Audit services to PIEs introduced in Russia, yet legacy corruption abounds

R

ussia appears to have coped relatively well during the pandemic. A report from the World Bank estimated that its economy would shrink by 4% in 2020, less than projected earlier due to fiscal, monetary, and social policies that helped contain the costs of the economic disruption.

But a reputation for corruption still dogs Russia. "Corruption significantly impedes businesses operating or planning to invest in Russia. High-level and petty corruption is common, especially in the judicial system and public procurement," notes a 2020 profile of business in Russia prepared by the Risk and Compliance Portal, a business resource maintained by GAN Integrity.

While the government has overhauled its regulatory environment, respondents to this article feel the measures have not gone far enough and, in some cases, are toothless. Anti-dumping legislation is easily circumvented, while some, such as Decree of the Government of the Russian Federation No. 622, allow Russian clients to refuse to cooperate with auditors representing international brands. This does nothing to dispel Russia's murky reputation, a hangover from the Soviet era.

The main changes in the regulatory environment of audit activities are determined by the amendments to the Law 'On Auditing', which were adopted in July 2021 and come into force on January 1, 2022. From now on, the interests of the profession are represented by only one organisation - the self-regulatory organisation of auditors, the Association 'odruzhestvo' (SRO AAS).

The concepts of 'an audit organisation providing services to public interest entities (PIEs)' and 'an audit organisation providing services to PIEs in the financial market' have been introduced. PIEs are clients that have the form of public joint-stock companies and companies with a share of state ownership, and PIEs in the financial market are listed companies, banks, insurance companies, as well as dealers, brokers, investment fund management companies and some other categories of clients.

For these auditors, special registers will be provided, the first of which will be kept by the Ministry of Finance of Russia, the second by the Central Bank. The presence of an audit company in these registers gives it the right to audit the financial statements of relevant clients.

For individual auditors, the possibility of conducting a statutory audit has been cancelled. From now on, individual auditors can only carry out proactive audits or provide consulting services.

The regulation of the content of the auditor's report has been clarified, namely, the requirements that differ from the requirements of the International Standards on Auditing (ISA 700 (revised), ISA 701, ISA 705 (revised), ISA 706 (revised)) have been removed. Additionally, the requirements for audit reports on the financial statements of public interest entities have been introduced.

Yerofeev feels that the demand for high-quality audit services in Russia is stagnating. "'Dumping' is the main word that characterises the state of the market," he says. "The anti-dumping measures provided for by the legislation are a fiction and are easily bypassed by both the organisers and the participants of the competitions. The only exceptions are large private companies that are really interested in quality audit, but most of these clients still prefer to attract auditors from the big four."

Dumping is the existence of price discrimination between domestic and export markets. Generally, it indicates the presence of a market distortion in the home market, such as import barriers, a monopoly or cartel, or some combination of these factors that gives domestic producers the ability to maintain domestic prices at a level higher than export prices.

In the short term, dumping enables protected firms to run at higher rates than would be economically feasible in an open market, giving them a major cost advantage. Over the long run, dumping can deter investment in the market where it is occurring and over time, dumping may permit an initially less efficient industry to displace an equally or more efficient competitor.

Despite the dumping, demand for accountancy services has declined in Russia.

"In 2020 and first half of 2021 demand for accounting services, financial audit and tax consulting decreased by 6% and 8% respectively," says Irina Makarova, certified auditor, Audit-Avangard, an Ecovis member firm. "This trend will probably continue in 2021-2022 following an increase of obligatory audit criteria in 2021. The labour market also fell since spring 2020. This year we see a slow recovery in salaries, the number of new vacancies and the activity of applicants.

Alexander Sirous, partner at CRS Russaudit, sees a different trend in the auditing market. While demand has grown in traditional audit services in the middle market, the current regulatory environment is becoming so onerous that smaller audit firms are considering leaving the market.

"Some small and mid-size players may have operational issues meeting regulatory and compliance challenges," says Sirous. "Different firms take different strategies trying to stay in business or win work."

Headhunting other companies might seem like the obvious solution but Sirous says mergers and acquisition activity is low in Russia.

"We are aware of only one major transaction," he says. "There are two or three audit firms who we believe are trying to consolidate with players of some significance, specifically in niche markets, such as audit of investment firms and other financial market players regulated by the Central Bank of Russia. But the number of transactions, if any, is very low. The trending idea is a creation of alliances, rather than mergers and acquisitions.

In terms of future areas of growth, Makarova says the accounting industry should look toward IT for future revenues. "The trend towards digitalisation continues," she says. "All companies, including small enterprises, are required to submit financial statements in the electronic form. The Russian government continues to support IT industry. Preferences such as a reduced income tax rate at 3% and a social taxes rate 7.6% were introduced in 2021." 

She points out that services relating to digitalisation such as IT consulting and IT audit have become more popular recently. "Since digitalisation is the intersection of business and IT, some consulting tasks migrate from the field of traditional technology consulting to management consulting aimed at point-to-point optimization of business processes," she says.

The next 12 months are predicted to see a big shake up in the Russian accounting industry. "There is a possibility of the consolidation process picking up and certain clients ceasing to work with their current auditors," says Sirous. "It is possible that some of the companies of strategic importance may switch from the big four to the largest of the second-tier firms, which have invested in their audit technologies and quality management. Generally, the audit market is likely to become more segmented in the next year or two."

The Russian accounting market is developing rapidly and Makarova points out that as businesses struggle with increasing regulations, outsourcing among accountancy firms is becoming more popular.

"As of 2021, there are about 30 thousand companies operating in Russia that are engaged in outsourcing of accounting," she says. "Their services are used by about 1 million companies and individual entrepreneurs. Due to the tightening of government controls over taxes and transactions, it is becoming more difficult for businesses to cope with new regulations. Management prefers to attract highly-qualified consultants. For this reason, the accounting outsourcing market is one of the most promising."