State Financial Institutions: Rules for audit activity in Ukraine require changes

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Kyiv, August 12, 2015. The task of audit activity reform is to increase the quality of services provided to Ukrainians to a new level corresponding with European standards. In this case, the risks that Ukrainian society faces in the form of suffering losses because of companies’ financial frauds will be minimized. This is the outcome reached by participants of the round table on the reform of audit activity held at Ukraine Crisis Media Center in the framework of the Ukraine Reforms Communications Taskforce project.

“Out of the 55 banks currently recognized as insolvent, auditors reached a negative conclusion regarding at least five banks. Fifty had positive or relatively positive conclusions provided by over 20 national companies. Meaning that the auditors confirmed the validity of their financial reports while the banks had gone bankrupt and had depositors lining up. That’s why we say that the position of auditor is a socially important profession. The auditor needs to be responsible for the reporting he or she validates,” stated Deputy Finance Minister of Ukraine Olena Makeyeva, arguing in favor of reform.

Tymur Khromayev, Head of the National Commission on Securities and Stock Market of Ukraine (NCSSM), supported the reforms as well. He noted that the NCSSM stopped the securities trade activities of over 90 issuing companies whose general capitalization reaches a combined 400 billion hryvnia. All of these firms also had validated financial reports from 29 national audit firms. “Audit in Ukraine has slid into formality. Banks have no trust in borrowers and despite the auditors’ conclusions demand additional encumbrance. The income of these 90 companies over several years is equal to zero, but their value reaches one third of our GDP! It is not possible. It needs to be stopped,” said Khromayev.

Adomas Audickas, Advisor to the Minister of Economic Development and Trade of Ukraine, noted that the Ministry initiates mandatory audit for companies with state-owned shares, as it is the only way to get true information on the actual financial state of a company. A respective bill will be presented for the consideration of the government committee this week. On the other hand, the owner, in this case the state, needs to be confident in the conclusion received from auditors. This is why, Audickas stated, it is important that the audit is made in accordance with the best international practices. “The audit standard needs to be high,” noted Audickas.

Wrapping up on the state of play with audit activities in Ukraine while advocating for the need for changes, Makeyeva noted that since 2011 Ukraine has been expelled from the list of so-called third countries enjoying simplified access to markets of EU audit services. To get access, Ukraine had to work out a plan to apply EU requirements to the auditor profession. But this never happened, stated Makeyeva. Thus, the Finance Ministry started drafting the reform model of the audit services market. To make sure these changes are in line with the European integration plan, the Ministry requesting assistance from the European Commission and the World Bank, asking them to provide an expert who would help draft the law to reform the audit services market. Jon Hooper, senior financial management consultant with the World Bank, was delegated for this role.

According to Makeyeva, audit activity reform is to be based on impartiality and independence regarding the quality control of audit checks on companies that are of social importance (public joint stock companies, banks, insurance companies, private pension funds etc.). “In such a way, our reform has to provide independent impartial control over the companies in which people deposit their money, and thus may fall victims to audits of poor quality,” noted the Deputy Finance Minister. She also mentioned the importance of establishing public monitoring for auditors’ activities to check the accuracy of financial reporting on socially important companies. Separate procedures for quality control and monitoring will be set up for them. “The council for audit activity is to execute public control over auditors’ activity under the administration of the Finance Ministry. It will comprise seven representatives from regulatory bodies and as well as four not connected to the audit market to be chosen through an open hiring procedure,” said Makeyeva.

The Deputy Finance Minister also said that the draft law on audit activities is going through its final approval procedures at ministries and state bodies, Its English translation has been sent to field-specific international institutions who are expected to provide their professional feedback on the reform model and its conformity with EU requirements. The Finance Ministry expects to receive feedback by the end of August, and pass the document to the Cabinet of Ministers for approval.

Round table participants agreed that audit activity reform would help increase trust in financial institutions.