, most of which are local. The quality of the work performed by these private sector auditors is, therefore, directly relevant to the ongoing efforts to improve the financial management of donor-funded projects. One of the objectives of this review is to encourage the development of a cadre of properly skilled and trained accountants and auditors, through (i) enhanced institutional capacity of the officially sanctioned accounting organization, (ii) improved quality of accounting education, and (iii) a strengthened regulatory framework governing accounting and audit practices in Haiti. 8. Local banking groups dominate Haiti’s financial sector. Two large foreign banking groups have each established a local branch to serve international clients. There are nine banks in total, with total assets of approximately US$2 billion as of June 2007 (source BRH). The third largest bank, BNC, is state-owned. Haiti has no stock exchange and is not expected to develop one in the foreseeable future. The domestic insurance industry is small and relatively unsophisticated (life insurance policies are rare). The private pension sector is still underdeveloped. In the absence of institutional investors of any significance, there is currently no mechanism for channeling long-term private savings toward investment activities. Two second-tier banks, privately-owned Sofidhes and the BRH-controlled Industrial Development Fund, provide medium- and long-term loans to the local business sector along with other types of financial and related services. 9. Based on the above, the ROSC Accounting & Auditing for Haiti supports the following three key development objectives: (a) financial sector stability and development; (b) an improved business climate, conducive to private investment and local companies’ access to credit and long term finance; and (c) improved governance and accountability in public enterprises. In this context, this ROSC seeks to assist the authorities in taking initial steps toward (i) modernizing the country’s statutory accounting and auditing framework and creating a regulatory and professional environment conducive to the observance of sound financial reporting practices; (ii) strengthening the country’s accounting and audit profession; and, (iii) helping to develop a cadre of adequately trained accountants and auditors who will contribute substantially to public enterprises’ accountability and transparency. Haiti ROSC– Institutional Framework for Corporate Accounting and Auditing 4 II. INSTITUTIONAL FRAMEWORK FOR CORPORATE ACCOUNTING AND AUDITING A. S TATUTORY F RAMEWORK A1. Private Enterprise Sector 6 10. Until 2007, there were only two statutory requirements for accounting and auditing concerning commercial (non-financial) enterprises: (a) enterprises were required to apply a standard accounting system ( plan comptable ) and (b) practicing accountants were required to be affiliated with the national accounting professional body. Under a decree dating back to 1981, all industrial, commercial and agricultural enterprises, irrespective of their legal form, are required to keep books of accounts in French, in one of the country’s currencies and in accordance with the National Accounting System ( Plan Comptable National or PCN). 7 A decree dating back to 1960 on joint stock companies ( sociétés anomymes or SA) required that the directors of an SA submit, on an annual basis, a detailed report on the balance sheet and income statement to the shareholders. The same decree required that a “ commissaire aux comptes ” (the official title used for statutory auditors in France and Francophone countries in Africa) be appointed to “verify the truthfulness of the company’s accounts. 8 In practice, this latter requirement was rarely complied with. 11. Whereas the stated objectives of the introduction of the PCN included the expansion of the private sector, in practice it was developed with an exclusive focus on taxation. This is evidenced by the fact that the recitals of the 1981 decree state that a system of accounting is prone to facilitate tax inspections. In addition, the designated user under this decree is the tax administration (Art. 2). The implication is that accounting was never really intended as a tool for enterprises to monitor their financial situation and performance, nor was the PCN designed to address the needs of external users of financial information for credit or investment purposes. It should be noted that since Haiti’s fiscal year ends on September 30, in practice the majority of companies close their books of accounts as of that date. 12. A tax decree published in October 2005 significantly steps up accounting and audit requirements in Haiti. The decree’s requirements became applicable for the financial year ending September 30, 2007 and superseded all previously enacted laws and regulations. Its main requirements are as follows: 6 For purposes of this report, “enterprise sector” refers to all commercial organizations (companies) operating outside the financial sector (i.e. other than banks, insurance companies, pension fund administrators, or other providers of financial services). 7 Décret du 16 avril 1981 instituant le Plan comptable national, le Conseil National de la Comptabilité et l’Ordre des Comptables Professionnels Agréés d’Haïti, Art. 1. This presidential decree (which has the force of a law) was published and therefore came in force on January 5, 1984. The Decree of October 11, 1983 to regulate the implementation of the PCN requires financial statements to be presented ion Haitian Gourde. 8 Décret du 28 avril 1960 sur les Sociétés Anonymes , Art. 34-35. Haiti ROSC – Institutional Framework for Corporate Accounting and Auditing 5 a) Bookkeeping/accounting/financial reporting: All companies and sole proprietorships with annual sales or total assets of HTG 1.25 million (equivalent to about US$35,000) or more must prepare financial statements and file them with the tax administration ( Direction Générale des Impôts or DGI) within 90 days after the end of their fiscal year. Those financial statements must be established “in conformity with accounting principles generally recognized by the Haitian State, as included in the (…) [PCN] and according to International Accounting Standards” (Para. 56). b) Auditing/certification: All companies and sole proprietorships with annual sales or total assets of HTG 15 million (equivalent to US$420,000 approximately) or more must have their financial statements audited by an independent, authorized professional accountant or a duly authorized audit firm, and the auditor must be a member of the Haitian Institute of Licensed Professional Accountants (OCPAH ⎯ Para. 31). The financial statements must be filed together with the auditor’s report. For companies with sales or 9 assets below HTG 15 million, their financial statements must be signed by the owner or a registered accountant (“ comptable patenté” ). c) Sanctions: Companies failing to submit their financial statements in time are subject to a fine of HTG 25,000 (approximately US$700) per month, up to a maximum of HTG 300.000. 10 However, the decree does not establish the responsibility of company managements and boards with regard to the fairness of the financial statements presented. Moreover, a fine of 1% of the amount assessed can be imposed on an accountant involved in the preparation of accounting records that contain errors leading to a significant assessment. Finally, a criminal court can impose a fine of up to HTG 1.5 million or sentence to imprisonment an accountant who prepared or helped prepare fraudulent financial statements. 13. Small enterprises, defined as having annual sales below about US$35,000, 11 are only required to keep record of their cash inflows and outflows, which is consistent with international good practice as these entities are very unlikely to need bank credit and equity capital. Nevertheless, it could be useful for Haiti to develop a standardized approach for a cash basis accounting framework, as these enterprises are potential users of micro-credit services. Moreover, some of them will eventually need to scale up their activities and then will need to access bank credit. 14. Haitian enterprises are not subject to any requirement to publish their financial statement or publicly disclose their financial standing. This severely limits the role that accounting information plays in the economy. Civil law jurisdictions 9 Consistency with the previous requirement would require “and” instead of “or” (otherwise entities who exceed one of the threshold but not the other fall under both requirements). 10 Décret du 29 septembre 2005 Relatif à l’Impôt sur le Revenu (published on October 5, 2005), Art. 44, 45, 49 and 189. Financial statements are defined as the balance sheet, statement of income, statement of cash flow, notes and annexes including the list of fixed assets, depreciation and amortization, provisions and certain accounts related to foreign transactions (“ comptes relatifs aux opérations en portefeuille extérieur” ). 11 HTG 1.25 million. Decree of September 2005, Art. 33-34. Haiti ROSC – Institutional Framework for Corporate Accounting and Auditing 6 often require that annual financial statements be filed with a corporate registry, which the public can access to for a nominal fee. No equivalent tradition seems to exist in Haiti, where there is no legal requirement for publication of company financial statements. For corporations (SAs), the commercial code of 1960 12 requires that a copy of the directors’ annual report on the assets and liabilities position of the company be forwarded to the Ministry of Commerce and Industry. 15. In addition, in the absence of any mechanism for monitoring of enterprise accounting and auditing practices, incentives to comply with the PCN are weak. In the absence of a requirement to publish or other mechanisms to enforce the PCN, the consequences of not complying with accounting obligations are limited. The lack of a deterrent effect creates an environment where compliance is low, which seriously hampers the level of financial transparency in the private sector and is, therefore, detrimental to Haiti’s investment climate. 16. The tax administration is not currently equipped to enforce the Tax Decree of October 2005 properly. The tax administration ( Direction Générale des Impôts or DGI) has two enforcements divisions: (a) Unité Contrôle et Gestion Fiscale (UGCF), which deals with the larger taxpayers, defined as enterprises with sales of HTG 10 million (approximately US$280,000) or more; and (b) Direction de la Vérification (DV), which covers all the others. DGI is facing severe capacity constraints, both within UGCF and DV, with regard to its capacity to enforce the provisions of the Tax Decree of 2005 involving accounting (Para. 12). These difficulties are compounded by the fact that tax returns are not standardized; therefore, any automated processing of the information contained in the returns is virtually impossible. 17. In sum, the statutory framework governing corporate accounting and auditing standards applicable to commercial enterprises is incomplete and loosely enforced. Given the growing emphasis on private sector development in Haiti, the corresponding increase of credit to mid-sized and small enterprises will require that these enterprises’ provide reasonably good accounting information to local or foreign lenders or investors. This, in turn, requires clarity in the accounting rules prevailing, which is not the case at the moment. In addition, some form of enforcement, deterrent effect or a combination of the two will be necessary. Given the difficulty for a state as fragile as Haiti to sustain the necessary infrastructure for the enforcement of accounting obligations of hundreds of small local enterprises, a premium should be placed on transparency and the role of external auditors. A2. Financial sector 18. Banks are subject to much more stringent regulations governing accounting and auditing; still, no clear definition of applicable accounting and auditing standards is provided. The decree on banking activities of 1980, 13 Art. 57, requires 12 Decree of August 28, 1960. 13 Décret du 14 novembre 1980 réglementant le fonctionnement des banques et des activités bancaires sur le territoire de la République d’Haïti . Haiti ROSC – Institutional Framework for Corporate Accounting and Auditing 7 banks to report to the BRH on their “monthly situation” and submit a profit and loss statement every six months. Detailed BRH-issued regulations dealing with accounting and auditing issues are contained in Circulars no. 61-1 on external audits, no. 87 on loan- loss provisioning, and no. 93 on monthly financial reporting to BRH. No circular deals specifically with accounting rules to be applied by banks. A paragraph in Circular 61-1, Section 5 states that “until accounting and auditing standards are established in Haiti, the independent auditor should conduct its audit in accordance with auditing standards generally recognized on an international level, and ensure that the bank has prepared its financial statements in accordance with accounting standards generally recognized on an international level”. The problem is that there is no clear and universal understanding of which standards are “generally recognized on an international level”, except for IFRS and possibly U.S. Generally Accepted Accounting Principles (GAAP). In addition, some BRH-issued circulars contain provisions that contradict IFRS on significant aspects including loan-loss provisioning (Para. 58). 19. All banks must have their annual financial statements audited by an audit firm whose appointment is approved by BRH. This latter provision, which is fully in line with international good practice, is meant to ensure that external auditors of banks meet minimum “fit and proper” conditions. Circular 61-1 also contains various requirements intended to ensure auditor independence, and sets guiding principles for the relationship between the BRH and the auditors, aimed at avoiding duplication and maximizing synergy between the audit work and bank supervision, which is broadly in line with a paper issued by the Basel Committee in January 2002 and the International Audit Practice Statement 1004 issued by the IAASB. Other important provisions include the requirement for auditors to provide the BRH with all information deemed useful by the BRH and the obligation for the auditor to “alert” the board of directors and the BRH when it becomes aware of facts that may indicate violations of the banking law or practices that may be detrimental to the bank’s ability to operate normally or to depositors. 20. A draft new banking law presented before the Haitian Parliament in July 2007 includes several provisions aimed at increasing external auditors’ accountability vis-à-vis the BRH. In particular, the new law would: (a) Require that at least two partners in a licensed audit firms have a minimum of five years of experience as senior staff or audit partner (Art. 61); (b) Set stringent prohibitions aimed at ensuring the auditor’s independence (Art. 62); (c) Enable the BRH to dismiss the audit firm with cause (Art. 63); and (d) Allow the BRH to notify the “appropriate disciplinary authority” in case of violations of law by an external auditor (Art. 72). However, since no institution is currently fulfilling any meaningful disciplinary role in relation to external auditors, the effectiveness of this provision is doubtful, This raises an issue with respect to the oversight of the audit function in Haiti (Para. 38). 14 14 According to the BRH, at the time this report was being finalized (July 2008), le draft banking law was still before Parliament. It should be also noted that the BRH has the power to dismiss external auditors in the banking sector. Haiti ROSC – Institutional Framework for Corporate Accounting and Auditing 8 21. Banks are required to make their financial statements and audit report available to the public, 15 but there is no requirement to publish them. The financial statements can be reviewed by the public at the bank’s premises, but the bank is not obliged to provide a copy. The larger local banks prepare an annual report containing their full financial statements and audit report. One of the two larger banks also posts its full financial statements and audit report on its website. In order to facilitate the public’s access to bank financial statements and thereby foster depositor’ confidence and protection, the best solution would be for BRH to post all such financial statements and audit reports on its website. This practice is commonly observed among bank supervisors worldwide and contributes to market discipline, which is an important feature of a modern banking supervision framework. 22. BRH monitors compliance by banks with accounting requirements, through off-site reviews and on-site inspections, complemented by regular meetings with the external auditors. The staff of the Supervision Department within BRH generally has a strong background in accounting, and BRH’s supervisory procedures are largely adequate. The natural evolution toward a more risk-based approach to supervision will require significant training for supervision staff in risk management, internal controls and IFRS. 23. Insurance and pension fund administration are fundamentally unregulated activities and are only subject to the general accounting and auditing requirements applicable to commercial enterprises. Because, historically, insurance policies were issued by international companies though local brokers, the insurance business was regulated as a trade activity; however, regulatory requirements were minimal. For tax purposes, October 2005 Tax Decree, Article 157, requires local insurance companies to file their financial statements, prepared in accordance with templates prepared by the DGI. The only specific accounting rules set in the decree has to do with the calculation of technical reserves. 16 A3. Public enterprises 24. Public enterprises operate under specific legal forms in Haiti, either as an o rganisme autonome de l’Etat or as a société d’économie mixte (SEM). The former is a state entity 17 with operational autonomy, not included in the general budget and operating as a commercial, for-profit entity. The latter operates as a corporation except that one of its shareholders is the State or a public entity. A SEM can be controlled by private investors as a result of privatization, as is the case of the national cement company and the mills. 25. Public enterprises are subject to the same accounting, financial reporting and audit requirements as commercial enterprises. This approach is adequate 15 BRH Circular 61-1, Section 7. 16 For life insurance policies, the decree states that formulas used must be approved by the Ministry of Finance. For other types of policies, the reserve must be equal to 40% of “issued premium”. 17 These do not operate as corporation and, in general, their governance arrangements are potentially weaker than those of a SEM. Haiti ROSC – Institutional Framework for Corporate Accounting and Auditing 9 insofar as accounting is concerned; however, a higher level of accountability would be expected from public enterprises than from private ones. Under Article 1 or the Decree of 1981 establishing the PCN (Para. 10), all enterprise, irrespective of their form, legal status or nationality, must apply the PCN. Similarly, under the Tax Decree of 2005, Articles 1 and 150, all public enterprises must pay taxes on their income in the same manner as corporations or partnerships. 26. Currently, public enterprises are not legally required to have their financial statements audited, but most of them will be because the 2005 Tax Decree requires that they do so on account of their size. The country’s Supreme Audit Institution (Cour Supérieure des Comptes et du Contentieux Administratif or CSCCA) is responsible for oversight of the public enterprises. However, it does not carry out the audit of these entities’ financial statements, and it does not have the capacity to do so. 18 Given the complexity and size of commercial entities such as APN, CAMEP, EDH or Teleco, the CSCCA cannot reasonably be expected to audit their financial statements under current circumstances; therefore, that function ought to be left to private audit firms. 27. Publication of audited financial statements is not legally required from public enterprises. Given the poor state of these entities’ accounts at the moment (see a discussion of current accounting and auditing practices within the five largest public enterprises in Para. 67-68), publishing these accounts would not necessarily achieve much in terms of informing the public of the economic performance and financial condition of these entities. Nonetheless, a requirement to publish audited financial statements, which is a basic measure to establish the financial accountability of those types of entities, 19 would create an incentive to management and public authorities to improve their financial management. 28. Financial oversight of public enterprises by state entities is scattered among various entities and is very weak. In addition to the CSCCA, several institutions are involved, to some extent and in different ways, in the financial oversight of public enterprises. First, public enterprises are required under a decree of July 20, 2005 to submit their financial statements to the Ministry of Economy and Finance’s Unité de Programmation (UP) within three months after the end of the fiscal year. Second, the Council for the Modernization of Public Enterprises ( Conseil pour la Modernisation des Entreprises Publiques or CMEP) established in 1996, 20 has been actively involved in the audit of financial statements and in providing accounting assistance, with engagements commissioned by the GoH in relation to donor-funded projects. The CMEP has very limited powers over public enterprises (especially the o rganismes autonomes de l’Etat) when it comes to monitoring their efforts to restore an acceptable level of accounting and financial management. Finally, public enterprises being subject to taxation of their 18 According to a recent study by the World Bank on public financial management in Haiti, the CSCCA had yet to complete the audit of central government accounts for fiscal year 2003/04. 19 See in particular the OECD Guidelines on Corporate Governance of State-Owned Enterprises (2005). 20 Loi Portant sur la Modernisation des Entreprises Publiques , published in the official gazette ( Moniteur ) on October 10, 1996. The CMEP’s mandate is defined as follows: “to promote and manage the process for the modernization of public enterprises”. Financial management and reporting aspects are not specifically mentioned. Haiti ROSC – Institutional Framework for Corporate Accounting and Auditing 10 income, the DGI receives their financial statements and is authorized to carry out inspections to verify the accuracy of these statements. Coordination between the MoF and CMEP is nonexistent. B. T HE A CCOUNTING AND A UDIT P ROFESSION 29. Haiti’s accounting and audit profession services is still at a very early stage of development and faces a number of serious challenges. In a country, which just recently emerged from a long and severe crisis and where the private sector has been facing huge difficulties to develop its activities, one would expect the local accounting and audit profession to be fairly weak overall. Constraints to the profession’s development are varied, including: • A very narrow market base for statutory audits – Because the law only requires a very small number of enterprises to have their financial statements audited, professional accountants in Haiti have few opportunities to carry out audits. This makes it difficult for them to acquire the specific skills needed to conduct audits, which are fundamentally different from those needed for bookkeeping or tax return preparation. The recently enacted Tax Decree creates new opportunities for the auditing profession, as several hundred companies will be required to have their financial statements audited; • A poor image vis-à-vis the business community (Para. 70) coupled with local entrepreneurs’ reluctance to provide financial information, leading to low demand for sophisticated accounting services beyond basic bookkeeping and low fees; • A severe “brain drain” over the last five years caused by acute security problems – Accounting/audit firms have been unable to retain junior professionals, many of whom have left the country to go to Canada or the US. Future efforts to develop the profession should include specific measures aimed at reducing this phenomenon; • Divisions within the profession, between sole practitioners and the half a dozen or