Analysis of the draft law:
Greetings. As a lawyer with 15 years of experience, I have analyzed the submitted draft Law of Ukraine “On Amendments to the Law of Ukraine ‘On Audit of Financial Statements and Auditing Activities’ and Certain Other Legislative Acts”. Below, I provide a detailed analysis, structured for convenience.
1. Essence of the draft law
The main purpose of this project is to provide the legal framework for the implementation of European Union requirements regarding sustainability reporting in Ukraine. The draft law introduces the institution of auditing and providing assurance regarding sustainability reporting, defines qualification requirements for auditors in this area, and establishes rules for conducting mandatory assurance engagements. The project also clarifies the powers of the Audit Public Oversight Body (APOB) and the Audit Chamber of Ukraine, and improves quality control and disciplinary liability procedures for auditors, adapting them to new sustainability reporting requirements.
2. Structure and main provisions
Structurally, the project introduces comprehensive amendments to the core Law “On Audit of Financial Statements and Auditing Activities,” as well as targeted changes to the laws “On Public Electronic Registries,” “On Capital Markets,” “On Joint-Stock Companies,” and “On Limited and Additional Liability Companies.”
Key changes compared to current legislation:
- Terminology: New definitions have been introduced, including: “sustainability auditor,” “report on mandatory assurance of sustainability reporting,” and “mandatory assurance engagement.”
- Qualification requirements: Separate examinations for sustainability auditors have been established, and the procedure for acquiring their practical experience has been defined.
- Registry: The structure of the Register of Auditors and Audit Entities has been expanded with a new section for entities entitled to perform sustainability engagements.
- Powers of regulators: The role of the APOB as the main supervisory body has been strengthened; financing mechanisms and the delegation of powers to the Audit Chamber of Ukraine and professional organizations have been clarified.
- Quality control: The inspection procedure has been improved, including the possibility of issuing directives and applying financial sanctions directly as a result of supervisory actions.
3. Significance for stakeholders
This document is of critical importance for several groups:
- For legislators and experts: The project ensures the harmonization of Ukrainian law with EU Directives, which is a mandatory condition of the European integration process. Strict boundaries of authority are established between the APOB and professional self-regulatory organizations.
- For business: Business entities that will be required to publish sustainability reporting will receive a clear legal mechanism for verifying such reporting. It is important to pay attention to the provision that prohibits linking auditor remuneration to specific company performance results or the receipt of benefits by the company.
- For auditors: New professional standards and duties are being introduced. Key audit partners must now meet higher seniority requirements and confirm their qualifications in the manner revised in the project. Furthermore, new restrictions on the simultaneous provision of audit and certain non-audit services are being imposed.
- For citizens: Improving the quality and transparency of reporting by public interest entities (in particular, regarding the environmental and social aspects of their activities) creates additional guarantees of information reliability for investors and society.
Note that the draft law significantly details the procedure for disciplinary proceedings, which increases legal certainty for auditors but simultaneously strengthens enforcement tools for the regulator, including the APOB’s right to impose financial penalties as an enforcement document.
Analysis of the explanatory note:
Greetings. As a lawyer with 15 years of experience, I have analyzed this document. Effectively, we are dealing with a fundamental modernization of the audit services market to meet European ESG (Environmental, Social, and Governance) standards. Here is a detailed breakdown:
1. Essence of the draft law
The draft law is aimed at integrating Ukrainian audit legislation with European Union norms, particularly in terms of introducing mandatory audits (assurance) regarding sustainability reporting of enterprises. The document also optimizes the quality control system for audit services and strengthens the liability of public interest entities (PIEs) for violations of auditor selection procedures.
2. Why is this necessary, according to the authors?
The author of the explanatory note relies on three key factors:
- European integration obligations: Ukraine must fulfill the requirements of the Association Agreement and implement a number of new EU directives (in particular, Directive 2022/2464) regulating corporate reporting in the field of sustainability.
- International harmonization: The European Commission directly indicated the need for these changes in its 2023 report so that Ukrainian financial reporting would be understandable and transparent to EU investors.
- Strategic necessity: The government has already approved the Strategy for Introducing Sustainability Reporting, and without appropriate legislative changes, it lacks a mechanism for verification (quality control) of this reporting.
3. Main consequences for business and the professional community
The changes will be tangible for several groups:
- For auditors: The specialization “sustainability auditor” is being introduced. This will require the professional community to undergo additional certification and training according to European standards.
- For audit entities: A redistribution of powers is taking place. The Inspection of the Audit Public Oversight Body (APOB) is taking over quality control for all those performing mandatory audits, limiting the powers of the Audit Chamber. This strengthens state control over the market.
- For large business (PIEs): A serious “financial stick” is emerging. Monetary fines are being introduced for the absence of audit committees or for violations of the auditor appointment procedure. This disciplines the corporate sector in matters of transparency.
- General economic effect: The authors expect that improving the quality of reporting will make Ukrainian companies more attractive to European capital and integrate us into the global investment market.
Summary: The state is moving towards strict regulation of the quality of “non-financial” reporting, which is critically important for attracting investment post-war. I recommend that businesses start preparing now for the requirements regarding the preparation of sustainability reporting.
Analysis of other documents:
Greetings. As a lawyer with 15 years of experience, I have analyzed the provided package of documents regarding the draft Law of Ukraine “On Amendments to the Law of Ukraine ‘On Audit of Financial Statements and Auditing Activities’ and Certain Laws of Ukraine Regarding the Improvement of Legislation in the Sphere of Auditing Activities.”
1. Position of the document’s author
The author of the document is the Cabinet of Ministers of Ukraine, represented by Prime Minister Serhiy Koretskyi, with the Ministry of Finance (Minister Serhiy Marchenko) acting as the developer. The author’s position is unequivocally supportive: the government is submitting this project as a legislative initiative aimed at implementing EU legislation norms (in particular, Directive 2006/43/EC and Regulation 537/2014) and improving the audit system in Ukraine, which indicates an urgent need for systemic changes in this area.
2. Main provisions and significance for parties
To understand the scale of the changes, here are the key aspects that are of critical importance for legislators, businesses, and the expert community:
- Introduction of sustainability reporting audits: This is the main innovation of the project. The concepts of “sustainability auditor” and “report on mandatory assurance” are introduced. This means the emergence of new reporting requirements for large companies and a new area of professional activity for auditors.
- Strengthening of regulatory oversight: The project grants the Audit Public Oversight Body broader powers, in particular, regarding the review of Audit Chamber decisions, control over certification, and the imposition of fines on public interest entities (PIEs) for violations of the procedure for appointing auditors or the requirements for audit committees.
- Changes to certification and training procedures: The Certification Commission is being reformed; requirements for practical experience and continuous professional training (120 hours over three years) are changing. This directly affects the career paths of auditors.
- Strict restrictions for auditors: Restrictions are introduced on the simultaneous provision of non-audit services to public interest entities to prevent conflicts of interest. The list of grounds for cancellation of auditors’ registration in the Register is also expanded.
- Technical and organizational support: The document provides for the revision of a number of CMU resolutions (for example, regarding contributions to the Oversight Body) within six months after the adoption of the law, which will require active work by the Ministry of Finance and the Ministry of Justice.
From a business perspective, these changes are aimed at increasing confidence in reporting and harmonizing Ukrainian auditing with European standards; however, they significantly increase the level of responsibility and compliance requirements for both audit entities and companies subject to mandatory audits.
