“Big Four” auditors in Russia face hard times
This article originally appeared at Izvestia, one of Russia's largest newspapers. Translated for RI by Kristina Aleshnikova
PricewaterhouseCoopers (PwC), which has conducted the audit for Gazprom Open Joint Stock Company (OAO) for nigh on 15 years, has lost its contract with the company. Citing sources in the industry, Interfax announced that the Russian company FBC had emerged victorious after the bidding commission met on Friday to select an auditor to carry out of the mandatory yearly audit of the Gazprom stock company in 2015.
Ernst & Young (EY) and KPMG also took part in the tender. It was reported that a ceiling price of 318 million rubles was set for the bid. FBC made a bid of 204 million rubles.
The Russian branch of PwC did not deny the information regarding the termination of work with Gazprom but refused to comment.
“We will detail the company’s position on this issue later,” the auditor’s press service informed Izvestia.
According to government sources, recommendations were made this year to Russian state companies to replace foreign auditors with Russian ones, after the international rating agency Moody’s Investors Service downgraded the sovereign rating of Russia in February and Western countries adopted another package of sanctions.
The “Big Four” replaced by Russian alternatives
Currently, foreign auditing companies account for the lion’s share of the Russian market. Furthermore, most of the major organizations have already been working in the country since the early 1990s and have a wealth of experience working with both state-owned companies and the authorities. These are such international companies as Deloitte, KPMG, PwC, EY, and McKinsey & Company. Together they receive 42.6% of the total revenues from auditing in Russia.
Deloitte has already managed to work with the public procurement departments of the Ministry of Finance, the Ministry of Economic Development and the Ministry of Trade, and it has advised the Federal Antimonopoly Service (FAS), the Federal Service for Financial and Budgetary Supervision, and even the Investigative Committee of Russia. The company was engaged in audits of the Baikal-Amur Mainline (BAM) and the Trans-Siberian Railway reconstruction projects for Russian Railways and conducted an audit of the social network site VKontakte and Uralvagonzavod. In 2012 Deloitte partner Alexander Bragin became a member of the Expert Council of the Russian Government.
Another company, KPMG, has nine offices in Russia. Among other things, the company prepared a review of Russian stadiums for the Ministry of Finance and the Ministry of Sports as part of the preparation for the 2018 World Cup. KPMG has also worked with Avtodor, Russian Railways and Gazprom.
PwC, one of the most renowned organizations in the world, already worked in Russia prior to the 1917 Revolution and renewed work on Russian territory in 1989. Over the 25-year modern history of Russia, the company was noted for cooperation with the Federal Property Management Agency, the Ministry of Education and Science, the Ministry of Sports and the Organizing committee of Sochi 2014.
Ernst and Young, also a world-famous company, advised the government on the reorganization of Vnukovo and Pulkovo airports, cooperates with the Ministry of the Environment and has a contract with the Ministry of Communications. They also collaborate with Rostec, carry out the audits for Sberbank and Inter RAO, and develop business concepts for the company Northern Caucasus Resorts.
Clouds have been gathering since last spring
It started with Duma deputies talking about the need to replace foreign auditors. They did this immediately after the imposition of the first Western sanctions following the accession of Crimea. In May 2014 Yevgeny Fyodorov (United Russia), deputy of the lower house of parliament, announced that he was preparing amendments to the legislation, including to Article 5 of the Federal Law “On Audit Activity”, concerning the withdrawal of the right to provide services to companies with a government stake, to the Central Bank, and to state authorities, including Federal Ministries. The measure affected auditing and consulting companies which, although working in Russia, were from countries which had imposed sanctions on Russia. The ban on foreign access to government accounting and auditing of investment projects will render Russia’s government and economic sectors more independent, the deputy explained.
In addition, Fyodorov specified that foreign companies prepare, under external governance, proposals related to investment projects.
“Without these proposals, the government does not have the right to put its money into investment funds or federal target programs within a public–private partnership. And foreign auditors can only submit proposals if foreign investors are involved and only regarding the strategy associated with them. Some things will be permitted, some not — they will include a system of filters,” the deputy said. “Given the sanctions against the Russian Federation and our banks, we need to move to using national companies and rating agencies, but this takes time.”
Even before Fyodorov’s bill introducing a ban on foreign auditors, Andrey Svintsov, Yaroslav Nilov and Sergei Katasonov, deputies of the Liberal Democratic Party of Russia (LDPR), headed by Igor Lebedev, Vice-Speaker of the State Duma, carried out checks on the companies (including credit organizations) where the state-owned share exceeded 25%. The parliamentarians wrote into the law that the audit of these companies may be carried out only by auditing organizations which have no foreign investors in their authorized capital.
As the deputies pointed out, the provision of auditing services by foreign companies carries with it a high risk of information leakage despite audit confidentiality. According to the authors of the bill, the participation of foreign companies in the audit of Russian state enterprises damages domestic auditors economically. The share of the Big Four leading audit companies (PwC, KPMG, EY and Deloitte & Touche) in auditing profits in Russia increased by 22.4%, while in the same period the 46 largest Russian auditing organizations increased their share by only 4.5%. The Ministry of Finance, however, did not support the LDPR bill.
Later, the same deputy of the lower house of parliament, Yevgeny Fyodorov, prepared a bill to amend the federal law “On Banks and Banking Activity”. The amendments were aimed at prohibiting domestic banks (in the first stage, state-owned banks) from working with auditing and consulting companies with foreign participation. According to the deputy, such amendments will be able to protect the Russian financial system from attempts at focused and negative manipulation from without, which are particularly dangerous against the background of anti-Russian sanctions. The legislator also associates the same problems in the Russian banking sector in recent months with the excessive presence of foreign consultants.
Earlier, deputy Fyodorov again drew attention to foreign auditors. He asked the leadership of the Central Bank to review the policy on the formation of the Central Bank Audit Council. Most of the independent experts of the council had previously worked in the Russian offices
of American auditing companies; and the presence of such consultants, in the opinion of the legislator, is a questionable choice for the country’s main bank regulator.
At present, domestic banks actually carry out two audits: one according to Russian and one according to international standards. Fyodorov recommends preventing companies with foreign participation from carrying out either of these audits.
“The ban is necessary because without such measures the situation would be absurd: we are denied foreign funding but we should continue to be guided by international standards. No, in the light of such developments it is necessary that banks, at the very least state-owned banks, refuse to work with foreign auditors. The Central Bank, for example, should dismiss PricewaterhouseCoopers. Foreign banks of course will try to turn to their own companies, but we don’t need that, especially as they drain off money and pursue harmful policies,” Fyodorov noted. “For example, a striking example of the pernicious effect of foreign auditors’ policy can be seen with our Russian aviation industry, which was once thriving and which is now virtually destroyed. Here the foreign consulting organizations deliberately forced the industry into the conditions necessary to liquidate it in the shortest of time.”
Experts support Gazprom’s decision, noting that today Russian companies can offer a quality audit but for considerably less money.
“It should be noted that some of the significant determining factors for the choice are the planned rotation of audit service providers and more favorable price conditions offered by Russian auditors maintaining the same high quality of service. In addition, because of the sanctions, a number of state companies lost access to international capital markets and can do without an expensive audit, which also tipped the scales in favor of Russian auditors,” explained Armen Danielyan, member of the board of ACG Delovoy Profil (GGI). “However, do not expect a wholesale departure of state corporations from major foreign auditing companies, although the extension of sanctions into 2016 will increase the number of those wishing to replace their auditors.”
As the expert said, systemically important enterprises make use of the services of several major consulting firms at the same time, diversifying their contracts for various activities.
“A choice in favor of a foreign supplier of auditing services is due more to the desire to gain the trust of interested foreign investors. On top of this, confirmation of the accounts by an auditor with a good reputation in international markets is often perceived as a guarantee of the reliability of the borrowers,” explained Danielyan. “This is why most ADR and GDR companies, which are listed on foreign stock exchanges and which receive large amounts of funding, tend to turn to the Big Four companies present on the Russian market (KPMG, PwC, Deloitte and EY) to audit accounts to the required standards.”
The rejection of PwC is without doubt connected with geopolitical tensions and the fact that the Russian gas giant was included on the sanctions lists. The Big Four auditors are foreign companies, and in this there are certain risks for the company. PwC and other auditors work with virtually all Russian companies, and this is very easily explained — the more important functioning in Western capital markets is to the apparatus, the more relevant the services of the Big Four auditors are,” reckons Dmitry Kipa, head of the Analytical Department at QB Finance.
In his opinion, given the context of sanctions and the political role Gazprom plays in its relations with the EU, the services of PwC are not essential to the company; and from the point of view of both legislation and the quality of service which FBK offers, FBK can without doubt handle the contract in full.
“The situation with Gazprom is a definite precedent, and certainly some state-owned companies (especially those under sanctions) will terminate the services of the Big Four in favor of major local players, such as FBK, Finexpertiza, Rosexpertiza and others,” suggests Kipa.