Yuri Danilevsky
Oleg Ostrovsky
Eugeny Guttsait
The work on the current set of Russian audit standards has been going on since 1995. At the outset, the set of standards was established as a national equivalent of International Standards on Auditing (ISA) issued by the International Federation of Accountants (this used to be explicitly stated in the «General Provisions» Section of the first Russian standards). Therefore the underlying principles of ISAs were almost automatically incorporated in Russian standards. But, of course, one could not do without changes and amendments.
Firstly, Russian audit standards were called ‘audit rules (standards)’ (hereinafter referred to as the audit rules). This results from the difference between Western and Russian interpretations of the term ‘standards’. Until fairly recently, Russians regarded standards as a way of achieving interchangeability of components and spare parts rather than some reasonable harmonization of activities. Secondly, the following decision was crystallized (which has proved to be valid). Russia should develop a set of audit rules based on the Interim Rules of Audit Activities as approved by the Russian President’s Decree rather than wait for the issue of the audit law, which would have been the desired and solid framework. The adoption of the law was expected to require certain changes in the audit rules but initially it was clear that the updating process would be much easier than the creation [of audit rules] from scratch. Thirdly, localization was sought at the outset, which manifested itself both in the wording of Russian equivalents of ISAs and in the audit rules that do not have ISA prototypes.
Now there are 37 audit rules* approved by the Russian President’s Audit Commission. While 31 of them are ISA equivalents, six rules represent original national documents that incorporate specific features of Russian audit (short history of the Russian audit profession, etc.). These are «Description of Related Services and their Requirements», «Requirements for Internal Standards of Audit Firms», «Rights and Obligations of Audit Firms and Audited Entities», «Procedures for Entering into Audit Engagement Contracts», «Written Information on Audit Results Provided by the Auditor to the Management of Economic Entity» and «Auditor’s Education».
The six standards deal with issues which are either not specified in ISAs at all (since their treatment is based on established practices) or «embedded» in different standards. For example, the «Rights and Obligations of Audit Firms and Audited Entities» rule sets out rights and obligations of both parties to the audit engagement, which is quite useful for auditors and, especially, their clients because many clients believe that the rules (standards) do not apply to them. In addition, the six rules cover issues that are specified by the International Federation of Accountants in other documents (e.g. education of auditors) or regarded as those within the competence of national bodies (e.g. a set of related services). So, as a result of these six rules, a set of Russian audit standards is somewhat more extensive than the ISA system but remains within its framework and sticks to its overall idea.
Let us come back to the bulk of audit rules and their ISA prototypes. The Russian translation of ISA 1999 Bound Volume prepared by the International Center for Accounting Reform (ICAR)** contains 47 standards. Consequently, 16 documents that should be ISA equivalents are missing in the set of Russian audit rules. These are not only low priority documents ousted from the forefront by more urgent standards. These include backbone standards such as «The Preface to Audit Standards and Related Services» (similar to ISA 100), «Framework of Audit Rules» (similar to ISA 120), three standards on bank audits (similar to ISAs 1000, 1004, 1006), etc.
Neither audit books nor oral discussions in various audit conferences have provided a compelling reason to justify that even one of the 16 ISA equivalents is an unnecessary document for Russian environment. In our view, it is simply impossible to justify such a statement. A detailed review of the 16 standards proves that all of them can be effective in this country. In addition, several «purely Russian» audit rules should be developed.
To this end, we are surprised at recent statements of some high-level audit officials that the work on audit rules is almost over. This view might be driven by a fair belief that auditors can still use 37 existing audit rules in their practice. The lack of funding for continued efforts and reluctance to search for it might be another reason. However, consequences of this complacent view might be so grave that once again a classical formula of Russian political folklore comes back to mind, i.e. «we sought for a better thing (in terms of time and cost saving) but the outcome is [bad] as always».
In his interview, Mr. Jim Sylph, the Technical Director of the International Federation of Accountants, clearly stated that if only a portion of the standards is used, it will not be possible for the audit report to make reference to International Standards on Auditing*** with two consequences as follows. The international capital markets will not give as much recognition to audited financial statements of Russian enterprises (this will result in fewer investments and higher cost of loans) and it will put Russian audit firms at a disadvantage. No doubt, if Russia ends up with 31 out of 47 ISA equivalents, at best it will have a status of a country with an incomplete or partial use of ISAs. In addition, such a complacent position will lead to a significant delay in developing a full set of national audit rules (which will, sooner or later, push its way through). A qualified and well-built team of audit rule drafters has been idle since July 2000. In addition , it was idle during the second half of 1999.
On the other hand, if all of the 47 ISA equivalents are created, it would be possible to state the completion a fundamental and useful activity as well as the full use of ISAs in this country. Additional 7-9 audit rules will be quite useful at the initial stage of Russian audit development and are likely to become excessive in ten or twenty years. In any case, their existence will provide no reason for the conclusion that Russian audits are only in partial compliance with ISAs.
Further work on audit rules should be generally organized as follows. The MinFin and Central Bank will either seek funding for these activities or explicitly state that they do not have necessary funds. In the latter case, one can rely only on sponsors or public associations of auditors. 300-400 thousand rubles are required to finance the development of an audit rule. This amount can be decreased with efforts accelerated through easier operating procedures.**** Incidentally, these efforts might result not only in a full set of 54-56 audit standards but also in a complete List of Terms and Definitions Used in Audit Rules (ideally, it should take the form of a standard, as in the ISAs) which might serve as a solid basis for a national audit dictionary. In our view, the relevance of the latter product does not need to be proved.
In our view, 16 ISA equivalents and several «purely Russian» audit rules should be drafted in three versions. We believe that the first version should include equivalents of ISA 100, ISA 120, ISA 1004, ISA 1006 and, possibly, a rule (standard) on audits of unitary [100% state-owned] enterprises. The latter audit rule is crucial because a large number of unitary enterprises will be subject to audits. In addition, ISAs focus on public sector perspectives. However, these are covered at the end of relevant standards rather than in a separate standard. Such structure does not seem possible for the first version of Russian audit rules because most of them have already been issued.
The first version of audit rules should be followed by a second, which will take into account practical skills of the application of the former: drawbacks identified, recent changes in ISAs, etc. If the Audit Law is promptly adopted and an efficient federal government audit regulator is established, the move to the second version might be reasonable before finishing the work on the first version of audit rules. We believe that, subject to proper funding and organization, the second version of audit rules can be drafted much quicker than the first . A team of drafters can be selected through a tender. The updating of audit rules should be similar to ISA improvement procedures. Substantive changes are performed every few years while minor improvements can be made annually.
Audit rules implementation will require a set of various measures and is subject to special comprehensive research which is beyond the scope of this article.
Y. A. Danilevsky is a First Deputy Chairman, Audit Commission under the Russian President.
O. M. Ostrovsky is a General Director of Russia’s Institute of Professional Accountants.
E. M. Guttsait is a Senior Researcher at Russian MinFin’s Financial and Research Institute, he can be contacted by phone (095) 299 8945.