In the account books of Ukraine’s biggest government-owned enterprises, international auditors found all vices of state management: sweetheart deals, political populism, inefficiency, obsolete assets.
A government decree forced the biggest Ukraine’s state-owned enterprises to undergo an international audit, a novelty for many of them.
In June 2015, the government approved new criteria for firms which can audit the 150 biggest state-owned enterprises. The new requirements allow only the biggest international auditing firms to take part in tenders.
Andriy Tsymbal, the managing partner of the Ukrainian member firm of KPMG network, said the process is being sabotaged by local managers who are “not very interested in having an audit, so the timeline for the tenders and the audit itself is extended.”
As of May, just 36 state companies passed or are passing the audits and seven are holding tenders for the examination.
Mismanaging state assets
The government owns 3,340 enterprises. The top 100 account for 90 percent of assets and are worth Hr 926 billion ($36.8 billion).
Financial losses of state-owned companies are covered by taxpayers.
But in nine months of 2015, the top 100 enterprises managed to bring the state Hr 2.2 billion ($87 million) in profit, reversing record losses of Hr 66.5 billion ($2.6 billion) in 2014.
Increasing utility tariffs to market levels and cutting subsidies get most of the credit.
But state enterprises remain inefficient, outdated and produce less revenue they could – hence, years of unheeded calls to privatize them.
Economy Minister Stepan Kubiv wants only 705 enterprises to remain under state control, but needs parliament’s approval.
The process is expected to start with the sale of Odesa Portside Plant, one of Ukraine’s leading chemical producers, this summer. The price starts at Hr 13.2 billion ($521 million). Six electric power distributors are expected to get sold also.
Further privatization is another reason why the government wants state-owned assets to have a history of trustworhty international audits, said Alexander Pochkun, managing partner of Baker Tilly.
Corruption in balance sheets
According to Tsymbal, it is rare that a state-owned enterprise receives the highest mark from an auditor.
“To the best of my knowledge, the Ministry of Economic Development, which is supposed to oversee them, does not analyze in detail what are the results of the audit,” he said.
Given the bad reputation of state-owned enterprises, many expected that international auditors would find outright corruption. Indeed, “there are undisclosed related body transactions between the state-owned enterprises and, let’s say, relatives of management of state-owned enterprises,” Tsymbal said.
But no outright theft was found.
Sweetheart deals took place in subtle ways, but the fraud added up over time. However, a financial audit is not a forensic investigation and it not tasked with identifying corruption, he said.
The Soviet holdovers were not treated as businesses, so never learned how to operate properly. “This is creating the background for corruption,” Pochkun said. “If the state does not use this company to generate profit, it means that somebody else will generate the profit from it.”
Auditors say many state-owned enterprises to not comply with International Financial Reporting Standards. (pixabay.com)
Ghost assets
State-owned properties are expected to lose value after audits.
Evaluation of fixed assets, like buildings and equipment, is hard. Many post-Soviet companies had old purchase documents that are impossible to verify. Others had poor appraisals done.
Local practices contradict international ones. For instance, assets which do not exist or are broken should be taken off financial reports, but they cannot be written off due to complicated procedures in Ukraine. So eventually those assets are mentioned in records but auditors do not take their value into account.
Another problem is bringing financial statements in line with International Financial Reporting Standards.
Private vs state-owned
Given the need for foreign investment in Ukrainian state enterprises, the demand for international audits will remain high. However, auditors try not to rely on the state sector too much.
“I am still scared that something can be turned back,” Pochkun said.
Clients in state-owned enterprises also differ from those in the private sector. The management in a private company cooperates with auditors while the state ones see the audit as a requirement “imposed on them,” Tsymbal said. “They often do not understand why it is.”
