TAKING THE UNEXPECTED INTO ACCOUNT

If Azerbaijan is to become integrated into the world economic system, it needs to ensure transparency in its financial operations in the country and to combat economic crime and corruption. Auditing is one of the important tools in achieving these aims. In spite of the fact that the state has always focussed on expanding the scope of independent auditing operations, there are still quite a few problems hindering their development today.

Bad trends 

Two significant facts point to the need to introduce comprehensive new measures to reform this sector of Azerbaijan's economy. Firstly, local auditors get a very small chunk of the pie in the form of "the market of auditing services". Azerbaijan's Chamber of Accounts has told Regionplus that in 2012 their share was only 15 per cent (companies received 10 per cent and independent auditors 5 per cent), while foreign auditors netted 85 per cent of all the services, from which 48 per cent were provided by branches or representations of foreign companies, 37 per cent went to companies with foreign capital.

Secondly, the market does to a significant extent depend on compulsory audits. Thus, the share of compulsory audits in the overall volume of services offered in Azerbaijan in 2012 amounted to 73 per cent, while voluntary audits only amounted to 15 per cent. They said at the Chamber of Accounts that this ratio testifies to the fact that public interest in auditing still leaves much to be desired and it is only carried out when required by law. By comparison, the share of voluntary auditing is more than 20 per cent in the countries of the CIS [Commonwealth of Independent States - tr.] and 30 per cent in developed countries.

Compulsory audits 

Institutions, which are required to do so by law, do not strive to resort to the services of auditors either. What is more, the Ministry of Taxes and the Chamber of Accounts have discovered that evasion of compulsory auditing is acquiring a mass nature.

The legislation requires banks, insurance organisations, open joint-stock societies, societies with limited liability, municipal authorities, enterprises with foreign capital and a number of other economic entities to undergo compulsory audits. In 20ll, 9.9 per cent of the facilities subject to compulsory audit were checked, whereas 11.49 per cent were checked in 2007. This figure continued to decline in 2012. Only banks and insurance organisations underwent 100-per-cent auditing, which can easily be explained. By the very nature of their activity, these organisations are better integrated into international operational systems, and they are required to present their financial accounts together with the auditor's conclusions to the regulator (the Central Bank and Ministry of Finance). A similar situation can be observed in some other organisations. The Ministry of Justice demands the auditor's conclusions from the municipal authorities, the State Committee for Securities from those issuing the securities, the State Committee for Property Issues from the joint-stock companies, where the state is either a full or partial owner.

Limited liability companies are first and foremost among those subject to compulsory audits. According to the latest figures, there are 42,000 of them. But only 3.1 per cent of these companies underwent auditing checks in 2011. And this figure is continuing to decline. At the Chamber of Accounts they think that this may be due to these companies only compiling reports of their accounts for their founders, that is they are not required to submit them to any kind of state institution.

The surveys and studies carried out by the Chamber of Accounts reveal the reasons why those in charge of economic entities avoid audit checks. The main one is the fact that loopholes can be exploited in bookkeeping and accountability, in particular in the procedures for submitting financial reports. Moreover, the owners of entities are unwilling to comply with the legislative norms relating to the transparency of their accounts, to combating the unsatisfactory standard of auditing services, to improving training in auditing skills and knowledge, to distrust of auditing on the part of the clients, and to the lack of professionalism on the part of the auditors.

"The conclusion may be drawn that eliminating the shortcomings in the system of submitting financial accounts would provide a shortcut to preventing audit evasion. This is confirmed by international practice. After financial accountability underwent reform in Uzbekistan, the volume of audit services rendered went up 10 per cent. In Ukraine where it is required by law that audit conclusions form a component part of the accounts, the level of audit checks is around 100 per cent. They don't even bother with these figures in developed countries because they are not necessary," they said at the Chamber of Accounts.

Upgrading the legislation 

Examination of the auditing legislation could bring about a qualitative change in the situation. "Different aspects of auditing activity are regulated by more than 20 laws. Nevertheless there are still loopholes and shortcomings in the law, which present serious problems in rendering auditing services and regulating them," they told us at the Chamber of Accounts.

The legislative initiatives of the Chamber of Accounts of Azerbaijan are reflected in the draft concept of auditing services in the country, which embraces the period up to 2020. The document will be submitted to the government in November and may even be adopted this year.

The Chamber of Accounts of Azerbaijan recommends introducing changes in those directions relating to the creation of auditing organisation, to working conditions for the independent auditor and the arrangement of examinations in that regard, to drawing up auditing conclusions and accounts, and the rights, obligations and responsibilities of auditors. The chamber proposes amalgamating individual legislative acts defining the entities subject to the compulsory audit into the law "On auditing services" (in effect since 1994) and to reflect the name of these entities in this law.

E-auditing 

Azerbaijan's entrepreneurs can expect serious changes with regard to tax checks. From next year the Ministry of Taxes is to set about auditing on-line. At the present time, the taxmen are conducting a pilot investigation. The project to install this system in Azerbaijan was completed in May. It was implemented with the help of the Netherlands' tax administration within the framework of an international twinning programme. The advisor to the tax minister, Asaf Asadov, told Regionplus that the legal and methodological basis of the e-audit, created in Azerbaijan, is the first of its type in the CIS area.

According to the tax code, institutions are required to submit the necessary figures on-line within 15 days. These figures are to be studied at the tax office as part of a special programme and, on the basis of the outcome, the next steps will be planned. A. Asadov said that using an e-audit system will cut down the number of tax-related inspection trips by 90 per cent.

First of all, the e-audit will embrace foreign firms working in the oil sector, local holdings, enterprises and companies that have branches and conduct operations abroad, as well as large and medium-size commercial and service premises, which are using electronic cash machines and POS terminals. Moreover, e-auditing will be used by companies in banking, insurance, licensing, telecommunications, as well as companies specialising in on-line trading, processing centres and enterprises offering communal services. 

Thus, the introduction of e-auditing will be one of the steps aimed at boosting transparency in financial accounting at economic entities in Azerbaijan. The country's efforts to develop auditing activity as a whole are aimed at this. Therefore bringing this system in line with international standards and experience will consolidate the country's economic might.