The crisis reduces workload for auditors who began to feel comfortable on a Hr 1.116 billion market in 2008.
In the early ‘90s many Ukrainians didn’t know what auditing companies and their employers did, says Alla Savchenko, who jokingly added: “For many people, auditors were those who either worked in an auditorium or drove in Audi.”
Savchenko, who runs a top Ukrainian auditing firm, BDO Balance-Audit, said that Ukraine’s business environment has matured considerably in the last decade and a half. Today, many big companies use accountants and auditors to get an independent assessment of their financial books, to check the effectiveness of their operations and to boost transparency for investors by ensuring financial statements are in accordance with international standards.
Auditors gained respect in Ukraine and business boomed – until last year’s recession hit.
According to the Audit Chamber of Ukraine, the state auditing agency and market regulator, some 25 percent of private auditing firms were wiped out by this year’s economic plunge. With gross domestic product down nearly 18 percent in the first half of this year, sales of auditing services have plunged up to 40 percent, according to estimates.
“We are back to the levels of 2007-2008,” said Urmas Kaarlep, a partner at the Kyiv offices of PricewaterhouseCoopers, one of the world’s so-called Big Four auditing and account giants.
“It has certainly been a serious and painful correction, but hopefully Ukraine will be stronger when we emerge from the crisis. We expect to see growth trends resume in the latter half of 2010,” Kaarlep added.
Ernst & Young, also one of the Big Four, was the first international player to come to Ukraine, formally setting up a small presence as early as 1991, just after the country declared independence from the Soviet Union. Other accounting and auditing leaders soon followed. At first, their services were mostly in demand by international companies operating in Ukraine. The nation’s industrial jewels were snapped up on the cheap by influential domestic businessmen during Ukraine’s crony capitalism transition from the Soviet Union. In the past decade, these moguls consolidated their billion-dollar assets into more structured financial-industrial groups. Eager to borrow from abroad and tap into international capital markets, they soon became equally big clients for auditing and accounting firms.
In the four years before the crisis, the business of auditors and accountants mushroomed by an annual 30-50 percent. The state auditing chamber estimates that the auditing business in Ukraine was alone worth nearly $200 million in 2008.
That was then and this is now.
“These are extremely hard times,” said Oleksiy Gachkovskiy, founder of OLGA Audit. “More and more qualified specialists are leaving the auditing field.” Many leave to become accountants and finance executives, where demand is a bit higher.
Svitlana Stolyarova, head of the Audit Chamber, said the number of private audit firms has shrunk from some 2,000 to 1,500, while the number of officially employed auditors is down this year from 3,257 to 3,048.
As if the pain of recession wasn’t tough enough, accounting and auditing professionals all over – including in Ukraine — are also getting heat for their failures in identify imbalances within companies, such as unsustainable indebtedness, that has made this recession so deep. Many clients and investors are asking, for example, how didn’t you see all that toxic debt and asset bubbles building up?
Auditors and accountants insist they share only partial blame.
“I agree that, in many cases, professional advice and ethics could have stopped companies from pursuing initial public offerings, for example, when they actually were not ready to go, or stop them from raising capital or insist they attain a fair credit rating,” said Vitaliy Kazakov, head of Grant Thornton Ukraine. “But could the accountant or auditors be blamed for the macroeconomic problems? And how could they be blamed for misreading the financials if, actually in many cases, auditors deal with historic information, while markets and financials change daily.”
The Audit Chamber’s Stolyarova said auditors are limited in their ability to identity red flags in Ukraine’s murky business environment. It is often the case, she said, that a company’s books are clean, perfectly in shape on the day of the audit. “But on the very next day, money can be transferred offshore, while the enterprise goes bankrupt.”
Auditors insist they can’t play the role of economic cops. But they do get a good glimpse of what’s happening in Ukraine’s companies and economy overall. And one thing they clearly see is the shadow economy growing.
“One of the most visible trends [brought by deep economic recession] is a shift away from transparency, back towards the grey economy,” Grant Thornton’s Kazakov said. “Many local Ukrainian businesses which were thinking in recent years about going transparent in order to enter international capital markets via IPOs and private placements are suddenly cancelling audits and other related services,” he added.
Auditors also see tax authorities trying to force more out of companies to fill a budget gap. It’s become common for companies to pay taxes in advance as a favor to tax authorities.
“It’s a paradox” how much tax authorities are collecting “in the midst of crisis, when demand has catastrophically fallen, businesses can’t get loans while inflation and the currency are tipping off the scale,” BDO’s Savchenko said.
Despite all the hardships, Grant Thornton’s Kazakov expects most Ukrainian companies, including auditing and accounting firms, to survive one way or another, much as citizens and business did during the 1990s. He does not expect many big defaults by companies, though many will remain in deep freeze for a while.
Some auditors and accountants say they can help clients survive the crisis better. Others see new niches emerging.
InterGest Ukraine, for example, says companies can cut costs by outsourcing their accounting services.
“It is quite a new niche for Ukraine,” said company director Olena Makeyeva.
