Nikolai Remizov
There was a turning point for Russian auditors in October 2000. The Russian official translation of International Standards on Auditing (ISA) was issued with participation of the International Center for Accounting Reform (ICAR).
It is hard to overestimate the importance of this edition in the current Russian environment. Russian auditing practice has been developing for several years. Experts are still involved in disputes as to whether it has been developing at a sufficient pace, whether generally accepted audit principles are taken into account and whether we are moving in the right direction. Debaters used to appeal to international standards which almost no one in Russia managed to read because they existed solely in English and were available only through orders from abroad. Meanwhile, Russian regulations such as audit rules (standards) have been drafted for the past few years. These rules (standards) also invited ambiguous reaction on the part of auditing practitioners: some auditors accepted them, others rejected for different reasons.
Different views exist as to whether ISA should be implemented in Russia. Since Russia needs foreign investments and financial statements of Russian enterprises must be transparent for foreign users, Russian auditors have to use either ISA or ISA-based national standards. Nevertheless, there are opponents to this official view who argue that most of their Russian clients are primarily interested in tax-driven inspections and tax optimization rather than in some abstract «attestation of fair representation». In addition, it is often more advantageous to issue untrue and unfair financial statements for tax saving purposes. There is a lack of knowledgeable investors that would analyze balance sheets and prior period earnings for investment decision-making purposes. Clients are not ready to pay reasonable fees for potential audits «in compliance with the standards».
It seems to be a pretty straightforward situation. Russian auditors should either attest fair representation in those cases when users of financial statements need this, thus complying with all (or most of) ISA requirements and referring to their activities as «audits», or meet client requirements for tax-driven inspections and accounting advice, thus referring to these activities as reviews, special purpose audit engagements or agreed-upon procedures. In the second case, auditors do not have the right to issue an auditor’s opinion as to fair representation of financial statements in all material respects.
At the same time, the move to ISA in Russia has been too difficult. Since many clients do not understand the substance of classical audit and are not really interested in it, the growing Russian audit profession does not yet have a history of operations in accordance with generally accepted rules of ethics. In addition, practices on an ISA basis result in more complicated and expensive audits, which puts qualified auditors at a disadvantage as compared to their competitors that do not comply with the standards.
In our view, certain coercion measures are required at the current initial stage in order to expedite ISA implementation in Russian audit practices. In addition, it is crucial to have an opportunity of control over which auditors comply with ISA and which do not.
Who should be responsible for this control – government agencies or public audit bodies? Each of the two proposed approaches has both merits and drawbacks. On the one hand, government officials might be expected to advocate government interests during quality assurance reviews and would not protect the «esprit de corps» of some audit body. On the other hand, now employees of government control and review agencies are not properly qualified to understand all the details of audit techniques. Besides, the government cannot afford to provide substantial funding for the expansion of such government inspectors. Some auditors are also concerned that confidential information obtained by government inspectors can be used to damage their clients (e.g. by reporting some violations detected to tax authorities).
Unlike government agencies, public audit bodies might introduce ‘peer reviews’ to make sure that their members meet audit quality requirements and comply with the standards. The funding of such peer reviews might be secured, for example, through membership fees. Such audit bodies would have a required number of experts who are qualified in audit techniques and standards and might perform peer reviews during ‘low activity’ seasons. However, there is reasonable concern that such reviews will not be strict enough. The thing is that there are currently lots of Russian professional bodies that are struggling for new members and membership fees. For objective reasons, they are not interested in «scaring away» individual auditors and audit firms with stringent requirements. In addition, some auditors are not excited about having a peer review of their operations. They say that peer reviews might result in the ‘pirating of clients’ (using data obtained from audit working papers), stealing of methodical know-how, unfair competition (i.e. attempts to get rid of a competitor by accusing it of an allegedly low audit quality) and other negative facts.
Only when quality assurance issues are specified in the law, will the above problems be solved once and for all. In our view, a reasonable combination of government and public enforcement methods seems to be a plausible solution. On the one hand, it might be reasonable to delegate audit quality assurance functions to some most respectable public bodies in respect of their members. On the other hand, a top audit regulator should be empowered to take away audit quality assurance functions from public bodies that are discredited for their policy of appeasement or other negative acts and, vice versa, the regulator should extend the [audit quality assurance] functions of those bodies which prove to be strict and intolerant of noncompliance with the standards. As for licensed audit firms and individuals that, for some reason, have not joined the bodies authorized to perform quality reviews, they might be subject to direct control of government agencies with participation of qualified expert panels or teams from respectable public bodies.
There is no streamlined audit quality assurance system in Russia. So it is not possible to state the percentage of Russian audit firms that really comply with the standards and those which merely declare this. In the autumn 2000, the Moscow office of the World Bank inspected dozens of Russian audit firms seeking audits of World Bank projects in Russia to check whether they comply with ISA. Both foreign and Russian experts certified in Western audit rules performed the inspection. The experts were all independent of both Russian government agencies and public bodies and, accordingly, of the firms under inspection. Working papers of auditors, internal instructions and procedures as well as compliance with these instructions and procedures were subject to review. Prior to the start of the review, the firms under inspection were not informed about the review program and documents to be inspected. On 2 November 2000, the official Russian media agency announced the firms that had passed the inspection. These were «Big 5» Russian accounting firms and six 100% Russian audit firms: MKD from Saint-Petersburg, Moscow-based «Top-Audit», «Rusaudit, Dornhoff», «Rufaudit», «FBK» and «UNIKON/MS Consulting Group». So it is reasonable to assume that a tiny percentage of thousands of licensed Russian firms and individuals is on an ISA basis, given that many firms do not even claim to be.
Some Russian and foreign experts regard ISA-based audits in quite a peculiar way. The author of this article had a chance to find out two most frequent views of Russian auditors re ISA audits. Some Russian auditors are confident that their level of operations is «in line with international standards». The fact that these auditors have not read ISAs and are unaware of what the standards say does not reduce their self-confidence. Auditors believe that their client satisfaction and a lack of claims prove that they meet the standards. Other Russian auditors admit that they do not comply with ISA. However, they do not think this is required because Russia has its own specific audit requirements.
On the other hand, the author often heard some foreign auditors (usually senior staff of «Big 5» accounting firms who are certified in their homeland but are not quite proficient in the Russian language) draw a line between ISA – and Russian standard-based audits. The foreign auditors did not specify which «standards» they had in mind, i.e. rules (standards) of the Audit Commission, documents of the Russian Auditors Collegium or something else. They did not attempt to provide reasonable explanation as to which sections in Russian regulations are not satisfactory in the view of ISA respectable experts. However, foreign professionals implied that «an audit under Russian standards» is a current practice of individual Russian audit firms when the provision of related services is considered a top priority, while compliance with some standards is hardly achieved.
So one of the problems related to ISA implementation in Russia is quite straightforward. Foreigners often do not have an idea about what has been completed in the area of drafting and establishing national standards while Russian auditors have a poor idea about ISA. In addition, few Russian auditors are aware of even national audit rules (standards) despite the fact that they are produced in a clear language and have received numerous comments from experts.
The Russian President’s Audit Commission has produced 37 audit rules (standards), a set of audit techniques and a glossary of terms and definitions. In order to prove that Russian audit rules (standards) are close to ISA, the author performed a comparative analysis of these documents and provided comments on the reasons for occasional differences.
A full text of such analysis and comparison tables are published in January and February issues of the «Financial and Accounting Consulting» magazine. In our view, 26 Russian rules (standards) are in close compliance with their ISA equivalents. Although the names of eight rules (standards) are similar to those of their ISA equivalents, there are material differences. Such differences are due to different reasons such as peculiarities of Russian national legislation (the auditor’s opinion on financial statements, the auditor’s report on special-purpose audit engagements, related services), changes made in ISA during the work on Russian documents (audit sampling, audit of small businesses) as well as due to subjective views of those who drafted and discussed relevant regulations (fraud and error, audit evidence). The above differences need to be eliminated in the future both when improving Russian audit legislation and drafting revised rules (standards).
As of the end of the year 2000, five Russian rules (standards) do not have direct ISA equivalents. They cover issues such as preparing an auditor’s letter of comments addressed to the client’s management, educational and training requirements for auditors, rights and obligations of auditors and their clients, requirements for internal standards of audit firms as well as peculiarities of special purpose audit engagements that are tax-driven inspections. In our view, national audit regulators can solve these issues on their own.
Thirteen ISAs and International Auditing Practice Statements do not have Russian equivalents. This is merely due to the fact that drafting Russian regulations takes time and the work on a full set of documents is not yet complete.
In our view, most Russian audit rules (standards) represent a more detailed version of ISAs adapted for Russian experts. So when complying with Russian rules (standards), Russian auditors also comply with most ISA requirements. We hope that our analysis will contribute to a complex process of ISA implementation in Russian audit practices.
Mr. Nikolai Remizov is Director of Technical Standards Department, FBK audit firm. He can be contacted by fax