Accountancy firms are fishing for more business after the new commercial code was passed.
After 10 years in the making, the new Turkish Commercial Code will be given a warm welcome by both businesses and multinational accountancy firms
The development of commercial legislation in Turkey has failed to keep pace with the country’s economic growth over the past decade. While structural economic reforms have been carried out, a foreign investment law passed, and GDP levels more than tripled since 2002, Turkey has been slipping down the ranks in the World Bank’s Ease of Doing Business report. A key factor has been Turkey’s outdated Commercial Code, which was enacted in 1956, and the fact business has been kept waiting for a new 1,535-article Code drawn up over the past 10 years. Fortunately, this was finally approved by the Turkish parliament in January 2011 and will come into full force in 2013, and has been warmly welcomed by the private sector and its advocates, notably the multinational accountancy firms.
With Ankara inching towards European Union (EU) membership, over 90% of foreign direct investment (FDI) in the first half of 2011 originating from the EU, and with Turkey seeking to triple FDI from US$12.1bn in 2011 to an annual average exceeding US$30bn over the next decade, a new Commercial Code was long overdue. ‘For the past 10 to 15 years corporate governance has been affecting entities and companies, but there was nothing (legally binding) in the state code, so the new Commercial Code was needed on the demand side,’ says Professor Recep Pekdemir FCCA, a faculty member of the Istanbul Business School at Istanbul University.
The new Commercial Code is designed to mesh Turkish commercial regulations with EU legislation. It adopts International Financial Reporting Standards (IFRS) and auditing principles, and introduces concepts such as transaction auditing, penalties for non- compliance and mandatory company websites for posting financial data.
‘The most notable aspects of the new Commercial Code are the transparency of companies, corporate governance public oversight, accountability and quality assurance,’ says Nail Sanli, president of the Union of Chambers of Certified Public Accountants of Turkey (TÜRMOB). ‘The new Code is built upon the concept of transparency. Companies are required to have financial reporting complying with international standards and independent auditing of companies’ financial statements according to international standards. With the adoption of the corporate governance concept by companies, transparency will be achieved.’
With the new Code impacting all companies in Turkey there is a transition period before the law goes into effect. Implementation of a revised official set of Turkish Accounting Standards will occur on 1 July, but the provisions relating to IIFRS conversion, independent auditing and website requirements will not come into effect until 2013.
For the accounting sector to get up to speed with the new Code, training sessions have been underway for the past year at the country’s 30 leading auditing firms. ‘The accounting sector has always had very intense training programmes, but it has become more important because of the Commercial Code and we’ve implemented special compulsory training programmes,’ says Sanli.
But not all firms will have to invest in the same level of training. ‘Out of the top 500 companies, about 75% are owned by international investors, banks and insurance companies. These large-scale entities already apply international reporting standards, but it is different for the rest of the economy as they have not needed these kind of requirements,’ says Pekdemir. ‘Big foreign and local auditing companies will be expanding as more auditing is needed due to the Code, and they will increase their market share from auditing for large-scale entities to include small and medium-sized enterprises.’
Yet while the accountancy profession is stepping up its efforts, there will have to be improvements at a governmental level for the new Commercial Code to have full effect. As the US think-tank the Heritage Foundation notes on Turkey in its 2012 Index of Economic Freedom: ‘Property rights are generally enforced, but the courts are overburdened and slow, and judges are not well trained for commercial cases. The judiciary is subject to government influence. The intellectual property rights regime has improved, but infringement remains high.’
Meanwhile, Turkish business has to contend with the fact that the Code may yet be amended still further. While 631 meetings were held over five years to draft the new Code, with ‘development, discussions and approval taking nearly 10 years’, says Sanli, further amendments are likely this year.
‘Before these two milestones are reached, in July and at the beginning of 2013, I expect there will be more changes to the law, such as implementation, amendments, guidelines and disclosure,’ says Pekdemir. ‘The Turkish Accounting Standards Board has the authority to make changes, while the finance ministry, which can be considered quite conservative, will want to make some amendments to hold back the powers of the big accounting firms.’ That said, given the efforts needed to get the Commercial Code passed, ironing out the practicalities is to be expected. For now, companies and foreign investors see the harmonisation of the new Commercial Code with the Corporate Income Code, Civil Code and Penal Code as a boon for business.
Turkey aims to become world’s 10th biggest economy
Turkey’s economy has been on a roll for the past decade, with its GDP more than trebling to reach US$735bn at the end of the 2010 fiscal year. With a population of 75 million and ideally situated at the crossroads between east and west, Turkey has built up a strong manufacturing-based economy. While a major exporter to the EU, Eastern Europe and the Middle East, domestic demand is strong, accounting for 70% of GDP. Turkey registered economic growth of 9.6% in the first nine months of 2011, the second fastest after China among the major economies, although it is forecast to slow to 4% this year. Nonetheless, Turkey aims to be the 10th biggest economy in the world by 2023 – it is currently 17th.
Photograph by Paul Cochrane