Bringing an end to the banking crisis, swindling and stock manipulations, as well as improving an abject investment climate, are some of the ambitious goals of Ukraine’s Finance Ministry.
“These are the things you simply can’t ignore,” deputy Finance Minister Olena Makeeva said. “In the banking sector, 55 banks that are now insolvent were undergoing statutory audits in 20 national auditing companies. And only in five cases did auditing companies issue a negative conclusions or denial.”
A similar situation took place in the stock exchange.
The Securities and Stock Market Commission banned the trading of securities in more than 90 issuing companies whose combined market capitalization exceeded Hr 460 billion ($20 billion), Tymur Khromaev, head of the securities regulator, said on Aug. 12 at the Ukraine Crisis Media Center in Kyiv.
Makeeva said that 29 auditing companies had approved the financial records of at least 78 of the issuing companies.
“The companies’ earnings over the last several years equaled zero, yet their value, according to auditors, reaches a third of the (nation’s) gross domestic product! This is impossible. This has to stop,” Khromaev said.
Such incidents led to Ukraine four years being stripped of its simplified access to the European Union’s audit services market.
To make auditors more accountable in line with EU standards, the Finance Ministry has drafted new legislation. Ukraine’s Audit Chamber, national and international auditing companies, the World Bank and European Commission have joined the effort.
Some of the proposed changes include promoting market diversity, stronger supervision, the separation of statutory auditing of public interest companies, and pushing for self-regulatory instruments.
More choice
Some 1,272 auditing firms did business in Ukraine last year, and their number shrinks each year, said Oleg Kantsurov, who heads the Finance Ministry’s accounting methodology department.
Ten companies account for about 58 percent of the market whose share exceeds Hr 10 million, he said. Another 23 percent of the market is valued at Hr 1 million.
To remove conflicts of interest, the Finance Ministry seeks to strengthen auditing requirements and create a single register of practitioners.
“It’s unacceptable that an auditor can be an entrepreneur and work with an auditing company simultaneously,” Kantsurov said.
Another innovation, according to Alexander Suvorov from Baker Tilly, is to ensure that future auditors succeed in 14 disciplines and pass a qualification exam, followed by a three-year internship at an auditing company. Upon completion, the Quality Control Inspection enters the auditor to the registry.
Currently, Ukraine has five separate registers of auditors, Makeeva said, noting that all of the institutions have different qualification procedures.
However, Kateryna Rafalska, head of the financial reporting department at the securities regulator, said that “it’s unlikely that the regulators will give up keeping internal lists of companies whose audits they trust.”
Auditor oversight bodies
A fundamental conflict of interest lies in the very basis of auditing: the people whose financial records are inspected pay the inspectors’ bill, Jon Hooper, an EU expert assisting Ukraine’s government in auditing reform, said.
That is why firms, especially public interest companies, should be audited externally. This process is ongoing globally, “because it is believed that auditors have too often acted to protect themselves rather than assuring audit quality and protecting the public,” said Natalie Manuilova of the World Bank Centre for Financial Reporting Reform.
To prevent this, the Finance Ministry decided to introduce independent quality checks of auditing companies who inspect public-interest entities, such as, public joint stock companies, issuers of securities, banks, insurance companies, non-state pension funds, big businesses, and others.
To achieve that, the bill proposes to set up an agency consisting of a Council of Public Oversight and a Quality Control Inspection.
To ensure accountability and their independence, several challenges need to be met, Manuilova said. They are protection from political interference, independent financing, and professionalism.
The number of auditing firms has decreased from 1,672 in 2012 to 1,272 in last year. Some 10 companies account for about 58 percent of the market, raking in more than Hr 10 million yearly. Another 23 percent belong to auditing entities with more than Hr 1 million in profits. (Ministry of Finance)
Self-regulation
The Audit Chamber would also get additional powers like the ability to conduct regular quality and qualifications checks, as well as disciplinary proceedings.
However, the chamber first will need to transform from an institution that lobbies for the interests of private auditing companies into an independent self-regulatory body. “The Audit Chamber has proved ineffective because in 22 years the (auditing) profession has not developed much, and the interests of national auditors were not diligently represented either in Ukraine or abroad,” Makeeva told the Kyiv Post.
Similarly, the certification and quality control commissions are headed by the owners of auditing companies. “Of course, there is space for corruption,” she said.
Criticism
Some auditors say the proposed bill also contains controversial points that could undermine its value.
Natalya Gayevska, the president of the Union of Auditors of Ukraine, said the measures are long overdue. Equally, the Finance Ministry also has to make sure that all the proposals are consistent, and will help develop auditing, rather than ruin it, she said.
“It would be unfortunate if this reform resulted exclusively in a change in the regulator,” Gayevska said. “The changes have to be of good quality, so that 90 percent of the market isn’t just eliminated. … (They should) help the market realize its European future.”
In addition, the bill was drafted “in a hurry,” as is clearly evidenced by the lack of transitional provisions within the text of the bill, Gayevska said.
However, “it still has great chances to be adopted and come into effect in July 2016,” she said. “But this requires good will from the authors of the bill… so that they consider the auditors’ suggestions. If they do, Ukraine’s auditor community will embrace this bill.”
Kyiv Post’s legal affairs reporter Mariana Antonovych can be reached at [email protected]
