Report No. AAA35-AR Argentina Report on the Observance of Standards and Codes (ROSC)­Accounting and Auditing July 2007 Financial Management Unit, Operations Services Department Country Management Unit Argentina Latin America and the Caribbean Region Document of the World Bank Standard Disclaimer: This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Copyright Statement: The material in this publication is copyrighted. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW,Washington, DC 20433, USA, fax 202-522-2422, e- mail pubriahts@worldbank.org Argentina ROSCAccounting andAuditing-Table of Contents iv Argentina REPORT ONTHE OBSERVANCEOF STANDARDS AND CODES (ROSC) Accounting and Auditing Table of Contents MAINABBREVIATIONS AND ACRONYMS iii ACKOWLEDGEMENTS V EXECUTIVE SUMMARY vi I. BACKGROUND 1 11. AND AUDITING INSTITUTIONAL FRAMEWORK FOR CORPORATESECTORACCOUNTING5 A. STATUTORY FRAMEWORK 5 B. THEACCOUNTING AUDITPROFESSION c. AND 13 PROFESSIONALEDUCATION AND TRAINING 15 D. SETTING GENERAL-PURPOSE ACCOUNTING AUDITINGSTANDARDS AND 17 E. ENSURINGCOMPLIANCEWITHACCOUNTING AUDITREQUIREMENTS AND 18 111. ACCOUNTING STANDARDSAS DESIGNEDAND AS PRACTICED 23 A. ARGENTINEGAAPASDESIGNED 23 B. OBSERVED REPORTING PRACTICES 26 IV. AUDITING STANDARDS AS DESIGNEDAND AS PRACTICED 29 V. PERCEPTIONSONTHE QUALITY OF FINANCIAL REPORTING 33 VI. CONCLUSIONSAND RECOMMENDATIONS 34 VII. SUBSEQUENT DEVELOPMENTS 37 ANNEX -SUMMARY OFTHE MAINDIFFERENCESBETWEENARGENTINE GAAP AND IFRS 39 July 2007" Vice-president Pamela Cox Country Director Pedro Alba Sector Director Elizabeth 0.Adu Sector Manager Roberto Tarallo Task Manager Henri Fortin *This reports incorporates the comments received from Argentine counterparts and stakeholders inJune 2008 and M a y 2009, including main changes occurred subsequently to the preparation o f the report. Argentina ROSCAccounting andAuditing-Table of Contents V ACKOWLEDGEMENTS This report was prepared by the World Bank, on the basis of a diagnostic review carried out between December 2006 and May 2007, including a two-week field mission in Buenos Aires. The task team led by HenriFortin also included Ana Cristina Hirata Barros and Joanne Givens (LCSFM). Consultants Hector her provided assistance with regardto the financial statements review respectively. Messrs./Mmes. Mario Guadamillas, Jonathan Hoope and Felipe Saez provided advice and comments. This report from Argentine counterparts and stakeholders (BCBA, CNV, of Buenos Aires) in June 2008 and May 2009. The task team orld Bank Country Management Unit(LCC7C) inBuenosAires andWashington, DC. The review was conductedthrough a participatory process involving various stakeholdersand led by the Ministry of Economy and Production (MEP). The task team gratefully acknowledgesthe support received. This report was clearedfor publication bythe MEP on June 4,2009. Argentina ROSCAccounting and Auditing?-Executive Summaw vi EXECUTIVESUMMARY a. Strengthening corporate financial reporting i s important for Argentina, as the country seeks to foster confidence in the local business community in order to stimulate investments, both local and foreign. In addition, strong corporate accounting practices enable local banks and financial institutions to monitor adequately their businesses risks, credit and otherwise, which i s essential at a time when the Argentine banking sector emerges from the crisis triggeredby the events o f December 2001. Sound accounting and auditing is therefore essential to the stability o f Argentina's banking sector. b. This report analyzes Argentina's corporate financial reporting and auditing practices with a view to supporting the Government's strategy to (a) improve the investment climate for Argentine companies (including SMEs); (b) foster trade competitiveness by aligning the standards o f reporting and governance with practices that are prevalent among the country's main trading partners; and (c) ensure greater transparency in both the private and public sectors. International Financial Reporting Standards (IFRS), International Standards on Auditing (ISA) and good international practice, particularly among the other large countries inLatin America, have been usedas benchmarks for this exercise. A study o f corporate governance practices was conducted inparallel, which findings complement those of the ROSC Accounting & Auditing. The principal findings o f this ROSC are summarized hereafter. Statutoryframework-accountingand auditingstandards c. Argentina's statutory framework for accounting and auditing appears reasonably sound although it i s fragmented and at times unduly complex, with many laws setting different requirementsfor particular sectors and/or jurisdictions. d. With regardto financial reporting and auditing standards, efforts have been made to adopt portions o f international standards (IFRS and ISA), especially with the issuance in2000 ofthree accounting standards partially mirroring IFRS at the time. Nevertheless, Argentine standards are still less demanding than their international counterparts and require significant improvements and alignment with IFRS and ISA. Higher adherence to international standards will contribute to foster investors' and lenders' confidence which i s a key ingredient for local companies to gain access to credit and attract long-term capital. e. These efforts have culminated with the adoption o f IFRS for all listed companies, effective from 2011 on a mandatory basis (FACPCE Technical Resolution 26, March 2009). f. Another interesting, recent development has been the Central Bank's project to set up a central repository of corporate financial statements. This will enhance the availability o f accounting information for banks and support sound credit risk management practices. Giventhat credit decisions depend not only on the availability of Argentina ROSCAccounting and Auditing -Executive Summaw vii the borrowers' financial statements but also on their quality and reliability, a logical, parallel step would be to further align local GAAP with IFRS. g. The financial sector (banking, insurance and pension funds) currently operates under transitional regulatory arrangements issued in the wake o f the December 2001 crisis as part o f a broader set o f measures designed to help these entities emerge from the crisis in an orderly fashion. Those forbearance arrangements are to be phased out in the short to medium term. This ROSC did not include a detailed analysis o f current financial sector accounting rules precisely because these are intransition and expected to undergo significant changes inthe near future. The accountingand audit profession h. Traditionally, Argentina has had a strong accounting profession, perhaps the most prestigious in Latin America. Such high repute stemmed from a variety o f factors including strong university education, a fairly sophisticated financial sector, a tradition o f self-regulation arising from the requirements for all accountants to be registered, a legal system conducive to the development o f the profession, with all corporations being subject to statutory audits. It is still well perceivedamong the business community. i. However, for several years, the Argentine professionsufferedfrom divisions between capital city, Buenos Aires and the federal organization, FACPCE, which groups the 23 Provinces. Inthe late 1990s,the accountancy body ("professional council") of the City o f Buenos Aires-which comprises more than half o f the country's professional accountants and therefore i s by far the wealthiest body in Argentina-broke away from FACPCE. The recent reunification o f the accountingprofession has resolved this issue. The audit function The external audit function suffers from several weaknesses including: o Entry into the profession being based only on university accreditation (Le. obtaining a bachelor degree in accounting; by contrast, international good practice requires a professional certification based on an initial exam and a minimumnumber ofyears o fprofessionalpractice); o Continuing professional development (CPD) being simply encouraged whereas international standards require it; and o The absence o f an effective quality assurance system for the profession, except in regulated sectors, particularly the banking sector, where the Central Bank has established a robust system o f inspections o f the work o f external auditors. k. The implication is that some statutory auditors may not have sufficient technical capability and professional competence to adequately fulfill their obligations. It i s worth noting that, by contrast, Brazil has taken steps to reinforce in auditing practices on the dimensions mentioned above (entry requirements, CPD and quality assurance). Similarly, Mexico has established a system of professional certification required for all audits o f public interest entities, which includes an entry exam and compulsory CPD. It would be inArgentina's interest to draw onthe experience ofthese countries as partofits efforts to strengthen its auditing practices. Monitoringand enforcement 1. Another significant challenge in Argentina as in most countries throughout Latin America and the world more generally i s enforcing corporate financial reporting obligations, especially with regard to listed companies whose compliance i s critical to a well functioning securities market. Argentina is one o f the few countries in Latin America to require non-listed companies to file their annual audited financial statements with the local company registrar (called Inspeccidn General de Justicia or IGJinthe case of the City o f Buenos Aires). However, a review o f a significant sample o f audited financial statements o f companies incorporated in Buenos Aires (including listed and non-listed ones) showed a number o f departures with applicable accounting requirements, pointing to a need to continue strengthening existing enforcement procedures by the Securities Commission, the Buenos Aires Stock Exchange and the IGJ. CNV, especially, should dedicate greater efforts and resources to monitoring activities so as to achieve an adequate deterrence against non-compliance. Next steps-the way forward m. Since this ROSC was completed, several significant progress has been made, including the reunification o f the accounting professional bodies; a FACPCE action plan to fulfill its obligations vis-a-vis IFAC; and the adoption IFRS for listed companies. This creates a momentum for significant improvements in the quality o f financial information inArgentina. n. Reaching a standard of corporate transparency and financial accountability in Argentina that i s consistent with the country's objectives o f stronger private sector governance and competitiveness will require time and the contribution of all stakeholders, including the business community, accounting and audit professionals, accountancy bodies, financial sector and company regulators, and academia. 0. With a view to maximizing country ownership, this ROSC does not set out detailed recommendations to improve accounting and auditing in Argentina. Instead, it i s expected that a country action plan be developed-under the auspices o f the Ministry of Economy and possibly with the collaboration o f the World Bank and other donors-as part of the activities following the publication o fthis report. Based on the findings o f this ROSC, strengthening Argentina's corporate accounting and auditing practices would not necessarily involve major changes in the country's legal framework, even though some simplification inexisting laws and regulations appears necessary. p. Inthe short to medium term, mobilizing the profession's and other stakeholders' efforts to implement Technical Resolution no. 26 adopting IFRS for listed companies should be a priority. Inaddition, adopting ISA for audits o f public interest entities (listed Argentina ROSCAccountin2 andAuditing -Executive Summaw ix companies, banks, insurance companies, etc.) would be a logical and necessary evolution, which many stakeholders seem to welcome. Most efforts should focus on enhancing compliance with existing laws, regulations and standards. A greater level o f integration within the accounting and audit profession and collaboration among regulatory agencies should also be important guiding principles in drawing the roadmap for enhanced financial transparency and accountability in the Argentina's corporate sector. Finally, raising the awareness of. Araentina ROSCAccounting and Auditinp-Background 1 I. BACKGROUND 1. The review o f corporate sector accounting and auditing (A&A) practices in ' Argentina focuses on the strengths and weaknesses o f the regulatory and professional environment, and how these influence the quality o f corporate financial reporting. International Financial Reporting Standards (IFRS ) and International Standards on Auditing (ISA3),as well as international good practices are used as benchmarks for 'this assessment, which covers both statutory requirementsand actual practices. A description of the approach and methodology followed in conducting A&A ROSCs can be found at www.worldbank.org/ifa/rosc aa.htm1. A Corporate Governance ROSC was conducted in parallel by the World Bank. 2. Argentina is Latin America's third largest economy, with 40 million inhabitants and a gross domestic product (GDP) of US$183.3 billion in 2006. Argentina i s endowed with a wealth of natural resources, a well educated workforce, an export oriented agricultural sector which accounts for 10% o f its GDP, and a broadly diversified industrial base. Nevertheless, the country has suffered a succession o f economic crises, due in large part to problems o f inflation, external debt, capital flight, and budget deficits. The latest, and possibly the worst, o f these crises occurred in 2001- 02, resulting inone o fthe most severe economic downturns on record. 3. Despite three years of accelerated growth since the 2001 crisis, Argentina faces several developmentalchallenges.The economy began showing signs of recovery in 2003 and since then Argentina's economic performance has been impressive. The government has run primary budget surpluses since 2003; unemployment dropped to 11.4% by the fourth quarter o f 2005; and per capita GDP as measured inArgentine pesos i s expected to surpass the previous pre-recession peak in 2006. Economic growth has averaged 9% per year since 2003; and foreign debt stands at 68% o f GDP as of 2006, and i s slowly decreasing. Poverty levels have dropped from 58% in 2002 to 38.5% in 2005. However, a number o f challenges remain, and the World Bank's Country Assistance Strategy (CAS) for the period 2006-2008, sets forth a plan to maintain economic progress based on three broad principles: (i) sustainable growth with equity; (ii) inclusion; social and (iii) improved governance. 4. Sustained economic growth will depend in large part on Argentina's ability to enhance the investment climate and promote private sector development. Inthat regard, the CAS noted that streamlining bureaucracy and improving transparency are key challenges. Argentina ranked 6gth out o f 125 countries in the 2006 Global Competitive ' Inthis report, "corporate sector" is usedto refer to all private companies (financial and non-financial) * as well as state-ownedenterprises. IFRS correspond to (a) the pronouncements issued by the InternationalAccounting Standards Board (IASB), termed "IFRSs", (b) International Accounting Standards ("IASs") issued by IASB's predecessor, the InternationalAccounting Standards Committee (IASC), as mendedby the IASB, and c) related official interpretations (IFRIC and SIC). 3 ISAs are issued by the International Auditing and Assurance Standards Board (IAASB), an independent board within the InternationalFederationof Accountants (IFAC). Argentina ROSCAccounting andAuditing-Background 2 Index released by the World Economic Forum and ranked 10ISfout o f 175 countries in terms o f "ease of doing business", according to the World Bank Group's Doing Business Report. In order to improve it business climate and make it more conducive to foreign and domestic investment, Argentina needs to restore investor confidence. Moreover, Transparency International's Corruption PerceptionIndex indicates that the perception o f corruption increased inthe aftermath o f the crisis and remains a serious problem. Battling corruption, which i s part o f the set o f actions necessary to improvethe investment climate, will require that both private and public sector entities adhere to high levels of financial transparency and that they observe sound practices of accountability and governance. Finally, even though fraud detection i s not the main purpose of corporate audits, properly conducted audits do contribute to stricter compliance with domestic laws by local companies and help preventthe concealment o f illegal transactions. More generally, good standards o f accounting and auditing, as well as corporate governance, are key ingredientsfor restoring investor confidence. 5. Argentina's main economic partnerdoth in terms of FDI and trade--are the EuropeanUnion, the UnitedStates and Mercosur partners. The macroeconomic indicators in the CAS show that in 2002-2004, foreign trade equaled about 26% o f GDP-up from 9.3% in 1991-2001-and plays an increasingly important role in Argentina's economic development. Exports o f goods and services represented about 14% o f GDP in 2006, up from 11% in 2000. Greater regional integration is an important goal for Argentina in the long run. In this context, Argentina needs to align its business standards with those o f its main partners, especially industrialized nations. This alignment i s understood to be very important, especially inthe area o f corporate financial reporting; as a result, a trend toward such international harmonization has already begun to take place inArgentina over the recent period. 6. Since the December2001 crisis there have been significant improvementsin the financial system in Argentina. Growth recovery and fiscal improvement helped strengthen demand for pesos and stabilize the foreign exchange market. Since 2002, the Central Bank (Banco Central de la Repziblica Argentina or BRCA) has been accumulating reserves, credit to the private sector has grown and the levels o f non performing loans have diminished. 7. The banking sector has experienced robust deposit growth since 2002 and losses fell significantly in 2004 and 2005. Almost half of the banks' aggregate assets are currently held in government bonds. Therefore, the valuation o f these securities has a major impact on many banks' solvency. As part o f various measures to facilitate banks' financial recovery, the BCRA allows banks to book these bonds as held to maturity, exempting them from recognizing significant losses. State-owned banks present yet a greater challenge as these are still burdened with high operating costs and weak loan portfolios. The solution to these problems involves important fiscal and political considerations. Overall, increasing credit to the private sector remains a significant challenge for Argentina. This ROSC did not include a detailed analysis of current financial sector accounting rules inthose sectors precisely because the sector i s operating under transitional regulatory arrangements, which are to be phased out in the short to mediumterm. 8. Although the Buenos Aires Stock Exchange (Bolsa de Cornercio de Buenos Ares or BCBA) ranks amongthe largestin LatinAmerica, equity and debt markets, as in the rest of the Region, are characterizedby low liquidity. The bulk o f listings and trading occur on the BCBA. Inaddition, there are also eight self-regulated provincial stock exchanges inArgentina. Companies listed on these provincial exchanges may trade on any other stock exchange. BCBA i s divided into several listing segments, namely the (a) special segment, for large companies with capital exceeding AR$60 million, revenue exceeding AR$l00 million, or 1,000 or more shareholders; (b) the SME segment with simplified requirements for small and medium enterprises; and (c) ordinary segment for all other companies. Corporate bonds tend to be crowded out by government debt. Also the concentration o f debt in foreign currency makes the sector susceptible to high currency and maturity risk. The stock markets in Argentina are highly concentrated, with three companies accounting for almost half o f the market main index capitalization ("Bolsa"). There have been significant de-listings in the last decade and very few new equity issuancesa4A dozen Argentinean companies are listed in the U S and must therefore comply with the US securities laws, including the Sarbanes-Oxley Act o f 2002, as well as with regulations issued by the Securities Exchange Commission (SEC). Improvingcorporate financial reporting and governance i s seen as an important means to restore investor confidence, which inturn may lead to new listings and fewer de-listings. More generally, at a time where individual investors and depositors are still wary of losses in the aftermath o f the 2001 crisis, the broad set o f efforts necessary to foster long term savings inArgentina should include measures aimed at increasing transparency and accountability particularly among issuers o f securities and financial institutions. 9. Trust funds Wdeicornisos) compete with banks as important sources of financingfor companies. Other forms o fnon-bank financing inArgentina include (i) the financing o f agricultural exports through international and local suppliers' credits, (ii) small derivative markets, (iii) insurance companies, and (iv) pension finds. A general strengthening o f the institutional environment through corporate governance improvements will help broaden the sources o f finding for the capital markets in Argentina. 10. Various government and semi-autonomous bodies regulate Argentina's financial sector. These entities set out very specific accounting and auditing requirements for the agencies they oversee. They include: 0 The Central Bank (BCRA), which monitors the appropriate operation o f the financial market and implementation o f the Law on Financial Institutions and other regulations. It supervises financial and foreign exchange activities by means o f the Superintendency o f Foreign Exchange and Financial Institutions, As of December 2006, 168 companies were listed on the BCBA, 69 of which were included on the Bolsa index, the 13 largest making up the Mewal index. Further information on Argentina's capital markets i s provided inthe Corporate Governance ROSC. Argentina ROSCAccounting and Auditina-Background 4 which reports directly to the Governor. The Superintendency is chaired by one o f the Directors, who is widely empowered to make decisions for controlling financial and exchange institutions; 0 The Securities Commission (Comisibn Nacional de Valores or CNV) is responsible for supervising the activities o f listed companies, stock exchanges, investment funds, securities depositories, risk rating agencies, and trust funds @deicomisos). CNV is a self regulated public agency which reports directly to the Ministry of Economy and Production (MEP). The CNV has jurisdiction throughout the entire country and has broad powers; The Pension Fund Supervisor (Superintendencia de Administradoras de Fondos de Jubilaciones y Pensiones or SAFJP); 0 The Federal Insurance Supervisor (Superintendencia de Seguros de la Nacibn or SSN), which supervises insurance and reinsurance companies inArgentina; and 0 The National Institutefor Associations and Social Economy (Instituto Nacional de Asociativismo y Economia Social or INAES), which regulates cooperatives and mutual associations. 11. This ROSC addresses some of the key long-term strategies for sustained growth identifiedby the governmentof Argentina, as follows: Improving the investment climatefor argentine companies (including SMEs) by (i)identifyingweakness inreportingandgovernance regimes that have raised doubts about the viability o f investments; and (ii)encouraging remedial action that would enhance the confidence o f financiers, both foreign and domestic, inthe Argentine business climate. 0 Fostering trade competitiveness by aligning the standards o f reporting and governance with practices that are prevalent among the country's main trading partners. Progress toward this objective is closely related to the confidence trading partners feel in the viability of Argentine companies and the adequacy of their capitalization. 0 Promote greater transparency in both the private and public sectors by (i) ensuring that the rules clear, and (ii)enabling compliance with the rules to be monitored by the full array o f stakeholders. 11. INSTITUTIONAL FRAMEWORK FOR CORPORATE SECTOR ACCOUNTING AND AUDITING A. STATUTORY FRAMEWORK 12. Nearly 178,000 corporationsand limitedliabilitycompanies are registeredin the City of Buenos Aires,' where the vast majority of Argentine companies are registered. Only about 1% of these are corporations (sociedades andnimas, or SAs), which together with limited liability companies (sociedades de responsabilidad limitada, or SRLs) represent the most common and economically significant legal forms o f commercial companies in Argentina. SAs must have a minimum capital o f AR$12,000 (approximately US$4,000) and SRLs must have a minimum o f two and maximum o f 50 partners, but have no minimum capital requirement. Only SAs may list on the stock market. 13. The CommercialCompaniesLaw6--withimplementinglegislation-provides the basic legal framework for companies, whether listedor not. It sets out a number of requirements, includingsome pertaining to accounting, publication of financial statements, and internal controls. In addition, the Code of Commerce requires all companies to keep accounting records and sets forth some basic requirements pertaining to how such records should be kept.7 14. In accordancewith good internationalpractice, the Commercial Companies Law exempts SAs that are not considered as having public accountability from several of its requirements.' If a corporation meets all of the following conditions, it is exempted from a series o f requirements, as described later in this report: (a) has a share capital equal o f less than AR$10 million; (b) does not issue shares or debt instruments; (c) i s not owned inwhole or inpart by the government; (d) operates outside the financial sector; (e) does not provide public services or operate concessions; or (0 i s not controlled by, or does not control, a company that has public accountability under the law. Conversely, SRLs with share capital o f AR$l0 million or more are given equal treatment as large SAs, and must follow the same requirements as these. Thus, when this report refers to "large companies", it refers to both SAs and SRLs with a share capital above AR$10 million. Limiting the definition o f large companies to one criterion only can be problematic insofar as the size o f a business entity can only be properly assessed by considering a wider range of criteria including levels of sales, amount o f assets held and number of employees, which are not necessarily correlated. As a result, a company with highfinancial leverage (i.e., with a low capital relative to its assets) might be considered medium-sized. The objectives o f the current law could therefore be better achieved by basing the definition o f large companies on several financial indicators instead ofjust one. ' Ciudad Autdnoma de Buenos Aires. In this report, it is referredto alternatively as "Buenos Aires" or "City of Buenos Aires" (as opposed to the Province of Buenos Aires, which is a separate territory altogether). ' 6 Law 19,550/71, as amended. Art. 33-67 ofthe CommercialCode, as amended. Art. 299 ofLaw 19,550/71. Argentina ROSCAccounting andAuditing-Institutional Framework 6 15. The financial reporting framework in Argentina is somewhat fragmented, due in partto the country'sfederalsystem,which allows a great dealof autonomyto each province or to the federal capital in setting requirements for companies registeredwithin its jurisdiction.Since Buenos Aires is the economic center, and since many provinces tend to harmonize their requirements with those of Buenos Aires, this report focuses o n the requirements in Buenos Aires, unless otherwise stated. The application o f corporate financial reporting requirements to different types of companies is summarized inTable 1, which should be read in conjunction with paragraphs 12to 31. Table 1-Summary of AccountingandAuditingRequirementsby Types of Entities Listed C N V Company Law Yes, by auditor 0Audit committee required companies B C B A C N V rules registered with 0Controlling commission BCBA rules CNV required AR-GAAP 0Audit partner rotation every 5 years 0Publication required Banks Central Central Bank Yes, by Central 0Audit committee required Bank rules Bank- registered 0Controlling commission ( B C W auditor required 0Audit partner rotation every 5 years 0Publication required Insurance SSN Company Law Yes, by auditor 0Internal control companies SSN rules registered with committee required AR-GAAP SSN 0Publication required Large SAs IGJ Company Law Required for 0Sindico required (non-listed) IGJrules annual financial 0Publication requirement and SRLs AR-GAAP statements SOEs Depending Company Law Yes, by AGN 0Audit committee required on sector (for SAs) AR-GAAP Other SAs None Company Law Not required 0Sindico optional and SRLs 16. Listed companies are required to submit their financial information separately to both CNV and BCBA.The CNV andBCBA do not have a shared system to receive information from companies." A s a result, for CNV, companies must submit 9 FACPCE standards, as adopted(with or without amendments)by the provincialprofessional bodies. 10 According to the BCBA, they and the CNV are in the process of implementing a shared system that would allow financial reportsto be filed simultaneously. Argentina ROSCAccounting andAuditing-Institutional Framework 7 their information through an online system ("Autopista Financiera'7, similarly to the SEC's EDGAR system in the US. They must also file their information with the BCBA separately. 17. Both CNV and BCBA require listed companies to submit annual financial informationwithin 70 calendar days of the financialyear-end, or within two days of their approval by the board of directors, whichever comes first." Annual financial reporting requirements of CNV and BCBA are as follows: CNK Listed companies must submit audited annual legal entity financial statements comprising a balance sheet, income statement, statement of changes in equity and notes.l2These are to be prepared in accordance with the rules set forth in the Commercial Companies Law.13 Listed companies must also present a statementof cash flows.14Inaddition, CNV requires the following informationon an annual basis: annual report, external auditor's report, financial summary (resefia informativa), l5and report of the supervisory body (comisidnJiscalizadora or consejo de vigilancia). BCBA:Inaddition to all of the informationabove, listed companies must submit a statement of other relevant information.l6Also, BCBA requires companies to include additional complementary information, if it was not already included in the notes to the financial statements.Even if issuers are able to address both sets of regulations, unifying these and eliminating any duplication could only be beneficial to issuers and to the regulators themselves. 18. All companies with subsidiaries are required, under the Commercial Companies Law, to prepare consolidated annual financial statements, either as standalone statements or as "complementary information".l7The law does not provide any exemption for small groups from the consolidation obligation. Regarding listed companies, these are specifically required to submit their annual and quarterly consolidated financial statements as separate statements, instead of complementary I 1 However, CNV also requires annual financial information to be submitted at least 10 days prior the AGM, whereas for the BCBA, the deadline is 20 days before the AGM. Ifany changes are made to the financial documents at the AGM, the revised documentation must be resubmitted to the CNV and to the BCBA within 10 days o f the AGM. Sources: Section II.4(c) (Book 1) o f the consolidated set o f CNV Regulations; Art. 77 o f BCBA Listing Regulations 12 Section XXIII.l(b), Annex VI1(Book 7); Section XXIII 11.1, Annex Io f the consolidated set o f CNV Regulations. 13 Art. 62-65 of Law 19,550/71. 14 Chapter VI o f FACPCE Technical ResolutionNo. 8. 15 The resefia informativa is a report that includes an analysis of the consolidated financial statements (where applicable), as well as forward-looking information for the upcoming quartedyear. Section XXIII.11.6 of the consolidated set o f CNV Regulations details the requirements of the resefia informativa. While not as detailed and thorough as a US-style Management Discussion and Analysis (MD&A), this report is helpful for investors to properly interpret the fmancial statements and complements them with more qualitative information. 16 See Art. 62 o f BCBA Listing Regulations (Reglamento de Cotizacidn), as amended in September 2004, for full BCBA requirements. 17 Art. 62 of Law 19,550/71. information within the legal entity financial statements. l8 Presenting consolidated financial statements as "standalone" statements i s a more appropriate and internationally accepted presentation, and should be required for large groups-both listed and not-,as these statements are more useful to investors than the legal entity statements for the purpose o f assessing a company's financial position and economic performance. In all SAs, both consolidated and legal entity (i.e. only the parent company's) financial statements are approved by the board o f directors and presented to the shareholders' AGM, but only legal entity statements are to be officially approvedby the shareholders. 19. Listed companies must present quarterly financial information to CNV and BCBA, and submit notices of relevant information immediately to both. Large companies listed on the special segment o f BCBA (Para. 8) must prepare all the financial information that i s required on an annual basis also on a quarterly basis. Quarterly financial statements must be reviewed by the external auditors. For large listed companies, these quarterly statements (both legal entity and consolidated), must be submitted within42 days o f the quarter-end (or within two days o f approval by the board o f directors)lg to both C N V and BCBA. Companies that are listed on the ordinary segment have the option to present only the resefia informativaY2' following the same deadlines as large listed companies. These requirements are broadly in line with good international practice and similar to the ones prevailing inBrazil or Chile. 20. Corporations (SAs) with public accountability are required to file their annual audited financial statements with the company registrar of the local jurisdiction(province or Buenos Aires City), which can be accessed by the public.2' The financial statements must also be accompanied by a report o f the supervisory body (sindicatura or consejo de vigiZancia-Para. 3I), the board o f directors' annual report. and Public accountability for Argentinean companies i s defined in Para. 14. In the case o f Buenos Aires, the above-mentioned statements ands reports must be submitted to the IGJ at least 15 days before the AGM, which inturn must take place within four months of the financial year-end.22Then, within 15 days after the AGM, the companies must re-submit their financial statements, if any changes were made at the AGM. Other SAs and large SRLs are required to submit their audited annual financial statements, external auditor report, report o f the supervisory body (if applicable) and annual report and annual report to IGJ within 15 days o f their approval by the AGM (for SAs) or by the owners (for SRLs). Requiring non-listed companies to submit their financial statements to the IGJ '* For listed companies, the consolidated financial statements are independentfrom the legal entity financial statements, and they therefore have a separate set o fnotes, annexes and audit report. They must also be approved by the board o f directors and presentedto the AGM, together with other requireddocumentation. Source: Art. 62 o fLaw 19,550/71; Section XXIII.l ofthe consolidated set of CNV regulations; Art. 62.b.5 and 63.5 o f BCBA Listing Regulations l9 Section XXIII.l, Annex I o f the consolidated set of CNV regulations. Consolidated fmancial statements (annual and quarterly) must include a balance sheet, income statement, cash flow statement and explanatory notes. 20 Quarterly financial statements and the reseAa informativa must be approved by the board o f directors and signed by the president.They are not requiredto be audited. 21 Art. 145-146 of the IGJGeneral Resolution no. 7/2005. 22 Art. 234 of Law 19,550/71. Argentina ROSCAccounting andAuditing-InstitutionalFramework 9 before the AGM i s quite cumbersome and i s unlikely to bring about added benefit. This practice i s commonly required for listed companies, so that the securities market regulator has a chance to reviewthe financial statements for inaccuracies before these are presented to the public. However, the impact o f non-listed companies submitting inaccurate financial statements before the AGM i s much more limited; in addition, the IGJ does very little in terms o f reviewing the content o f financial statement, so the objective pursued i s unlikely to be achieved in any case. This requirement appears unnecessary and contributes to increasing the cost o f doing business inArgentina. 21, Insuranceand reinsurancecompanies are required to follow the accounting standardsissued by the insurancesector regulator,SSN.23Ifan issue is not covered in SSN rules, insurance companies should apply the relevant accounting standard issuedby the FACPCE. Insurance companies are required to submit their audited annual financial statements to the SSN within 45 days o f the financial year-end, comprising a balance sheet,24 income statement, statement o f changes in equity, annexes and supplementary spreadsheets. The annual financial statements should be accompanied by notes, a report o fthe supervisory body (sindicatura 22. or comisidn fiscalizadora), and reports by the external auditor and actuary. Insurance companies are also required to submit, on a quarterly basis, information on their financial position according to a standardformat provided by the SSN. A report of the auditor's limitedreview (revision limitada) must also be submitted. Currently, there are no listed insurance companies; however, ifthey were to exist, they would be allowed to submit their financial statements to CNV in accordance with the SSN accounting rules, with the sole exceptionthat they would have to use CNV's rules for revaluations of long- term fixed assets. 23. Banks and privatepensionfunds are requiredto follow the accountingrules issued by the Central Bank and pension fund supervisor (Superintendencia de Administradoras de Fondos de Jubilaciones y Pensiones, SAFJP), respectively Both . banks and private pensionfunds must prepare annual and quarterly financial statements comprising a balance sheet, income statement, statement o f changes in equity, statement of origins and application o f funds, notes and a number o f Annual and quarterly financial statements must be submitted to the respective regulator within approximately 50 to 70 days o f the end o f the period.26The annual financial statements 23 Section39.12.4.1 ofthe GeneralInsuranceRegulations (as amended by Resolution29,053102) sets forth the rules pertaining to financial and actuarial audits, as well as the reportsthat needto be presentedtogether with the financial statements. Resolution 30,490 sets forth the deadlines for annual and quarterly financial statements. 24 The balancesheet should follow a standardmodel set forth by SSN, as requiredby Resolution 24,847196 25 Financial reporting requirements for banks are set out in Central Bank Circular CONAU 1; for private pensionfunds, inInstruction 138. 26 Financial statements of banks must be submitted to the Central Bank by the 20" day of the month following the period-end. Inthe case of listed banks, they must also meet the filing requirementsofthe Argentina ROSCAccounting andAuditina-Institutional Framework 10 should be accompanied by a report o f the supervisory body (sindicatura or consejo de vigilancia), and external auditor's report. Quarterly financial statements require a limited review. 24. State-ownedenterprisesare required to apply AR GAAP in the preparation of their financialstatements.The organic lawthat creates the SOE states whether or not it is an SA. If it is, it must follow all the provisions o f the Commercial Companies Law pertainingto SAs. 25. Mostcompanies for which there is a higher levelof publicaccountability(Le., listed companies, large non-listed companies, banks, insurance companies and pension funds) are required to have a statutory audit at least on an annual basis. The exception to this i s state-owned enterprises (SOEs), for which there i s no annual external audit requirement, although some of them elect to hire an external auditor. Independent audits o f SOEs are conducted by the National Audit Office (Auditoria General de la Nacidn or AGN), the country supreme audit institution (i.e. the external auditor o f public acc~unts~~),underArgentinean Generally Accepted Auditing Standards (GAAS; discussed inPara. 69). However, AGN audits are conducted on a rotating basis, which means that SOE financial statements are not necessarily audited annually. Overall, AGN's structure and organization are primarily designed to address issues pertaining to the general government and not necessarily to conduct the type o f external audits inlarge SOEs requiringspecific corporate sector expertise. 26. There are additionalrequirementsfor externalauditors of listed companies, banks and insurance companies. The financial statements o f listed companies and insurance companies must be certified by an external auditor registered with CNV, Central Bank or SSN, respectively. In order to be considered for inclusion in the registries, auditors must meet several requirements,including having at least three years o f experience in audit, being affiliated with an accounting professional body for at least five years, and meeting certain independence requirements.28If an auditor meets these qualifications, they should submit an application, together with their curriculum vitae, to the CNV, Central Bank or SSN for inclusion in the respective registry. In addition, the CNV and Central Bank have institutedmandatory audit partner rotation every five years for companies under their purview.29 27. The responsibilityto appointthe external auditor varies by type of company. In the case of listedcompanies, the board of directors suggests an auditor. The audit CNV. For pension funds, financial statements must be submitted to the SAFJP by the 10" day of the second month following the period-end. 27 The AGN is discussed indetail inthe World Bank and Inter-American Development Bank's 2007 Country Financial Accountability Assessment (CFAA) for Argentina. 28 For inclusion inthe Central Bank and SSN auditor registry, auditors must have 3 years of experience specifically in auditing banks and insurance companies, respectively. Sources: Central Bank Communication "A" 2527;Section 39.12.1.3 of the of the General Insurance Regulations (as amended by Resolution 29,053/02); Section111.9.7ofthe consolidated set of CNV regulations. 29 The SSN is in the process of preparing a draft standard that would require external auditor rotation, which shouldbe issuedfor public comment later inthe second half of2007. Argentina ROSCAccounting andAuditing-Institutional Framework 11 committee must thenprovide an opinion on the suggestion, and it i s up to shareholders (at the AGM) to make a decision. Within insurance companies and private pension funds, the board o f directors is responsible for appointing the external auditor. The Central Bank, SSN and SAFPJ must be informed o f appointments and substitutions o f external auditors within 15, 5 and 5 days, respe~tively.~~ 28. The financial statements of public interest entities (including listed companies, insurancecompanies, pensionfunds and large non-listedcompanies) are availableto the public. However, while the financial information o f some companies is readily accessible on their respective regulators' website (e.g., CNV, SSN, Central Bank) access to other financial statements, such as those submitted to the IGJ, i s not as easy. The IGJ receives paper-based financial statements and files them away. Recently, it has begun to digitize these documents; however the financial statements are simply scanned as images and not as workable data (one cannot readily retrieve and compare revenue data of a set o f companies, for example). Inorder to access the financial statements at the IGJ, one must submit a request, inperson, and pay a fee o f approximately US$18, which i s quite high for many users. The standard turnaround i s approximately 3 to 6 months, and for urgent requests, it i s 15 to 30 days. 29. The Central Bank of Argentina (Banco Central de la Repliblica Argentina, BCRA) is in the beginningstages of a project to create a centralbalancesheet office (Central de Balances, CB) for non-financialcompanies. This office would unify the financial information that non-financial companies submit to the IGJ, CNV, federal tax authorities (AFIP) and financial institutions (for the purpose o f obtaining credit, etc.) in one database. Furthermore, companies would no longer need to prepare and submit separate financial statements to these institutions; rather, they would electronically submit one set of audited financial statements submit to CB. The information would be completely digitized and accessible electronically; o f course, while some data would be available to the general public, other data would be restricted, as they are now, only to specific government agencies or other authorized users. The creation o f the CB i s a significant step towards reducing the burden on companies to prepare several sets o f financial information, and tailor them to different audiences. In addition, this project would address several o f the shortcomings mentioned in this report regarding the IGJ (difficulty in accessing financial information, information only available in paper form, etc.). 30. Listedcompanies that issue shares-exceptSMEs- a r erequired to form an audit committee comprising at least three members of the board of directors, the majority of which must be independent.31Audit committee members must be experienced inbusiness, financial or accounting issues, and are appointed by the board o f directors. The responsibilities o f the audit committee include: providing an opinion on the appointment o f the external auditor and monitoring auditor independence; revising on the 30 CentralBank Communication "A" 2527; Chapters V and VI1 of SAFJP Instruction 23/05. 31 Audit committees are not required for companies that issue only debt. Art. 12-15 of Decree 677/01. The functioning of audit committees is governed by Decree 677101 and CNV General Resolution 400/02. Argentina ROSC Accounting andAuditing-Institutional Framework 12 audit plans o f external and internal auditors and provide an opinion on their performance; and supervising internal control systems, as well as management and accounting systems. In addition, the audit committee is responsible for providing an opinion on transactions between related parties, as well as informing the stock exchange o f potential conflicts o f interest in such transaction^.^^ Any changes in the composition o f the audit committee (e.g., substitution or addition o f members) must be communicated to CNV and BCBA withinthree days. 31. Large companies are required to appoint a sindicatura responsible for certain supervisory, audit and governance functions.33 Sindicaturas, which have equivalentsin a number of LatinAmerican countries, are a legacy of a periodwhen other functions includingexternalaudit, internal audit and the audit committee did not exist. When the sindicatura is performed by an individual, he or she goes by the title o f sindico; when it i s performed by a group, it i s called a comisidnfiscalizadora. To be appointed sindicos, one must be either a lawyer or public accountant, and cannot be a director, manager or employee (or spouse or relative o f these) o f the company or one of its subsidiaries. The sindicatura i s appointed by the AGM. Companies with public ac~ountability~~ are requiredto establish a comisidnfiscalizadora with an odd number o f members; other companies (Le., large SA and SRL with revenues greater than AR$10 million, equivalent to approximately US$3 million) can have an individual sindico. The sindicatura i s responsible for, among other things, overseeing the company's management and issuing an opinion on the financial statements and annual report of the company. In practice, experts in the field o f financial reporting consider the sindicatura as an outdated function, largely because (a) its overlaps with the role o f external auditors with respect to certifying financial statements and with that of audit committees for governance and internal control functions; (b) the hybrid nature o f its controlling functions-external and internal-makes it difficult to fulfill either of these functions properly; and (c) i s not subject to any form o f regulatory monitoring. It i s worth mentioning that in Chile, the requirement to appoint an inspector o f accounts, which is broadly similar to a sindico, was removed for listed companies on the basis that these have to have their financial statements independently audited. Moreover, large companies inArgentina are given the option to establish an oversight board (consejo de vigilancia) inplace ofasindicatura; however, inpractice, few companies opt to do 32 Art.73 o fDecree 677/01 sets forth the rules on related-party transactions. 33 Art. 284-298 o f Law 19,550/71. 34 Listed companies, financial institutions, state-owned companies and companies that operate state concessions or offer public services must establish a comisidnfiscalizadora, per Art. 284 o f Law 19,550/71. 35 The oversight board is required to have between 3-15 shareholders, who are appointed by the AGM. There are no professional requirements to become a member. Oversight boards have wide-ranging responsibilities, including presenting its opinion on the financial statements and annual report o f the company at the AGM, overseeing the board o f directors, as well all responsibilities attributed to the sindicatura. If a company chooses to establish one, it may do away with the sindicatura; however, in this case, an external auditor, appointed by the oversight board, is responsible is required to audit the financial statements o f the company. Art. 280-283 o f Law 19,550/71. Argentina ROSCAccounting andAuditing-Institutional Framework 13 32. Overall, Argentina's statutory framework for corporate financial reporting i s comprehensiveand quite sophisticated,although some level of simplificationand consolidationwould be necessary to facilitateitsapplication.Specifically withrespect to listed companies, the level o f requirement i s generally adequate even if financial reporting standards are an issue (discussed in Para. 62). Moreover, one o f the conditions to ensure that the framework i s properly applied and that its objectives are achieved i s to have a strong enough profession especially in the field o f auditing. This issue in discussed inthe next section. B. THEACCOUNTINGAND AUDIT PROFESSION 33. The accountingand audit professionin Argentina is organizedunder 24 self- regulated "professionalcouncils of economic sciences" (Consejos Profesionales De Ciencias Econdmicas), i.e. one per jurisdiction (provinces, plus the City of Buenos Aires). In order to practice accounting or auditing, one must be affiliated with the professional council of the relevantjurisdiction. These councils are not mere associations but instead they are officially sanctioned and have important regulatory prerogatives. This has traditionally been one of the strengths of Argentina's professional environment, insofar as it recognizes the distinct responsibility o f the profession, and in particular the role o f auditors as gatekeepers acting in the public interest. Moreover, it gives the professional body the ability to generate significant financial resources-mainly through member dues and a stamp on financial statements-which are used for a wide range o f activities particularly training. Lastly, the professional councils have the power to impose sanctions on members who do not observe its rules, which i s an important condition for self-regulation to be effective. Although their membership i s mostly made o f accountants, they also include actuaries, economists, et^.^^ 34. The professional council of Buenos Aires is by far the largest, with 55,000 members representing approximately half of the estimated total number of practicingaccountantsin Argentina.37The profession,inthe capital city therefore has a clear advantage over the provinces, with an adequate critical mass o f trained accountants. Such dominance reflects the fact that most large companies are incorporated within the City o f Buenos Aires. 35. The professionalcouncils,with the exception of Buenos Aires, are organized under an umbrella organization,the Argentine Federationof ProfessionalCouncils of Economic Sciences (Federacidn Argentina de Consejos Profesionales de Ciencias Econdmicas, FACPCE). FACPCE was created in 1973, and all 24 professional councils were part o f it until the late 199Os, when Buenos Aires broke away. The Buenos Aires 36 Inall of Latin Americawith the exceptionofUruguay, membershipinaccountancybodiesis limitedto accountants. A diverse in the membership, while relatively unusual, can be a strength for the professional body, given it broader outreach toward professions that have a stake in corporate accountingandauditing. 37 As the name suggests, the professionalcouncils congregatenot only accountants,but also economists, business admi,nistratorsand actuaries. However, accountantsrepresent the vast majority of members; inthe ProfessionalCouncil of BuenosAires, accountantsmakeup nearly90% ofmembership. Argentina ROSCAccounting andAuditing-Institutional Framework 14 council i s currently negotiating with FACPCE their reincorporation into the federation. FACPCE i s a member o f International Federation o f Accountants (IFAC) and as such must comply with IFAC's Statements ofMembershipObligations (SMO).38 36. There is a federal law that sets forth the specific professionalservices that can be rendered only by an accountant duly affiliated with a professionalc0uncil.3~ These include preparing financial statements and corporate tax returns, and auditing financial statements. The law does not differentiate between accounting and auditing services; as a result, all members are entitled to perform audits, which i s not in line with recent trends on an international level (see Para. 40). In addition, each professional council has its own law o f creation, issued by the relevantjurisdiction, which set forth the specific rules for that council and its members (e.g., structure, powers, disciplinary arrangements, etc.).40 37. IFAC's Code of Ethics, considered a benchmark of good international practice, has not been adopted in Argentina. An adequate code o f ethics is essential to ensure that licensed auditors perform their function observing the fundamental principles ' o f integrity, objectivity, competence, due care, confidentiality, and independence. As such, the code o f ethics i s an essential component o f the profession's credibility vis-a-vis the users o f financial reporting who rely on the work o f auditors. In Argentina, each professional council has adopted its own code o f professional ethics. While these vary across jurisdictions, variations are more in form than in substance. The codes o f ethics in Argentina tend to fall significantly short o f the IFAC code, particularly as regards auditor independence. For example, the ethics code of the Buenos Aires council, which was issued in 1980 and i s only about 5 pages long, i s much less comprehensive than the IFAC Code and i s outdated, as it has not been updated for over 20 years. 38. There is no legal requirement for auditors to take out professionalliability insurance, and it is not common practice to do so voluntarily. Only those firms belonging to the large international audit networks, which have internal policies in this regard, systematically take such insurance. While there i s no limitation o f auditor liabilit inthe law (from a civil or criminal perspective), there is insufficient localjurisprudence x to assess to what extent auditors would be subjected to civil or criminal sanctions incase o f professional misconduct in Argentina. This i s a concern insofar as it tends to limit auditors' accountability vis-a-vis stakeholders. 38 The SMOs establish requirements for IFAC members and associates to promote, incorporate, and assist in implementing international standards issued by IFAC and IASB. They also establish requirements for quality assurance, and investigationand discipline activities 39 Art. 13 of Law 20,488173. 40 Law 466100 of the City of Buenos Aires sets forth the by-laws of the Buenos Aires council (Consejo Professional de Ciencias Econdmicas de la CiudadAutdnoma de Buenos Aires). 41 A well publicized lawsuit involving a very large company with international background against a large audit firm was pending at the time this report was being prepared, but no conclusion can be drawn from this case at this stage, except that it provides anecdotal evidence that lawsuits against auditors exist inArgentina. Argentina ROSCAccounting andAuditing-Institutional Framework 15 39. The Argentine accountingand audit professionhas traditionally beenviewed as one of the best in Latin America, but due to the slow pace of change over the last ten years this leadership has eroded. Traditionally, Argentina has had a strong accounting profession, perhaps the most prestigious in Latin America. Such high repute stemmed from a variety o f factors including (a) strong university education; (b) a fairly sophisticated financial sector; (c) the fact that all accountants have had to be registered with a professional council, which guarantees a stream o f resources to these bodies; and (d) a favorable legal system, since all corporations being subject to statutory audits. It is still very well perceived among the business community. While the Argentine profession suffered from the divisions between the capital city and FACPCE, the recent reunification o f the accounting profession has resolved this issue (see Para. 84), and Argentina continues to play a leading role in Latin America, although other countries have advanced more rapidly over the past decade. 40. The Argentine professionis highly heterogeneous, large member firms of the international audit networks coexistingwith thousands of sole practitioners whose activities are almost exclusively dedicated to bookkeeping and tax returns. The market for audit services in Argentina i s dominated by the four large international audit networks ("Big 4"), although a dozen or so medium-sized firms, including the local affiliates o f the so-called "tier-2" international audit networks, have acquired a significant presence among public interest entities. O f the 46 entities sampled for the ROSC review o f financial statements (see Para. 66), half o f them were audited by a firm other than one o f the Big-4. The clear differences in nature between audits and related services, on the one hand, and bookkeeping and tax return preparation, on the other, call for greater differentiation in the regulation o f these a c t i v i t i e ~On . ~ ~an international level, recent trends have seen audit activities being more rigorously regulated whereas certain countries have completely deregulated bookkeeping activities, which nowadays are largely based on the use of commercial software and to a lesser extent on the work of individual accountants. c. PROFESSIONALEDUCATION TRAINING AND 41. There is no professionalexamination or professionalexperience requirement for registering as a public accountant in Argentina. In order to join a professional council as an accountant, one must hold a valid university degree in accounting. This goes against international good practice, as set forth in IFAC's International Education Standards for Professional Accountants (IES), which requires three years o f professional experience and the passing o f a professional examination. Perhaps as a result o f such relatively low professional requirements, a number o f regulatory institutions (e.g., Central Bank, CNV, SSN, etc.) have instituted additional professional requirements for auditors 42 Examples of countries where a clear differentiation between auditors and accountants exists include: (a) the US, where external auditors of listed companies are subject to separate registration requirements, standards and monitoring; (b) the UK, where bookkeeping has be completely deregulated; (c) France, where statutory auditors are treated as a separate profession; and (d) Spain (all statutory auditors must register with Instituto de Contabilidad y Auditoria de Cuentas (ICAC), a government-controlled institution). In Latin America, Mexico has also followed this trend by introducing in2001 a specific professionalcertification required for audits of all public interest entities. Argentina ROSCAccounting andAuditing-Institutional Framework 16 o f regulated companies. For example, the Central Bank, CNV and SSN all require a number of years o f professional experience in order to audit companies under their purview. 42. The lack of minimum requirements (in addition to the university degree) is made more acute by the fact that some public universities in Argentina - most notably the largest and most well-known, the University of Buenos Aires - do not require an entrance examination.Historically, public universities inArgentina did not require an entrance examination; however, this is beginning to change and many have now instituted an entry exam. Until relatively recently, any high school graduate interested in enrolling in a public university could do so. However, as the requirements for passing the first-year courses were quite high, the students lacking academic credentials tended simply not to advance intheir coursework. Private universities all tend to require an entry examination. 43. The Government of Argentina recently considered university programs in Accounting to be of public interest and, as such, all universitieswith such a major will have to go through an accreditation process. The National Commission for University Evaluation and Accreditation (Comisidn Nacional de Evaluacidn y Acreditacidn Universitaria, or CONEAU), which works under the Ministry o f Education, i s responsible for accrediting undergraduate programs considered by the government to be o f public interest, and all graduate programs in Argentina. Inthis regard, the Council o f Deans o f Economic Sciences (Consejo de Decanos de Ciencias Econdmicas, CODECE) establishes the evaluation standards, which must be approved by the Ministry o f Education and are later applied by CONEAU. FACPCE and CODECE have signed a cooperation agreement six years ago to work together in modifying curricula, and including graduate programs in the continuing professional education system, among other activities. The standards for evaluating accounting programs have not been finalized yet, and it i s expected that CONEAU will carry out the evaluation and accreditation process in 2010. A full accreditation by CONEAU i s given if a program complies with the standards and i s valid for six years. More commonly, however i s a partial accreditation, which i s valid for three years, and requires the universityto draw up an action plan for improvement. If a program does not comply with the standards and its improvement plan i s not considered feasible or sufficient, CONEAU will not accredit the program. The existence o f an accreditation process, which requires minimum standards of quality, should contribute to reducing the level o f heterogeneity that exists in accounting programs across Argentine universities, and i s a step inthe right direction. 44. Continuing professional education (CPE) is regularly offered by the professional councils or through FACPCE's SFAP training program;43however, attendance is not mandatory. As a result, there is no assurance that auditors have adequate capacity to fulfill their responsibilities or that their skills are up to date. Auditors employed by international audit firm networks are required to participate on a regular basis in the training sessions offered by those firms. The absence o f compulsory 43 The SFAP (Sistema Federal de Actualizacidn Permanente) training program was created in 2006; participation is not mandatory. continuing education and training tends to exacerbate the capacity divide that exists between the large international firms and local firms, particularly between firms in the capital and those inless economically significant provinces. The non-mandatory nature o f i s against international good practice and IFAC's SMO no. 2, regarding International Education Standards (IES). SMO no. 2 requires members (i.e. FACPCE in the case o f Argentina), to use their best endeavors to incorporate the essential elements o f IES 7 (regarding Continuing Professional Development) into their professional development requirements. D. SETTINGGENERAL-PURPOSEACCOUNTINGAND AUDITING STANDARDS 45. N o specific provision of the federal or sub-national laws addresses how accounting and auditing standard are to be developed and issued. Accounting and auditing standards in Argentine are "professional standards", this matter being de facto delegated to the each individual professional council for its respective jurisdiction, as part o f their general prerogatives as defined in Law 20 488. As a result, the possibility exists that different standards may apply from one jurisdiction to another. 46. In practice, the provincial professional councils defer to FACPCE, the country's federal accountancy body (Para. 33), for setting accountingand auditing. FACPCE issues the standards, which then must be adopted by the sub-national professional councils to become mandatory. While the professional councils are empowered to make changes to the FACPCE standards, in practice, the vast majority have adopted them without amendments. An agreement was reached in September 2002 between the 23 provincial councils to the effect o f eliminating any existing differences with FACPCE-issued accounting standards. The only significant exception to these arrangements had to do with the Buenos Aires council especially since 2001 when it decided to adopt several pronouncements differing from FACPCE's. 47. A very positiverecentdevelopmenthas beenthe decisionby the Buenos Aires professionalcouncil to adopt FACPCE's accountingstandards fully and phase out all existing differences gradually.44 This decision will help alleviate the regulatory burden imposed on companies headquartered in Buenos Aires with subsidiaries in the provinces, eliminate the confusion created that the existence of two sets o f standards and pave the way for closer cooperation between the nation's two main accountancy bodies (federal and capital city). At present, the situation i s as follows: (a) Since 2006, all FACPCE standards ("RTs'Y apply in BuenosAires infull; (b) For Jiscal years starting January I,2008, two other RTs will become applicable in BuenosAires; (c) Residual differences relating to long-term assets acquired in the 1990sand before will be gradually eliminated, as these assets depreciate over time.45 44 Professional Council of Economic Sciences o f the Autonomous City of Buenos Aires Resolution CD 93 ofAugust 10,2005. 45 These differences are due to the non-recognition o f deferred tax liabilities resulting from inflation adjustments o f the 2001/03 crises, which was allowed by the professional council o f Buenos Aires. Thispractice was substitutedby disclosure inthe notes to the financial statements. Argentina ROSCAccounting andAuditing-Institutional Framework 18 48. The process by which standards are developed is handled by FACPCE's research department (Centro de Estudios Cientzficosy T&cnicos, or CECyT). I t is a fairly transparent process, but relies almost exclusively on the pro bono work of a small group of professionals.Standards are elaborated by CECyT incooperationwith a consultative body comprised exclusively o f volunteers (CENCyA). Once a draft standard i s ready it i s sent to FACPCE's Executive Board (Junta de Gobierno) for approval; once approved, it i s made available for public comment for a period o f at least 120 days. The text is posted on FACPCE's website. 49. Stakeholders outside the profession, especially financial statement users, are not actively engaged and sought out. Although accounting specialists are widely represented in CENCyA (among permanent and invited members), its members are exclusively from the accounting profession, government and academia. There i s a lack o f participation from the business sector (Le., preparers o f financial statements) and users (investors, banks). Therefore the standards tend to reflect more the perspective o f accounting practitioners than that o f the users. The financial and corporate sector regulators are consulted but they are not actively involved in the development o f the standards. Moreover, the standard-setting process relies almost exclusively on accountants. Finally, FACPCE has limited resources because it does not collect dues from licensed accountants (the local professional councils do), which means that its capacity for research and standard-setting i s highly constrained. At the same time, part o f the solution probably involves giving more autonomy andpower to CENCyA and giving more o f a say in the standard-setting process to financial and corporate regulators and to representatives o f the investor and banking community. Interesting lessons inthat regard could be drawn from Mexico and Brazil, which have established independent or semi- autonomous financial reporting standard-setters over the recent years.46 E. ENSURING COMPLIANCEWITHACCOUNTINGAND AUDIT mQUIREMENTS 50. As discussed in Section A above, Argentina has a fairly elaborate statutory framework for accounting and auditing, setting a relatively high standard of financial reporting and accountability for corporate entities. However, an important issue to be addressed i s the robustness o f enforcement, including (a) whether adequate mechanisms are in place to monitor compliance with laws, regulations and standards pertaining to financial reporting and (b) the institutional capacity o f the relevant agencies and professional bodies. Ensuring that applicable accounting and audit requirements are actually observed i s essential to achieve the objective o f greater financial transparency and improved business climate inArgentina. 46 In the case of Mexico, the Centerfor Research and Development of Financial Reporting Standards was established in 2001 as an independent, nonprofit organization. 12 regulatory agencies and self- regulated organizations are represented (see 2004 World Bank ROSC Accounting & Auditing on Mexico). Inthe case of Brazil, a Committee on Accounting Pronouncements(CPC) was establishedin 2005 as part of the Federal Accounting Council. It includes representatives of the investing, business and academic communities. Inthis regard, FACPCE is considering a proposal to restructure CENCyA per the examples above. 5 1. Enforcement of financial reporting requirements for listed companies is carried out by both CNV and BCBA. With a view to optimize the use of both institutions' resources, CNV and BCBA have concluded an agreement whereby they share monitoring resp~nsibilities.~~Specifically, BCBA i s responsible for conducting a thorough desk review o f the periodic and annual financial statements o f listed companies and submit a report o f its findings to CNV. CNV is not boundby the BCBA's report, and it may request additional reviews to be conducted by BCBA and/or conduct a more thorough investigationon its own. Intheory, conferring the responsibility to conduct desk review to the BCBA, which has more human and financial resources, would allow the CNV to free up some much-needed resources to conduct on-site inspections. However, in practice, there has been some overlap between the monitoring efforts o f the two institutions, with C N V carrying out desk reviews inparallel to those of BCBA. 52. CNV's Issuers Department (Gerencia de Emisoras) is responsible for monitoringlisted companies' compliancewith financial reporting rules. Seven CNV staff are responsible for monitoring compliance with filing requirements pertaining to, among other things, financial reporting, for the 300-some companies under the agency's purview. Rather than having separate on-site and off-site supervision departments, CNV divides companies into groups, and supervision staff are assigned a group o f companies. These staff members are rotated periodically. C N V conducts reviews o f the financial statements o f a sample o f companies on a quarterly basis. A number o f factors are taken into consideration in the construction o f the sample, including: whether the company has been inspected before, whether the company i s a financial institution, company size and listing segment. In addition, CNV uses the.findings of the report by BCBA, as well as qualifications in the external audit report, report o f the audit committee, statements o f relevant facts, and investor complaints as possible triggers for a more thorough investigation. CNV also conducts on-site inspections. However, since CNV has a very limited supervision staff and resources, the frequency with which it i s able to carry out its own reviews including on-site inspections i s constrained. In this regard, it has issued supervision manuals that detail the checks that are to be conducted during the desk review and on-site supervisionphases. 53. BCBA's Technicaland SecuritiesDepartment(Gerencia T&cnicay de Valores Negociables) has a staff of approximately 20 in charge of monitoring compliance with financial reporting requirements. The staff is assigned to cover different instruments, by type: listed companies, bonds, trust funds (fideicomisos), post-dated checks, etc.; and each type o f instrumenti s then further broken down by economic sector (finance, oil, telecom, etc.). Staff members are rotated periodically. The monitoring activities that BCBA carries out include: (a) issuing requests for additional information, (b) verifying accounting documents and books, (c) conducting on-site inspections, and (d) investigating complaints. BCBA issues warnings (individualizaciones) to alert the market whenever a company i s late in submittingits financial statements, when there are qualifications inthe external auditor's report, or when there are any other specific issues about a company that the market should be made aware. Furthermore, if companies submit incomplete financial statements or ifthey delay submissionby more than 15 days, 47 Section XXXIII.2.1 o fthe consolidated set o f CNV Regulations. Argentina ROSCAccounting andAuditina-Institutional Framework 20 BCBA may suspend trading o f the company's securities. 48 In case o f very serious transgressions or o f repeated failure to comply with BCBA requirements, BCBA may cancel trading altogether.49 While these more severe sanctions are not common, the BCBA does apply them; for example, since 2005 it has suspended trading in three cases for non-compliance with financial reporting rules." 54. Sanctions are made public on the CNV and BCBA websites, which increases the deterrent effect and therefore the usefulness of these sanctions. The CNV is empowered to apply sanctions to individuals and companies that fail to comply with its regulations. CNV sanctions include warnings, fines, and temporary suspensions or bans from conducting public offerings." All CNV sanctions must be made public. Sanctions applied by BCBA, such as warnings, trading suspensions or cancellations, are posted on BCBA website and in its daily bulletin. Sanctions pertaining to suspensions or cancellations o f public offering o f securities appear on the websites o f both CNV and BCBA. From a user's perspective, the BCBA website i s excellent, as one can search for sanctioned companies by type o f sanction, by company name and by date range. The CNV, by contrast, posts its sanctions as numbered resolutions, grouped by the year the sanction was applied. Since CNV issues much fewer sanctions than the BCBA, it i s not difficult to find sanctions on the C N V website, despite the lack o f search capability. 55. The IGJ is empowered to apply sanctions to companies under its purview and to concerned individuals (including managers, directors and sindicos) that fail to comply with applicable Company Law provisions and IGJ regulations. Sanctions include private warnings (Le., not made public), published warnings, and fines. In addition, it can petition the courts to dissolve or liquidate a company in certain cases.52 However, the IGJ lacks resources to monitor compliance with financial reporting requirements and thus works on a purely reactive basis, Le., it will investigate cases o f non-compliance based on complaints but does not check for timeliness or completeness o f filings on a regular and test basis. Furthermore, the fines for non-compliance are quite low, and are not a useful deterrent. Sanctions are not posted on the IGJwebsite. 56. For the banking, insurance and pension sector fund sectors, the Central Bank, SSN and SAFJP are charged with enforcing accounting and auditing obligations in their respective areas of purview. The Central Bank's Supervision Department and Department o f Auditor Control are responsible for monitoring compliance with financial reporting and auditing requirements for banks. Since 1998, the Central Bank's Department o f Auditor Control has been monitoring the work o f external auditors through inspections, assigning a rating to the quality o f the work, from 1 (very good) to 5 (unacceptable). An average o f 60 inspections per year has been carried from 2004 to 2006. The SSN has two departments responsible for monitoring compliance with 48 Art. 43 ofBCBA ListingRegulations. 49 Art. 46 ofBCBA ListingRegulations. 50 Among its sanctions, the BCBA may also reducea company's daily trading time (cotizacidn a Ruedu Reducida). Although this sanction is not currently being applied, the measure may be used for sanctioningcompanies that are late in submittingtheir financial statements. 5 1 Art. 10 of Law 17,8 11, as amendedby Decree 677/01. 52 Art. 302 ofLaw 19,550/71, as amended. financial information requirements: the Gerencia de Evaluacidn and Gerencia de Inspeccidn.The Gerenciade Evaluacidn conducts desk reviews o f financial statements of all insurance companies on a quarterly basis. Based on its findings, it may request an on- site inspection, which i s conducted by the Gerenciade Inspeccidn.Before carrying out an on-site inspection, SSN carries out inspections o f the external auditors, who are required to make their work papers available and provide explanations. This helps the SSN determine the scope of their on-site inspections. In cases o f non-compliance, both institutions may issue warnings, fines, and suspend or ban companies from offering financial/insurance services.53 The SSN issues alerts o f recent sanctions on its website. Archived information on previous sanctions is not available on the website, but SSN keeps a Sanctions Registry, which may be consulted. 57. Each professional council is responsible for monitoring and enforcing professional rules among its membership. Each professional council has a body responsible for disciplinary issues (Tribunal de Etica Profesional or TEP). Inthe case o f Buenos Aires, the TEP i s comprised o f 15 members, o f which 12 are public accountants. j4 Such strong reliance o f the opinions o f accounting and/or audit practitioners does not necessarily allow the views o f financial statements users and other thirdparties to beproperly reflected. The TEP investigates cases o f misconduct submitted to it either though a written, substantiated complaint, or upon request by the board o f directors o f the professional council or the judiciary. TEP rules on the case and applies relevant sanctions, including warnings, private or public reprimands, and suspension or cancellation o f professional ~icense.~' 58. So far, professionalcouncils haveput the emphasis on ex-post enforcementof knownallegedcases of non-compliance,and no quality assurance mechanismaimed at ensuring compliance through ex-ante monitoring has been established. The concept o f professional quality assurance at the level o f the accounting and audit profession as a whole i s a relatively new one worldwide. It has been codified by IFAC as part of its Statements of Membership Obligations (SMO), which IFAC member bodies, including FACPCE for Argentina, are expected to observe to the best o f their ability.56In Latin America, Brazil i s the only country to have established such systems7and so far this system has been well perceived within and outside the profession. On an international level, virtually all industrialized nations have introduced a system o f independent oversight for statutory auditors, which includes quality reviews o f the professional practice (or "inspections"). It is worth mentioning that the US Public Company Accounting Oversight Board (PCAOB), which supervises statutory auditors o f companies listed in the US-including foreign companies with American Depository Receipts (ADRs+has begun carrying out inspections o f several Latin American audit firms, 53 Art. 41 and42 ofthe Financial Institutions Law; Art. 58 of Law 20,091173. 54 The others are: one graduate in business administration, one economist and one actuary. Art. 18 of Law 466100 ofthe City of BuenosAires. " Art. 30 of Law 466100 of the City of BuenosAires. 56 SMO 1, Quality Assurance, ratifiedby IFAC's Council inNovember 2004. 57 In2001, Brazil's Federalaccountingcouncil put inplace an External Review Committee ("CRE") and issued a professional norm establishing a peer review system among auditors (sole practitioners or firms) for listed companies. Arnentina ROSCAccounting andAuditinn-Institutional Framework 22 including one from Argentina. Countries with a number o f companies listed inthe US are setting up their own quality control systems, in an effort that these will be recognized by the PCAOB. Obtaining PCAOB recognition reflects very positively on the quality of domestic regulation vis-a-vis the local and international investingcommunity." 59. In addition, CNV, Central Bank, SSN and SAFJP have issued rules applicable to statutory auditors of entities under their purview. These institutions have the power to enforce their rules and sanction auditors. While sanctions are communicated to the relevant professional councils, they are issued directly to the auditor and do not require approval or action on the part o f the professional council. Professional councils are also required to inform the relevant regulator o f any cases involving infractions o f professional rules, as well as the sanctions that were applied, when these involve external auditors of regulated companies. 60. Over all, efforts to strengthen the enforcement of financial reporting and auditing requirements need to be expanded in order to boost confidence in Argentine companies. While regulators have recently undertaken a series o f efforts aimed at raising the requirements pertaining particularly to internal controls and audit, these have not been accompanied by the necessary enforcement activities to ensure the effectiveness o f these measures. Inaddition, the enforcement regime inits current stage i s somewhat hampered by the fact that regulators are generally lacking in autonomy vis-a- vis the government, particularly from a resource perspective (i.e., they rely solely on budget allocations to fund their operations, as opposed retaining the revenues earned from their enforcement efforts, such as fines). As a result, some regulatory agencies - particularly the CNV - are lacking in human and financial resources to effectively carry out their monitoring and enforcement duties. Since Argentina i s looking to enhance its investment climate and promote development o f the private sector, it i s essential that Argentine regulators strengthen their enforcement activities, as good financial reporting and auditing are essential for restoring investor confidence. 58 It should be noted that the EUhas also initiated a process to evaluate the quality of domestic regulation o f the external audit fhction with regard to listed companies, in order to determine whether it could rely on it. Argentina ROSCAccounting andAuditing- Accountina Standards as Designed and as Practiced 23 111. ACCOUNTING STANDARDSAS DESIGNED AND AS PRACTICED A. ARGENTINEGAAPASDESIGNED 61. As of May 2007, Argentine GAAP consisted in 11FACPCE-issuedTechnical Resolutions ("RTs"), plus four related interpretations, coupled with a few pronouncements of the Buenos Aires professional council. Some o f the pronouncements conflicted with the RTs during a transitional period; however, these differences will be eliminated as o f January 1, 2008. As previously noted (Para. 46-47), Argentina has had two separate sets o f accounting standards since 2001: the main set issued by FACPCE, and the other by the Buenos Aires professional council. The complete list of extant RTs follows:59 RT 6, Financial Statements inHomogeneous Currency; RT 8, Presentation o f Financial Statements, General Standards; RT 9, Presentation o f Financial Statements, Commercial Entities; 0 RT 11, Presentation o fFinancial Statements, Non-Profit Organizations; RT 14, Financialreporting byjoint ventures; RT 16, Conceptual Framework for Accounting Standards; RT 17, Discussiono fGeneral Issues; RT 18, Discussion o f Specific Issues-RTs 16-18 were issued inDecember 2000 partly on the basis o f IAS (i.e. international standards, which are now labeled IAS or IFRS dependingon whether they have been issued before o f after 2001); RT 21, EquityMethod, Consolidation, Related-Party Disclosures; 0 RT 22, Agriculture; and RT 23, Post-employment and Other Long-Tern Benefits to Employees. 62. Although AR GAAP have been partially aligned with IFRS since 2000, they are significantly less demanding than IFRS, and financial statements prepared under AR GAAP are unlikely to fully meet the needs of users accustomed to using IFRS- or US GAAP-based financial statements. Although no official inventory o f differences between Argentine accounting standards and IFRS exists, the local member firms of the international audit networks keep an unofficial inventory o f such differences for their own use or their clients'. AR GAAP may be adequate for mid-sized Argentinean firms who are mainly financed through the owner's capital contribution, but internationally acceptable standards of financial reporting are required for larger companies that need to raise or borrow funds on a long-term basis and/or actively engage in international transactions involvingjoint ventures, capital investments or large levels o f trade. 59 Interpretations cover Related-party transactions (financing, refinancing and other; Int. no. 1); Statement o f cash flows (no. 2); Accounting for income tax (no. 3,); Miscellaneous issues (no. 4). The full text of all RTs and interpretations can be accessedonline on the Buenos Aires council's website at http://www.conseio.ore.ar/marcole~al/marcole~al.htm~contables. Argentina ROSCAccounting andAuditing- Accounting Standards as Desinned and as Practiced 24 63. The most significant discrepancies between AR GAAP and IFRS are as follows (a more detailed analysis i s provided inAnnex 1):60 A number of rulesfor the recognition and valuation of assets, liabilities, income and expenses are not in line with IFRS. These relate to property, inventories, investments, intangible assets, income tax, goodwill, etc.61The possibility under AR GAAP to capitalize pre-operating or reorganization expenses contrasts sharply with IFRS requirementsto expense these, the latter being widely viewed by the investor community as a more conservative-and therefore more appropriate-treatment. Besides, more discretion i s givento preparers with regard to the recognition o f contingent liabilities than under IAS 37. Transparent and internationally compatible criteria for valuing assets and recognizing revenue and profits i s critical to the credibility o f the financial reporting framework especially inthe eyes o f investors and lenders who are used to operate on an international level. Ultimately, the adequacy o f recognition and valuation rules i s key to the quality o f the financial statement and therefore to investors' and lenders' ability to make properly informed decisions and to their willingness to invest or lend; Financial statements are to be restated when "inflationary conditions" prevail, whereas IFRS require a hyperinflationary contextfor financial statements to be restated. The issue of inflation, how it affects the financial information and how accounting standards should treat it, i s a complex one. Many Latin American experts in the field o f accounting and financial reporting are o f the opinion that IFRS62does not deal withthe issue of inflation adequately. One ofthe reasons has to do with the fact that they believe the financial statements should be price-level adjusted even if inflation i s relatively low (e.g., between 5 and 10% on an annual basis, which i s not considered hyperinflationary). The main problem with this approach i s that it introduces complex accounting treatment that international investors are not necessarily familiar with, and tendto be suspicious of. Accordingly, without disputing from a purely conceptual standpoint the validity o f restating financial statements for the effect o f relatively low inflation, such complex treatments which can lead to inflating reported assets Specific sources for this analysis included abrochurepublished by PricewaterhouseCoopersArgentina, a memorandumprovided by Deloitte Argentina, discussionsheld with each of the Big-4's local firm in BuenosAires, and the "20-F" filings of four Argentinean companieslisted inthe US. This analysis was corroboratedby the review of a large sample of published financial statements (see 111B.hereafter). Investments: According to IAS 27, investments in subsidiaries and associates should be valued at cost inthe legal entity (not consolidated)financial statements of the investor. RT 21.1.2 does not offer this option. Intangible assets: Pre-operating and organizational costs that may be capitalized in Argentina (per RT 17.5.31) must be recognized as expenses in the period in which they are incurred, in accordance with IAS 38. Income taxes: The above differences relate to the decision by the Buenos Aires professional body to allow companies-on an extraordinary basis- to not account for deferred liabilities, as a result of inflation adjustments resulting ffom the 2001/2003 crisis. In addition, non-listed companies were allowed to discount deferred tax assets and liabilities (per RT 17.5.15), which is not allowed under IAS 12.53. The international standard specifically dealing with this issue i s IAS 29, Financial Reporting in Hyperinflationary Economies. Argentina ROSCAccounting andAuditing- Accounting Standards as Designed and as Practiced 25 and earnings are problematic insofar as they introduce a difference with the accepted global financial reporting standards (IFRS and U S GAAP) and tend to foster a negative perception o f undue complexity. A joint working group comprising members o f FACPCE and the Mexican Institute o f Accountants has been set up to develop amendments to IAS 29, Financial Reporting in Hyperinflationary Economies, one o f the objectives being to eliminate the current differences between IFRS and Argentine accounting practices. It should be noted that inflation accounting has been completely phased out in Brazil where current inflation levels are broadly comparable to those observed inArgentina; I n a merger or acquisition, thefinancial statements of the combined business entity can be prepared using the `@poolingof interest" method, which is no longer accepted under IFRS (and US GAAP). This means that the assets and liabilities o f the entity that, under IFRS, would be considered as acquired, do not need to be stated at fair value (Le., can be kept at historical costs). The implication o f not reflecting the fair value (e.g., revalued amounts) o f assets and liabilities after a merger or acquisition i s that the earnings o f the combined entity are likely to be higher than under IFRS, due to the effect of depreciating and amortizing non-revalued amounts. While a number o f companies would probably prefer applying the existing method since in many cases it leads to higher earnings, financial statement users with international exposure tend are likely to prefer a treatment o f business combinations consistent with IFRS andU S GAAP; Non-listed companies' consolidated financial statements are presented as "supplementary information", to be read in conjunction the financial statements o f the parent company, instead of as a complete, standalone set o f financial statement^.^^ As a result, many non-listed companies tend to provide incomplete consolidated information. Because parent company (or "legal entity") financial statements do not give a complete and faithful view o f the financial position and performance a corporate group taken as whole, this represents a significant, potential weakness, limiting investors' and lenders' ability to make properly informed decisions; and A lower level of disclosure in the notes to the financial statements. Disclosures are also essential for investors and lenders to interpret the financial statements (which are largely influenced by management estimates) and to make properly informed decisions. Incomplete disclosure has a adverse effect on investors' confidence. 64. Specific accounting rules issued by the respective regulatory bodies apply to listed companies, banks, insurance companies, pension fund and cooperative sectors. Listed companies are required to follow AR GAAP, as amended by CNV. CNV has issued a comprehensive set o f regulations for listed companies, applicable to companies that issue either equity or debt securities. Among these regulations are a set o f accounting rules based on FACPCE's pronouncements with modifications. 63 Such presentation is a requirement under the Commercial Companies Law. C N V has placed greater emphasis on consolidated financial statements. Argentina ROSCAccounting andAuditing- Accounting Standards as Designed and as Practiced 26 65. Taken as a whole, current gaps between AR GAAP and IFRS are detrimental to the quality of domestic companies' financial reporting, especially in the view of internationalinvestors and lenders. Discrepancies with IFRS can lead to sharply different financial indicators (e.g., debt and net asset value). Added to a lower level o f disclosure, this requires investors and lenders to perform additional due diligence and analyses, or may actually impede them from making fully informed decisions, which inturncan deter investmentor credit. B. OBSERVEDREPORTINGPRACTICES 66. 46 AR GAAP-based, audited financial statements of Argentine enterprises (non-financialcompanies) were reviewedas part of this ROSC.64All these enterprises were incorporated inBuenosAires, and 31 o f them were listed on the BCBA. The date o f the financial statements ranged from October 31,2005 to October 31,2006. The review had two basic objectives: (a) assess the overall quality o f the presentation o f the financial statements and level o f disclosure and (b) detect possible departures with applicable standards.The financial statements o f non-listed companies were obtained from the IGJ. The corresponding audit reports were also reviewed. A total of 98 issues, most o f which involving departuresfrom AR GAAP, were identified through the review. 65 67. The mainissues arisingfrom the review are as follows: Absence of cashflow statement - Five companies omitted the presentation o f a statement o f cash flows, which i s one o f the most important statements for investors and lenders to assess the financial prospects o f a company. Intwo other cases, the cash flow statement contained obvious errors, such as the presentation o f all cash flows as "from operations", including those relating to investing and to financing, which means that the cash flow statement could not be used reliably. Lack of disclosure on sensitive transactions or issues, especially regarding: o Income taxes -In 10cases, disclosures were insufficient for the reader to gain a proper understanding o f the company's tax position. The inherently sensitive an nature o f income taxes, which often involve complex calculations and interpretations, may explain this; o Financial instruments - In several cases, disclosures did not allow the reader to gain a proper understanding o f the nature o f financial instruments and the way they have been accounted. The fair value concept and the calculations o f effective interest rates have not yet been adopted or made in the majority o f cases because, although local standards embrace IFRS requirements in this connection, postponement o f actual application to years or periods starting 64 The sample should not be considered as representative of all Argentine companies. Although the findings may not necessarilyreflect systemic problems of the business sector more generally,they are usefulfor illustratingpotentialproblems. 65 The objectives, methodology and tools used by the World Bank are different from those used by regulatory bodies(suchas BCBA andCNV). Therefore, they can leadto different conclusions. Argentina ROSCAccounting andAuditing- Accounting Standards as Designed and as Practiced 27 January 1, 2006 has been allowed. Overall, the review noted a tendency to disclose as little information as possible on the nature, terms, conditions and risks associated with financial instruments; o Leases - The vast majority of lease arrangements in Argentina qualify as "operating" (as opposed to "finance"). In most cases reviewed, disclosures were limited to rental amounts for the period; no disclosure was made o f minimum payments, other contractual obligations, and lease period. These disclosures are essential for financial analysts to be able to assess a company's total indebtedness, which is an essential financial indicator, and carry out modern valuation techniques; therefore, their absence i s detrimental to investors' confidence; o Signijkant accounting policies, especially for revenue recognition. Transparency in the way revenue i s accounted for i s particularly important insofar as it shows the investing community that company management has very limited leeway to manipulate earnings. In a majority o f the corporate failures that occurred in the U S during the first half o f the decade involved inappropriate earnings management and/or misstatements related to revenue recognition. Therefore, a lack o f clarity in company stated policies for recognizing revenue i s likely to be negatively perceived by sophisticated investors and lenders; o Relatedparty relations and transactions - Inthree instances, such disclosures were insufficient or absent. Disclosures o f related party relations and transactions are particularly sensitive for the protection o f investors. They represent o f an essential feature o f in a good corporate governance framework; o Details of significant captions on the balance sheet, such as the terms and conditions o f loans, inventories, and capitalized borrowing costs; o Other, including the procedures followed for asset impairment testing, accounting for deferred income tax and capitalizing borrowing costs. 0 Other cases of departure from AR GAAP included (i)the recognition o f contingent assets in relations with a claim for a tax rebate; (ii)an inadequate income statement presentation (in two cases, certain transactions were presented as extraordinary even though they did not meet the definition o f AR GAAP for such items) and (iii) a set o f statements, the presence o f a significant excess o f in current liabilities over current assets, negative results and cash flows and a depleted net equity-raising questions about the possibilities o f the entity to continue as a going concern-with little if any information on the terms and conditions o f the current liabilities. The first two cases above clearly illustrate a a tendency toward distorting results, which may reduce confidence among financial statement users. Argentina ROSCAccountinp andAuditing- Accounting Standards as Designed and as Practiced 28 Inconsistent valuation of property, plant and equipment (PP&E) - Under Argentina GAAP, PP&E must be recorded on the balance sheet at restated (Le., inflation adjusted) cost, net o f accumulated depreciation and impairment, if any. Inflation adjustments were made until 1995 and then during the period 2001- 2003.67 The residual balance o f these restatements, particularly those o f the period 2001-2003, i s still included in the carrying values o f most assets. Also, certain property revaluations made until the early 1990s and, in a few cases, during the crisis period, are still part o f the carrying value o f the related assets. On the other hand, although local standards require inflationary restatements when "inflationary conditions" prevail, no such restatements are being made at present even though inflation indices are inthe region o f 12%. 68. The implication of these observed departures is the need to improve the quality of corporate financial reportingin Argentina in order to meet the needs of investors and lenders.Besides, they call for stronger enforcementof accountingand auditingstandardsamong enterpriseswith a higher degree of public accountability. Strengthening the monitoring o f corporate financial reporting practices, listed or not, should start by reviewing the current structure o f the financial statements and accompanying notes o f listed companies to identify any gaps in the content and presentation o f the statements and notes, or areas lacking clarity. Moreover, closer monitoring o f periodic filings seems necessary, in order to identify anomalies in the way particular transactions events or new types o f transactions have been accounted for. Finally, a periodic review o f the work o f the statutory auditors (see Para. 76) would be a useful complement to enforcement actions directed at the companies themselves. 66 Such inconsistency derives from the failure to recognize the effects o f inflation in certain cases, when in similar situations in the past, inflation was recognized. FACPCE has the right, according to RT 17.3.1, to determine-based on qualitative, not quantitative, factors-when accounting for inflation should begin or cease. 67 Duringthis latter period, the basis ofrestatement was the wholesale price inflationary index rather than the retail indicators that would have meant that the period was not hyperinflationary. Under IFRS, accordingly, no restatement would have been made. Argentina ROSCAccounting andAuditina- Auditina Standards as Designed and as Practiced 29 IV. AUDITING STANDARDSAS DESIGNED AND AS PRACTICED 69. FACPCE's Technical Resolution 7 ("RT 7") is the basic authoritative reference for audit practitioners. Together with other minor pronouncements, it constitutes a body of standards far less elaborate than ISA. RT 7 is a 17-page document with a number o f sections enunciating fairly general principles regarding the auditor's personal qualifications, independence requirements, the various steps to be followed in the conduct o f audits, and the form and content o f the audit report. No detailed guidance i s provided in the standard, which increases the risk that it could be inappropriately applied. In addition, the pronouncement i s silent on fundamental issues such as quality control o f the audit work, the responsibility o f the auditor vis-a-vis fraud and materiality, management representations, using the work o f experts, and communications o f audit matters to audit committees. Moreover, the local standards do not consider the various other types o f engagements and reports (reviews, other assurance engagements, agreed-upon procedures and compilation engagements). 70. RT 7's provisionson the auditor's report contain two clear differenceswith ISA: (a) "subject to" qualifications,which are not permitted by ISA, are allowed and (b) review reports can only be issued for interim financial statements, not for year-end financialstatements.The first issue is of serious concern, because "subject to" qualifications-whereby the auditor makes a partial disclaimer on the scope o f the audit opinion with regard to an uncertainty with a potentially material effect on the financial statement (e.g., in connection with a claim by a third party against the company+represent at best a form o f understatement and at worst a misleading information vis-a-vis the users o fthe audited financial statements. A very short section on special reports could be interpreted as allowing the preparation of agreed-upon procedures and compilation reports but no specific mention i s made o f this type o f engagement anywhere else inthe RT 7. Obviously, the concept o f assurance engagements i s not contemplated in RT 7 or other rules. Also, piecemeal opinions are still permitted. On those various matters, a full alignment o f local GAAS with ISA would significantly improve the quality o f auditors' reporting by removing sources of ambiguity 71. Notwithstanding the above, nothing impedes Argentinean auditors from carryingout audit engagements in accordancewith ISA. 72. In 2003, FACPCE decided to ado t ISA with effective implementation for fiscalyears starting on January Is*, even though as of the date of the report, 2007, B this decision had not been implementedyet. ISA adoptioninArgentina hadbeen under consideration for several years. At the time o f FACPCE first official decision (2003), a four-year transition period was appropriate. Efforts have been made FACPCE by and its technical arm, CECyT, to disseminate the standards but several factors are likely to impede proper implementation including but not limitedto: The more elaborate nature and complexity of ISA, requiring significant training for many existing audit practitioners; FACPCEResolutionsno. 284103 and315/05 Argentina ROSCAccounting andAuditina- Auditina Standards as Desianed and as Practiced 30 Inherent difficulties in conducting the required large-scale training programs, including the need to prepare supporting material and to have a sufficient number o f appropriately qualified trainers; Resistance to adopt international standards in some sections of the audit profession, especially among sole practitioners and the smaller firms, who tend to be wary o f the high cost that observing ISA may entail for them, both interms o f training and time necessary to carry ISA-compliant audits; this is compounded by the perception among those practitioners that, since the audit firms belonging to the large international networks are already supposed to observe ISA under their member firm obligations, the difficulty o f switching to ISA will be more acute for purely local firms and professionals. 73. The version of ISA adopted by FACPCE is the one issued in 2004. Much effort has been made since 2004 by the International Audit and Assurance Standards Board (IAASB) to revamp ISA, including a "clarity project" to facilitate their application. FACPCE should therefore adopt the more up-to-date version o f ISA. Sticking to the old version o f ISA would not be in the interest o f the Argentine profession for a variety o f reasons: (a) these standards are not necessarily much easier to observe, (b) they do not incorporate the results o f the IAASB's efforts to make the standards clearer and easier to understandand (c) they can no longer be identified as ISA which takes away one of the key the advantage o f using international standards, which is recognition and greater trust by financial statement users. 74. A proposalhas been floated among the professionto restrict the application of ISA to the statutory audit engagements of listed companies. Ifthis idea eventually prevails, this could lead to confusion among financial statement users as audit reports looking alike but prepared on the basis o f very different standards will be disseminated, without necessarily a clear differentiation as to the level o f comfort they provide to the users. This may also reinforce current perceptions o f a heterogeneous profession, with Big 4 and second-tier firms carrying out ISA-based audits and other segments o fthe audit profession adhering to a lower standard o f practice. It should be noted that IFAC, the audit profession's international body, has developed specific guidance for external I auditors inthe small and medium practice (SMP) to carry audits in compliance with ISA, which means that, on an international level, adequately structured SMPs are considered capable o f applying ISAs. In any event, a rational approach would be to require ISA for all statutory audits o f "public accountability" (or "public interest") entities under the Argentinean law, especially since these entities are more likely to be audited by firms belonging to the large international audit networks, whose internal policies require the use o f ISA. For audits o f smaller business entities, local auditing standards could still be applied during a period o f transition until appropriate steps have been taken to enable small practitioners to apply ISA. Inthat case however, the auditors should be requitedto include a mention in their reports that the standards applied are significantly less demanding than ISA. Arzentina ROSCAccounting andAuditing- Auditing Standards as Designed and as Practiced 31 75. The review of 46 published audit reports evidenced a number of anomalies pointing to the need for stronger enforcement of auditing standards. As part o f the review o f the 46 sets o f financial statements reviewed (Para. 66) the corresponding audit reports were also analyzed. 28 different audit firms were involved in the preparation o f those reports. An equal number o f reports had been issued by Big-4 firms and by other firms. The most significant errors contained in these reports, many o f them obvious, involve three types o f issues: a) Absence of qualification in the opinion on thefinancial statements, when such qualification was required under local standards. A number o f the departures identified in Para. 67 should probably have been reported in the corresponding audit reports by means o f "qualified opinions". Circumstances were a qualification was required but absent included: o Financial statements grossly incomplete - In one case the auditor indicated that those had been prepared in accordance with "legal rules" and gave a "clean" opinion. In another, the auditor failed to qualify herhis opinion on financial statements omitting the required comparative data; o Omission of the statement of cashflows, inthe case offive companies; o Financial statements showing a signijicant excess of current liabilities over current assets, negative results and cash flows and a depleted net equity raising questions about the possibilities o f the entity to continue as a going concern. Extremely little information was given on the nature o f current liabilities and the conditions under which they had originated or whether the creditors were actually related parties. The auditors' report was silent as to the going concern status o f the company, and did not object to the absence o f disclosure inthe notes; and o Inappropriate presentation of a transaction as "extraordinary" - A large manufacturing company opted to report the results o f a very significant debt restructuring as "extraordinary items" inthe income statement. b) Inconsistencies in theform of the audit report - Audit reports are expected to strictly follow the standard four-paragraph format and wording, describing with sufficient precision the statements to which the auditor's opinion apply, and the conclusions drawnby the auditor based on herhis audit. 69 69 Issues identified included the following: (i)in its report an auditor described the scope of its examination as including the legal entity financial statements including the "supplementary information" (Le., consolidated statements), the report of managementand certain specific disclosures required by CNV. However, the opinion inthe report only referred to the basic statements and omitted any reference to the consolidated information, and it did not give any kind of assurance on the other information that the auditors claimed to have "examined"; (ii)similarly, a report included all the statements in the scope of examination but only referred to the financial position and results of operations inthe opinion, Le., it omitted to refer to the statement of cash flows; and (iii) an auditor did not include a second paragraphexplaining the scope of his audit, which is required by local standards. In the same report, no differentiation was made of management and auditors' responsibilities and, althoughcomparative statements were presented, no opinion was given on these. Argentina ROSCAccountina andAuditing- Auditing Standardsas Designed and as Practiced 32 c) Ambiguous andor unclear mentions in the audit report - An audit report i s to be carefully worded in order to provide clear, concise information to the users of the financial statements regarding any material issue identified inthe course ofthe audit, and to avoid the risk o f misinterpretation. The review found several cases. A company which was the plaintiff in a lawsuit against the government had recorded a receivable for the amounts claimed. The auditor included a "subject to" in the audit report although the recognition o f such contingent asset would have called for a more definite and unambiguous "except for" qualification o f the opinion, clearly expressing the auditor's disagreement. Another auditor had decided to state a division o f responsibilities with an independent appraiser who had been hired to assess the market value o f fixed assets as part o f a revaluation. The appropriate procedure would have been for the auditor to review the methodology followed by the appraiser in order to satisfy herhimself as to the adequacy o f the amounts recorded on the balance sheet, not to simply rely on the work o f the appraiser. A "subject to" was included in the opinion regarding a doubtful receivable from an associate on the balance sheet; this i s an obvious case d) Oh o f substitution o f an "except for" qualification (i.e. where the auditor clearly states a disagreement) with a more lenient or ambiguous "subject to" mention, which does not clearly indicate a disagreement. 76. The above issues, taken as a whole, are worrisome and underscorethe need to (a) further align AR GAAS with ISA and (b) establish some sort of quality monitoring mechanisms for the statutory audit function. External audits tht`comply simply with AR GAAS (Le., RT 7) are prone to be less thorough in addressing essential aspects such as the company's risk environment and internal controls than audits conducted in accordance with ISA. Thus, simply observing RT 7, an auditor i s less likely to detect, address and report on risks o f misstatement in the financial statements. Bringing the audit practice to the level o f the international standard is essential to the confidence investors and lenders have in the external auditors' ability to be effective gatekeepers o f the credibility o f corporate financial reporting inArgentina. Argentina ROSC-Perceutions on the Oualitv ofFinancial Reporting 33 V. PERCEPTIONSONTHE QUALITY OF FINANCIALREPORTING 77. Perceptionsof the quality of financialreportingin Argentina vary greatly, as there is great heterogeneityin the transparency, comprehensiveness, comparability and overall quality of financial statements. Generally speaking, there are observable differences between the financial statements o f listed versus non-listed companies; companies listed in the U S versus those listed only domestically; banks versus other types o f companies; larger companies versus SMEs; with the former tending to be perceived as o f better quality thanthe latter. 78. Furthermore, observers mentionedthat vis-A-vis its peer countries, the level of disclosureinArgentina is significantlylower, particularlyas comparedwith Chile. Observers mentioned that since accounting rules are much less detailed and stringent than IFRS, companies tend to disclose the legal minimum. Further, several observers noted that the additional information companies provide to investors had somewhat diminished since the 2001 crisis. They also noted that MD&A are often o f little use, in part because the basic requirements for these are extremely limited and are the same for listed and non-listed companies (SA). 79. Observers also cautioned that for a foreign investor, Argentine financial statements may not be readily understandable. The complexity and multiplicity o f rules used to draw up financial statements make it difficult for individuals, other than analysts trained in the local market, to understand them. As a result, when foreign investors want to invest in an Argentine company, they tend to choose ADRs, instead of investing directly inthe Argentine stock exchange. Argentina ROSCAccounting and Auditing-Conclusions and Recommendations 34 VI. CONCLUSIONS AND RECOMMENDATIONS 80. Over the years, Argentina has developed a comprehensive and relatively demanding statutory framework pertaining to corporate accounting and auditing. On the whole, however, accounting and auditing practices in Argentina require significant improvements to provide investors and lenders complete and accurate financial information, in accordance with international standards. The principal findings o f this ROSC are follows: (a) All companies above a certain size are considered as publicly accountable and must therefore have their financial statements audited and file these statements with a company registry. This requirement is designed to provide some form of protection to creditors and other third parties. In addition, the company law requires that all companies with subsidiaries prepare consolidated financial information on an annual basis. As far as the stock market and financial sector are concerned, the regulatory framework for corporate financial reporting i s quite sophisticated. (b) The current regulatory environment for accounting and auditing (which includes all rules regarding these subjects, such as lws, regulations, generally-accepted accounting principles, etc.) i s fragmented, with varying laws and regulations acrossjurisdictions (the 23 provinces plus the capital city) and from one business sector to another. This makes compliance with the law more complex and costly especially for companies with operations nationwide. Moreover, some the provisions o f the law have become somewhat outdated. This i s the case, for instance, of the sindicos whom large companies are requiredto appoint and whose functions inpractice overlap with those of statutory auditor and audit committee. (c) The accounting and audit profession in Argentina i s organized under 24 self- regulated professional councils of economic sciences, one for each local jurisdiction. Among those, the professional council o f Buenos Aires i s by far the largest, grouping approximately half o f the nation's practicing accountants. At the country level, FACPCE i s the umbrella organization for the whole profession, recognized by a specific federal legislation. The profession inArgentina i s highly heterogeneous, large member firms o f the international audit networks coexisting with thousands of sole practitioners whose activities are almost exclusively dedicated to bookkeeping and tax returns. Whereas it has traditionally been viewed as one o f the best in Latin America, its leadership has been eroded over the last ten years, inlarge part due to the slow pace o fchange. (d) As far as accounting and audit standards are concerned, federal or sub-national laws do not address how these are to be set; in practice, the provincial professional councils defer to FACPCE for setting them, the only significant exception being Buenos Aires. FACPCE process to develop the standards i s fairly transparent but it relies almost exclusively onpro bono work and involves mostly the members ofthe profession. (e) Since the beginning o f the decade, FACPCE has taken commendable steps to align Argentina's Generally Accepted Accounting Principles (GAAP) with IFRS. Argentina ROSCAccounting andAuditing-Conclusions and Recommendations 35 Nevertheless, significant gap exist at present on a number o f recognition and valuation principles, for assets, liabilities, income and expenses (including in the way financial statements may be adjusted for inflation), regarding consolidation and business combinations, and with respect to the level o f disclosure inthe notes to the financial statements. (f) Similarly, Argentine auditing standards are much less elaborate than ISA, leaving out several important notions such as quality control, materiality, addressing fraud, or communication with governance bodies. (g) With respect to education and training, the license o f public accountant in Argentinais based on the system o funiversity accreditationwhich is traditional in Latin America. It does not require a professional examination or professional experience. Moreover, licensed accountants and auditors are not subject to any continuing professional development obligation. (h) Enforcement o f financial reporting requirements for listed companies is carried out by both CNV and BCBA. Sanctions are made public on the C N V and BCBA websites, which increases the deterrent effect and therefore the usefulness o fthese sanctions. The review o f a fairly large sample o f listed enterprise financial statements found a number o f departures with applicable standards, pointing to the need for stronger enforcement o f accounting and auditing standards among these enterprises. (i)Regardingnon-listedcompanies, thecompanyregistrarandregulator, IGJ(or its equivalent in the Provinces), i s empowered to apply sanctions on companies that do not comply with applicable provisions o f the law and/or its own regulations. However, its lack o f resources limits enforcement to cases where complaints have been filed by third parties, and companies that do not file their annual statements are not systematically tracked. In addition, fines for non-compliance appear too low to have a real deterrent effect. (i) Each professional council is responsible for monitoring and enforcing professional rules among its membership. So far, professional councils have put the emphasis on ex-post enforcement o f known alleged cases o f non-compliance, and no quality assurance mechanism aimed at ensuring compliance through ex- ante monitoring has beenestablished. (k) An interesting, recent development is the decision by the Central Bank to establish a central repository of corporate financial statements to enhance the availability o f accounting information for banks, in an effort to promote and support sound credit risk management practices. Since credit analysis and decisions depends not only on the availability o f the borrowers' accounts but also on their accuracy and reliability, a logical parallel evolution would be to align local financial reporting standardwith IFRS. 81. Instead o f including prescriptive recommendations in the ROSC report, the approach inthis case has been to incorporate as much as possible inputs from the national authorities and the private sector to enhance country ownership and therefore the likely impact o f this ROSC. A country action plan is expected to be developed as part o f the Argentina ROSCAccounting andAuditing-Conclusions and Recommendations 36 activities following the publication o f this report, under the aegis o f the Ministry o f Economy (MoE), possibly with the assistance o f the World Bank and other donors including the Financial Sector Reform and Strengthening (FIRST) Initiative. 82. The action plan would involve government policies as well as capacity development withinthe accounting profession and, to a lesser extent, regulatory agencies. The plan should include the following activities as priorities for the short to medium term: Implement FACPCE's action plan7'in a timely manner, in order to comply with the requirements under IFAC's Compliance Monitoring Program. FACPCE has set forth a number o f actions it must taken in order to comply with IFAC's Statements o f Membership Obligations (see Para. 85). Specifically, the following actions are o f particular importance: o Adoption of international standards (IFRS and ISA)for public interest entities. As was done inBrazil, Chile and Mexico, Argentina should adopt IFRS for public interest entities such as banks, listed companies and insurance companies. In addition, audits o f such entities should be carried out inaccordance with ISA. o Creation of a public oversightsystemfor the accountingprofession. The action plan includes the creation o f a quality review program for the accounting profession. This program should be implemented as part o f a broader system o f independent oversight (i.e., not dominated by the profession) for statutory auditors. While the Argentine accounting profession i s highly respected, self-regulation i s no longer accepted internationally. Current good practice requires that quality control programs operate under a system o f public supervision, e.g., monitored by a collective group o f regulatory agencies, or by an independent regulatory body for the accounting profession. 0 Harmonize and strengthen the monitoring activities carried out by regulatory agencies, particularly CNV and BCBA. Listed companies should not be required to submit separate sets o f financial statements to the two institutions. Therefore, a shared system that would allow for financial statements to be submitted to both institutions simultaneously should be implemented as soon as possible. Also, it i s expected that the creation o f a central balance sheet office (Central de Balances) by the BCRA will contribute to eliminating this problem (see Para. 29). Inaddition, there have been some cases o f duplication o f monitoring and enforcement efforts on the part o f C N V and BCBA, which i s not represent an efficient use o f their scarce resources, an issue o f particular importance for CNV. Harmonizing the work o f both institutions would contribute to a more efficient monitoring system, thus further deterringnon-compliance. 70 FACPCE's action plan is on IFAC's website: http://www.ifac,org/Comp1ianceAssessment/part~3/ARG1 .pdf. Argentina ROSCAccounting andAuditing-SubsecyuentDeveloDments 37 VII. SUBSEQUENT DEVELOPMENTS (Le., after the report was prepared) 83. During the period betweenthe finalization of this report and its publication, the Argentine profession and regulatory agencies have taken a series of steps towards improvingthe accounting and auditing framework inthe country. Specifically, they have achieved the following: (a) unification o f the professional bodies and accounting standards; (b) development o f an action plan as a part o f IFAC's Compliance Program; (c) adoption o f IFRS for listed companies. In addition, advances have been made with regard to the implementation o f ISA. Inthis regard, a draft Argentine standard (PRT 14) has been approved, which will put into effect a number o f international standards, and ISAhas beentranslated andpublishedinthe country. 84. Unification of professional bodies and accounting standards in Argentina. The process o f unification o f accounting standards in Argentina, which began in 2005, culminated with the reintegration of the Buenos Aires professional council as a full member o f FACPCE, in September 2007. Members o f FACPCE are required to approve, without modification, and adopt the standards issued by the Federation. Differences pertaining to the following were maintained on a transitional basis: (a) method o f calculating the value o f recoverable assets; (b) accounting for deferred tax liabilities resulting from the accounting o f inflation adjustments in 2002. These differences will be eliminated inthe financial years beginningJanuary 1,2008. 85. Development of an action plan, as required under IFAC's Member Body Compliance Program, which covers most of the recommendations set forth in this report. FACPCE has prepared an action plan which details a series of activities that will be undertaken inorder to address IFAC's recommendations regardingthe implementation o f SMO 1 through 7. The action plan, which was approved by IFAC in May 2008, includes activities pertaining to the convergence with IFRS, adoption o f ISA, and the creation o f a quality control program. 86. Adoption of IFRS for listed companies. In March 2009, FACPCE approved Technical Resolution no. 6 adopting IFRS for listedcompanies and applicants for listing. Under the Resolution, extant IFRS and those to be issued inthe future will be mandatory. These provisions do not extend to so-called "entities included in the SME compartment and other entities under the purview o f the National Securities Commission such as fund managers or undertakings o f collective investments". Entities outside o f the scope o f the Resolution will be able to apply IFRS voluntarily. Inany cases, entities required to apply IFRS or who opted to apply them will have to apply them wholly and without modifications, including their interpretations (IFRIC and SIC). With regard to accounting for investments in "dependent entities" (entidadesdependientes),the Resolution requires that they be accounted "under the equity method (IAS 28) and not at cost or fair value as providedinIAS27".71 7' Information and comments provided by the University of BuenosAires. Argentina ROSCAccounting and Auditing-Subseauent DeveloDments 38 87. RT 26 is applicable for financial statements issued for periods starting on or after January 1, 2011, and for interim financial statements o f the corresponding financial year; early adoption i s not allowed. The Resolution includes provisions related to the transition period, which set out the complementary information to be included in the year-end and interim financial statements for financial years beginning on or after January 1,2010. In general terms, it requires the reconciliation o f the equit7 and results for the period according to the standards currently required and under IFRS.7 88. Over the recent period, one could note a greater level o f scrutiny on the part o f agency overseeing the registry o f companies (Inspeccidn General de Justicia) regarding information to be submitted, inter alia, whem changes in boards o f directors and amendments to bylaws occur. It should be noted that price-level accounting remains prohibited by law, even though according to unofficial sources inflation would be around 20% on a yearly basis. Finally, one could notice FACPCE's significant efforts to secure endorsement for its technical resolutions by all accounting professional councils throughout the country; and, FACPCE as well as the accounting professional councils have beendevoting significant efforts to achieve closer relations with regulatory agencies, especially the National Securities Commi~sion.'~ Argentina ROSCAccounting and Auditing -Annex: Argentine GAAP v. IFRS 39 ANNEX -SUMMARY OF THE MAINDIFFERENCESBETWEENARGENTINE GAAPAND IFRS Sources: Text o f the standards, studies prepared by two large audit firms72 and consultations with local professionals with recognized ARGAAP and IFRS expertise, corroborated by the results o f the review o f the financial statements for the year 2005 or 2006 o f 46 companies incorporated in the City o f Buenos Aires, as well as Form 20-F filed by four Argentine companies. A. Recognition and measurement of the various elements of thefinancial statements (assets, liabilities, income and expense) Restatement ofjnancial information for the effects of inflation - Whereas IFRS require "price level" restatement o f the financial statements inthe context o f hyperinflation only, Argentine standards call for the recognition o f changes in the purchasing power o f local currency whenever inflationary conditions prevail. Although the current economic situation would indicate that such conditions are again present, no corresponding adjustment has been required since 2003 (References: RT 6, as modified by RTs 8, 10 and 19, and RT 17; IAS 29). Business combinations -Both the purchase and pooling (or "uniting") o f interest methods are accepted in Argentina, depending on the nature o f the case, under Argentine GAAP, while as a result o f the issuance o f a new IFRS dealing with this matter in 2004, only the former can be followed according to IFRS (References: RT 18.6 and IFRS 3). Translation of foreign currency statements and transactions - IFRS (IAS 21) require that functional currencies reflect the economic substance o f the underlying transactions and circumstances in which a company operates. Argentine accounting rules do not identify specific criteria to be followed to determine functional currencies. Also, these rules allow the monetaryhon-monetary method for the translation o f the statements o f so-called integrated entities (basically extensions o f parent's activity) with recognition o f translation differences inthe results o f the period (References: RT 18.1and IAS 21.39). Current receivables and payables - According to local principles they have to be recorded at the value o f estimated cash flows discounted at internal return rates determined at the date o f the initial measurement. No discounting would be required by IFRSfor current receivables or payables (References: RT 17.5 and IFRS Framework). Inventories - In accordance with local rules, inventories must be stated at replacement cost (production or purchase) at the date o f the financial statements. IFRS require valuation o f inventories at the lower o f cost and net realizable value (References: RT 17.5.5.4 and IAS 2.9). Valuation of investments in subsidiaries and associates - In the legal entity financial statements o f the parent company (Le. not the group's consolidated financial statements), '*Deloitteand PricewaterhouseCoopers. Argentina ROSCAccounting andAuditing -Annex: Argentine GAAPv. IFRS 40 Argentina GAAP require that investments in subsidiaries and associates be valued following the equity method; IFRS require inthese cases valuation at cost or at fair value dependingon certain circumstances (References: RT 21.1.2; IAS 27.37 and IAS 28.35). Property, plant and equipment (PP&E) - Under IFRS, these assets are stated at cost net of accumulated depreciation and any accumulated impairment losses. Revaluations are allowed to avoid significant distortions provided that revaluation exercises are carried out with enough frequency to guarantee that carrying amounts do not differ substantially from fair value. In Argentina, PP&E i s valued at restated cost net o f accumulated depreciation. No revaluations are permittednow although they were accepted inthe past including the one in 2001/02 based on the devaluation of the peso, allowed by FACPCE but disregarded by the CPCE/BA. The remaining balances o f this procedure in the statements o f the companies that adopted it represents a departure from IFRS as well as the remnants of the recognition o f inflation in2002/03 recordedon the basis o f wholesale indices and still sitting in most balance sheets (References: RT 17.5.11 and RT 6, as modified, and read in conjunction with FACPCE Resolution 240/02 and 287/03; IAS 16.30-31). Investment property - This is supposed to be stated following the rules applicable to PP&E, i.e. at restated cost less depreciation and impairment (RT 17.5.11). IAS 40 also offers the option o f valuation at fair value calculated at each balance sheet date. Impairment of assets - Local rules on this subject are basically similar to those o f IFRS. However, the application of these practices to PP&E, specifically the comparison o f carrying values with fair values calculated by use o f discounted cash flows, has been postponed to periods starting on or after January 1, 2008. Accordingly, most companies record impairments o f PP&E based on perceptions about the expected degree o f utilization and, generally, insituations when a full write-off i s required. Intangibles - Pre-operating and organization expenses can still be capitalized in Argentina (References: RT 5.13.1;IAS 38). Goodwill - IFRS 3 indicates that goodwill is not supposed to be amortized but it should be subject to an impairment test every year. Argentine GAAP still require annual amortization (RT 18.3.3.1) although IFRS guidance i s also accepted. Negative goodwill can also be amortized over a number o f years (RT 18.3.3.2), as opposed to immediate recognition incurrent results and reversal o f existing items to net equity under IFRS. Deferred income tax - Differences with IFRS relate to (i) choice given to non-listed the companies to carry deferred assets or liabilities at discounted values and (ii) a significant discrepancy in the treatment o f the temporary difference generated by the inflationary adjustment of PP&E during the crisis o f 2001/02. At that time, the CPCEBA authorized the non-recording of the deferred liability arising from the higher carrying value o fthose assets originating from that adjustment which was replaced by a disclosure o f the amounts that should have been deferred by year o f expected reversal (References: RT 17.5.15, RT17.5.19.6 and Interpretation 3/03, as modified by Resolution 312/05; IAS 12). Argentina ROSCAccounting and Auditing -Annex: Argentine GAAP v. IFRS 41 Contingent liabilities - More discretion is given to preparers with regard to the recognition o f contingent liabilities than under IAS 37 B. Presentation of thefinancial statements Consolidation of financial statements - Consolidated statements are presented together with those of the controlling entity. CNV requires that they be placed before the latter. However, they are considered supplementary information and generally do not disclose sufficient information to stand on their own, i.e. they have to be read in conjunction with the accounts of the parent company. Moreover, AR GAAP allow certain exclusions of subsidiaries from the consolidation (e.g. when the value o f the investment has been fully writtenoff on the balance sheet o fthe parent company), which conflict with IAS 27. Extraordinary items - Argentine standards permit the segregation o f unusual and infrequent items as extraordinary (RT 9 1V.C). This conflicts with IAS 1.85. Classzjkation of current and non-current items - In Argentina all balances realizable or payable within one year o f the date o f the financials are classified as current (RT 8 111. B). No exceptions are contemplated for situations such as operating cycles shorter or longer than one year (IAS 1S7). Minority interest - IFRS require the segregation o f minority interests' results in the statement o f income and their inclusion inthe statement o f changes in equity rather than their separation as an independent item. Local disclosure rules call for displaying of the minority interest in a line between total liabilities and net equity in the statement of financial position (RT 9 1II.C). C. Disclosure in the notes to thefinancial statements Changes in accounting policies - Local requirements do not go beyond the enunciation o f the changes and the amounts involved. IAS 8.29 calls for further disclosing including the reasons for each change. Bases of recognition and measurement of revenue - This is not specifically addressed by local disclosure rules. Accordingly, these disclosures (IAS 18.35) are infrequent. Construction contracts - IFRS require detailed information such as the methods used to determine the stages o f completion and data on each contract in process. Argentine standards are silent on disclosure needs (References: IAS 11.39/40 and 42). Date of authorizationfor the issue offinancial statements - There are no requirements for inclusion o f this information inthe statements as prescribedby IAS 10.17.