Supervisory bodies should become service with a human face – discussion of why businesses are afraid of audits


Current requirements for businesses, especially individual entrepreneurs, are too high. It is necessary to reduce the list of areas and activities to be controlled, to reduce penalties for violations, and strengthen personal responsibility of officials, who exercise control, for procedural violations. This was stressed by business representatives and experts at a discussion held at Ukraine Crisis Media Center.

“Businesses are afraid of audits as they know beforehand that they will be ‘guilty’”

Today, 39 bodies exercise control at the central level alone. In addition, local administrations and all executive committees of local councils also have some powers. According to Oksana Prodan, MP of Ukraine (faction “Block Poroshenko”), member of the Committee of Verkhovna Rada of Ukraine on Taxation and Customs Policy, the legislative changes introduced during the year, have not improved the situation. The number of bodies was reduced, but not the number of areas to be controlled: now one body covers several areas, so the pressure on business has not decreased, says Kseniia Liapina, head of the State Regulatory Service of Ukraine. Besides, there is no coordination among them. In practice, not all civil servants know the limits of their authority and their responsibilities. The powers of tax police were terminated, but it continues working. In addition, labor services have expanded their powers since January 1.

Businesses are especially outraged by the innovation which obliges all individual entrepreneurs, similarly to major employers, to specify work complexity, job class, etc. in regulations on compensation and inflicts large penalties for violations. However, no one gives any explanations how to fulfill these requirements, although the law “On State Supervision and Control” provides for this.

According to Svitlana Ichenska, chairman of the Union of the Entrepreneurs, owners and tenants of Sumy region (Sumy), “businesses are afraid of audits, because they know beforehand that they are ‘guilty’”. An inspector can hardly be punished for a mistake. Serhii Polishchuk, representative of Food Company “Ecoproduct” from Ivano-Frankivsk, said that they had long been trying to prove that their company was fined wrongly. The public council at regional branch of State Fiscal Service (SFS), independent auditors, and SFS information center decided in their favor, but the findings were not considered.

Lubomyr Chorniy, senior expert of the USAID Program “Leadership in Economic Governance”, noted that inspectors’ impunity and huge fines create favorable conditions for corruption: small businesses have to choose between a bribe and bankruptcy. Panelists stressed that as long as Ukraine does not provide comfortable environment for fair business, Ukrainian products cannot compete in foreign markets, as businesses in developed countries work in a much better climate.

Recommendations to the state: narrow the scope of control, balance the rights of businesses and supervisory authorities

For supervisory bodies to become a “service with a human face”, we must change the approach to audit so that control was not considered as pressure and extortion. “The best approach is to minimize the opportunities for supervisory bodies to interfere in business activities. […] We do not let businesses do what they should do: make money and produce a product,” stressed Mr. Chornii.

It is necessary to reduce the list of areas and activities which are to be controlled, to reduce penalties for violations. All sectoral laws must agree with the law “On Principles of State Supervision and control.” The Labor Code should provide a simplified procedure for the establishment of labor relations for small businesses. One possibility to regulate labor relations between individual entrepreneurs and their staff is to develop a standard contract that would specify mutual rights and obligations, said Oksana Prodan.

We must also strictly regulate the powers of control and increase personal responsibility of officials who exercise control. Kseniia Liapina reminded that two administrative protocols of the State Regulatory Service on procedural violations constitute grounds for dismissal.

Kseniia Liapina said that under the concept of reforming labor service, the number of independent supervisory bodies should be reduced to 25, and local services will become service centers. Also, according to the law “On State Supervision and Control”, an integrated framework uniting the existing bases of supervisory bodies will be created till the end of 2017. It will help to coordinate activities, monitor appropriateness and legality of audits.

Recommendations to businesses – unite to protect themselves and legislative initiatives

The first recommendation for businesses is to unite and defend their rights as well as report any violations to the leadership of supervisory bodies. Kseniia Liapina reminded that Article 10 of the Law “On State Supervision and Control” specifies a list of reasons that entitle business to legitimately refuse an audit. Business has the right not to allow the inspectors to conduct audits if they cannot provide a list of reasons for auditing. Inspectors have not the right to check something, if this requirement is not published on the official website of the supervisory body. If the supervisory body has any claims, the entrepreneurs who have received the supervisory body’s explanation before, have every right to refer to this explanation. They should complain about any violations to the State Regulatory Service because thus the inspector’s actions are checked. If the violation proves to be true, it may end in making an administrative offence report and dismissing the inspector. The same protocol is also a reason for protection of the entrepreneur’s rights in court. “If we create a precedent, it will be a signal for all that they should work within the powers. […] Both business and leaders of supervisory bodies should keep inspectors up by teaching them psychologically and regulatory,” stressed Kseniia Liapina.

The second recommendation is that business should set its agenda and propose changes pursuing own benefit. Lubomyr Chornii urged entrepreneurs to monitor legislative initiatives and respond to them in all cases where any special statutory provisions are planned to be used, which almost always creates a risk of abuse.

The State Service on Labor makes a conciliatory gesture

Roman Cherneha, head of the State Service of Ukraine on Labor agreed with the fact that the new requirements to individual entrepreneurs are excessive and should be reviewed. He noted that the State Service of Ukraine on Labor is cooperating with employers’ associations, Regulatory Service and Economic Development Ministry to elaborate the final version of rules of procedure of the State Service of Ukraine on Labor that will ensure better protection of business and transparency in procedures. Roman Cherneha urges businessmen who have faced bribe requests from the Service officials to directly contact him. “We should try to restore public confidence in the power. This is a strategic task for the whole state apparatus,” he noted.