Nikolay Pavlenko
One of the specific features about the current draft of the national audit law is the fact that it does not take into account the specific nature of the national accounting system and current practices of economic entities.
The discussions of the draft law revealed the following issues that need to be solved in terms of its practical implementation:
- the usage of the term «audit» since there are several areas of audit activities;
- the existence of several charts of accounts;
- supervision of audit activities.
The audit law that is intended to be a single systemic regulation on outside control should govern several audit areas rather than limit the term «audit» solely to controlling the accuracy of financial statements.
In terms of its substance and terminology, the draft law keeps silent about special types of audit while governing procedures for financial auditing. Special types of audit are referred to as those included in international classifiers and specified in Russian regulations rather than to audit specialization. For example, it is worth mentioning environmental audit, man – caused emergency audit, mineral deposits and natural resources audit.
The term «audit» is used in Russia in a broad context similar to that found in international practices. The term «audit» can apply not to only to the reviews of financial statements by certified auditors with economic or legal academic background, but also to the assessment of other parameters of the enterprise and its environment in other areas, i. e. reviews of the complete operating cycle of the enterprise and its business environment.
If the law is enacted without giving effect to the above factors, there might be legal collisions that can lead to unpleasant practical implications for both lawmakers and audit firms.
There are two ways of avoiding such collisions: either the name of the law should be changed to the Financial Audit Law or the draft should be amended to identify special types of audit that are subject to separate laws and regulations. Accordingly, the definition of audit activities will require relevant amendments.
Audits of financial statements and the information disclosed may include examination of such matters as the fair valuation of assets (e.g., mineral deposits), ascertaining that the enterprise is in compliance with laws and regulations (e.g., environmental remediation and reporting), or determining the amounts of contingent liabilities (e.g., the potential outcome of a lawsuit or the consequences of a man-made catastrophe). Consequently, the auditor may have to do audit work (or receive expert assistance) in areas that are not part of the normal accounting system. The audit law should take these broad possibilities into account, but at the same time, should not give the «financial auditor» such an extensive mandate as to infringe upon the prerogatives of other separate laws and regulatory agencies.
The second issue arising from different financial reporting techniques resulted in different types of audit licenses (i.e. general, insurance, bank and investment audits). However, quite a large group of economic entities is not covered by the draft law.
Three types of charts of accounts and financial statements coexist in the Russian accounting system.
The first type is intended for budget organizations and public sector institutions funded out of the government budget. These entities produce their own financial statements and operate under specific laws and regulations.
The second type is effective for credit organizations and banks with financial performance structured in a different way. Accordingly, they have been using their own special chart of accounts and set of additional financial reporting components.
The third type is established for organizations and enterprises that keep accounting records under a general (standard) chart of accounts intended for business enterprises. It should be noted that this system has many accounting options and subsystems, such as the simplified accounting system for small businesses.
Accounting for non-profit making organizations that are not engaged in business activities requires special attention. This accounting option represents a hybrid regime, somewhere between what is used for budget-funded organizations and accounting treatments for business entities. This is evidenced by the fact that many non-profit organizations used the chart of accounts for budget-funded organizations for a long time because it enabled them to solve their tasks and represent more fairly their financial performance.
Each type of the chart of accounts is intended to meet its own function. The first function in the case of budget-funded organizations is representing as accurately as possible the use of funds for their intended purpose and ensuring proper control. The second function in the case of banks is disclosing as completely as possible the use and flows of clients’ funds and financial transactions involving the bank’s own funds and borrowings. The third function in the case of all other enterprises is ensuring control over proper cost and profit accounting.
In the meantime, some Russian audit theorists insist that an audit professional possessing a single license and audit certificate can qualify for the reviews of financial statements issued by any legal entity or individual. Many audit theorists refer to international experience and tend to forget about the specific nature of Russian audit and accounting. However, the solution of this issue is not unambiguous.
It is recommended by the author that an audit of budget-funded organizations should be included in the list of types of audit activities, as established by the draft law.
The review of the audit law by professionals has revealed several views as to how the audit community should organize control of audit activities.
The first view is that auditors should be controlled by a government agency (agencies).
The second view: auditors should be controlled by the community of audit firms represented by the audit panel that includes partners, managers or founders of leading audit firms. Being top managers, some of them might not even have a valid audit certificate. This would encourage the monopolization of the audit market by a group of large companies and facilitate the manipulation of smaller audit firms, auditors in public practice and employees.
The third view: auditors should be controlled and certified by a public audit body that brings together all experts with valid audit certificates. The most respectable professionals should manage operations of the public body. Upon the expiration of an audit certificate or in the case of its absence, a member of the community is expelled and becomes an associate member without voting rights (until he or she obtains an audit certificate). Most national professional bodies are structured on a similar basis, i.e. they are self-regulating associations of qualified professionals.
An everlasting question as to what is more important – an organization (state, firm, enterprise…) or a human being, rather than professional assessments of the implications of this law, underlies the disputes about the structure of the audit community. In Russia, the interests of an Organization have always been considered superior to those of an individual (citizen). This results in the lack of link between the actions of an individual and his or her professional responsibility.
In my view, considering the current environment, the most feasible scheme is the one based on the first view, i.e. the control and regulation of the Russian audit profession should be performed by the government with active involvement of all audit firms and individual practitioners. However, this scheme should be transitional, with a provision in the law that most of the practical control and regulation will be passed on to a national professional body of auditors.
This has been a description of some of the issues to be resolved with respect to the draft audit law. The author and ICAR invite comments from readers and, in particular, ask readers to consider writing short articles, supporting or opposing the views presented here.
Nikolay Pavlenko is a Deputy Chairman of the Federation Assembly Section on Accounting, Audit and Supervisory Activities and a Partner at Georg Consulting.