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Legal and Regulatory Environment
Overview of Statuatory Framework for Accounting and Auditing
Although not a member of the European Union (EU), Iceland is a member of the European Economic Area and, as such, must comply with the EU Directives and Regulations in the area of accounting and auditing. Certain aspects of the EU Directives and Regulations have been incorporated into the following regulations:
- Act on Private Limited Companies No. 138/1994;
- Act on European Companies No. 26/2004;
- Regulation 860/2010 on quality assurance systems;
- Regulation 589/2009 on examination for certification as auditors;
- Regulation 30/2011 on continuing education of auditors; and
- Regulation 460/2011 on a public register of auditors and audit firms.
The main laws on corporate accounting and auditing are the Annual Accounts Act No. 3/2006, which transposes Regulation (EC) 1606/2002 on the application of international accounting standards into Icelandic legislation, and Auditing Act No. 79/2008, which transposes Directive 2006/43lEC on Statutory Audits of Annual Accounts and Consolidated Accounts.
The Annual Accounts Act No. 3/2006 contains rules on: presentation and content of annual financial statements and annual reports; valuation methods used; publication of financial statements by certain limited liability companies; thresholds for small- and medium-sized companies; and obligations for auditing of annual financial statements by a state-authorized auditor. Annual financial statements are submitted to the Register of Annual Accounts operated by the Directorate of Internal Revenue. Entities subject to the Annual Accounts Act must appoint at least one state-authorized public accountant, an audit firm, or two accountants.
The Auditing Act No. 79/2008, as amended, sets requirements for mandatory audits and regulates the audit profession. Every limited liability company in Iceland is required to hire an auditor or inspector and have its annual financial statements audited. Entities that meet certain size conditions—except those regulated by specific industry laws—do not have to fulfill the audit requirements. For public limited companies, a state-authorized public accountant must perform a full-scale audit. Publicly listed companies must appoint two auditors, one of whom must be a state-authorized public accountant.
Banks, securities companies, insurance companies, pension funds, travel agencies, and entities listed on the Nasdaq OMX also have mandatory audit requirements under separate industry laws.
The Ministry of Finance and Economic Affairs (MoFEA), the Financial Supervisory Authority (FME), and the Central Bank of Iceland (CBI) have overall responsibility for the financial markets. The FME and CBI are independent agencies “under the auspices of MoFEA.” The FME is an integrated supervisor, responsible for the supervision of all types of financial intermediaries. The legal and regulatory framework for the supervisor and operations of the financial intermediaries and the securities market are in general harmonized with the EU’s regulatory framework.
Regulation of Accountancy Profession
The Institute of State Authorized Public Accountants in Iceland (FLE) is authorized by Auditing Act No. 79/2008 to regulate the accounting profession. The Public Auditors Oversight Board (ER), which was established under the Auditing Act, oversees the FLE and the audit profession. The ER comprises representatives from the public sector and the profession. The Auditing Act describes requirements for the qualification, certification, registration, and approval of auditors. It also contains provisions on the independence of auditors, appointment of auditors, rules on audit fees, quality assurance, and termination of auditing licenses, transparency, and confidentiality.
Corporate accounting and auditing is under the responsibility of the Ministry of Finance and Economic Affairs. The Ministry grants certification to auditors in Iceland. An audit firm needs to apply to the Ministry of Economic Affairs to get a license to carry out audits.
It is not clear, however, whether the professional activities of accountants (other than auditors) are regulated in Iceland.
Audit Oversight Arrangements
The Auditors Public Oversight Board (ER) was established by Auditing Act No. 79/2008 of June 12, 2008 to oversee the audit profession and audit regulations in Iceland. The ER comprises representatives from the public sector and the profession. Under Chapter V, Articles 14–18 of the Act, the ER is responsible, among other areas, for the following activities:
- monitoring the compliance by auditors and audit firms with the provisions of the Audit Act, the Code of Ethics of the Institute of State Authorized Public Accountants , and other rules that apply to the work of auditors;
- auditor certification and continuing professional development; and
- quality control.
The ER is not a member of the International Forum of Independent Audit Regulators.
Professional Accountancy Organizations
The Institute of State Authorized Public Accountants in Iceland (FLE) was established on July 16, 1935 in Reykjavik and is the only professional body representing auditors in the country. FLE membership is mandatory for individual auditors who are qualified as state-authorized public accountants.
Under Auditing Act No. 79/2008, the FLE is entrusted with the following tasks in consultation with the Public Auditors Oversight Board: (i) establish a Code of Ethics for auditors following confirmation by the Minister of Finance and Economic Affairs; (ii) promote the regular organization of courses of study that comply with continuing professional development (CPD) requirements specified in Article 7; (iii) keep CPD records; and (iv) undertake quality control reviews of the work of auditors.
The FLE is a member of the Nordic Federation of Public Accountants.
Projects or Other Information
Over the next two years, as a member of the European Economic Area, Iceland will be transposing into national law the requirements of Audit Directive 2014/56/EU on Statutory Audit amending Directive 2006/43/EC and Regulation (EU) No 537/2014 on specific requirements regarding statutory audits of public interest entities (PIEs). Most of the provisions in the Regulation are tied to the Directive and, therefore, are applicable as of June 17, 2016. Under Regulation (EU) No 537/2014, the identification of PIEs and thus their definition is now crucial to determine which entities, as of June 2016, will be within the scope of statutory audits. The current PIE definition in Iceland encompasses listed companies, credit institutions, insurance companies, and pension funds.
The Institute of State Authorized Public Accountants in Iceland (FLE) states in its 2015 Action Plan that the implementation of these new EU directives will be one of its priority areas for the 2015–2016 period. The key stakeholders involved in this project are the Ministry of Industries, the FLE, and the Public Auditors Oversight Board.
Adoption of International Standards
In line with the requirement of Auditing Act No. 79/2008, the Institute of Authorized Public Accountants in Iceland (FLE) has established a mandatory quality assurance (QA) review program for all auditors and audit firms performing all types of audits of financial statements. Reviews are conducted every three years for public interest entities and every six years for other types of companies. In this activity, the FLE is overseen by the Auditors Public Oversight Board (ER). The FLE reports to the ER on an annual basis. Although the FLE notes that its QA review system is based on ISQC 1 and the Eighth EU Directive, it is not clear whether the existing QA system is in line with the requirements of SMO 1 (revised 2012).
More information and a qualifying statement in the FLE’s Action Plan are needed on the compliance of the existing QA review system with the requirements of revised SMO 1.
Current Status: Partially Adopted
International Education Standards
The Auditing Act No. 79/2008 establishes educational requirements for auditors in Iceland. The certification and education is overseen by the Ministry of Finance and the Auditors Public Oversight Board. The Institute of Authorized Public Accountants in Iceland (FLE) states that the auditors’ certification and continuing professional development (CPD) system are in line with IES requirements as issued by the IAESB.
The Act requires candidates entering the profession to hold a master’s degree, practical experience of a minimum of three years under the guidance of an auditor, and to pass a final examination of professional competence, organized by the Ministry of Finance. FLE members are required to complete at least 120 monitored CPD hours over a three-year period, and compliance with this requirement is verified as part of the quality control process arranged by the FLE.
Although IES requirements appear to be in place for auditors, it is not clear whether the overall accounting education system in Iceland, including the pre- and post-qualification requirements for all categories of professional accountants, are aligned with the IES requirements. For this reason, the jurisdiction adoption status has been assessed as partially adopted.
Current Status: Partially Adopted
International Standards on Auditing
The Auditing Act No. 79/2008, Article 33, states that audits should be carried out in accordance with generally accepted auditing standards (GAAS). The Act explains further that GAAS in Iceland are commonly referred to as the International Standards on Auditing (ISA).
A mandatory audit requirement exists for publicly listed entities, private limited liability companies, banks, financial institutions, pensions, and insurance companies. Although additional requirements exist for certain industries, the impact of ISA application is unclear.
More information is needed on which ISA version has been translated into Icelandic and made available in the jurisdiction.
Current Status: Adopted
Code of Ethics for Professional Accountants
According to the Auditing Act (79/2008), Article 8, auditors in Iceland are required to observe the Code of Ethics issued by the Institute of State Authorized Public Accountants (FLE). The Code has to be approved by the Ministry of Finance.
The FLE reports that, based on an agreement with IFAC, it has implemented and translated, under the supervision of the Auditors Public Oversight Board, the IESBA Code of Ethics (July 2009) without modifications, and that the Ministry approved this Code in 2010.
It is not clear whether all accountants (in addition to auditors) are subject to ethical requirements in Iceland and, for this reason, the jurisdiction status has been assessed as partially adopted.
Current Status: Partially Adopted
International Public Sector Accounting Standards
IPSAS have not been adopted in the Icelandic public sector. The FLE reports that, in 2014, a parliamentary bill was put forward that proposes that IPSAS be implemented in Iceland in 2016. The FLE says that this bill is still in a draft stage of deliberations at the Ministry of Finance and with Parliament, and no vote has taken place yet.
Current Status: Not Adopted
Investigation and Discipline
According to Auditing Act (79/2008), the responsibility for investigation and discipline (I&D) of auditor activities rests solely with the Auditors Public Oversight Board (ER). The ER may take up issues on its own initiative if it believes that an auditor or audit firm has violated the Act, the Code of Ethics of the Institute of State Authorized Public Accountants (FLE), or other rules that apply to the work of auditors. Article 17 of Act No. 79/2008 describes what measures are in place to discipline auditors in Iceland.
More information and a qualifying statement from the FLE are needed to determine to what extent the I&D system in Iceland complies with the requirements of SMO 6. The extent of the FLE I&D system’s compliance (if it is operational in addition to the one operated by the ER) with the requirements of revised SMO 6 should be disclosed. It is also unclear how professional accountants who are not members of FLE are regulated.
Current Status: Partially Adopted
International Financial Reporting Standards
Icelandic accounting standards are set out in the Law on Annual Accounts No. 3/2006. The Law dictates that the Minister of Finance and Economic Affairs should establish an accounting board to set uniform accounting rules and regulations for use in Iceland, based on and in addition to the Law. To date, this board has not been established.
The Law also dictates that IFRS should be used as additional accounting rules, so that when the Law does not give enough guidance, IFRS can and should be used.
IFRS are translated into Icelandic and published by the Icelandic government. The adoption of IFRS for SMEs is under consideration. Unless SMEs are part of a consolidated group that uses IFRS, or are in the large or medium-sized company category, as per Icelandic regulation, they follow Icelandic statutory accounting requirements. IFRS are required for separate and consolidated financial statements of all companies whose securities trade in regulated and non-regulated markets, except for the consolidated and separate financial statements of large and medium-sized companies whose securities do not trade in a regulated market, as well as pension funds above a specified size.
Current Status: Partially Adopted
- Institute of State Authorized Public Accountants in Iceland (FLE)
- Ministry of Finance and Economic Affairs
- Nordic Federation of Public Accountants
- Auditing Act No. 79/2008, 2008
- Directive 2014/56/EU amending Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts
- Regulation (EU) No 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public interest entities and repealing Commission Decision 2005/909/EC Text with EEA relevance
- The Accounting Act No. 145/1994 as amended, issued December 29, 1994
- Act No. 3/2006 on Annual Accounts, issued January 17, 2006
- The new Accounting Directive 2013/34/EU, repealing and replacing The Fourth and Seventh Directives, entered into force on July 20, 2013
- IAS Regulation 1606/2002
- Einar Guðbjartsson, “European traditions in accounting: Accounting in Iceland,” February 2014.
- IFRS Foundation, “IFRS Application Around the World—Jurisdictional Profile: Iceland,” September 2013.
- IMF Country Report No. 14/257, Iceland, Report on Observance of Standards and Codes (ROSC), March 2014.
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