II. REVIEW OF THE AUDIT PROCEDURES AND THEIR RESULTS

1. Ownership transformation audits

1.1 Problems related to ownership transformation audits

In their reports about completed work and initiatives to various competent bodies on the completed work and initiatives, all auditing bodies emphasised the following problems:

·       Excessive duration of court procedures

·       Reduction of social property assets, which has continued even after 31 December 1992

·       Prevention and obstruction of the RS Fund for Development in from carrying out audits of legal persons under its ownership

·       Performance of audit procedures, which do not deter the process of ownership transformation

·       Incomplete control over foreign trade and foreign currency  transactions of domestic legal persons, and especially  insufficient control over the investments of domestic legal persons into companies abroad

·       Incomplete control  over the prevention of money laundering in cases in which privatisation was not conducted on a cash basis

·       Coverage of legal expenses and court duties

·       The effects of receivables being written -off too early on the tax liabilities, and the need for measures for actual elimination of such damage

These problems were solved in the following manner:

a) By changing the regulations

These were solved partially until the middle of 1996 through changes of and supplements to the ZPPOLS (Law on Ownership Transformation of Legal PersonsCompanies Owned by the RS Fund for Development Act (OTCOFA), the Foreign Trade Transactions Act and the Act on the Agency of the Republic of Slovenia for the Auditing of the Ownership Transformation of Companies (hereinafter referred to as the Auditing Agency). With changes in to the OTCOFA in October 1995, it was possible (through the inspection procedure to establish the legality of using social property assets after 31 December 1992) also to establish any greater reductions of social property and capital in companies of greater value by means of legal transactions and other legal actions referred to in Articles 48 and 48a of the Ownership Transformation of Companies Act (OTCA). After 1 January 1993, the problem of continued  loss was permanently solved by passing  the  Auditing  Agency  Act.

Since its founding, the Auditing Agency has actively participated in the preparation of the Completion of Ownership Transformation of Companies Act (COTCA), which was passed in spring 1998 in order to ensure that the findings of auditing bodies regarding the reduction of social property of legal persons which have not implemented the privatisation procedure or which have done so even before the passing of the OTCA are properly taken into account and in order to enable the institutionimplementation or renewal of audits also for those legal persons which have already conducted implemented privatisation, but there is a suspicion that not all of the assets arising from the business operation of the formerly socially-owned company was included in this process. Proposals from the Auditing Agency were partially taken into account also in  COTCA. However, a limitation was added that an approval of those by shareholders or partners who hold at least a 10% share in its capital is required for the implementation or renewal of the audit procedure in a company which has already been privatised, which, to a large extent, obstructs the implememntation of these procedures.

To a smaller extent, the presented problems were also solved by the Republic of Slovenia Budget Implementation Act with its conditions for the awarding of state subsidies, and the Method of Payment of Due Compulsory Duties Act (MPDCDA) with conditions for the writing -off of interest in arrears.

b) By taking the legal practice into account

Excessive delays in the solving of court disputes remains a problem to this date, since now, over six years since the introduction of audits, as much as 32% of all lawsuits filed are still unresolved pending as at 31 December 1999. In order to accelerate the decision-making process in lawsuits, the Auditing Agency addressed a supervisory complaint to the Minister of Justice in 1997. Initially, this had a  large effect, but then the matters gradually returned to a slow pace. The Auditing Agency employs all the available legal options for filing extraordinary legal actions remedies in litigation proceedings on the basis of appeals against audit decisions (audits, demand for protection of legality).

The problem of non-suspensive audits, i.e. audit procedures which do not bar the implementaition of the privatisation process, was solved as late as 1998 with a decision of the Supreme Court of the Republic of Slovenia that an auditing decisions issued after the completion of privatisation should be executed in such a manner that a supplementary privatisation procedure is performed for the yet non-privatised capital.

Exemption from the payment of court duties in legal proceedings was achieved by the Auditing Agency through a decision by the Supreme Court.

c) By constant co-operation with the competent authorities

In order to accelerate the pace of criminal proceedings for in criminal cases, the suspicion of which was established during the audit of ownership transformation, the Auditing Agency agreed in 1997 with the State Prosecutor's Office of the Republic of Slovenia and the Ministry of the Interior that charges for criminal actions are to be passed on to bodies of the Ministry of the Interior and that the State Prosecutor’s Office is to be informed of all such charges.

Since the adoption of OTCOFA in October 1995, the RS Fund for Development as a rule no longer obstructed audits of the ownership transformation, and the Auditing Agency established co-operation with its legal successor, the Slovenian Development Corporation (SDC). This was primarily intended to ensure audit reports for affiliated companies abroad and to implemetnt the urgently needed procedures even after the implemetation of the OCOTCA.

1.2. Assessment of the justifiability  and efficacy of ownership transformation audits

The comparison of data from Table 8 below and those from reports by other competent authorities enable the following assessments[3] of:

·       Whether the introduction of a special preliminary supervisory procedure was justified

·       Whether the results of the audit have yielded satisfactory economic effects in the form of an increase in the social capital and collecting of the unpaid receivables

Table 8. Results of audits of legal persons which have obtained the second approval[4] and of other legal persons in which reduction of social property was established as referred to in Article 48a of the OTCA

								(amounts in million SIT)
		Number		Reduction		Voluntary				Amounts
		of legal persons	%	pursuant to Article 48a	%	harmoni- sation	%			in decisions	%
Audit of ownership
transformation, of which:		1.101	100,0	86.174	100,0	52.215	100,0			34.141	100,0
1.   Suspended  procedures		74	6,7
2. Legal persons which have acquired the second approval of which:		396	36,0	56.166	65,2	40.524	77,6			15.780	46,2
- appraisals		267	24,3	45.624	52,9	36.415	69,7			9.349	27,4
3. Other legal persons in which diminishingreductions were established:
- owned by the SDC		102	9,3	17.962	20,8	7.704	14,8			10.257	30,0
- undergoing the bankruptcy
or liquidation procedures		67	6,1	3.206	3,7	1.656	3,2			1.593	4,7
- deleted from the Court Register		38	3,5	1.684	2,0	1.377	2,6			307	0,9
- privatisation before adoption passing of the OTCA		5	0,5	2.667	3,1					2.667	7,8
- privatisation before adoption passing of the OTCA		5	0,5	2.667	3,1					2.667	7,8
- other (subsidiary companies)		99	9,0	4.489	5,2	954	1,8			3.537	10,4
4. Other legal persons in which diminishingreduction was not established under Article 48a of the OTCA:		320	29,1

                                   

1.2.1 On the justifiability of  implementing the procedure

The introduction of a special preliminary supervisory procedure prior to the ownership transformation of formerly socially-owned companies has caused quite a few disputes and second thoughts. The statistical data presented below regarding the extent of established reduction of social capital and its comparison with certain macroeconomic categories, information about how the companies and competent authorities have observed the audit findings and information on the dynamics of the audits and suitability of the selection of legal persons enable the assessment of whether this procedure was actually necessary, rational, sufficiently extensive and managed dynamically:

1. During ownership transformation audits for the period from 1 January 1990 to 31 December 1992, the auditing body established reductions of social property assets referred to in Article 48a of the OTCA at 658 legal persons, i.e. 60% of all legal persons in which the audit had been performed. However, the social capital of these legal persons represented as much as 94% of the social capital of all audited legal persons. The total reduction of social property in these 658 legal persons amounted to SIT 86,174 million.

Even the statistical data[5] from the closing accounts of legal persons for 1992 indicate that in 1992 legal persons maintained only about 87% of the real value of social capital, while they maintained in entirety or even increased the real value of their share capital. This is also confirmed by the audit findings. With a comparison of data on the balance of social capital (SIT 1,142 billion) and the capital of the known owners (SIT 63 billion) prior to  the audits and after the completed audits, it was found that, according to the bookkeeping value as at 31 December 1992, the social capital is 7% higher after the ownership transformation audits than before the beginning of the audits and it amounts to SIT 1,223 billion, while the capital of the known owners is 20% lower and according to audit findings amounts to SIT 50 billion according to audit findings.

The data that the established reductions are 3.5 times higher than the amount of the average net profit in the Slovene economy in 1992[6] speaks additionally of the significance of ownership transformation audits and the extent of established reductions of social capital.

A comparison of the established reductions with the amount of social capital of legal persons which have acquired the first approval shows that such reductions represent 11% of the social capital of these legal persons.

The selection of legal persons for audits was dictated primarily by demands requests and initiatives for the introduction of audits. The current situation is as follows: by the end of 1999, 67% of the audited legal persons, in which reductions were established, had already been privatised, for 17% of them the SDC is in charge of privatisation, and in 16% of them (the liquidated ones or those deleted from the Court Register), the audits will have no economic effects.

2. The fact that ownership transformation audits have been accepted as relevant also by the audited legal persons is proven by the data that 524 of these legal persons voluntarily eliminated the established reductions amounting in total to SIT 52,215 million (60% of all reductions). The amoutnt of voluntarily eliminated reductions represents 8% of the social capital reported in the opening balances of legal persons which have acquired the first approval. The legal persons which have acquired the second apporoval have also achieved a high percentage of voluntary harmronisation, and the issued decisions were implemented in their entirety.

It is also characteristic of this process that the auditing body had to issue audit decisions primarily to those legal persons which are not privatised pursuant to the OTCA (i.e. those owned by the SDC and their controlled companies, and to those legal persons which were privatised incorrectly before the inroduction of the OTCA) and to legal persons in which non-suspensive audits were performed, as well as that these decisions were not implemented.

3. In addition to reductions referred to in Article 48a of the OTCA, the auditing bodies also established suspicions of a reduction referred to in Article 48 of the OTCA.

For ownership transformation audits of legal persons performed in the period from 1 January 1990 to 31 December 1992 and the audits which took place after 1 January 1993, the auditing bodies have expressed their suspicions of reductions of social capital that are thought to amount to a total of SIT 33,051 million. The Social Custodian of the Republic of Slovenia believes that suspicions of a reduction of social property assets are justified in 450 audit reports or cases.  Of a total of 450 audit reports, in which the reduction referred to in Article 48 of the OTCA was established by the Social Custodian of the Republic of Slovenia, this reduction was eliminated by agreement prior to filing of the lawsuit in 112 cases, and in 140 cases after filing of a lawsuit through court or out-of-court settlements. In 54 cases, the Social Custodian of the Republic of Slovenia established that, due to the performance of the bankruptcy or liquidation procedure, direct action could not be undertaken.

Co-operation of the Auditing Agency with the SDC is presented in section 1.2.2.

4. In comparison with the dynamics of issue of approvals by the Agency of the Republic of Slovenia for Restructuring and Privatisation, the dynamics of completion of the audits indicate that the audits did not impede the privatisation process. The corresponding data is given in Table 5 of the Appendix and the dynamics of audit completion are also shown in the diagram below.

The previous auditing body began the ownership transformation audits of legal persons in June 1993. The number of legal persons which received a decision on the initiation (implementation) of such an audit was more or less known. The audited legal persons had to take audit findings into account in their programme of ownership transformation. The curves comparing the number of completed audits with that of legal persons with the first approval exhibit a steep, parallel and uniform increase. Around midyear 1995, the number of legal persons with the first approval exceeded the number of completed audits. At this time, ownership transformation audits were completed in 58% of the legal persons. The audits had no impact on time elapsing from the issue of the first approval to that of acquiring the second one.

1.2.2 On economic effects

The economic effects of ownership transformation audits can be established in several ways, since certain effects are only formal in nature, while others involve an actual increase in value. The legal persons which were privatised pursuant to the OTCA and received the second approval reported increased social capital on the basis of voluntary harmonisation or by implementing the decision. Appraisals of the value of their assets and possibility of creating reserves and provisions to the debit of social capital also had an important effect on this process. Harmonisation was especially important in those cases in which irregularities were established concerning the capital structure or reporting of the company assets, since these can be eliminated by mere corrections of the bookkeeping entries. A satisfactory number of legal persons also decided to introduce the activities to ensure the return of alienated property , which improved the quality of property in those cases in which the bookkeeping entries served merely to establish the receivables. It is indisputable that the results of ownership transformation audits have helped reduce the privatisation deficit. For certain other legal persons, it is now already clear that the desired economic effects have not and will not be achieved (liquidation, bankruptcy, etc.) or there is still a doubt as to whether they will be achieved (companies owned by the SDC act in accordance with the COTCA):

1. Ownership transformation audits were performed in 396, i.e. 29% of all legal persons which received the second approval. The social capital of these audited persons represents 82% of the social capital of all audited persons. In 347 of these legal persons, damage referred to in Article 48a of the OTCA was established in the amount of SIT 56,166 million, i.e. 65% of the total amount of damage to all the audited persons.

The legal persons which received the second approval to the entry of ownership transformation into the Court Register and were subjected to the audit procedure performed a voluntary elimination of damages to the amount of SIT 40,524 million, which represents 72% of the established amount of damage to these legal persons.

According to data that the Auditing Agency acquired during the audit procedures performed after 1 January 1993, and according to data of the RS Agency for Restructuring and Privatisation regarding the issued second approvals, 85 legal persons complied with the issued audit decisions (total amoutnt SIT 16,608 million, i.e. 49% of the total amount of decisions).

Damage to social propertyassets established in legal persons which received the second approval was therefore for the most part formally eliminated to a large extent. The decisions issued to legal persons in which non-suspensive audits were performed remained non-implemented;  they amounted to 3% of the total amount of the issued decisions. In one of these legal persons, pursuant to Articles 5 and 6 of the COTCA, the Slovenian Development Corporation took over their shares to to the amount of the established damage.

2. Of 396 legal persons which acquired the second approval and in which an ownership transformation audit was performed, 267 established the value of their capital on the basis of appraisals by certified appraisers. In such legal persons, damage to social capital was established to the amount of SIT 45,624 million, which is slightly more than one half of the total amount of the established damage pursuant to Article 48a of the OTCA or 5% of social capital of the audited legal persons. The legal persons whose value was underestimated by certified appraisers performed voluntary harmonisation in the amount of SIT 36,415 million or 80% of the amount of the established damage.

However, according to data of the RS Agency for Restructuring and Privatisation, the value of capital established by certified appraisers’ is on average 16% lower than the value of capital established by legal persons on the basis of their opening balances. As the main reason for lower value of capital obtained by appraisals, the audited legal persons stated the general economic situation in the Republic of Slovenia at the end of 1992, i.e. the continuation of negative trends, which affected the appraisers’ predictions regarding future profit and loss accounts and net cash flows. Data on the business operation of legal persons[7] actually show that, during a period of ten years, 1992 was the worst one as regards business results. In 1992, the expenses of commercial companies were 4.6% higher than their revenues (0.3% in the previous year). However, the situation gradually improved during the following years: in the period from 1993 to 1996, expenses were still higher than revenues, but only 1% or even less, while in the period from 1997 to 1999 the revenues exceeded the expenses.

No public data is available about the extent (in terms of value) to which the measures prescribed by the auditing body were taken into account in the case of appraisals. Since these data are collective in nature and differences in the appraised values resulted from appraisal of the entire company assets, the Auditing Agency is unable to establish these data either. However, in the audit procedures performed after 1 January 1993, the Agency found while checking the implementation of the audit decisions issued during the ownership transformation audit procedures that, for example, in most cases of appraisals, the measures prescribed by the auditing body were not taken into account in terms of value (e.g. receivables) or were taken into account at most up to 30% in terms of value.

3. In addition to 347 legal persons which acquired the second approval, the auditing body also established damage to social capital in the following 311 legal persons:

102 legal persons owned by the SDC

99 legal persons which are affiliated with (i.e. controlled by) legal persons which acquired the second approval or by other legal persons

67 legal persons undergoing bankruptcy or liquidation procedures

38 legal persons deleted from the Court Register for various reasons (completion of bankruptcy or liquidation procedures, acquisitions and dissolutions)

5 legal persons in which privatisation was performed before the passing of the OTCA

                                   

In 320 legal persons, the auditing body found no damage to social capital pursuant to Article 48a of the OTCA.

a) in 102 legal persons owned by the SDC, damage to social assets was established in a total amount of SIT 17,962 million, i.e. 21% of the total damage to the audited legal persons. These legal persons voluntarily eliminated the damage in the amount of SIT 7,704 million, i.e. only 43% of the established amount of damage to these legal persons. The amount from decisions (SIT 10,257 million, i.e. 57% of the established amount of damage) exceeded the voluntarily harmonised amounts.

Decisions issued to these legal persons represent as much as 30% of the value of all issued decisions, and the SDC is in charge of their implementation. The Auditing Agency informed the SDC of all cases for which the courts confirmed the audit decisions by issuing final decisions concerning court disputes or in which the plaintiffs withdrew their lawsuits (a total of 17 legal persons), so that the SDC could enforce claims pursuant to special provisions of Section V of the COTCA concerning actions in the case of established damage to social property .

b) The established damage to affiliated legal persons (i.e. controlled companies) as a rule had to be taken into account by the parent company prior to acquiring the second approval. The auditing body found that the damage to controlled legal persons amounted to SIT 4,489 million or 5% of the total established damage referred to in Article 48a of the OTCA. These legal persons voluntarily eliminated the damage in the amount of SIT 954 million or 21% of the total amount of established damage. For the audited legal persons which did not submit proof of voluntary elimination of damage, the auditing body issued decisions in a total amount of SIT 3,537 million, i.e. 79% of the total amount of damage.

c) For legal persons undergoing the bankruptcy or liquidation procedure and for those already deleted from the Court Register due to completed bankruptcy or liquidation procedures, acquisition or dissolution, damage to social propertyassets was found in the amount of SIT 4,890 million or 5.7% of the total amount of damage. This damage was eliminated voluntarily primarily by the legal persons undergoing status changes.

These legal persons account for 5% of the total amount of issued decisions. The Auditing Agency knows of only one case in which the official receiver enforced the audit decision.

d) Legal persons which were privatised before the OTCA and in which damage to social property was established in the amount of SIT 2,667 million or 3.1% of the total amount of damage did not perform harmonisation with the findings of the auditing body voluntarily; audit decisions had to be issued to prescribe the measures to eliminate the damage (8% of all issued decisions).

By the end of 1999, only one audit decision was implemented, while lawsuits had to be filed in order to enforce the others.

After the enforcement of the COTCA, the Auditing Agency informed the SDC of the audited legal persons which were privatisation contrary to the legal regulations, so that the SDC would be able to enforce its legal competencies pursuant to Articles 5 and 6 of the COTCA in such legal persons. The Auditing Agency is informed of the position of the SDC, i.e. that it intends to enforce its rights on the basis of the COTCA only after the court decisions become final, therefore the Auditing Agency is keeping it informed of the finally resolved court disputes.

4. Ownership transformation audits were introduced in order to establish, before the privatisation of legal persons, any possible damage to social property caused by:

unjustified decreases or prevention of assets increases, or

incorrect relationships between the social and private capital

The measures to eliminate damage to social propertyassets included bookkeeping corrections of assets or capital and had to be taken into account also in the opening balance as of 1 January 1993. Depending on the cause of damage to social property, bookkeeping corrections may in certain cases also mean the final actual elimination of damage. In other cases, the final effect of damage elimination can be ensured only through other activities, in addition to bookkeeping corrections.

a) Bookkeeping corrections mean the final actual elimination of damage in the following cases:

Damage to property (e.g. if not all of the company's tangible fixed assets are reported in the business books; if revaluation of land and long-term financial investments is not performed; if receivables to companies abroad are not nominated in SIT using the middle exchange rate of the Bank of Slovenia; if excessively high liabilities are reported);

Only a minor part of the established damage to property was of such nature that it could be eliminated by a mere bookkeeping correction.

Damage to social capital (e.g. if transfer of social capital was performed free of charge and outside of the prescribed official pathways; if the revaluation reserve was distributed incorrectly).

Since corrections in this part were performed almost in their entirety (over 90%), the Auditing Agency believes the estimated damage due to transfer of social capital free of charge and outside of the official pathways or due to incorrect distribution of the revaluation reserve in the amount of SIT 17,000 million to have been eliminated.

b) For a predominant part of the established damage, final elimination of damage can be achieved only by additional activities, as in the case of:

·       Damage to assets: by collecting receivables or destroying issued bonds;

In ownership transformation audits performed after 1 January 1993, the Auditing Agency monitored the actions of the audited legal persons concerning receivables created in such procedures. On the basis of a sample composed of 47 legal persons, the Auditing Agency found that the audited legal persons have collected 13% of receivables, while for 5% of them the filed lawsuits have not yet been finally resolved (see diagram below);

·       Damage to social capital: by issuing additional shares;

·       On the basis of data acquired during audit procedures performed after 1 January 1993, the Auditing Agency also finds that the audited legal persons have eliminated damage to social capital to the amount of SIT 2,000 million by issuing additional shares for the social capital.

In 1998, the Auditing Agency informed the Government of the Republic of Slovenia of its findings regarding the actual elimination of damage to social property. Measures were also proposed which in the opinion of the Agency could increase the effects of elimination of the established damage. On proposal of the Agency, a provision was included in the Republic of Slovenia Budget Implementation Act that collection of receivables from commercial companies as established during the audits is the essential precondition for granting state subsidies. The proposals of the Auditing Agency are also taken into account reasonably in the MPDCDA, which among other stipulates that elimination of damage to social propertyassets is a condition for writing off of interest in arrears for unpaid taxes for any payments made in the form of coupons.

2. Audits for the period from 1 January 1993 to the entry of ownership transformation into the Court Register

2.1 Problems encountered during audits performed during the period from 1 January 1993 to the entry of ownership transformation into the Court Register

During the performance of its audit procedures after 1 January 1993, the Auditing Agency mainly faced the following problems:

·       Some legal persons resisted the institution implementation of the audit procedure by referring to the non-existence of a “well-founded suspicions” and the preclusivity of the deadline of “by the time of entry into the Court Register”. Two legal persons which are now owned by the SDC still will not allow the audit procedure to be performed after the date of transfer of social capital to the RS Fund for Development.

On the basis of a legal opinion of the Institute of Public Administration, the       Auditing Agency implements its audit procedures forcibly and gives the audited   legal persons the possibility of filing appeals in administrative disputes.

·       The slow pace of solving court proceedings against the decisions of the auditing body issued in the course of ownership transformation audits is obstructing the work of the Auditing Agency also after 1 January 1993, since no final decision has been passed as to whether certain legal actions and transactions mean damage pursuant to the criteria referred to in Article 48a of the OTCA. This makes the Agency’s work more difficult, especially when selecting the legal persons in which audit procedures are to be implemented or deciding on whether a certain damage has caused a reduction in a company’s social capital or assets. It also interferes with the decisions of the owners of audited legal persons on whether they should file lawsuits for compensation.

In 1999, the Auditing Agency first encountered the problem of archiving analytical bookkeeping records and documentation and, consequentially, the performance of evidentiary proceedings  (the Slovenian Accounting Standards stipulate a compulsory period of archiving of 5 years).

Since a special 10-year time-limit applies for the filing lawsuits for partners or shareholders of an audited legal person to refute dispute legal actions which that have caused a reduction in of social capital or assets, and since bookkeeping documents are constitute vital evidence for successful management of the litigation proceedings, the Auditing Agency adds a note to all audited legal persons in the explanation to a decision on implementation of an audit procedure issued after 1 January 1993 that they are subject to a special time-limit for archiving their business documents and other documentation which is as stated in the decision, and that premature destruction of such documents will result in liability for a criminal action of destruction of uction of documents pursuant to ownership transformation the Penal Code of the Republic of Slovenia.

 

The Auditing  Agency has informed the National Assembly of the Republic of Slovenia of this problem at a professional conference on supervisory and auditing institutions in the Republic of Slovenia, while the National Assembly’s Committee for the Supervision of Ownership Transformation and Privatisation was informed of this matter in the Agency’s quarterly reports on the procedures performed. The Auditing Agency is now preparing proposals for solving this problem.

·       The audited legal persons have frequently informed the Auditing Agency with of the viewpoints of commercial auditors regarding the established damage to social property and their requests for value corrections for measures imposed by the auditing body. In order to ensure appropriate disclosures and observance of the findings of the auditing procedures, the Auditing Agency has been presenting the problems which have appeared during auditing procedures performed after 1 January 1993 to the Auditing Institute of the Republic of Slovenia. This especially applies to the fact that accountable employees of companies in which a reduction of social capital or propertyassets was established do not provide for the entry of such reductions in their business books. For this reason, it frequently happens that the owners who are otherwise interested in collecting, receivables, are not even informed of such reductions. The Auditing Agency agreed with the Auditing Institute of the Republic of Slovenia that the Institute would inform all certified auditors and auditing companies in writing that, due to undisclosed reductions of social capital and propertyassets, they must pay particular attention to any possible undisclosed facts and observe the international auditing standards in connection with such problems when auditing a company’s annual accounts and during discussions with company management.

2.2. Assessment of the justification and efficacy of audits performed after 1 Jaunuary 1993

After the analysis of legal conditions and possible effects of audits after 1 January 1993, the Auditing Agency determined the criteria which would enable most rapid and efficient performance of auditing procedures:

·       Completion of the auditing procedures with respect to e.g. individual fields of industry, capital or business associations, bankrupt companies, companies in which the state holds an ownership share, existence of a request;

·       Rational choice of the legal persons to be audited on the basis of data, e.g. on previously established damages (especially on transfer of their business activities to by-pass companies; write-offs of receivables and investments; capital transfer and incorrect distribution of profits; conclusion of detrimental contracts) and methods used for their elimination, data on the issues and sale of the company’s own securities, data from financial statements for the current year, data from requests and initiatives, data on tax irregularities, historic data on the entry of companies into the Court Register and other public  domain data on the methods of business operation;

·       Increasing the awareness and informing of company owners, especially the institutional ones, of the significance, methods and effects of audits, which is also associated with reports to other bodies competent for audits (Tax Administration of the Republic of Slovenia, the Commercial Auditor, the Social Custodian of the Republic of Slovenia);

·       Completion of audits within the deadline, which will enable the owners to enforce their economic effects;

·       Appropriate internal organisation and personnel policy, continuous up-to-date training, use of special knowledge, information support.

In the opinion of the Auditing Agency, the selected criteria enable a judgement to be made of whether the instiution implementation of an audit procedure was justified or not and whether an audit has yielded any economic benefits.

2.2.1 On the justifiability of audits

The result of audits for the period after 1 January 1993, which show that reductions of social capital or propertyassets were established in 75% of all audit procedures, indicate that the Auditing Agency has used correct criteria for the selection of legal persons to be audited, and also that initiatives by other bodies, company owners and other damaged parties were justified well-founded in the majority of cases. In reviewing the database of the legal persons audited by the previous auditing bodies, the public  domain data from other privatisation bodies and the results of assessment of the continuance of the privatisation procedures, the Auditing Agency composed a list of 300 legal persons (of over 1100 for which it is competent, or of 658 in which damage to social propertyassets was established during ownership transformation audits). This list is constantly updated.

A comparison of the amounts of established reductions with respect to the number of legal persons in which such reduction was established shows that the average amount of established damage to social property (taking into account only the criteria referred to in Article 48a of the OTCA) amounts to SIT 131 million for the period from 1 January 1990 to 31 December 1992, and, for the period after 1 January 1993, the established damage taking into account the criteria referred to in Articles 48 and 48a of the OTCA amounts to SIT 126 million in total. This indicates that the established reductions after 1 January 1993 are not as high as reductions in the previous period, but are nevertheless significant for the owners of the audited companies. However, the owners will have to enforce the elimination of the established reductions of social capital or property themselves. The Auditing Agency has invited owners of the audited companies to use their legal rights option to refute the legal actions which have caused reductions of the company propertyassets by the company several times, and has also informed them of their rights and options for enforcing their right to have reductions eliminated the reductions pursuant to the general legal provisions of the (Obligations Act). The audit reports have been conceptualised and designed in such a manner that they ensure more efficient management of legal proceedings for the plaintiffs. For this purpose, the Auditing Agency used the concepts of stipulations of the legal theory concerning possible options for refuting disputing legal transactions and given legal actions referred to in the Obligations Act and the Companies Act and concerning the statute of limitations. At the same time, the Auditing Agency has made ensured that other persons competenent for supervision have also been informed of its findings.

2.2.2 On the economic effects of audits

Even though (through its organisation, work methods and information provision) the Auditing Agency has been striving throughout its existence to ensure that the findings of audit procedures are in the public interest (as additional assets available to cover the privatisation deficit) and benefit the audited companies and their owners, the effects of elimination of reductions of social capital or property of legal persons on the basis of the findings of audit procedures performed after 1 January 1993 have started showing only in 1999. These effects are seen primarily in those companies whose owners are co-operating with the authorised institutions authorised in the field of privatisation, and are manifested primarily in two forms:

a) Bookkeeping records or civil lawsuits

Certain companies in which the established reduction of the property did not involve an outflow of assets, appropriate bookkeeping corrections sufficed to achieve the correct balance of assets and liabilities towards the sources of funds;

Two injured companies have filed lawsuits or filed for arbitration. Lawsuits have also been filed by the Social Custodian of the Republic of Slovenia and official receivers in order to dispute  injurious actions.

b) Monetary compensations

Through out-of-court settlements made by the Social Custodian of the Republic of Slovenia or on the basis of claims requests by the audited companies, the damaged companies have already received monetary compensations and have recovered their alienated assets from the beneficiaries;

Monetary equivalents of the non-privatised property or insufficient effects with respect to social capital have also been remitted to the SDC.

According to available data at its disposal, the Auditing Agency is estimating the effects of audit procedures performed after 1 January 1993, which have been achieved by the end of 1999 in the form of monetary compensations, to be in excess of SIT 660 million, i.e. 7% of all reductions of social capital or property established to date. A few out-of-court settlements are still in preparation. In addition to the already remitted monetary compensations and reimbursements for the alienated assets, the audited legal persons have also made bookkeeping corrections amounting to over SIT 6 million and lawsuits have been filed against the beneficiaries in the amount of over SIT 58 million (yet unresolved). The Social Custodian of the Republic of Slovenia submits quarterly reports on his activities concerning the filed lawsuits on the basis of audit procedures performed after 1 January 1993.

For three cases in which audit procedures were performed after 1 January 1993, the Auditing Agency established assets which were not taken into account in the opening balance as of 1 January 1993. These amounted to a little over SIT 19 million in total. Together with their increase by 1 May 1998, they were passed on to the SDC for ownership and management.

Through its audit procedures after 1 January 1993, the Auditing Agency contributes to ensuring the budgetary income, since it promptly informs the tax and customs bodies of the established reductions of social capital or propertyassets which affect the tax and customs liabilities of the audited legal persons. Authorisation for the seizure of documents has also been proven a useful institute.

3. Assessment of the effects of audits pursuant to the Completion of Ownership Transformation Act

The audit procedures pursuant to the Completion of Ownership Transformation Act did not become viable in practice, even though legal persons have expressed their interest in them. This is because such audits were limited by making them permissible only if they are requested by the company shareholders holding at least a 10% share in the company. Since the established excess propertyassets would be taken from them and transferred to the SDC, the owners are naturally not at all inclined to file requests for audits.

According to data acquired by the Auditing Agency from the SDC, the effect of a single completed audit procedure is slightly over SIT 5 million in monetary funds transferred to the SDC.

III. ANALYSIS AND ASSESSMENT OF THE LEGAL REGULATIONS AND BY LAWS FROM THE FIELD COVERED BY THE AUDITING AGENCY

The regulations applying to audits can be divided into those important for the auditing body’s status and those important for the very task of auditing. Both segments are supported either by Supreme Court decisions or by its legal practice, therefore such acts are also relevant for clarifying the role of audits.

1. Regulations important for the status of the Auditing Agency

The Auditing Agency was established pursuant to Article 1 of the Republic of Slovenia Agency for Auditing the Ownership Transformation of Companies Act. It began its work on 7 August 1996 on the basis of a decision passed by the Constitutional Court of the Republic of Slovenia. In a legal dispute initiated by the Agency for Payment Transactions and Information (APTI) as the previous auditing body, the Constitutional Court passed a decision that the decision made by the legislator to establish a new special body for the specific task of auditing, which comprises incomplete and new tasks, is not constitutionally disputable. The competencies of performing ownership transformation audits at companies referred to in the first paragraph of Article 48 of the OTCA, individual tasks of tax inspection audits referred to in Article 73 of the Tax Administration Act and reviews of the financial and material operations of companies referred to in Article 72 of the APTI Act were transferred to this new agency. The competencies to perform audits for the period from January 1993 until the entry into the Court Register and to perform audits of capital and business associations of other legal persons with the audited legal persons were also awarded to this agency. It was determined that this agency would acquire the personnel which had performed the audits to that date and that its employees would have the same level of salaries and the same bonuses as before. The Auditing Agency was supposed to acquire business premises in the premises of the former auditing body, while the other material conditions required for its work would be provided by the Government of the Republic of Slovenia. During the implementation of these provisions, a dispute arose between the Auditing Agency and the APTI as the former auditing body (and also between the APTI and the Government of the Republic of Slovenia), since the APTI did not hand over any of its audit archives, premises or assets to the new auditing body. It had provided the new auditing body only with six of its employees. The Auditing Agency was forced to institute legal proceedings against the APTI in order to enforce its rights. The dispute was resolved through a decision passed by the Supreme Court in Ljubljana (Ref. lps 55/97 of 24 June 1997) with a court settlement that took place on 16 December 1997, so that the APTI had to deliver the required archives. In June 1997, the necessary business premises were leased and the personnel was acquired on the basis of an Agreement of Temporary Assignment of Employees by the Tax Administration of the Republic of Slovenia and on the basis of implemented public invitations.

2. Since the Auditing Agency enforces its competencies at least within the framework of the procedure prescribed by the OTCA and the corresponding act, it filed a constitutional dispute with respect to the fifth paragraph of Article 231 of the Tax Procedure Act, which annulled in entirety the provisions on the special supervisory procedure from the Auditing Agency Act, but stated as its reason only redundancy of the procedure for tax control. The Constitutional Court annulled the disputable provision only in the part referring to the special supervisory procedure, which is applied by the Auditing Agency in the implementation of its competencies.

3. The Auditing Agency has also managed to achieve a decision by the Supreme Court stating that the Auditing Agency is not obliged to pay any court duties, since it has the status of a special state authority which is exempt from the payment of taxes and duties by law. At the same time, ownership transformation audits are in the public interest and are exempt from the payment of court duties. A dispute arose due to a change of Article 11 of the Court Duties Act which omitted the APTI from the group of entities which are exempt from the payment of duties and taxes, since APTI had not been implementing its public authorisations in supervisory procedures since 7 August 1996, due to which the courts and the Ministry were convinced that this change also applies to the Auditing Agency.

2. Regulations relevant to the tasks of the Auditing Agency

2.1 Ownership transformation audits

1. The conditions for the introduction, methods of implementation and effects of ownership transformation audits were stipulated in Articles 48 to 51a of the OTCA. The legal transactions and actions from Article 48a of the OTCA and the effects of audit findings concerning these actions were determined only with a change of the basic act in June 1993. The audits and their effects were the subject of various theoretical explanations and concrete disputes, so that a series of issues had to be resolved through court proceedings, for example:

·       Regarding alleged retroactivity of the Act, the Constitutional Court decided that the legal transactions referred to in Article 48a the OTCA are null and void even pursuant to the former regulations, and therefore this Article serves to operationalise only the economic criteria of compliance with the principles of good husbandry in business operations, and that each company is autonomous in managing its own capital and assets. Regarding Articles 48b and c, the Constitutional Court decided that these two articles regulate only the procedure for legal reporting of social propertyassets and at the same time enable the suspicions based on the act to be disproved in those specific legal proceedings, which ensures decision-making under full jurisdiction;

·       Regarding the delimitation of competencies for the harmonisation of ownership relationships arising from approved discounts in the distribution of internal shares with reference to the Social Capital Act in a dispute between the auditing body, which passes its decisions on the basis of irregularities referred to in Article 48a of the OTCA, and the RS Agency for Restructuring and Privatisation, which passes its decisions on the basis of Article 45 of the OTCA, the Constitutional Court explained in its decision on the matter of a constitutional complaint against the decision of the Agency for Privatisation that the audit decision is relevant for such harmonisation;

·       Regarding the duty of the Agency for Privatisation to observe the audit decisions and regarding the effects of audit decisions in the event of non-suspensive audits pursuant to Article 49a of the OTCA (audits which were instituted before the beginning of ownership transformation and the corresponding decisions were issued after the entry of ownership transformation into the Court Register), the Supreme Court ruled that the audited legal persons are obliged to perform supplementary privatisation, and the bodies competent for privatisation (or the Agency for Privatisation in the event it is still competent for these matters, or the SDC pursuant to Article 5 or 6 of the COTCA) are obliged to invite the audited legal persons to do this;

·       The subject of this judgement were also the decisions that audits in subsidiary companies which do report any shares of social capital are permitted and that audited legal persons which have performed harmonisation voluntarily and have entered their ownership transformation into the Court Register are no longer entitled to file legal proceedings for lawsuits against the audit decision;

·       The answer to the question of whether privatisation which was performed independently prior to the passing of the OTCA and without the existence of a previous holding company pursuant to Article 145b of the Companies Act is considered an illegal transfer of social capital outside of official pathways will also be very important.

·       Regarding a special formulation of point 10 of Article 48a of the OTCA, the Court passed decisions unfavourable for the auditing body in all those cases in which the auditing body either did not prove or did not explain how the irregularity (even though proven) concerning assets or sources of funds affected the ownership transformation of an audited legal person (e.g. unjustified expenses).

2. In order to protect the remaining social capital, which was established by the auditing body in cases of non-suspensive audits or illegal transfer of assets outside of official pathways, the first paragraph of Article 5 of the COTCA stipulates that the social capital established in final audit decisions is to be transferred to the SDC. In practice, this decision is implemented by complying with the final decision of the court concerning the existence of damage. However, this also means that the relatively long duration of court proceedings is postponing the access of beneficiaries to social capital.

3. Audit reports and decisions impose on the audited legal persons an obligation to make the following corrections in their balance sheets as of 31 December 1992: an increase in their assets and social capital in the event that irregularities were established that concerned the assets, or an increase in their social capital and decrease in the private capital in the event that irregularities were found in their capital structure.

However, the amount of social capital which was included in ownership transformation due to the findings of the auditing body was affected by the following objective factors:

·       methods for establishing the amount of social capital (using specific methodology or through appraisals)

·       possibilities for creating reserves and provisions

Pursuant to the provision of Article 4 of the OTCA, companies established the amount of their social capital either on the basis of assessments using the methodology for the preparation of the opening balance or on the basis of appraisals by certified appraisers. Appraisals, especially those based on the method of future returns, which according to data of the RS Agency for Restructuring and Privatisation was the most frequently used one, were already of the type that enabled the re-evaluation of the measures concerning company assets (receivables, investments, other assets) which were imposed on the basis of the audits, so that only the possible future benefits were taken into account. Therefore, not all of the measures in the reported amounts actually caused a consequential increase of the assets or of social capital.

However, irrespective of the effects of appraisals on the value of assets and, consequentially, the value of social capital, there was a change to the Decree on the Methodology for the Calculation of the Opening Balance (Official Gazette of the Republic of Slovenia Nos. 5/95, Articles 59 and 59a) with rules on creating long-term provisions on the basis of the difference in assets assessed according to the opening balance and assets assessed on the basis of appraisals, and with rules on creating reserves for such overestimated assets and additional free reserves amounting to 20% of the share (basic) capital in the opening balance. This change enabled a redistribution of the social capital established by the audits to liabilities or other capital items outside share capital.

Therefore, both regulations made it objectively possible to prevent the measures imposed on the basis of the audits from increasing company assets or capital in the total established amount; this was to be done only to the amount resulting from the assessment of the assets and liabilities according to the rules of the applied method or the rules of appraisal.

On the basis of the OTCA and the above-mentioned methodology, legal persons were also entitled to create long-term provisions for environmental reclamation to the debit of their social capital or assets according to a previously approved programme; however, they were obliged to spend these provisions in their entirety. In audits performed after 1 January 1993, the Auditing Agency found that the beneficiaries did not spend the provisions by the prescribed time-limit. It therefore gave an initiative in relation to the proposal of the Elimination of Long-Term Provisions for Environmental Reclamation Act (Poročevalec DZ 50/96, EPA 1655) in order to review the consumption of long-term provisions at all legal persons. It also expressed its opinion that the unused long-term provisions or those not used for the appropriate purpose should be considered part of non-privatised social capital.

4. In theory and in practice, the provisions of Article 48b on the significance and purpose of voluntary harmonisation with the measures imposed on the basis of ownership transformation audits and on the prohibition of receivable write-offs, and the provisions of Article 48c on the measures to impose changes in the structure of capital, caused different interpretations and therefore different applications of this act (in a case in which trading in a joint venture’s shares had already taken place before its entry into the Court Register). This case is still the subject of a constitutional complaint.

In the event of voluntary harmonisation, the majority was of the opinion that the audit findings would have to be minimised to such a degree as to merely ensure a sufficient amount of capital for privatisation, and not as warnings, instructions or orders for conscientious collection of receivables. However, such practices still cause numerous disputes with the external owners of the audited companies who have a vested interest in careful and effective management of the company assets, especially since it turned out that approximately 20% of the audited legal persons did ensure actual effects through the collection of receivables.

Regarding the write-offs of receivables, the viewpoint of experts in the field of commercial audits is that, with the adoption of the Slovenian Accounting Standards, this prohibition should be interpreted only as a prohibition of deleting the bookkeeping entries of these receivables, while corrections of the value of receivables should be permitted. In the opinion of the Auditing Agency, the provision on the prohibition of write-offs of receivables means the prohibition of any type of use of such receivables until a relevant decision is passed by the company owners, since corrections of the value of receivables may reduce the reported company profit during the process of ownership transformation, and also because, according to the rules of the Companies Act, the distribution of profits is a right limited to company owners.

5. For the audited legal persons which transferred their capital to the SDC prior to the passing of the OTCA, it was only the adoption of changes to the OTCOFA in October 1995 that indisputably determined the competencies for the institution implementation of ownership transformation audits, with a direct effect on privatisation. In this manner, such legal persons were equalised with those which were privatised pursuant to the OTCA with respect to the preliminary supervisory procedure and its effects. Both in such legal persons and in those audited legal persons in which the SDC participates in the social capital pursuant to the provisions of the OTCA, the effects of audit decisions were determined by the OTCOFA. Pursuant to the provision of Article 25d of this act, the amount of established damage was taken into account in determining the price of shares at the time of the company’s privatisation. With the passing of Section V of the OCOTCA in May 1998, another concept was adopted for taking the established damage into account: the companies owned by the SDC and undergoing privatisation were to first collect the alienated assets or capital (or collect reimbursements of the value of the alienated assets or capital from the beneficiaries) with an SDC authorisation, unless they decide to waive the right to their collection.

The auditing body was warning already during the phase of adoption of the COTCA that the new concept had resulted in an unequal position of the audited legal persons, that it would prolong the privatisation process and render all audit findings effectless, because, contrary to public interest, it permitted the audited legal persons which allow damage to occur to formally cover up for it. Even though in general this act did stipulate that audits should be performed in the same manner as before its passing, and protected its effects at the same time, a dispute was revived of whether the auditing body is competent at all to implement any procedures for the period in which a company was already owned by the SDC due to the cancellation of special provisions of OTCOFA on audits, and since the provisions of the OCOTCA and those of the Auditing Agency Act are not terminologically harmonised. This matter is now a subject of an administrative dispute.

2.2 Audits performed after 1 January 1993

Audits for the period from 1 January 1993 until entry into the Court Register were stipulated in the third paragraph of Article 1a of the Auditing Agency Act. However, due to a constitutional dispute, this act has been applied only since 7 August 1996 on the basis of a Constitutional Court decision. This constitutional dispute and the above-mentioned poor working conditions and poorly defined relationships with the former auditing body are the formal reasons due to which the audits began to be implemented much later than was thought necessary (in 1995). Unfortunately, each delay reduces the effects of the audits. On the other hand, the contentual reasons reducing the effects of audits include poorly co-ordinated work of the bodies competent for privatisation, disputes concerning the importance and usefulness of the audits, minority capital shares in institutional owners and their differing opinions on the role in privatisation, as well as the fact that the legislator did not determine administrative and legal measures of coercion, but rather decided to associate the effects of ownership transformation audits with the wishes of the owners.

Due to long time intervals, the auditing body had to face two problems: that of presenting evidence and that of a conflict between special norms stipulated in the OCOTCA, which define the possible time-limit for the implementation of a special supervisory procedure and the norms of the Slovenian Accounting Standards, which prescribe the general terms and conditions for archiving documentation. Therefore, the auditing body is warning legal persons in decisions on the implementation of audits of their obligation to archive documentation for a period of 10 years and that any destruction of business documents is subject to punitive measures for criminal actions. The contentual factors which theoretically reduce the effects of audits have been postponed or perhaps even minimised by the legislator, since Articles 25h and 25i of the OTCOFA, which continue to apply pursuant to the provision of the second paragraph of Article 65 of the COTCA, stipulate a period of 10 years, within which the owners may enforce their claims for returning of company assets or capital or for reimbursement of damage by the beneficiaries on behalf of and to the benefit of the audited company.

2.3 Audits pursuant to the Completion of Privatisation Act

In order to establish the amount of assets not privatised by the companies which prepared their opening balances for the needs of ownership transformation, the provision of the fifth paragraph of Article 63 of the COTCA stipulated resumption or institutionimplementation of audits. Such audits were performed only in two cases, in spite of a wide interest from various initiators. The Auditing Agency finds that due to a formal condition which has  associated the performance of audits with the acquisition of an approval of 10% of company owners, such audits cannot be used as a means of increasing the assets of the SDC, since it is not in the interest of company owners to act to the benefit of the SDC by giving their approvals or to waive any assets that their company is using in creating its business results. On the initiative of the Auditing Agency, a veto of this formal condition was proposed, but the National Assembly did not vote in favour of it.

CONCLUSIONS

The basic purpose of the ownership transformation audits, the methods of their implementation and the ways their effects can be taken into account can yield positive experiences, which can be used during future privatisation processes.

The purpose of the audits was to increase social capital which is the subject of privatisation, but only due to the reasons manifested in individual legal transactions and actions which were detrimental to the business status of the audited companies and their sales value. Only the most important reasons represented by legal criteria were analysed during the audits, but their economic significance was not acknowledged in their entirety.

Another purpose of the ownership transformation audits was to protect the rights of the future owners of social capital. In spite of temporal incongruities, the methods of managing the audits can still be adapted to this purpose and the security instruments are in place, since a 10-year period has been legislated for filing requests for audits to establish damage or unjustified benefits. The owners nevertheless still have various problems and inhibitions in exercising their rights (minority shares, privatisation deficit, transformation of the tax legislation*DZU).

Report prepared by::

Alenka Kovač  Arh, General Director

Roža Žust, Deputy General Director

Mojca Jančar Vidmar, Head of the Service for Information and Analytical Matters