European Integration as a Landmark – Service for Accounting, Reporting and Auditing Supervision

The Service for Accounting, Reporting, and Auditing Supervision is an oversight body that handles accounting, reporting, and auditing. The regulations established by the Service aim to create a culture of transparency in business activities. Its mission is to promote the transparency, quality, and reliability of financial and governance information needed to make effective economic decisions by establishing international standards.

David Mchedlidze, Head of the Service for Accounting, Reporting, and Auditing Supervision, discusses the Service’s strategic goals, corporate sustainability priorities, and the importance of supporting the private sector in integrating with the EU.

David Mchedlidze, Head of the Service for Accounting, Reporting, and Auditing Supervision, discusses the Service’s strategic goals, corporate sustainability priorities, and the importance of supporting the private sector in integrating with the EU.

Tell us about the Service for Accounting, Reporting, and Auditing Supervision activities.

Since 2016, based on the Association Agreement with the European Union, the reporting and audit reform has been underway in Georgia. According to the legislation, the Service for Accounting, Reporting, and Auditing Supervision (SARAS) of the Ministry of Finance of Georgia was entrusted with implementing the mentioned reform. The main functions of the Service are the production of the enterprise reporting website, the implementation of the international standards/rules of financial reporting and auditing defined by the Law of Georgia “On Accounting, Reporting and Auditing”, production and monitoring of state registers of auditors/auditing firms, certified accountants, professional service accountants, and accounting firms, recognition of certification programs of accountable persons, examination processes and continuing education programs and monitoring of persons providing these services. In addition, the Service actively ensures the establishment of an effective system for detecting and preventing money laundering and terrorism financing, which complies with the Financial Action Task Force (FATF) recommendations.

The vision of SARAS is designed for long-term perspectives. Our core values are conducting our activities with integrity, objectivity, and impartiality, treating our stakeholders carefully, monitoring their needs, and responding promptly. We promote quality teaching and professional development, as well as research and implement the best supervisory practices. SARAS actively cooperates with international organisations. We learn more about the practices of different countries and try to share their experiences. We are always open to cooperation.

One of SARAS’s strategic goals is the reflection and gradual convergence of EU regulations in legislation. Could you tell us about the activities carried out in this direction and which corporate sustainability-related directives the Service is currently preparing?

As I mentioned in the Service’s annual report, I consider granting the candidate status to our country as a special achievement of 2023, which is undoubtedly the most important event of the year and represents a valuable step forward on the path of European integration. It should be noted that the reforms being implemented by SARAS in accounting reporting, auditing, and anti-money laundering supervision are part of the obligations outlined in the Association Agreement between Georgia and the European Union. I am pleased to note that the results achieved by the SARAS team have played a positive role in the historic decision-making process.

As the two most important directions of harmonising Georgian legislation with the European Union legislation – gradual approximation and dynamic approximation – were put on the agenda by the Association Agreement, both directions represented an action plan for the Service from the initial stage of the reform, to introduce EU standards in the field of accounting and auditing in the Georgian legislation and to carry out several successful reforms. SARAS continues to actively work on the issue of dynamic approximation with the existing directives and regulations in the European Union; the introduction of corporate information, in particular the corporate sustainability reporting standard, is an activity to be implemented within the framework of dynamic approximation, which is important for Georgia on the way to further rapprochement with the European Union. In this regard, one of the directions is the development of the legal framework for sustainability reporting, the implementation of the related standard, and the introduction of best practices in the country.

Within the framework of the EU membership candidacy granted to Georgia, the process of dynamic approximation has become very important this year. Therefore, processes have been initiated in SARAS to introduce corporate sustainability reporting requirements.

It should be noted that the European Commission developed the Corporate Sustainability Reporting Directive (CSRD) in recent years, which came into force on January 5, 2023, for EU Member States. The mentioned Directive replaced the existing non-financial reporting directive – with an updated edition and requirements. Preparing corporate sustainability reports for enterprises using the relevant standard will become mandatory in the EU member states for the 2024 reporting period, which will be submitted to local authorities from 2025. For Georgia to keep pace with EU requirements, the Service has started cooperation with representatives/experts of EU member states to ensure dynamic approximation with the regulatory directive and implementation of corporate sustainability reporting standards in Georgia. For this purpose, appropriate legal procedures have been initiated with the standards issuing body (www.efrag.org). In addition, the Service gradually ensures that the awareness of stakeholders and accountable enterprises is raised and relevant training is provided for professional circles.

The stated vision of SARAS is noteworthy, according to which, in 2024, taking into account the recommendations of the EU member states, the service will develop a draft law of Georgia on amendments to the Law of Georgia on “Accounting, Reporting and Auditing”, and by 2025, it will ensure the submission of a draft law to the Ministry of Finance of Georgia/the Government of Georgia for further initiation.

The new regulatory framework will help investors, civil society, consumers, and other stakeholders assess a company’s potential for sustainable development. The reform’s stated goal is to strengthen the green economy.

Since 2018, first- and second-category companies and PIEs have had to prepare governance statements. How ready is the private sector to meet corporate sustainability standards, and what is the main challenge in this direction?

True, according to the Law of Georgia “On Accounting, Reporting and Auditing” in 2018, public stakeholders and entities were obligated to submit audited financial and governance statements in the first and second categories. According to the Law, governance reporting includes performance reviews, corporate governance statements, and non-financial reports. The auditor’s opinion with the relevant authority regarding compliance with the regulatory and normative acts and consistency with the financial statements of the same reporting period should accompany it. Governance reporting informs interested parties about the entity’s activities, development, and status. With the help of these reports, stakeholders can evaluate the enterprise’s prospects and main risks, as well as how successfully it has fulfilled the set goals.

To simplify the process of preparing governance statements for entities, the Service has developed a “Governance Reporting Guide”. The guidance is a flexible, widely applicable, recommendatory document based on the latest international and current best practices and does not create new legal obligations. It establishes the basic principles, which ensure the proper presentation and comparability of the entities’ statements. The “Governance Reporting Guide” has been published both on the Service website and the reporting portal and is available to any interested party.

To raise public awareness about the preparation of governance statements and share the best practices of leading countries, the Service held several events. At these events, the public learned about the main objectives of the preparation of governance statements, the best practices of advanced corporations, and modern trends such as integrated reporting.

In the current context, taking into account the practice of submitting governance statements, a positive trend can be observed – the majority of accountable enterprises submit the reports prepared in compliance with the requirements of the law.

As already mentioned, corporate sustainability reporting replaces part of non-financial reporting with new requirements. Despite several challenges, such as conducting time-consuming work to implement a proper sustainability policy and producing reports with relevant indicators, enterprises must understand the importance of environmental, social, and governance parameters in the company’s daily activities and future business strategy. The service will help enterprises with relevant instructions and manuals and offer awareness-raising measures along with the introduction of the legal framework.

The new European Directive on Corporate Sustainability Reporting will help create a more sustainable and competitive economic environment, ensure enterprises’ sustainable development, and strengthen investor confidence. Is it planned to harmonise the Georgian legislation with this regulation?

As mentioned above, in 2022, the European Commission developed the Corporate Sustainability Reporting Directive (CSRD), which entered into force for EU Member States on January 5, 2023. The mentioned Directive replaced the existing Non-Financial Reporting Directive – with an updated edition and requirements. Preparing corporate sustainability reports using the relevant standard for enterprises will become mandatory for the 2024 reporting period, which will be submitted to local authorities from 2025.

According to the CSRD, companies must prepare a corporate sustainability report if they are:

• large enterprises, regardless of whether they are Entities of Public Interest;
• small and medium-sized enterprises (SMEs) (except micro-enterprises) that are Public Interest Entities;
• Non-EU enterprises that own a branch or a subsidiary within the EU.

Companies subject to EU regulatory legislation must disclose how environmental and social issues affect their risks and challenges. In addition, they must also disclose information about their business model’s impact on people and the environment.

The service constantly ensures that Georgia is at the forefront of international practices. One of the priorities of the service in 2024 is the implementation of the Sustainability Directive. However, it should be noted that implementing new directives in the country is a complex issue and will be done gradually over time. With our initial view, SARAS considers it appropriate to apply the requirements mentioned above in Georgia to enterprises of the first category and Public Interest Entities (except for the fourth category) and to implement it from 2027, concerning the reporting period 2026.

What are your plans to support the private sector for integration with Europe?

One of the main conditions for the country’s rapid economic development and investment growth is a healthy and fair business environment. Our ongoing economic reforms aim to further improve this environment.

The fulfillment of the obligations assigned to it by SARAS will positively affect the enterprise; in particular, the entrepreneur will have reliable and transparent reporting, which will increase its reputation and help gain the trust of stakeholders, investors, and customers. Demonstrating a strong commitment to sustainability shows an entrepreneur’s sense of responsibility. In preparing a sustainability report, an enterprise identifies potential risks at an early stage, such as regulatory changes, supply chain disruption or reputational damage. Practical management of these risks can reduce costs and prevent negative business impacts. The activities carried out in the direction of audit, in particular the education of auditors, strengthening of professional organisations, and monitoring of persons subject to supervision, will positively affect the auditor, who will perform the work at a highly professional level.

We believe that trust creates opportunities; therefore, we create a transparent business environment that promotes the development of the capital market and is a prerequisite for the country’s economic development. We hope businesses will better understand their company’s financial state and plan the future perspective correctly, investors will boldly invest in Georgia, and ultimately, the reform results will be tangible for each of us.

It must be noted that in the successful course of the reform, the involvement and support of our international and local partners, since with their help completely free of charge, many activities in different directions (including training for enterprise accountants and trainers of financial reporting standards) were carried out within the competence of SARAS, including in terms of raising awareness. In terms of international cooperation, I would single out the signing of the cooperation agreement between SARAS and the International Finance Corporation (IFC) as a successful example. The collaboration aims to strengthen the Service’s environmental, social and governance (ESG) reporting capacity and develop better sustainability reporting in Georgia, including on ESG.

We also recently attended an event organised by the World Bank’s Centre for Financial Reporting Reform (CFRR) in Austria, where the regional project – “Strengthening the Accounting, Auditing and Sustainability Reporting (EAASURE) Program” – took off. The mentioned project is also important for SARAS since it will provide us with valuable assistance in introducing sustainability reporting.