Estonia

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  Estonian Auditors’ Association

Legal and Regulatory Environment

  • Overview of Statuatory Framework for Accounting and Auditing

    In Estonia, the Accounting Act regulates basic accounting functions for all registered business entities. The Act requires that at the end of each financial year, an accounting entity prepares an annual report that consists of the annual accounts and the management report. The auditor’s report (if compulsory) and the profit distribution proposal for the financial year should be annexed to the annual report. Annual reports are required to be filed at the Commercial Register within six months of the end of the financial year.

    Accounting Framework

    As a member of the European Union (EU), the statutory framework for accounting and auditing in Estonia is subject to European Commission (EC) Directive 2014/56/EU (which has amended 2006/43/EC) for the audits of financial statements, Regulation EC 1606/2002 on the application of international accounting standards, and the Accounting Directive 2013/34/EU for the preparation of statutory financial statements. These directives and regulations, which are transposed into national legislation, together with other company, financial and capital markets laws outline financial reporting requirements in Estonia.

    In regards to accounting standards, Estonia is subject to the IAS Regulation adopted by the European Union in 2002. As such, International Financial Reporting Standards (IFRS) as adopted by the EU are required for the consolidated financial statements of all European companies whose debt or equity securities trade in a regulated market in Estonia. Foreign companies whose securities trade in a regulated market in Estonia (and generally in the EU) are required to report under IFRS as adopted by the EU for their consolidated financial statements unless the European Commission has deemed their local accounting standards to be equivalent to IFRS, in which case they may use their local standards. In addition to listed companies, IFRS as adopted by the EU are required to be applied by credit institutions, insurance undertakings, financial holding companies, mixed financial holding companies, and investment firms. All other Estonian companies can choose whether to prepare their consolidated and annual accounts in accordance with IFRS as adopted by the EU or in accordance with the Estonian Accounting Standards (Estonian Generally Accepted Accounting Principles (GAAP)).

    Estonian GAAP is promulgated by the Estonian Accounting Standards Board (EASB). The EASB is an independent committee whose rules of procedure must be approved by the Government on the proposal of the Minister of Finance. Estonian GAAP (effective from 2013) is based on IFRS for Small and Medium-sized Entities (IFRS for SMEs) with limited differences from IFRS for SMEs with regard to accounting policies as well as disclosure requirements. In areas not specifically covered by Estonian GAAP, the treatment in IFRS for SMEs is recommended, but not mandatory. Each Estonian GAAP standard contains a brief comparison with the respective section of IFRS for SMEs.

    Auditing Framework

    In accordance with the Estonian Auditor’s Activities Act, all public limited companies are subject to audit. In addition, if a larger limited liability company exceeds certain quantitative thresholds related to revenue, asset, and/or employee numbers they are required to undertake either an audit or review depending on size. An entity subject to a review may instead opt for an audit if they desire. Additionally, the Authorized Public Accountants Act provides audit requirements for public interest entities (PIEs). The following entities are considered to be PIEs and must undergo a mandatory audit: listed entities, financial institutions, and entities which exceed certain revenue, asset, and/or employee thresholds.

    Audit requirements are outlined by the Estonian Auditor’s Activities Act which stipulates that the basis of auditing are the international standards transposed by the European Commission and established by the Commission Regulation and those standards prepared on the basis of the principles of the International Auditing and Assurance Standards Board (IAASB) and International Ethics Standards Board of Accountants. The Estonian Auditing Activities Oversight Board is responsible for approving the standards prepared pursuant to the principles and on the basis of the standards provided for in this Act. To have legal effect in Estonia, any regulation (including IAASB standards) must be translated into Estonian. The most recent translations of ISA are the 2016 ISA, which was translated by the Estonian Auditors’ Association.

  • Regulation of Accountancy Profession

    In Estonia, the auditing profession is regulated by the Auditors Activities Act. The act established the Auditing Activities Oversight Council (AAOC) which is in charge of all oversight functions related to Estonian auditors and auditing firms in coordination with the Estonian Auditors’ Association (EAA). The Ministry of Finance holds ultimate responsibility for ensuring that the two organizations carry out their activities with regard for the public interest. Lastly, the Auditors Activities Act also outlines the requirements for participation in and operation of a system of investigation and discipline as well as the procedures and entities responsible for audit quality assurance.

    The act outlines the initial professional development requirements for practicing as an auditor in the jurisdiction. A sworn auditor (auditor) is a person who holds at least Bachelor’s degree or an applied higher education diploma or equivalent educational qualification before submitting an application for taking the professional examination; passes professional examinations and an aptitude test (the content of which is determined by the act and the Ministry of Finance); receives the qualification of sworn auditor by a decision of the Minister of Finance; and who takes the oath of the profession. Individuals must also join the EAA.

    In addition to overseeing the granting, suspending, and revoking of auditing licenses, the AAOC is also responsible for (i) adopting auditing and ethical standards; (ii) conducting the professional examinations for auditors; (iii) conducting quality assurance reviews and disciplinary proceedings; (iv) imposing sanctions; and (v) overseeing activities delegated to the EAA, such as continuing professional education and development.

    Meanwhile the EAA shares in some the above-mentioned responsibilities, such as (i) translating standards into Estonian for application in the jurisdiction; (ii) organizing the continuing professional education of auditors; and (iii) participating in disciplinary proceedings of the AAOC.

    Finally, through the transposition of the EU Audit Reform, auditors of public interest entities (PIEs) are now subject to mandatory audit firm rotation as well as restrictions on non-audit services. These have been implemented through amendments to the Auditors Activity Act in January 2017 to require contracts for the provision of the statutory audit of annual accounts of a PIEs to be extended for a total of up to ten consecutive years. Additionally, a sworn auditor may not provide services to a public entity (government entity) for a period of greater than seven years. Finally, an audit firm carrying out the statutory audit of a public interest entity or any member of the network of sworn auditors to which such audit firm belongs shall not, directly or indirectly, provide to the audited public interest entity, to its parent undertaking or to its controlled undertaking in the member state any service specified in Article 5 (1) of Regulation (EU) No 537/2014.

  • Audit Oversight Arrangements

    The Auditing Activities Oversight Council (AAOC) is the audit oversight authority in Estonia and was established by the Auditors Activities Act. The AAOC carries out the following responsibilities: (i) granting, suspending, and revoking of auditing licenses; (ii) adopting auditing and ethical standards; (iii) conducting the professional examinations for auditors; (iv) conducting quality assurance (QA) reviews and disciplinary proceedings; (v) imposing sanctions; and (vi) overseeing activities delegated to the Estonian Auditors’ Association (EAA), such as continuing professional education and development. The Ministry of Finance holds ultimate responsibility for ensuring that the two organizations carry out their activities with regard for the public interest.

    The EAA, as the national professional accountancy organization, shares in some the above-mentioned responsibilities, such as (i) translating standards into Estonian for application in the jurisdiction; (ii) organizing the continuing professional education of auditors; and (iii) participating in disciplinary proceedings of the AAOC.

  • Professional Accountancy Organizations

    Estonian Auditors' Association (EAA)

    The EAA is a public-private network of over 150 audit firms and 350 individual auditors, standing for a reliable business environment in Estonia. It is the only legally recognized, self-governing PAO in operation in the country. Membership of the association for all certified auditors desiring to practice the audit profession is compulsory. The EAA (i) seeks to be a leader in initiatives supporting the development of Estonia as a smart economy with a competitive and transparent business and investment environment, (ii) leads and participates in public discussions in order to increase public awareness of the auditors’ value proposal, (ii) cooperates closely with different interest groups, state authorities and business organizations, (iv) contributes to the development of the financial regulatory and legal framework, (v) supports provision of high-quality assurance services by organizing trainings for professionals, exchange of information, networking, and oversight of the audit profession.

    EAA is a member of IFAC as well as an associate member of Accountancy Europe.

  • Projects or Other Information

    Through the Estonian—Swiss Cooperation Program, Switzerland supports Estonia and other new European Union (EU) member states to reduce reducing economic and social disparities within the enlarged EU. The objectives and utilization conditions are set forth in each country's Framework Agreement. Under this agreement, Estonia received roughly 1.8 million Swiss francs to support effective implementation and enforcement of the Acquis Communautaire targeted to Corporate Financial Reporting, which allowed the Estonian Auditors' Association to fund SMO-related activities in the areas of developing and delivering training for its members. Projects which demonstrated institutional and regulatory capacity building for corporate sector financial reporting and auditing at the national level were selected for this support under this program.

Adoption of International Standards

  • Quality Assurance

    The Auditors Activities Act confers upon the Auditors Activities Oversight Council (AAOC) the mission of public oversight of the audit profession.

    The AAOC is responsible for the implementation of a quality assurance system and to carry out those reviews. The AAOC’s system of quality assurance undertakes reviews for statutory auditors and statutory audit firms based on risk and at least once every six years for audits of non-public interest entities (PIEs) and once every three years for audits of PIE audits.

    The AAOC’s QA system is fully compliant with EU legislation and regulation on auditing and, according to the Estonian Auditors’ Association which helps support the QA review system, is also aligned with SMO 1 best practices is uncertain.

    Current Status: Adopted

  • International Education Standards

    The Auditors Activities Act stipulates the initial and continuing professional development requirements in order to practice as an auditor in Estonia.

    A sworn auditor (auditor) is a person who holds at least Bachelor’s degree or an applied higher education diploma or equivalent educational qualification before submitting an application for taking the professional examination; passes professional examinations and an aptitude test (the content of which is determined by the act and the Minister of Finance); receives the qualification of sworn auditor by a decision of the Minister of Finance; and who takes the oath of the profession.

    The Auditors Activities Oversight Council is responsible for conducting the examinations and then overseeing the granting of audit licenses.

    Continuing education requirements are stipulated in the act and auditors must fulfill 40 hours of continuing professional development (CPD) per year, which aligns with IES requirements. The Estonian Auditors’ Association (EAA) is responsible for organizing the CPD activities.

    The EAA reports that there is only partial compliance with IES 1–6. Furthermore, in light of the 2015 IES requirements, which emphasize learning-outcome approaches, more information is needed to assess the extent of alignment and incorporation of the IES in national accountancy educational requirements.

    Current Status: Partially Adopted

  • International Standards on Auditing

    The Auditors Activities Act specifies the basis of auditing as international standards (IAASB standards). The Auditors Activities Oversight Council has legal responsibility for auditing standard-setting in Estonia. However, for any regulation to have legal effect in Estonia it must be translated into Estonian.

    In 2016, the Estonian Auditors’ Association (EAA) was delegated the responsibility of standards’ translation.

    The EAA has translated all ISA that are applicable for audits on or after December 15, 2016, which includes the new auditor’s reporting standard. For the translations of ISA into national language, EAA reports it has followed the IFAC Policy on Translations.

    Current Status: Adopted

  • Code of Ethics for Professional Accountants

    The Auditors Activities Act specifies the IESBA Code of Ethics as the required ethical parameters for auditors. The Auditors Activities Oversight Council has legal responsibility for ethical standard-setting in Estonia. However, for any regulation to have legal effect in Estonia it must be translated into Estonian.

    In 2016, the Estonian Auditors’ Association (EAA) was delegated the responsibility of standards’ translation.

    The EAA translated the 2016 IESBA Code of Ethics, which includes the NOCLAR standard. For the translations of the IESBA Code into national language, EAA reports it has followed the IFAC Policy on Translations.

    Current Status: Adopted

  • International Public Sector Accounting Standards

    Public sector entities utilize General Rules for State Accounting which is issued by the Ministry of Finance, and is based on the Estonian GAAP and the International Public Sector Accounting Standards (IPSAS). Since 2004, a full accrual accounting and reporting system in accordance with IPSAS has been implemented in Estonia although the Estonian Auditors’ Association indicates that there are some areas where simplified application or non-application of the IPSAS has been opted for. According to the Accrual Practices and Reform Experiences in OECD Countries, accrual budgeting was set to be implemented in 2017.

    The Estonian accounting and reporting systems provide data on assets, liabilities, revenues, expenses, commitments, and payments, and the Ministry of Finance compiles a consolidated annual report for the whole government, including all government levels and their decentralized entities.

    Current Status: Adopted

  • Investigation and Discipline

    The Auditors Activities Act establishes an investigation and disciplinary system (I&D) system for auditors and outlines the roles and responsibilities for the Estonian Auditors’ Association (EAA), Auditors Activities Oversight Council (AAOC), and Ministry of Finance. The Ministry of Finance holds ultimate responsibility for ensuring that the two organizations carry out their activities with regard for the public interest.

    The AAOC is responsible for organization and oversight of I&D system and has the authority to carry out investigations and/or disciplinary proceedings. The AAOC will request a written explanation from the member of the EAA concerning the circumstances for the basis for the commencement of disciplinary proceedings. In order to commence disciplinary proceedings, the AAOC must pass a resolution which must be immediately communicated to the member of the EAA with respect to whom the disciplinary proceedings were commenced. In case the outcome is the suspension or termination of auditing license, the Ministry of Finance (MoF) is the one that issues the administrative act. The MoF also has the right to apply certain administrative sanctions on auditing firms in relation with I&D.

    However, in practice, the majority of case proceedings are carried out by the EAA and the decision (including the chosen disciplinary punishment) is approved by the AAOC.

    I&D proceedings may also be conducted within the EAA with respect to its members on the basis of the results of an investigation or quality control, a precept issued by the Ministry of Finance or any other document or information which gives a reason to believe that the member of the EAA has committed a disciplinary offence.

    EAA has conducted a review of its I&D system and has noted that there are a few areas of departure from SMO 6 components including diversity of representation on the disciplinary committee, establishment of timeframe targets, tracking mechanism for I&D system, as well as a process for independent review of cases where no action was taken.

    Current Status: Partially Adopted

  • International Financial Reporting Standards

    International Financial Reporting Standards (IFRS) as adopted by the EU are required for the consolidated financial statements of all European companies whose debt or equity securities trade in a regulated market in Estonia. In addition to listed companies, IFRS as adopted by the EU are required to be applied by credit institutions, insurance undertakings, financial holding companies, mixed financial holding companies, and investment firms. All other Estonian companies can choose whether to prepare their consolidated and annual accounts in accordance with IFRS as adopted by the EU or in accordance with the Estonian Accounting Standards (Estonian Generally Accepted Accounting Principles (Estonian GAAP)).

    Estonian GAAP is promulgated by the Estonian Accounting Standards Board. Estonian GAAP (effective from 2013) is based on IFRS for Small and Medium-sized Entities (IFRS for SMEs) with limited differences from IFRS for SMEs with regard to accounting policies as well as disclosure requirements. In areas not specifically covered by Estonian GAAP, the treatment in IFRS for SMEs is recommended, but not mandatory. Each Estonian GAAP standard contains a brief comparison with the respective section of IFRS for SMEs.

    Current Status: Adopted

Disclaimer

IFAC bears no responsibility for the information provided in the SMO Action Plans prepared by IFAC member organizations. Please see our full Disclaimer for additional information.

Methodology

Methodology
Last updated: 01/2019
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