Long-stalled au­dit re­form on to-do list of Verkhovna Rada

Kyiv Post - - Business Focus - BY JACK EVANS EVANSJWM@GMAIL.COM

In­ter­na­tional as­sis­tance to Ukraine is con­tin­gent on fi­nan­cial sec­tor re­form, not only of banks, but also the com­pa­nies that au­dit them.

The In­ter­na­tional Mon­e­tary Fund, for in­stance, iden­ti­fied tax au­dit­ing as a prob­lem, writ­ing: fi­nan­cial au­dits of bud­get re­ports (do) not en­tirely com­ply with in­ter­na­tional stan­dards.”

The Ukrainian gov­ern­ment pledged to adopt a new au­dit law, com­ing into com­pli­ance with Euro­pean Union stan­dards, by July. It missed the dead­line, but law­mak­ers are shoot­ing for Sept. 22 to pass the law.

The Pri­vatBank scan­dal put au­dit and ac­count­ing into the spot­light. Ukraine’s big­gest bank was owned by oli­garchs Ihor Kolo­moisky and Gen­nadiy Bo­golyubov be­fore the state took it over in De­cem­ber.

In July, the Na­tional Bank of Ukraine with­drew au­dit­ing rights from PwC au­dit firm in re­tal­i­a­tion for its fail­ure to iden­tify prac­tices that left Pri­vatBank with losses ap­proach­ing $6 bil­lion. PwC au­dited Pri­vatBank from the mid-1990s to De­cem­ber 2015.

The cen­tral bank claimed that “the au­dit find­ings by PwC failed to high­light risks faced by Pri­vatBank, which led to the bank be­ing declared in­sol­vent and na­tion­al­ized, with sub­stan­tial re­cap­i­tal­iza­tion costs borne by the state.”

PwC called the NBU’s de­ci­sion un­jus­ti­fied and pledged to “ex­am­ine all op­tions to re­verse the de­ci­sion.”

On Sept. 12, in an in­ter­view with Reuters, Fi­nance Min­is­ter Olek­sandr Dany­lyuk did not rule out tak­ing the au­di­tors to court to re­cover the enor­mous multi­bil­lion-dol­lar costs to tax­pay­ers for Pri­vatBank’s bailout.

The ex­clu­sion of PwC from NBU’s Reg­is­ter of Bank Au­di­tors in July could dis­suade other in­ter­na­tional au­dit­ing com­pa­nies from work­ing in Ukraine, but ex­perts say that is un­likely as the new leg­is­la­tion on au­dit­ing and ac­count­ing will in­crease de­mand for their work.

Vik­tor Gala­siuk, a mem­ber of par­lia­ment who sits on the Tax and Cus­toms Pol­icy Com­mit­tee, told the Kyiv Post that the new leg­is­la­tion, if passed into law, will have a “pos­i­tive ef­fect on in­vest­ment cli­mate, even though it’s a drop in the bucket. It will con­trib­ute to the har­mo­niza­tion of our na­tional leg­is­la­tion in the sphere of ac­count­ing and fi­nan­cial re­port­ing with the EU stan­dards and In­ter­na­tional Fi­nance Re­port­ing Stan­dards. The im­ple­men­ta­tion of some of its pro­vi­sions will help to raise aware­ness and re­duce in­vestor risks.”

Vi­taliy Kravchuk, a se­nior re­search fel­low at the Kyiv-based In­sti­tute for Eco­nomic Re­search and Pol­icy Con­sult­ing, cau­tiously wel­comed the pro­posed changes, say­ing they were “not per­fect,” but steps to in­crease trans­parency “through wider avail­abil­ity of fi­nan­cial re­ports.”

Kravchuk said the en­vis­aged changes will only mod­er­ately in­crease the re­port­ing bur­dens of larger com­pa­nies, while smaller ones should ben­e­fit from “sim­pli­fied re­port­ing” re­quire­ments.

But Gala­siuk raised con­cerns about an al­ter­na­tive draft law he said would be “ex­tremely detri­men­tal” and “pose a threat to in­de­pen­dent au­dit­ing in Ukraine.”

It also im­poses un­re­al­is­ti­cally high re­quire­ments on the size of an au­dit firm, stip­u­lat­ing a min­i­mum of 15 qual­i­fied em­ploy­ees. “Prac­ti­cally all firms based any­where ex­cept Kyiv will not be able to ful­fill this re­quire­ment,” Gala­siuk said.

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