Paraguay's statutory framework for accounting and auditing

8. The principal finding of this ROSC is that Paraguay has an incomplete, fragmented and loosely enforced statutory framework for accounting and auditing. Outside the financial, cooperative and, to a lesser extent, state-owned sectors, (referred to as supervised sectors) there are no legally sanctioned standards and no enforcement mechanisms. Only one fourth of the largest 200 companies in the country belong to one of these sectors.

9. Recently enacted tax law empowers the Ministry of Finance (MoF) to adopt standards for accounting and auditing. The Ministry may impose International Financial Reporting Standards (IFRS) or other Generally Accepted Accounting Principles (GAAP) on Paraguayan taxpayers, provided they would not conflict with tax regulations. The law also mandates external audits for companies with revenues above one million US dollars, however, to put this into practice, the tax administration is required to establish a registry for external auditors and set auditing standards. As of the date of this report, none of these provisions had been implemented.

10. Within the supervised sectors, the quality of standard setting, compliance with standards and supervision of compliance is uneven and the regulation in place is fragmented. The Banking Superintendency (SIB) appears as the strongest regulator. As in many other countries, banking regulation has a prudential focus and differs significantly from IFRS. The National Securities Commission's accounting standards although based on international standards, date back to 1992 and have not been updated. The insurance and cooperative sectors are facing new sets of accounting rules that become effective in 2006. It is too early for a full assessment, but it is clear that in both cases the new statutes are significant improvements over existing ones. State-owned enterprises are subject to the supervision of the Auditor General of the Republic (CGR); but CGR's role is mostly focused on oversight of procurement processes and investigation of fraud allegations.

11. All five regulatory agencies maintain a separate registry for external auditors, causing duplication of efforts. Each agency has its own set of rules, which range from highly detailed, such as those issued by SIB or the Superintendency of Insurance (SIS), to broad guidelines, as is the case with the National Institute of Cooperatives (INCOOP). These different registries, coupled with the possibility of a sixth registry likely to be created by the tax administration, impose an unreasonable burden on audit firms. A cross-check of membership in each respective registry shows that 26 out of 34 companies belong to at least three. External auditors must periodically renew these memberships, through processes that are mostly redundant. More importantly, there is no formal process of communication between registries, so it is possible for an auditor suspended in one registry to be present in another.

These registries are intended to regulate professional practice, provide a basis for quality control, and set minimum professional standards, including a requirement for previous experience and adequate institutional capacity for audit firms and individual practices; none of these regulations requires professional examination or continuing education however.

Improving the quality of professional practice

12. University curricula in accounting and auditing in the country are not subject to any type of minimum requirements, and efforts should be made towards harmonization with the International Federation of Accountant's (IFAC) educational standards. Establishing educational standards is in line with international benchmarks is all the more important since, with the exception of supervised sectors, a college degree in accounting is the main and often the only requisite for a professional accounting or auditing practice. The team interviewed five universities that offer accounting degrees and found great interest in the improvement of accounting education but, as is often the case; the lack of resources - technical and financial - is a major impediment.

13. The accounting profession in Paraguay is organized through voluntary associations. The Paraguayan College of Accountants, (Colegio) was established in 1916 and has close to 2,100 members. Its Professional Board adopted IFRS and ISA in 2003 but, without legal backing, the Colegio's resolutions are viewed only as guidelines by practicing accountants and auditors. The Colegio organizes annual conferences and offers regular courses and seminars on professional issues. In March of 2005, over 200 professionals formed a new organization, the Paraguayan Council of Public Accountants, (Consejo). The Consejo has recently published a Code of Professional Ethics and a volume of Auditing Standards.

14. Efforts made by the profession to set, disseminate, and enforce the use of accounting and auditing standards and a code of ethics by their members have met limited success. The professional associations do not have enough resources and although highly qualified professionals have volunteered valuable time to achieve these goals, such an approach lacks sustainability. International standards for accounting and auditing are constantly evolving. Adoption of these standards requires continued monitoring and evaluation before they can be implemented in any country. The task of setting standards is a full time occupation, and the same can be said for the tasks of enforcing standards and effectively imposing a code of ethics for professional practice. Even with significant strengthening and increased resources, it is difficult to envision the professional associations in Paraguay assuming all of these roles. This report endorses the alternative of a specialized institution with ample participation of the profession and other relevant sectors.

15. Implementing a high-quality financial reporting regime will require significant efforts in the areas of professional education and capacity building. Three main sectors should be targeted for action: (i) in the academic sector, university curricula for accounting and auditing must be updated and harmonized with IFAC's education standards. Professors must be trained to effectively deliver better quality courses; (ii) in the regulatory sector, supervisors charged with enforcing new regulation will require training; and (iii) practicing accountants and auditors must significantly improve and expand current efforts directed at continuing professional education.

Transparency in financial reporting

16. Paraguay's statutory framework does not require the publication of audited financial statements by any public-interest entity, except listed companies. Publication requirements exist only for some supervised companies, and they differ significantly from one sector to another. CNV makes the financial statements of listed companies readily available on its website. Banks, insurance companies and large cooperatives are required to publish abbreviated financial statements in a newspaper. SOEs are not required to publish their financial statements, although some do so voluntarily. There are no publication requirements for non-listed companies.

17. The perception of corruption and lack of rules is one of the major obstacles that Paraguay's corporate sector must overcome to attract domestic and foreign investment. The arguments against publication of financial statements center on the costs involved and the revelation of strategic information to existing or potential competitors. These arguments, although valid, do not take into consideration that enhancing investor and creditor protection is vital to improving the country's business climate, which in turn benefits all. Also, from the point of view of the entrepreneur, availability of good information will help to improve strategic planning and execution of complex business scenarios. Recent developments in the country's stock market show that when given a real choice based on adequate information and the confidence that follows transparency, investors are willing to channel financial resources into the country's companies. Paraguay's private sector must assume leadership for compliance and disclosure.

The road ahead

18. The description of Paraguay's statutory framework for accounting and auditing points directly to the need for clear and comprehensive rules. Paraguay's accounting and auditing statutory framework should follow a coherent structure. It must have an efficient standard-setting process and a strong, capable institution to monitor the quality of professional practice and enforce the statutes.

19. Moreover, the report recommends actions toward building capacity within academia, regulatory agencies and the accounting and audit profession. It also includes recommendations in the areas of professional examination and continuing education. 20. Companies, especially those that have public-interest characteristics should be made aware of the potential benefits derived from high quality and transparent financial reporting. Greater awareness is the fastest way to foster disclosure and compliance.

21. Addressing the weaknesses in the accounting and auditing environment and achieving the needed improvements will require a strong involvement of the Government and the contribution of all key stakeholders. The main challenges for in-country stakeholders will be to arrive at the necessary consensus in order to develop an effective Country Action Plan (CAP) and secure the commitment of all involved in its implementation.

22. At the suggestion of the ROSC team, the MoF convened a meeting with representatives of the accounting profession, the five regulatory agencies, the business community, and academia. This meeting was chaired by Minister Bergen and took place on March 3, 2006, during the main mission of the ROSC Accounting & Auditing in Asuncion. The team recognized this as a significant step, and in order to give this group the structure and resources required to become the real force behind the proposed reforms, it is the first recommendation of this report that through an official act of the MoF, a National Steering Committee (NSC) should be formally established, its terms of reference defined and its members appointed. The membership of the NSC should include the institutions that participated in the aforementioned meeting. The NSC should have a Secretariat equipped with a small staff to be provided by the MoF. All member institutions are expected to contribute significant time to the preparation and monitoring of the CAP. The NSC should also serve to mobilize donor support to carry out the CAP.