TRANSPARENCY OF FINANCIAL REPORTS OF COMPANIES IN

THE REPUBLIC OF KOSOVO

Ylber PREKAZI

¹ South East European University, Faculty of Business and Economics, ylberprekazi@gmail.com

Article history:

Submission 17 December 2021

Revision 01 March 2022

Accepted 25 April 2022

Available online 30 April 2022

Keywords:

Financial Information,

Financial Reporting,

Financial Statements,

Transparency.

DOI:

https://doi.org/10.32936/pssj.v6i1.318

A b s t r a c t

The financial reporting of any business entity wherever it operates is essential for the efficient

management of that entity. Financial reporting in accordance with IFRS, international best practices

and EU directives helps to create a more transparent business environment and enhances the

credibility of other stakeholders. The financial reporting of companies in the Republic of Kosovo

is important for a well-functioning market economy and provides some of the basic elements for a

proper and sound financial system in Kosovo.

The purpose of this research is to analyze whether the financial statements of companies in Kosovo

are transparent, and each interested party can find their financial statements and other necessary

information, as well as how they are prepared in accordance with IFRS/IAS requirements.

Providing quality financial reporting helps users of that information to make important economic

decisions. Financial information published and available to stakeholders in most cases to

companies in Kosovo is considered not very reliable and not very transparent, as well as

incomplete.

The results of this research reflect the lack of transparency of financial information from companies

in Kosovo, which is easily verified through the qualifications of the opinion of the auditor's report,

clicks on the website, etc.

1. Introduction

In the context of today's economic reality, information is very

necessary in making the right decisions for the future. To be

useful and timely, financial information must also be reliable,

comparable, fully compliant with acceptable standards, and

clearly transparent. In order to achieve transparency in financial

reporting, high quality financial information must be prepared in

full compliance with generally accepted accounting principles.

In the managerial environment of companies, their management

is always faced with situations where sometimes necessary

decisions must be made, for its sound future. But to make such

decisions, which are nevertheless in the best interest of the

company they lead, it is necessary to make fair and accurate

assessments of all the information that they send with complete

certainty. In order for that information to be accurate, fair and in

the best interest of the company, the information must be

provided in a timely manner, it should be complete and based on

either national or international accounting standards. Also, it must

be in accordance with certain rules and norms drafted by state

regulatory bodies or by the company itself.

The pace of internationalization of trade and investment has

accelerated in recent years, so all this has been accompanied by

calls for financial reports to be internationally comparable (Elliott

& Elliott, 2007). So, the financial information extracted from the

financial reports of a particular economic entity of a certain

country can be compared freely and seamlessly with similar

information of another economic entity in another part of the

world. Nowadays, this has led to working more and more in

regards to harmonizing the same standards in all countries and by

all companies.

https://prizrenjournal.com/index.php/PSSJ/issue/view/11
mailto:ylberprekazi@gmail.com
https://doi.org/10.32936/pssj.v6i1.318
https://orcid.org/0000-0001-5638-7804

Accounting standards came to light as an attempt to act against

subjectivity and to achieve comparability between the financial

statements of different entities. These standards have been

developed both nationally (in most countries) and internationally,

such as IAS and IFRS.

2. Objectives of Financial Report

Financial reporting offers data that is practical in doing business

and economic decisions. As a result, the overall aims of external

financial reporting come from the necessity of external users that

need to trust the data that managers communicate.

FASB in its conceptual framework identifies the main objectives

of financial reporting. These objectives can be summarized as

follows (Charles, 1993):

 A financial report should offer information that is

handy to investors, creditors, and other current

potential stakeholders in making rational investments,

lending, or similar decision.

 Financial reporting should provide information to

assist investors, creditors, and other current and

potential interest groups in estimating the amounts,

timing, and uncertainty of cash receipts from

dividends or interest as well as returns from the sale,

maturity of securities or loans.

 Financial reporting should provide information on the

enterprise's economic resources, requirements for

those resources (the company's obligations to transfer

resources to other entities and owners’ equity), and the

effects of transactions, events, and circumstances that

alter these resources.

The major focus of financial reporting should be providing

information on earnings and their components. Earnings analysis

provides knowledge on:

 management performance,

 long-term profit capabilities,

 future earnings

 the risk that are related to borrowing or investing.

So, the main objectives of financial reporting should be in terms

providing information that is useful to investors, who will be able

to decide whether to invest or not, creditors in order for them to

make the right decisions regarding lending, and analysts, who will

make a fair analysis of the probable situation in which a company

is actually located. Also, this can be beneficial for other users

regarding the assets owned by an entity, the sources of the flow

of that asset, claims on those sources, etc.

A complete financial report, harmonized with the required local

and international standards and published as such, with the

greatest possible transparency, will meet not only its objectives

regarding the providing of information on the financial condition

and situation for a given business entity, whether it is a current

situation or a state of perspective, but it will also meet the needs

of different users, both those within the entity and those outside

it.

Today, financial reporting in companies is no longer limited to

financial statements but also includes a wide range of data and

information that need to be reported, for reporting to be as

complete and transparent as possible.

So, furthermore, other data should be published and made

transparent, such as: disclosures of financial statements, auditors'

reports, a five-year summary of key financial data, net sales or

operating income, income or loss from operating operations,

income or losses from ongoing operations for ordinary shares,

total assets, long-term liabilities, and preferred shares as well as

cash dividend per ordinary share, market data, higher and lower

sales prices of ordinary shares for each quarter during the last two

years, etc. (Xhafa, 2005).

3. Preparation of Financial Statements for

Reporting

The financial statements show the final stage of accounting data

processing and are presented as the bearer of accounting

information.

The preparation of financial statements requires management to

make estimates, judgments and assumptions that affect the

implementation of accounting policies and the information

reported regarding the assets, liabilities, income and expenses of

the entity.

Financial statements that are in discrepancy with the standards

may result in disagreement and inconsistencies in the basic

principles and as a result, may lead to ambiguity, and all this may

have an impact on true and fair financial reporting.

The IASC states that the purpose of financial statements is to

provide information about the financial position, performance,

etc. that is useful to different users in making economic decisions

(IASC, 1989).

So, when preparing financial statements, care should be taken to

disclose information such as the current financial condition or

situation of a business entity, information on good or bad

performance for a given period, so that this information which use

by different users, both inside and outside the entity, to influence

their decisions based on this information provided by the

construction of the financial statements.

The conceptual framework of the IASB presents the main

qualitative characteristics that the financial statements should

contain after their preparation. These features represent that

information presented in the financial statements are practical and

usable to many users. Four main qualitative features are:

 comprehension;

 importance;

 reliability;

 resemblance.

Also, when preparing financial statements, some basic

assumptions should be considered, which are also defined by

accounting standards. Thus, IAS 1 identifies some of the basic

assumptions or principles such as:

 The principle of fair presentation of financial

statements

 The principle of going concerned

 The principle of causality of revenues and

expenditures

 The principle of a treatability (consistency)

 Ethical responsibility of financial reporting

While making preparation for the financial statements, other

documents of the financial statements regarding the obligations

that certain business entities have for financial reporting, in

addition to having to comply with the laws, norms, rules and

standards set by the country, meanwhile ethical aspects must be

looked after, because the reputation of an enterprise or

corporation also depends on its good image

As known, in most entities that managers have a task, that of

achieving the greatest possible profits. But at the same time, the

standards of modern ethics impose another task, to contribute to

maintaining and increasing the values of the entity for the benefit

of all those directly or indirectly involved with the entity,

including the public. Large organizations are more responsible for

this, always keeping in mind the impact that a large organization

can have compared to small ones.

4. Financial Reporting Period

A subject is required to prepare its financial statements at least

once a year. This is also set out in IAS 1 which requires entities

to prepare annual financial statements.

Yearly financial statements are usually published once in three

months after the end of the firm's fiscal year. (Stice et.al., 2001).

In Kosovo by law, the financial statements of companies that are

audited no later than April 30 of the following year, and the

consolidated financial statements that are audited in accordance

with ISA no later than June 30 of the following year.

A complete package of financial statements contains:

 a statement of financial position;

 a profit/loss statement;

 a statement of changes in equity;

 a statement of cash flows;

 notes (IFRS 1, paragraph 8).

In preparing the financial statements, the company's management

decides on the application of certain accounting policies and

evaluates their implementation.

The applied accounting policies should be disclosed:

 The measurement basis (or bases) used in the

preparation of the financial statements,

 Other accounting policies are used, as required for a

proper understanding and proper presentation of the

financial statements.

The International Accounting Standards Committee (IASC)

recognizes that not all users' information needs can be by the

financial statement, still, it considers that some necessities are

common to all users: in particular, they have some interests in the

financial situation, performance, and suitability of the enterprise

as a whole (I.A.S.C., 1989). Users of financial statements and

accounting information are investors, managers, shareholders,

employees, creditors, tax authorities, financial analysts and

advisers, and the public.

5. Transparency of Financial Reports

Transparency refers to the principle of creating an environment

where information published by the company on the current

situation, such as assets, liabilities, capital, revenues, and

expenditures are understandable to all users of information.

Transparency is a prerequisite for accountability, especially for

lenders and borrowers, for investors, national authorities, and

international financial institutions. More transparency makes the

economic decisions easier to make alongside other agents in the

economy. Additionally, transparency encourages greater

accountability, internal discipline, better governance, higher

decision-making quality, etc. (Greuning, et.al. 2011).

Providing information that is both transparent and beneficial to

market players is an important prerequisite for a regular and

efficient market. Greater transparency in financial markets makes

them more stable and less volatile over time. Disclosure of

financial information is in any case in line with the requirements

of accounting standards.

Disclosure of information that will be available to other

competitors, is one of the preconditions that is often reluctant to

make public complete information during a financial reporting by

various entities.

In the context of the disclosure, financial statements should be

easy to interpret. The information available enables monitoring of

the entity's financial performance. This helps to foster

transparency and market discipline as two crucial aspects of good

company governance. In addition to the goal being, in

empowering stakeholders, transparency can be a tool to achieve

more progressive governance. Adoption of internationally

recognized financial reporting standards is a vital step toward

greater transparency and correct financial statement

interpretation.

Today, there are numerous instances that complete and

transparent financial reporting can damage the financial fraud or

financial evasion that occurs in many corporations whether small

or large. Financial evasion are actions that intentionally

misinterpret the performance of a financial statement. They range

from the easiest, such as changes in accounting forecasts to the

most severe, the recognition of fraudulent recognition of false

income (Xhafa, 2005).

The primary responsibility in the preparation of a company's

financial statement lies with the management of that company.

Therefore, the preparation and presentation of these financial

statements in line with IFRS is the responsibility of management.

6. Transparency of Financial Reports of

Companies in Kosovo

The purpose of this research is to analyze whether the company's

financial statements in Kosovo are transparent, and each

interested party can find their financial statements and other

necessary information, as well as how they are prepared in

accordance with IFRS/IAS requirements.

To see how transparent, the financial statements of companies

are, we have used the external auditor's reports for a significant

number of companies as well as their websites.

As it is known, the law determines which companies, in addition

to the annual financial reports, those reports should also be

audited by an independent external auditor. Therefore, given that

we are dealing with an objective audit of what these companies

have reported, this increases the value and reliability of the

information reflected in those reports, and from the final report of

the independent auditor can be judged then how many companies

has complied with the requirements, rules, local and international

standards for financial reporting. In other words, based on the

response to the report of the independent auditor, the level of

transparency of those financial reports can be assessed to some

extent, depending on what the external auditor thinks about the

report.

According to the law in Kosovo, the annual financial statements

contain:

 statement of financial position at the end of the period;

 statement of comprehensive income for the period;

 cash flow statement for the period;

 statement of changes in equity; and

 notes.

The external report of the author should be prepared in

compliance with the ISA and give his opinion regarding the

financial statement of the companies that have been audited for

that period. The most common opinions that may arise from the

analysis of some of the auditor's reports are:

a) Unqualified opinion.

b) Unqualified opinion with emphasis of matter

paragraph.

c) Qualified opinion

d) Qualified opinion with emphasis of matter paragraph.

e) Opposite opinion.

f) Opposition opinion with emphasis of matter

paragraph.

g) Withdrawal from giving an opinion.

From the analysis conducted on a considerable number of

companies in the Republic of Kosovo, this situation is presented

in the external audit report:

Table 1. Audit opinions issued

2017 2018 2019

Type of auditor's opinion Number of

reports

Number of

reports

Number of

reports

Unqualified 65 69 79

Unqualified - emphasis of matter 14 10 19

Qualified 36 34 41

Qualified - emphasis of matter 1 4 8

Opposite 0 0 0

Opposite - emphasis of matter 0 0 0

Disclaimer of opinion 4 3 3

The sample researched in this

paper

120 120 150

Total reports submitted to the

authority

361 361 394

Source: Data from KCFR, analyzes performed by the author

Based on table 1, it can be concluded that a considerable number

of reports or about 54 percent in 2017 have an unqualified opinion

of the auditor, while 46 percent are reports that have an

unqualified opinion with emphasis of matter, then qualified to the

point of denial of opinion.

In 2018, about 57 percent have an unqualified opinion of the

auditor, while 43 percent are reports that have an unqualified

opinion with emphasis on the issue, then qualified and up to the

disclaimer of the opinion.

And in 2018 about 52 percent have an unqualified opinion of the

auditor, while 48 percent are reports that have unqualified opinion

with emphasis of matter, then qualified and up to the disclaimer

of the opinion.

Therefore, from all that was pointed out in the paragraphs above,

it is a situation where only a little over 50 percent of the financial

reports are with an unqualified opinion by the independent audit,

or that in all key areas of the company's financial status, the

financial statements provide the information fairly., as well as

financial performance and cash flow for year when the audit was

performed and are in accordance with IFRS. Whereas almost half

of the reports have an opinion with emphasis of matters, up to the

disclaimer of the opinion by the external auditor.

Also, based on the information gathered from these companies’

websites that are included in this study, financial data and annual

reports can be found together with the audit report of only about

10 percent of them. So, mainly or over 90 percent of the financial

reports with the opinion of the auditor we have found only in the

supervisory authority such as KCFR, as an independent

professional body and competent authority in the Republic of

Kosovo which is responsible for publishing reports submitted by

companies for the relevant period.

Then, if we take a look on the financial reports submitted by

companies in this period 2017-2019, there is no information about

the future which would help to predict the future, there is no non-

financial information, there is little or no information at all on

corporate governance, lack of applied accounting principles and

policies, etc.

7. Conclusions

This study concludes that the transparency of financial reporting

is the degree to which external users and especially investors have

access to as much information as possible financially and non-

financially about a company.

The main objective to be achieved during the financial reporting

of companies, is to provide various stakeholders, especially

investors, with at least the minimum necessary information, on

100

which they will rely when making investment decisions in the

various company.

Through audits of the financial statements, through an assessment

from a “neutral” perspective, it is assumed that the problem of

agency (agency theory) between equity owners or shareholders

and managers is reduced.

Also, the process of auditing financial statements reduces the

costs of using financial statements by various stakeholders,

making it possible, in the first place for shareholders but also

other users of financial information, not to additional costs are

incurred in investigating the accuracy of the information

published by the company.

Finally, companies during the financial reporting process must

adhere to the rules, requirements, laws, and standards for

financial reporting, so that their financial reports are reliable,

understandable, and especially easily comparable.

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