Accounting and audit firms at the forefront of turning murky Ukrainian companies into potentially juicy acquisitions
With evidence mounting that more foreign investors are finding this former Soviet backwater investment-attractive, accounting and audit firms have been at the forefront of turning murky Ukrainian companies into potentially juicy acquisitions by helping bring their accountancy practices in line with Western standards.
The first two months of this year alone have seen vibrant foreign investment interest in Ukraine’s banking sector, with the most recent acquisition of Ukrsotsbank, one of Ukraine’s largest banks, by Italy’s Banca Itesa for an estimated $1.1 billion, and the much smaller purchase of Mriya Bank by Russia’s Vneshtorgbank. The acquisitions follow on the heels of other major purchases by foreign businesses in the Ukrainian banking sector last year, but that sector has not been alone in attracting billions of dollars in foreign capital.
Ukraine’s economy-driving steel sector, for example, saw the now near-legendary sale of the Kryvorizhstal steel mill to Mittal Steel, the world’s largest steel producer, for a whopping $4.8 billion – a sum unheard of in Ukraine just two years ago.
Accounting and auditing professionals working for the Big Four accounting firms in Ukraine say that the growing foreign investment interest in the country has also been increasing demand for their services.
Greater interest, bigger impact
“The significant amount of interest from foreign investors that we see at the moment provides more opportunities for the provision of transaction services, such as due diligence assistance, to foreign and Ukrainian investors interested in acquiring enterprises in Ukraine, said senior manager of KPMG Audit Andrey Tsymbal.
“This also increases demand for audit services, as investors want to see transparent financial information of the enterprises that they have invested in.”
Tom Cradock-Watson, a partner with Ernst & Young in Ukraine, agrees.
“Companies are realizing the benefits of having made the decision to have their financial statements prepared under international standards and audited,” he said. “This has resulted in a greater understanding of the value that audit companies bring to their clients.”
Cradock-Watson said improvements that Ukrainian companies have been making in accountancy practices have been paying off, leading to more work for accounting and audit firms in Ukraine.
Quentin O’Toole, partner-in-chargeof audit services at Deloitte & Touche’s Ukraine office, said that the immediate impact of greater investment interest in the country has also resulted in a large increase in foreign-investor demand for due diligence services from accounting and audit firms that have local expertise and experience.
“This is resulting in the rapid growth of the financial advisory and transaction support areas of accounting and audit firms in Ukraine,” O’Toole said.
He said that other areas, including audit, tax and consulting, are also experiencing strong growth.
“For example, Deloitte is the global auditor for Mittal Steel, and their recent acquisition of Kryvorizhstal has resulted in the appointment of Deloitte as auditors for Kryvorizhstal,” O’Toole said. “This is a very large audit, and financial reporting in compliance with U.S. accounting standards is required to enable Mittal Steel to meet their quarterly and annual reporting obligations to the Securities and Exchange authorities in the U.S.”
Transparent, not invisible
As Ukrainian companies vie for foreign capital investments, they also find themselves increasingly turning to accounting firms that can service their ledgers in line with international accounting standards – a process that helps make companies more transparent and attractive to investors.
Deloitte’s O’Toole said larger Ukrainian companies are becoming more transparent, as they are eager to raise funds from foreign lenders and investors.
“Transparency and credibility is a critical requirement for these companies when they go to offshore markets to raise funds,” he added.
“This is affecting our business in a number of ways. These companies require, among other things, audited financial statements that are in accordance with International Financial Reporting Standards, tax advice on how to restructure their affairs so that they are more transparent, and the strengthening of internal controls and financial reporting systems, all of which are services offered by firms such as ourselves.”
O’Toole said that demand for these services will continue to grow as more companies seek funding to fuel their growth.
KPMG’s Tsymbal said that a growing number of Ukrainian companies are now preparing or planning to prepare their financial statements in accordance with IFRS, adding that this is not sufficient.
“A number of Ukrainian companies still need to improve their corporate governance structure, internal controls, as well as accounting and management reporting systems to become more transparent,” he said.
“It is not infrequent when we have to reject a new audit client because its structure or past history are not sufficiently transparent for us,” said Alexei Kredisov, a managing partner with Ernst & Young in Ukraine.
“However, I can say now that there are fewer and fewer instances of such companies. We are observing a trend that is seeing Ukrainian companies going through the process of legal restructuring before coming to an international auditor.”
Taxing issues
Each of the Big Four accounting firms said that it was not possible to provide figures for the amount of profit taxes declared by Ukrainian companies nationwide in 2005 compared with 2004 after changes in Ukrainian tax legislation lowering the corporate profit tax from 30 percent to 25 percent kicked in at the start of last year.
“[That question is] not possible to answer,” said Ron Barden, a partner with PricewaterhouseCoopers tax and legal services.
“Business is generally positive and profits would be expected to rise along with the level of taxes paid,” he said.
Professionals at the Big Four firms largely agree, saying that the corporate tax-payment culture in Ukraine is currently beset by other problems that make it difficult to generalize about the effect of a small drop in the profit-tax rate over the last year. They say that if Ukrainian companies did pay more taxes last year, it was because they have become more transparent and legally compliant.
PricewaterhouseCoopers’ Barden said that a reduced tax rate generally increases compliance and collected tax amounts.
“As the tax rate reduces, taxpayers become more comfortable with the overall tax burden, and this, combined with the need to provide meaningful financial information to potential investors should improve transparency,” he said.
Karl Gessner, partner-in-charge of tax and legal services at Deloitte & Touche’s Ukraine office, said that his firm has noticed a trend with Ukrainian corporate taxpayers becoming more compliant with tax legislation.
“Whilst the reduction of the corporate income tax rate from 30 percent to 25 percent has definitely encouraged this move to greater transparency, we believe a significant effort is still required to further improve tax governance and transparency in Ukraine.”Improving tax legislation would move this process along, he said, adding that improved methodologies were also vital to compliance in Ukraine.
