Galina Florova
The State Duma is about to finish working on the draft Audit Law. This draft law is among the regulations to be adopted at the spring session [of the State Duma]. During its exposure period, all stakeholders had a chance to provide comments on the draft. So the long-awaited audit law is soon to be ready.
Following the spontaneous development of the audit market in Russia in late 80s-early 90s of the 20th century, the government issued the Interim Audit Rules in 1993 that are still effective. There have been attempts to adopt an audit law but they were a failure. Now the draft law is ready for the second Duma hearing. The draft law is intended to maintain some continuity with the Interim Rules but there are brand new provisions that reflect objective needs of the audit market.
Re: Objective of an Audit and Fair Presentation of Financial Statements. Under current Russian legislation, the objective of an audit is to ascertain whether the financial statements of an entity give a true and fair view and whether transactions of the enterprise comply with current legislation.
Under p.1 of the draft law, the objective of an audit is «to express an opinion whether the financial statements of auditees give a true and fair view and whether accounting record-keeping procedures comply with Russian legislation». This understanding of audit objectives is recognized internationally. According to the International Auditing Practices Committee (IAPC) of the Council of the International Federation of Accountants, the objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework.
P.1 of the draft law provides the previously unspecified definition of the term «fair presentation of financial statements» from the viewpoint of auditing, which is «… the level of accuracy of financial statements that enables their users to draw correct conclusions about financial and economic position, financial performance of auditees and make informed decisions based on these conclusions».
So we are getting closer to generally accepted terms to the extent of audit objectives. The primary objective of an audit all over the world is to protect users of economic information, provide them with fair data about the accuracy of financial statements and financial position of auditees.
Re: Audit Standards. P.5 of the draft law introduces a two-tier set of Russian audit rules (standards): federal rules that are approved by the government (represented by an authorized federal agency) and standards developed by professional audit bodies. The federal standards should be binding for all market participants while the second-tier standards are binding only for members of audit bodies (associations). The latter standards cannot be more relaxed than the federal standards. In my view, the upgrading of audit standards to a law is a significant step forward. Such standardization of auditing has proved to be efficient internationally.
However, it should be noted that the implementation problem of audit standards does not arise from the fact that either auditors are unaware of them or the standards do not have a legal effect. The problem is much more pervasive. The Russian audit will become civilized only when there is an interested user of fair audit information.
Re: Audit Secrecy. Now it is time to address a key debatable issue. The draft law approved in the first reading does not even mention this concept, which treats data obtained by an auditor during an audit as confidential information. We have been formally using concepts such as bank secrecy, medical secrecy, correspondence secrecy and investigation secrecy. For some reason, there has been a different attitude to audit secrecy. This might result from the past when there was a total government control of everything and everyone. It looks like an auditor will have to provide information about its auditees not only in line with a court ruling but also upon request of all agencies, including the Russian Ministry of Finance. Therefore, an audit community has been unanimous in suggesting the following explicit provision of the draft law: information that constitutes audit secrecy cannot be disclosed to third parties unless required by the court ruling.
Re: Federal Agency. Section 16 of the Draft Law introduces the definition of a federal government audit regulator. This is a «federal executive agency as specified by the Russian Government».
The federal government audit regulator will be primarily responsible for setting regulations within its competence as established by the Government, approving national audit rules (standards), arranging the certification of auditors in the Russian Federation, licensing auditors, determining the extent of and procedures for reporting by individual auditors and audit firms, organizing quality assurance reviews, accrediting professional audit bodies, maintaining government registers of certified auditors, individual auditors and audit firms.
It should be noted that the delegation of all these functions to a single agency may result in increased government regulation, which can impair the independence of auditors.
In civilized audit markets, professional self-regulatory accounting and auditing bodies are mainly responsible for audit supervision. Professionals themselves identify and expel bad faith market participants from their bodies. There are already quite respectable and strong public bodies of auditors in Russia that are able to assume this mission. In my view (and I am not the only one who thinks like that), it is not necessary to delegate unlimited authority to a federal agency because some functions can rest with public audit bodies in the interest of feasibility of operation.
It should be noted that in his review of the draft law the Russian President stated that its authors might end up with a «framework» regulation by delegating all these functions to a single agency. By the way, the draft does not even mention the existing Central Certification and Licensing Audit Commissions (TsALAKs) of the Russian MinFin and Central Bank. So the authors of the draft law tried to dismiss these two agencies from audit licensing. However, this might change during the second reading of the draft because the President believes that bank audits will be adversely affected if the Central Bank is dismissed from audit regulation.
Re: Audit Certification and Licensing. The draft law, like the Interim Rules, provides for the compulsory certification and licensing of audits and some related services because these procedures [compulsory certification and licensing] enable the government to control and impede the inflow of poorly qualified auditors to the audit market (see Section 13). A new idea is the delegation of certification and licensing authority to a federal government audit regulator. Is it really reasonable to concentrate unlimited power within a single agency, even a federal one? In my view, the concentration of licensing and supervision within a single agency is questionable.
Re: Audit Risk Insurance. According to generally accepted international practices, auditors must take out professional indemnity insurance. The detection risk exists regardless of the competence of auditors because they are also human beings and it is human nature to make errors. Even internationally recognized century-old firms sometimes face lawsuits over unprofessional audits and the costs of litigation are very high. Once again, auditors are subject to compulsory insurance in most countries.
Unfortunately, Section 11 of the draft law has quite a vague norm that enables audit firms and individual auditors to take out civil liability insurance under terms and conditions specified by a relevant federal agency.
Re: Auditor’s Responsibility. The Interim Rules have a norm concerning the auditor’s responsibility for audits conducted improperly. Obviously, audits are not subject to rigid rules in the environment where there are no quality criteria. It is difficult to establish some responsibility before requirements for a detailed auditor’s report have been set. Unfortunately, the draft law does not set forth audit quality criteria but enhances the responsibility of auditors for violations of the law.
Section 7 introduces the concept of a knowingly false auditor’s report. This is either an auditor’s report produced in cases where an audit is not performed or an auditor’s report that is in explicit conflict with evidence reviewed during the audit.
An auditor’s report can be considered knowingly false only following a court ruling. Filing a knowingly false auditor’s report would result not only in the cancellation of audit licenses but also in the criminal liability of those who sign such reports. The imposition of sanctions for violations of audit legislation rests with a federal agency.
However, penalty fees envisaged in Section 19 of the draft law for certain violations of its requirements are questionable because, under the Russian legal system, this liability is to be specified in the Administrative Offence Code. So amendments to the current Administrative Code should be considered alongside this draft.
Re: Audit Regulation. The draft suggests a new audit regulatory framework by providing government and non-government regulation (self-regulation).
Government regulation rests with a federal agency. It is expected to take over the Russian President’s Audit Commission, TsALAKs of the Russian MinFin and Central Bank, including audit certification and licensing.
The Audit Council of the federal agency is to be set up according to the draft law in order to obtain the input from the audit profession when taking government regulatory measures. The Audit Council should have representatives from accredited professional audit bodies (no less than 51% of its overall membership). In the view of the authors of the draft, the Council should maintain liaison with accredited professional audit bodies, develop national rules (standards) as well as major audit regulations adopted by the federal agency.
In accordance with the draft law, the non-government audit regulation is to rest with professional audit bodies that have obtained the accreditation (official recognition and registration) with the federal agency. These bodies can bring together auditors (including individuals), audit firms and their bodies (associations, unions). Under the draft law, individual auditors and audit firms must be members of at least one accredited professional audit body whose articles of association provide for relevant membership.
Also, the draft law provides that accredited professional audit bodies have the right to carry out quality assurance reviews of their members. They can impose certain sanctions as a result of these reviews or file a well-founded application to the federal agency requesting the imposition of penalties on such individuals and entities. These bodies can require their members to comply with audit rules (standards). The only thing that needs to be done is to provide a more detailed description of the authority of these bodies.
The non-government audit regulation is a brand new idea in Russian legislation. However, such type of audit regulation has proved to be a success in most developed countries because it facilitates the standard-setting process and enforcement by the government.
To this end, the draft law intended to streamline the audit market has some faults. However, we hope that the lawmakers will take into account the view of interested market participants and Russia will continue its way to the civilized audit market.
Ms. Galina Florova is the General Director, Fincomaudit. She can be contacted by phone (095) 190 1311 or e-mail: fincom@cityline.ru.