Focus on finance and accounting research
Nova Science Publishers, Inc New York 2007 Volume 23 Issue 3-4 (Current Politics and Economics of Russi)
Irena Solodchenko
Abstract
The paper is a study
of development of auditing in Ukraine since 1980th. The statutory
audit for most of Ukrainian companies in the middle of 90s
was a powerful spur to audit development. After the statutory audit had
been restricted a majority of audit firms were forced to reorganise their
work in preference to consulting and other auxiliary services. The Ukrainian
auditors are very independent of government but depend on their clients. In
2003 there were accepted International Standards on Auditing as that of
national. Now Ukrainian auditors having many internal problems are trying to
find their position in Ukrainian society.
1.INTRODUCTION
Ukraine as a whole
belongs to the twelve countries that became part of the Soviet Union in the
early twentieth century. Now Ukraine is the largest state in Eastern Europe. In
terms of population, Ukraine ranks 5th in Europe (after Germany,
Italy, Great Britain and France) and 21st in the world. In a referendum
held on December 1, 1991, the people of Ukraine endorsed independence.
Nowadays, Ukraine is a Presidential and Parliamentary Republic. Parliament -
the Verkhovna Rada of Ukraine - is the sole legislative body. Verkhovna Rada is
a unicameral assembly of 450 deputies, whose
main function is making laws. The President of Ukraine is vested with
the power of the head of state. He has the authority to speak for the state and
he is the guarantor of the state sovereignty, of territorial integrity, and of
the observance of the Constitution, civic rights and freedoms. He is elected
directly by the voters for a term of five years, with no more then two full
terms. In 2005 an “orange” revolution took place in Ukraine and the reform transforming Ukraine in
parliamentary-presidential republic has come into force.
During Soviet times the
control of the enterprises was carried out with the state by means of Control
and revision departments. The system had the basic aspiration of the ministries
and departments and as a whole parties and the states to solve all from above,
to supervise any step of the enterprises and the organizations. Various checks
and inceptions were spent as much as possible without enough caring about
productivity of checks.
In this paper, we seek to provide an
insight into how audit has developed recently in Ukraine and the influences at
work. We also present ideas about
problems of audit in Ukraine. The
paper is structured as follows. In the next section we look at the history of
audit development in Ukraine. After we study more carefully three main aspects
of the auditors’ activity: the position of auditors in Ukrainian society, the
degree of their independence and responsibility. In Section 6 we consider what
are modern problems of Ukrainian auditors, how they get over them and what
tasks the auditors have to decide in the nearest future. The seventh section is the conclusion.
2. THE HISTORY OF AUDIT DEVELOPMENT IN UKRAINE
The history of accounting development in Ukraine can be divided into
four stages.
Infancy stage (the
mid 80s-1994). The beginning of
audit in Ukraine was motivated by both internal and external reasons. In the
middle of the 80s of the twentieth century international capital flowed in
Ukraine, a part of the Soviet Union at that time. Foreign investors wished for
having a real idea of the state of assets and liabilities in a Ukrainian
enterprise. In this connection in May 04, 1987 the Ministry of Finance of USSR
issued the Instruction No. 124 ‘On taxation of joint ventures[1]’ according to
which joint ventures were obliged to file their annual balance sheet only after
theses balance had been audited by a Soviet audit organisation. But foreign
investors distrusted in the State Soviet control. Then such principal investors
as the World Bank, USAID forced the
Ukraine government to implement international standards of auditing.
That time there were growing number of private sector
(co-operatives, small-scale enterprises, small companies) which were out the
scope of the Control and Revision Administration (CRA)[2] subordinated to the
Ministry of Finance. Many officials from the State control and revision
departments lost their jobs, so they became first independent auditors which
started to control private sector (Redko, 2002a:22).
So by 1992 there was a considerable increase in audit
firms which were independent from government. These audit firms had been over
their infancy, created their infrastructure and intellectual potential. After
having sized up the situation they initiated a creation of the Union of Auditors in Ukraine (the SAU[3]). The first
congress of the Union of Auditors was held in June 04, 1992 where the Ukrainian
auditors adopted their Statute and determined to cooperate for protecting their
interests and promoting the audit development in Ukraine based on International
rules and standards (Stock market,
2001:24).
Soon the audit activity became legitimatized. On April 22, 1993 the Verkhovna Rada of
Ukraine adopted the Law of Ukraine on Auditing Activity № 3125-ХІІ(the Audit
Law) accordingly to which the auditors should be certificated and an audit
activity was subject to licensing. Every Ukrainian citizen who has a
qualification certificate on auditor activity in the Ukrainian territory could
be an auditor. An auditor had the right
to pursue an audit activity particularly, to create an audit firm and combine
with other auditors forming a union (the Audit Law, art. 5).
On July 1993 the
Union of Auditors created the Chamber of Auditors and nominated ten members
(50% of members) there. Another 10 members of the Chamber of Auditors are
represented by the Ministry of Finance, the State Tax Administration, the
National Bank, the State Statistics Committee, the Ministry of Justice of
Ukraine and some representatives from educational, scientific and other
organisations[4].
The Chamber of Auditors certificates auditors; approve
auditing standards and education curricula; makes the Register of audit firms
and sole practitioners (the Audit Law, art. 14).
The statutory audit and its reversing (1995-1997). The Audit Law
prescribed that an auditor (an audit firm) should confirm the authenticity and
completeness of the annual financial statements of commercial banks, companies,
enterprises, co-operatives, partnerships and other entities which financial
reporting was subject to the official promulgation. An exemption
was only for state, non-profit companies and that of which annual revenues was
less than 200 monthly minimum wages[5] (the Audit Law,
art. 10).
On December 1994 the new Tax Profit Law was adopted.
This law interpreted the term “the official promulgation” as, besides, an
official filing of financial reporting to the State Tax Inspectorate of
Ukraine, the National Bank of Ukraine, the State Property Fund of Ukraine, the
Antimonopoly Committee of Ukraine and other establishments authorised to
receive financial reporting (Tax Profit Law, 1994, § 1.23). Thus, most of
Ukrainian companies, including small business, were obliged to file auditor’s
conclusions confirming the financial reporting of 1995 year.
There were palmy days for audit firms. Audit costs
were high and audit firms were getting surplus profits. The Chairman of the
National Bank of Ukraine (the NBU) of that days V. Getman noted[6] that there was
simply a robbery in the audit market: one hour of audit cost 10 mln. karbovantsev[7].
At that time calculation of tax was based very closely on accounting data and local tax
inspectors were allowed to direct 30% of tax fines for the maintenance of their
local which was an incentive for local tax inspections to fine enterprises (Solodchenko and
Sucher, 2005: 608-609). Thereupon an ailing competition aroused between audit
firms and tax inspectorates. The Ukrainian companies, on the one part, were
obliged to be shortly audited for a fee, and on the other part, they were not
exempt from the tax control (Ponomarenko, 1998). They translate into 30,000 to
50,000
enterprises being obligated to undergo an annual statutory audit in addition to
tax audits by the tax administration. This posed an unnecessary financial and
administrative burden on small enterprises (ROSC, 2002).
By the
end of September, 1995 most of Ukrainian companies had not been audited yet for
two main reasons: high audit costs and lack of certified auditors. The
Verkhovna Rada of Ukraine issued the Regulation N 344/95-VR
in which the term for statutory audit and auditor’s conclusion was prolonged
until 31 March, 1996.
But the
problem could not still be resolved. Ukraine had only one certified auditor for
70 companies and
this was argued by Pr. Sopko at the First All-Ukrainian Congress of Auditors.
The monopolism of audit firms caused cursory checks, unjustified high price on
audit services that had been at the rate of the early 90s when the monopolism
of audit firms was absolute and it was available only for bonanza commercial
companies. Following this, audit not only got many adherents (many auditors
were more skilled than state officials of the control authorities), but also it
spotted themselves with low audit quality, sham conclusions (Zhuravski,
1997).
Both numerous appeals of Ukrainian
companies to Verkhovna Rada concerning an abolition of the statutory audit and
the efforts of influential industrial lobby led
to the scope of a statutory audit was restricted (the
Regulation of Verkhovna Rada № 110/96-VR of 26
March, 1996). Sine then it has covered only banks, trusts, currency and stock exchanges,
investment funds and investment companies, credit unions, non-governmental
retirement funds, insurance companies and other nonbank financial institutions.
Audit development in free conditions (1998-2005). After the
statutory audit had been restricted audit firms found themselves under
unfavorable conditions because of a diminishing demand on audit services. As a
result of it, some audit firms collapsed, others, the most gumptious ones,
started looking for a cooperation with the Big Six. But the overwhelming
majority of them reorganized their activity and laid special emphasis on
consulting and accounting services.
The Big Six just made its activity more vigorous. This
fact stirred up discontent of many Ukrainian auditors as the Big Six audited
large-scale enterprises taking the bread out of their mouth. The foreign audit
firms were
working
up a Ukrainian market through the Ukrainian government. Redko argues that the
NBU virtually promoted foreign auditors making commercial banks to ask the Big
Six for auditing (the NBU was even sending out by e-mail the lists of
“permissive” firms for auditing). The State Tax Administration also allowed
expenditures for audit carried out by foreign firms not to be taxable (contrary
to current legislation) while it was not allowed for a national audit. The State Property
Fund of Ukraine got foreign audit firms to take part in privatization projects
disregarding the national audit (Redko, 1998).
During the
statutory audit times the main problem became visible– clients considered an audit of their financial reporting as mere
formality and demanded from the auditors only a positive conclusion. There were various
possible reasons of this.
First, financial reporting little reflected the actual state of affairs
of Ukrainian entities because of high level of shadow economy has been
calculated to amount to about 45% of the total economy (Kuchma, 2000).
Second, it was
difficult to imagine a manager of a company who had paid for a negative
appraisal of his activity. Redko admits that it is actually unknown to the
Chamber of Auditors when a manager paid for a negative conclusion or for a
refusal to give out a conclusion. Many problems of accounting in Ukraine,
tangled tax legislation, criminal responsibility for tax evasion,
hundred-per-cent entrepreneurial risk and other reasons make the clients not to
be agreed even to the true (especially promulgated) conclusion. Moreover, they
do not wish to pay for the conclusion (Redko, 2002b:50).
In 1997 the Union of Auditors and the Ukraine
Federation of Professional Accountants and Auditors (UFPAA) set up a journal
“The Ukrainian Bulletin of Accountants and Auditors” with the purpose, especially,
of permanent connection with their members and for giving continuous
information on an activity and plans of the Union of Auditors. But at the turn
of 2002 the journal “The Ukrainian Bulletin of Accountants and Auditors”
stopped issuing under the aegis of the Union of Auditors. Soon the Chamber of
Auditor started a new edition – a journal the Auditor of Ukraine.
Back in the end of 1996 the State Commission on
Securities and Stock Market (the SCSSM) demanded from public companies and
issuers of bonds their annual financial reporting to be confirmed by an auditor[8].
This step was considered then as a growing understanding of the independence
audit role (Dorosh, 1997:40). Yet despite the attractive and invigorative
conditions that the SCSSM was provided for auditors the audit of
financial reporting kept on reducing. If in 1995 it accounted for 98% of all
audit works, in 1998 it reduced to 60-75% (Redko, 2000).
On january 1,
1999 the Code of Ethics for Professional Accountants and in
2000 the Auditor Register into effect (by the Protocol # 95
of the Chamber of Auditors of 31 October, 2000). This step was due to the
abolition of licensing of audit activity[9].
As of 1
October, 2002 the Chamber of Aiditors certified 5,097 auditors. They included
in the Auditor Register 1,478 audit
firms and 498 auditors (sole practitioners)[10].
According to an information bulletin of the Chamber of
Auditors “The audit in Ukraine – 2000) the orders on audit had the following
structure (Table 1).
Table one. The orders on audit in Ukraine
|
The
type of audit
|
The number of orders |
The
cost,
|
||
|
Quantity
|
%
|
%
|
||
|
The audit of financial
reporting
|
8994
|
21
|
29780,84
|
35
|
|
The audit of financial
condition
|
4535
|
11
|
15159,97
|
18
|
|
Non-audit work
|
29251
|
68
|
37467,32
|
47
|
|
Total
|
42780
|
100
|
82408,13[12]
|
100
|
Auxiliary services
take first place both quantitatively and at order costs. This evidence a little
demand for independent audit in Ukraine as a verification of
public financial reporting, source documents and other information concerning
financial and economic activity of entities. The auxiliary services, chiefly
tax consulting, are the main source of revenue for Ukrainian audit firms.
Thus, we can sum up that audit in Ukraine was developing
rather with the help of administrative methods than by owners’ request. At the
time of the statutory audit, there had been keen demand on audit that favored
with audit development in Ukraine. At the beginning of 90s, many companies
learned of a new profession that helped them reduce tax fines. After the
statutory audit had been restricted, many companies kept on being the clients
of the auditor firms (or sole practitioners) that had audited them. The
Ukrainian auditors are up against serious competition from the Big Six that
audit mostly big and solvent companies.
3. THE STANDARDS OF AUDIT
Right up 1995, the Ukrainian audit had developed
without national standards. As nature adhors a vacuum, other organizations,
such as National
Bank of Ukraine, the State Property Fund of Ukraine, the Ministry of Finance of
Ukraine were
trying during 1994-1995 to issue some documents regulating the audit’s
conclusion requirements, audit control, etc. They did it without coming to an
agreement with the Chamber of Auditors. Zubilevitch argues that the very fact
of issuing of the documents was evidence of lack of understanding that audit is
an independent control (Zubilevich, 1996).
At last, on October 5, 1995 the Chamber of Auditors by
the Protocol # 5 approved the Temporary standards of audit in Ukraine. The
first four standards were:
# 1 “Objectives of audit”
# 2 “Audit agreement”
# 3 “The main audit principles”
# 13 “The audit conclusion”
However, the separate standards prevented from appreciating
the system selected by the Chamber of Auditors as a whole. Moreover, there was neither
the unity of requirements to standards nor interdependence of basic concepts (Zubilevich, 1996).
Then by 1997, there issued others three audit standards:
# 4 “The audit planning”
# 8 “The auditor’s evidences”
# 9 “The drawing up of audit”
Nevertheless, this was not still enough to help the
Ukrainian auditors when they had to make a complex decision. Ponomarenko stated that the Temporary
standards of audit did not secure surely the audit firms in case they would be
accused of the lack of conscientiousness from both the audited companies and
judicial bodies. Besides, the system of standards proposed by the Chamber of
auditors contains 28 projects in addition to the active standards. Nearly all of them are based on international
audit standards but they are not published in the press, so they cannot be the
subjects of wide speculation (Ponomarenko,
1998:18).
The
Temporary standards of audit existed not long. From 01 January 1999, they were
repealed and the Chamber of Auditors with the Protocol # 73 approved the
National standards of audit composed of 32 standards. The new standards, named
“national”, still used the terminology of international ones. Because of this,
some terms were not in agreement with Ukrainian legislation.
The
National
standards of audit issued by the Chamber of Auditors changed actually nothing.
They passed a little ahead of adopting of new accounting standards. For
example, in the Standard # 1 “The requirements of the national audit standards”
the matter concerns financial reporting while this term appeared only in 2000
when the Accounting Law was signed by the President of Ukraine (Zubilevich,
1999). Pr. Borodkin noted that the National standards of audit
were a methodical base for audit activity in Ukraine. Although there were some
shortcomings that reduced the practical value of these documents, which
auditors need so much. These shortcomings consist of too scientific language,
general phrases and lack of practical advises to an auditor (Borodkin, 1999).
But the National standards of audit existed
only 5 years. In March 4, 2003 the National Bank of Ukraine issued the letter
712/1161-1595 “On application of the International standards of audit”. In this
letter, the NBU warned that if the Chamber of Auditors did not adapt the
National standards of audit to the International standards until June 1, 2003,
the banks would conclude agreements for 2003 year on auditing with foreign
firms which employees had international certificates. In case of defaulting, the NBU
would oblige Ukrainian banks to be re-audited following international
standards.
In order to press
the foreign audit firms and give Ukrainian auditors a chance to extend the
field of their action, the Chamber of Auditors decreed (Protocol # 122 of April
18. 2003) that the International Standards of Audit and Code of Ethics are
accepted as national standards.
The supporters of
this decision were firmly convinced that international standards of audit would
greatly improve the quality of the Ukrainian audit and enhance its prestige. Many
opponents of the step were characterized as “standpatters”. A member of the
Chamber of Auditors named such main groups of opponents who were against international
standards of audit:
–
big audit firms which have been using the
international standards for a long time. So the implementation of the
International standards would create additional unwanted rivalry for them;
–
some auditors and sole practitioners who never carried
out an audit but only checked tax reporting and gave consulting (Buhgalteria, 2003).
However, there is
need for developing national audit regulations to take accounts of national
specific character of Ukrainian auditors’ work. In the connection, the Chamber
of Auditors is going to issue the Science and Practical Comments on using the
International standards of audit. The Comments are aimed to help in
understanding The International standards, comments being developed to every
standard[13].
Thus, after having
existed nearly 14 years of Ukrainian auditing, the national standards of audit
did not start developing yet. All standards of audit until 2003 were based on
international ones without considering national peculiarities. An average
Ukrainian auditor has been waiting for the national standards very much, as he
needs some rules, some support how to conduct himself in Ukrainian environment
rather than in that of Western, which are strange for him. Actually, an
orientation of basic principles to Western priorities leads to a certain
conflict with Ukrainian society. This is a subject of the next chapter.
4. THE PLACE OF THE UKRAINIAN AUDITORS IN SOCIETY
The matter of the place
that Ukrainian auditors occupy regarding society is a sore and open issue in
Ukraine. Borrowing western slogans, the Ukrainian auditors were trying from the
very beginning to present themselves as an independent part of society, a
certain accounting elite, which advocates public interests. Nevertheless, in
the early 90s such a positioning could be misapprehended by the very society
and particularly by clients: it had a likeness with the fresh yet, at that
moment, communist ideas.
As just the clients
considered the main source of finance for the developing audit stratum, there
were noted in the preamble of the Audit Law that the system of a financial
control is aimed to protect an owner’s interests. Such
an orientation pointed out the main clients – owners. Since then the Ukrainian
auditors have kept on arguing that only they can represent to an owner the
actual state of affairs in his company.
Moreover, there was conflict of interests. In the
middle of the 90s, the main consumers of the statutory audit and annual
financial reporting were tax inspectorates. Such a situation gave rise to
unfavorable criticism from state enterprises, as tax inspectorates were one of
the state control authorities. An owner of a state enterprise is a Ukrainian
State, so in this case it is impossible to understand whose interests auditors
protect (Zubilevich,
1995:16).
However, catering
for merely owners greatly constricted client circles. As the communist past
lost in thought, there were written in the Code
of ethics for professional accountants, accepted in 1998 that an defining feature of an independent auditor is his
responsibility to Ukrainian society which included clients, credit grantors,
governments, employers, employees, investors, the business and financial
community, and others who rely on the objectivity and integrity of professional
auditors.
Nevertheless, in
Ukraine neither society nor owners order an audit. These are managers of
companies that want to check their activity for correct tax charge[14]. Some Ukrainian auditors are alarmed at this and
are still trying to make believing owners in the necessity to be audited in
spite of the fact that in Ukraine owners and management are often “in the same
cord” and they do not need any outsiders between them. The rest understand that
it is difficult to change the situation. Redko wonders why the thesis on an
owner’s interests protection became a priori in an auditor’s activity. It is incomprehensible what an owner has to
be protected if the term “an owner” images a director or a chief accountant of
an audited company. Some auditors are trying to be “fastened” to a solvent
client if only for several years. Moreover, this is not an owner who chooses an
auditor. Just executive management chooses audit firms depending on their
capabilities to decide mainly tax problems (Redko, 2002b:50).
A blind imitation
of the Western principles prevent Ukrainian auditors from their right
positioning in a Ukrainian society. Western principles are not always
acceptable for Ukraine because of different levels of development, mentality,
history, etc. For example, the collapse of the bank “Ukraine” was a great crash
in Ukrainian history. The irony of it was that the auditor of the bank had been
Arthur
Andersen. However,
there was an essential distinction between Enron crash and that of “Ukraine”. In USA, nobody attributed
blame to the American government or other state structures. On the contrary,
the name of Arthur Andersen was heard as the main (after the very bankrupt)
causer of what had happened. In Ukraine
there were no heard of any claims against auditors (The mirror of the weak, 2002).
Thus, this is a task for
Ukrainian auditors to find their place among society. The attempts to imagine
as a protector of all Ukrainian society do not meet with support among the
society, as it is incomprehensible how an auditor can represent a real state at
an enterprises taking into account a high level of shadow economy in Ukraine.
Nor the owners of companies can be the main clients of audit firms as in
Ukraine this is mainly executive management who are initiators of an audit.
5. THE INDEPENDENCE-DEPENDENCE OF UKRAINIAN AUDITORS
Here we consider
the matter of auditor independence in two lights: independence from the
government and dependence on clients.
Independence from the government. In another economy in transition, the Czech Republic,
there is one Chamber of Auditors, which provides a single focus for regulation
and enforcement outside the government (Sucher and Zelenka, 1998). On the
contrary, in Russia, an organ of executive power appointed by the Russia
government regulates an audit activity[15].
The Ukrainian auditors are enough independent. The
audit organizations train auditors, give them a qualification and keep their
eye on auditors concerning discharging their professional obligations.
Unlike developed
countries, where auditors have a great deal of freedom in their actions and
self-control, Ukrainian auditors have been given an absolute freedom
accompanying a full unconcern of the government for audit existence and
development (The mirror of the week, 2002). The
government actually provided self-control for Ukrainian auditors: there has
been no governmental control body over them. The Chamber of Auditors is an
unprofitable and, in all but name, social organization which are not competent
for legal approval of its decisions. The Union of Auditors is in a similar situation
(Redko, 2002b:49)
Nevertheless, it
does not mean that Ukrainian auditors are in “hothouse” conditions. The
Ukrainian government restricts auditor independence by distributing auditors
among branches.
For example, on December 7, 2000 there issued the Banking Law
No. 2121-III which enacted that the audit of a bank is to be performed by an
auditor that has a certificate of the National Bank of Ukraine empowering him
to audit banking institutions. Opponents of this step argue that a
certification of bank auditors by the NBU turns audit firms into revision
departments of the National Bank, and they will lose their independence completely
(Business,
2003).
Since January 01, 2001,
the Chamber of Auditors has stopped giving out specific certificates to audit
banks (type-B). From that time until April 2004 the NBU had not certified any
citizen of Ukraine but merely prolonged the certificates that had been given
out earlier by the Chamber of Auditors. After having received many complaints
concerning an infringement of their rights on free choice of business and on
certification vested by the Audit Law, the Chamber of Auditors applied to the
NBU for reconciling their interests on certification of bank auditors[16].
What's more, the Law of Ukraine “On Financial Services
and State Regulation of Financial Services Markets” # 2664-III of July 12, 2001
enacted that a financial institution is to be audited by an auditor who is
entered in a special list on the regulation of financial institutions and
services keeping by the government bodies. This demand had not been long worked
for a lack of the very list. However, The State Commission for Regulation of
Financial Services Markets of Ukraine finally
approved the List of auditors who are allowed to audit financial
institutions[17]. Since then an
auditor have to be put on the List only by authority of the Department of the
State Regulation of Financial Services Markets
of Ukraine
The number of
bodies wishing to manage an audit activity is on the increase. Among them there
are law-enforcement agencies that tend to get independent auditors to take part
in hack (spoken) revisions accordingly art. 128 the Administrative Code of Practice (Redko, 2002a).
The dependence on clients is a very painful problem for Ukrainian auditors. Here we consider its two main aspects:
1.
The foundation of dependent audit firms. As a matter of
fact, the Audit Law interdicts to audit:
–
by an auditor who has close sibling connection with
the management of an audited company;
–
by an auditor who has private property interests at
the audited company;
–
by an auditor who is either management or a founder,
or an owner of the audited company;
–
by an auditor who is an employer of the audited
company;
–
by an auditor who is an employer, joint owner of
a doughtier enterprise, a branch or an
agency of the audited company (art. 24, the Audit Law).
Nevertheless, some auditors are in management of
companies (especially at holding companies). They found their own firms
auditing subordinated companies that are a part of the holding. This is
explained by the wish of management to prevent from leaking information about
essential faults and more credit to the “own auditors” (Redko, 2002b:49).
2. Rendering of consulting services. This is a sore
point for many countries. It was a shock for American society to learn that in
2001 Disney paid to PriceWaterhouse Coopers for auditing and
$US 32 mln for other services[18]. For example, in Czech Republic auditors are prohibited from offering
bookkeeping consultancy or completing tax return for those clients whom they
audit (Sucher and Zelenka,
1998:) 731).
In Ukraine, there had been no problems with consulting
and only the Western events made Ukrainian auditors see why it is bad. The
Audit Law allows along with an audit to make examinations, accounting and tax
consultations, an analysis of financial and economic activity and other
economical and legal support of business (the Audit Law, art. 3).
As we had seen in
Table 1, auxiliary services ratio was 47% in 2000. Therefore, clients tend to
obtain from Ukrainian auditors a whole complex of services. In fact, it is
profitable to have such clients. So, no wonder that there have appeared new
services such as accounting for the third party, software developing, tax
automation, etc. Nevertheless, Ukrainian auditors believe that it is not
services but an audit has to extend covering political, social, charitable
organization, etc. (Galitsian
contracts, 2002a).
Thus, the Ukrainian
auditors have actually full independence from the government while there is a
tendency to restrict the independence by fastening auditors to government
organizations such as the National Bank of Ukraine, The State Commission for
Regulation of Financial Services Markets of Ukraine, etc. At the same time,
Ukrainian auditors are dependent on their clients as the circumstances are
pressurizing the Ukrainian auditors to give out mainly positive auditor’s
conclusions.
Ukrainian
independence has (or rather must have) its native distinctive features
different from universally accepted ones. These distinctive features are caused
not only by the fact that the profession of an auditor is too “young” for
Ukraine but also by institutional environment of the national business, ownership
and the place of an audit in national economy (Redko, 2002b:51).
6. TODAYS’ PROBLEMS OF
THE UKRAINIAN AUDIT
Now we can
assert that the Ukrainian audit exists. It has many problems but the problems
are revealed, they are not covered up, and there are many discussions in mass
media about them.
The actual
problem is a dumping. Usually auditors do not have stable prices. In order not
to lose a client, they are always ready to give a considerable price reduction
(Galitsian contracts, 2002b). The Union of Auditors along with the Chamber of Auditors intend
examining all audit firms how they keep national standards of audit, including
a ratio between prices and quality of their services[19].
Another problem is a quality control of audit
services. Illusions of independence made some auditors feel being out of any
control. There are only 5 persons that work in Control and Registration
Commission at the Chamber of Auditors. Working on a voluntary basis (gratis)
they have to control 1700 audit firms (sole practitioners) throughout Ukraine (Galitsian contracts, 2002c).
In addition, the
certification of auditors gave rise to unfavorable criticism. Both the
representatives of international organizations– donors of Ukraine and certified
auditors – managers of audit firms who faced into difficulties while recruiting
qualified personnel (Redko, 2003a:47). In
this connection on November 19, 2002 the Chamber issued the Regulations on
Certification of auditors (the Protocol No. 116). The Regulation extended the
term “certification” and the list of disciplines which a candidate for a
certificate has to learn; entrusted the Chamber of auditors with examining;
implemented an continuous raising the level of auditors’ skills, etc.
All the time, since 1997, the
Ukrainian auditors have been trying to extend clients through the statutory
audit. The
part of auditors has been in a wait condition. Instead of working up an audit
market together with other auditors they either wait for a statutory audit or
for one-shot job provoking some appeals of auditors to the government
(Pilipenko and Shevchuk, 2002:19)
For example, Redko
proposes an audit to be statutory:
1)
for public organizations, political parties, mass
media,
2)
when companies are privatized, amalgamated;
3)
when land is parceled out among farmers;
4)
for annual financial reporting of public and close
corporations;
5)
all budget enterprises (mainly health protection and
education)(Redko, 2003b:53).
The Union of Auditors, the
Chamber of Auditors and even some initiative groups have prepared about ten
bills but all of them duplicate each other and mostly they are not passed in
the Verkhovna Rada. These failures
are the result of the abasement of
auditors on the parliament and government. The happy years for the Ukrainian
auditors, when Alexandra Kuzhel[20] was their
representative in the Verkhovna Rada fell into the past. The other members of
the Union of Auditors who came in her stead have not had the same authority
over the parliament[21].
Now we mark the main task that
the Ukrainian auditors have to decide in the nearest future.
First, the
Ukrainian auditors have to determine their position in society, i.e. define
whose interests they protect. There is some conflict. On the one part, an audit
firm is a business client-oriented structure. These clients are first of all
management, directors and even chief accountants of companies[22]. On the other part,
auditors want to represent public interests. Actually, it is a very difficult
problem for anybody to represent interests of all society or even an owner in
such conditions:
a)
an audit is called for if a company must be audited
according to a law,
b)
in 90% cases clients are interested in tax auditing
(Redko, 2002b:50).
So many Ukrainian
auditors should call things by their right names and name themselves as tax and
accounting consultants. It may be reduce their status but it is an honest step
that would meet approval and support among clients.
Second, it is a barest
necessity for Ukrainian auditors to develop national standards of
audit adapted to the Ukrainian reality.
Third, quality
control on audit services has to be open and all-or-nothing. The Union of Auditors and the Chamber of
Auditors of Ukraine should widely cover the work of the commissions on
professional ethics in mass media. An open and outright fight for “clean” ranks
would give renewed impetus to an audit movement in Ukraine.]
7. CONCLUSION
In a initial state an Ukrainian
audit was developing rather with the help of administrative methods. A competent
aggressive politic in the form of a statutory audit in the middle of 90s gave a
powerful incentive to an audit development. At that time, Ukrainian auditors
had built their original capital and made their main clientele.
After a statutory audit had been reversed for most of
Ukrainian companies, many audit firms were failed. Those who kept in the market
became to render widely auxiliary services. Ukrainian companies have to resort
to the help of auditors because of tax pressure. A competition with the Big Five forced
Ukrainian auditors to accept international standards of audit as national ones.
In Ukraine,
auditors are actually independent from the government unlike, for example,
Russia where there is a state control on audit activity. At the same time,
there is dependence on clients. During the last 15 years many audit firms have
practically knit with their clients and a rotation of auditors would be useful.
However, there are some doubts. First, it can hardly believe that a rotation in
Ukraine would be carried painlessly enough. Second, most of audit firms survive
owing to regular clients (patrons) which they “snatched away” back at the time
of a statutory audit.
The Ukrainian
auditors have to find their place in society. An audit just as it is (an
examination of financial reporting by request of an owner) is not much called
for in Ukraine. Still, Ukrainian auditors have no wish to name themselves as
tax and accounting consultants. However, there is an allied profession as
lawyers who do not represent themselves as representatives of society. They
direct their attention toward clients who pay them for consultation,
representing their interests, etc.
Ukrainian auditors
know their problems and discuss them openly. The Commission on public relation
works actively with mass media, takes part in round-table discussions and
popularize profession. This holds out hope that Ukrainian auditors finally
occupy a fitting place not only in Ukraine but also in the world arena.
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[1] Joint ventures in Ukraine are commonly known as
enterprises that are based on joint capital of Ukrainian and foreign founders
which together control the enterprise and share their income and risks.
[2] CRA is equivalent to a public sector auditor.
[6] Session no. 11 , The Room of Session
of Verkhovna
Rada of Ukraine, September 19, 1995 at 16 o’clock in the afternoon
[8] the State Commission on Securities
and Stock Market the Order N 330
of December 23, 1996 ‘On approval the Temporary regulations on giving regular and particular information by public
corporations and bond issuers
[9] on June 01, 2000 г. the Law on licensing of some activities № 1775 was adopted. The Law did
not provided for licensing of audit activity
[13] REQUIREMENTS to
the Science and practical comments on an application in Ukraine of the
International Standards of Audit, assurance and ethics protection and
Regulations on national audit practice. The
REQUIREMENTS are approved at a joint sitting of the Commission on audit
standards and practice of the Chamber of auditors and the Commission on national standards of audit of
the Union of auditors (the protocol of July 3, 2003)
[14] although it is
a common practice in Ukraine
when companies believe that it is less expensive to call for tax audit and pay
some fine which can be equal to an audit price
[16] the Chamber of Auditors, Letter ‘Concerning a certification of external
auditors of banks’, N 2-131 of April 13, 2004
[17] the Order of The State Commission for Regulation of Financial
Services Markets of Ukraine ‘On approval of Rules of the Register of Auditors
who can audit financial institutions’ N 86 of February 19, 2004
[20] O. Kuzhel was a deputy from 1994 to 1998. Being a very
energetic person of influence she was consolidating the Ukrainian auditors and
lobbying favourable laws for them
[21] There had been even a fact when the
President of the Union of Auditors and the Chairman of the Supervisory Board of
the Chamber of Auditors addressed the Ukrainian deputies not to approve a bill
which would make the work of the audit firms worse and promote the Big Five.
The member of the Chamber of Auditors I. Belousova appears to submit the bill
off, by her own initiative without coming to an agreement with the Chamber of
Auditors (the Letter
of the Chamber of Auditors of
N 2-121 of July
04, 2001)
[22] chief
accountants are often an audit initiators in order to eliminate errors before
an examination of tax officers
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