In his interview with the Post, Alexei Kredisov described the rapidly growing Ukrainian accountancy and audit business
Londonbased Ernst & Young Global Ltd. was among the first international professional services firms to launch operations in Ukraine by establishing Ernst & Young Ukraine back in 1991. At present, Ernst & Young Ukraine employs around 400 people and has two offices in the country – one in the capital Kyiv, and one that opened recently in Donetsk.
In his July 2 interview with the Post, Alexei Kredisov, ountry managing partner at Ernst & Young Ukraine, described the rapidly growing Ukrainian accountancy and audit business, as well as the company’s future development plans.
Kredisov said he was convinced that Ukrainian companies preparing to enter international capital markets have become the main driving force for the development of the professional services sphere, including audit and accounting services.
He added that Ernst & Young Ukraine, which provided services toward the recent landmark initial public offering of Ferrexpo, the first Ukrainian company to list its stock on the London Stock Exchange’s main trading platform, would continue developing capital markets-related advisory services in line with market trends, in addition to its other advisory services.
KP: Can you describe some recent trends on the Ukrainian audit and accounting market?
AK: For us, recent trends reflect a significant increase in demand for our services, primarily driven by a number of major Ukrainian companies preparing for capital markets, for example, IPO and public debt transactions.
Very recently, the first Ukrainian company Ferrexpo listed its stock on the main market of the London Stock Exchange [Ferrexpo is a UK holding company that owns Ukraine’s largest iron-ore exporter, and which brought its owner, Ukrainian billionaire Kostyantyn Zhevago, $420 million for a 25 percent stake on the LSE – shares have grown by 37 percent since the listing].
We assisted in this listing as auditors and reporting accountants, and we have a number of companies in the pipeline preparing for IPOs. There will probably be one IPO this year, and several next year.
This is trend number one – a big appetite for IPOs and capital markets.
Trend number two is for medium-sized Ukrainian companies to reorganize, clean up and prepare for better borrowing conditions and better partnership conditions with foreign partners or foreign lending institutions.
So, basically, after completing formation of their businesses and acquiring new businesses, companies start to clean up, reorganize and prepare financial reports that are understandable in the West.
KP: So, your major clients are Ukrainian companies?
AK: Yes, the majority of our business comes from Ukrainian companies.
KP: In general, how has your clientele and your business changed?
AK: When we started our business here in Ukraine in 1991, the overwhelming majority of our clients were foreign companies. In fact, they were small and medium-sized foreign companies. This remained the case over the next several years until probably the late 90s.
In early 2000, we began to acquire clients among Ukrainian companies. And now, the majority of our business comes from Ukrainian companies.
Nevertheless, since early 2000 until 2007, a shift among Ukrainian companies has also taken place. In early 2000 Ukrainian companies were asking primarily for some basic accounting advice or auditing services (such as transforming their accounts to international standards, and then international auditing); today, the scope of services has become more complex and comprehensive. We provide an entire scope of services that now includes helping companies get listed on foreign stock exchanges, or group restructuring, or operational improvement.
KP: How would you estimate the market’s turnover and its growth?
AK: I would estimate the size of the Ukrainian market of the Big Four [audit and accounting] companies at about $110 million. And this figure grows by approximately 25 percent every year. The pace of growth is limited not so much by the market, but primarily by the capacity of Big Four firms, meaning that the Big Four firms do not have the resources to do more work.
KP: Do you mean a lack of human resources?
AK: The market demands more services from accountants, auditors and consultants, which the Big Four firms cannot offer.
Ukraine can offer an insufficient number of professionals. For example, today Ernst & Young needs several more partners, which we don’t have on the market. We need several more managers.
KP: Besides the Big Four, how many foreign accountancies work in Ukraine?
AK: There are several so-called second-tier international firms. And there are several reputable Ukrainian firms. Their market size is difficult for me to estimate. But I would say that there is a big gap between Big Four business and other businesses.
KP: What’s the Big Four market share and what is Ernst & Young’s market share?
AK: It is difficult for me to say regarding overall market size and overall accounting professionals, but I think that Big Four business in the overall auditing advisory business clearly accounts for more than 50 percent of total business. We internally estimate Ernst & Young’s market share within the Big Four business at approximately 40 percent.
KP: Many professional accountants are dissatisfied with Ukraine’s Tax Code, saying it has many variant readings, lacks transparency, leads to corruption, and forces companies to pay big penalties sometimes. What is your opinion about it?
AK: Let me answer this question with a bit of humor: Because of our Tax Code, we have even more work than we would have otherwise. What I mean by that is exactly as you described – because our Tax Code is not ideal, or otherwise not very simple to understand and follow, we have a lot of inquiries and service requests for our tax and legal colleagues to help our clients understand and apply Ukrainian tax laws and legislation. I agree that the Ukrainian tax and legal systems are not very well developed, and there is great room for improvement.
KP: What are your plans for development?
AK: We have a number of practices. Presently, we are primarily aggressively developing our advisory departments, such as technology security and business risk services, business advisory services, transaction advisory services, human capital advisory services, professional trainings, and real estate advisory services – they are developing at an incredible pace. Some of these services are developing at a rate of more then 100 percent a year.
Our focus is on developing our IPO and capital market offerings. We feel that with a number of successful listings, and especially with the very successful listing of Ferrexpo, this tendency in the Ukrainian economy will develop very quickly. Many Ukrainian companies will want to go public, and we want to be prepared. We want to be with the right companies helping them go public. This is trend number two.
KP: Do you have offices in the regions?
AK: We do. In fact, we are the only firm out of the Big Four firms that has an office outside of Kyiv, which is in Donetsk. It is a very successful office. We now have approximately 35 people there and plan to grow probably to approximately 60 people next year.
There are a number of regional centers with a high concentration of business… We will not be opening offices during the next 12 months, but we will certainly be considering opening offices in other regional centers in the future.
KP: Aside from Ferrexpo, can you provide a couple of examples of your successful collaboration in terms of accountancy?
AK: We are very proud to service major Ukrainian companies or business groups.
We work with Interpipe [Ukraine’s leading producer of steel pipes and railway wheels, controlled by Ukrainian billionaire Viktor Pinchuk], Industrial Union of Donbass [one of Ukraine’s largest holding companies, which boasts mills in Hungary and Poland], we are consolidating auditors there. We also work with SCM [System Capital Management, a holding company owned by Rinat Akhmetov, Ukraine’s richest businessman], providing audit and significant advisory services.
We also work with some state companies, such as Naftogaz Ukrainy [Ukraine’s state-owned oil and gas company], where we are consolidating auditors, for example. We work closely with Ukrainian Railways, providing a number of advisory services to them. We assist the government and state companies with reform agendas, and we are helping these companies present themselves properly before the investment community.
And equally, we work with major Ukrainian banks, Ukrainian telecommunication companies and the agricultural sector.
KP: Has there been any other IPO that you assisted with other than Ferrexpo?
AK: Currently, this is our only IPO outside of Ukraine. But let us not forget that this is the only IPO out of Ukraine on the main market of the London Stock Exchange. As I said earlier, there are several more IPO prospects in the pipeline.
KP: Can you provide a forecast for the market for the next several years?
AK: This is quite easy, because I do forecasts as a part of my work. And I can say the following: I quite often compare Ukraine to Poland. Ukraine is a bigger country with a larger population, with bigger production and service capabilities. Nevertheless, we, Ernst & Young Ukraine, have a business of approximately 400 people and two offices. In Poland, Ernst & Young has a business of approximately 1,300 people, and if I’m not mistaken, six offices.
As far as I’m concerned, there is no good reason why we should be behind Poland. In fact, we should be ahead of it. As such, it is just a matter of time before we get closer to our Polish practice or, in fact, bypass them.
So, I forecast significant growth of my business – the accounting and advisory business in Ukraine. This growth will continue. We believe that the growth rate is very high right now and I forecast that this growth rate will be even higher, because with companies going public, with companies going through a period of change, when they restructure, clean up, merge or acquire, or go outside of Ukraine, they will require the services of Ernst & Young. I believe there will be an incredible increase in demand for our services in the next five years or so.
On the other hand, I believe that our search for talented people, who will want to be in the advisory and auditing business, will be even more intense and competitive, and this will be our biggest bottleneck for the development of our business.
