With the signing and provisional application of the Association Agreement, Ukraine’s path to European integration will be made up of supposedly small steps that will bring the country closer to the EU in various spheres. In January, the Verkhovna Rada is expected to adopt a new law on audit activity in line with EU norms. Currently, Ukraine’s audit sphere functions according to norms established back in the early 1990s.
The current Ukrainian system of audit services regulation prescribes that the Audit Chamber of Ukraine performs supervision activities. “Indeed, this system can be called a self-regulatory system, wherein one auditor checks another,” says Scott Calhoun, project manager with the EU-FINSTAR (“technical assistance in priority areas of the financial sector”) project, funded by the EU Delegation to Ukraine. “Huge international scandals have taken place due to gross violations of audit quality standards, ignored by the auditors manipulation of financial reports, and other significant audit shortcomings. The collapse of the Enron energy corporation in 2000 is an example. People lost their money and there was a deep distrust of the audit profession. Because of this, the International Auditing and Assurance Standards Board (IAASВ) developed recommendations to form the basis for a new model of audit regulation. These recommendations were applied in EU directives.”
The foundation of a modern audit system in the EU is a functioning independent public body that supervises auditors. Ukraine is going to establish the same model. The Association Agreement prescribes EU cooperation in audit, and the governmental action plan for implementation of the Agreement prescribes harmonisation with European legislation.
Originally, in August, 2015,the Ministry of Finance drafted a law with the assistance of the EU-FINSTAR project and World Bank specialists. The EU invited John Hooper, a British audit expert with extensive experience in audit reforms, to join the project. Hooper assisted with the draft of the new auditing law in partnership with the Ministry of Finance, and then working with the Verkhovna Rada Committee on Taxation and Customs Policy, chaired by Nina Yuzhanina.
The draft law prescribes the establishment of a public supervisory body for audit services consisting of a supervisory council for audit activity, and an inspection body for quality assurance. The supervisory body will oversee audits of enterprises and institutions of public interest (i.e. large companies and financial institutions that have shares traded on stock exchanges and that must report to the Securities Commission). The Audit Chamber of Ukraine will continue to supervise auditors engaged in optional audits. The Chamber will in turn be supervised by the new public supervisory body.
“An independent supervisory body will strengthen confidence in auditors. Accordingly, it will increase demand for their services. It will also contribute to investments in Ukraine. After all, trust in true accountability is very important for investors,” says Hooper.
Currently about 2,500 auditors work in Ukraine. About a quarter of them work for companies engaged in obligatory audit. Obviously, after the reforms are implemented, there will fewer such companies as many of them still fall short of the new standards and international requirements. This segment of the market will feel the greatest impact from the reforms.
Like many other draft laws aimed at European integration, the draft law on audit has met significant resistance from stakeholders. The strongest resistance has come from the Audit Chamber of Ukraine, which will lose some of its authority and become subordinate to the new public supervisory body after the reform. According to EU norms, members of the audit supervisory body must not be actively engaged in audit work, but currently almost all the members of the Audit Chamber of Ukraine are practicing auditors. Coincidentally or not, the Ukrainian parliament registered an alternative draft law on auditing which, according to experts, did not meet the EU requirements and, as such, could not be combined with the draft law prepared by the Ministry of Finance and international consultants. After discussion by the Committee on Taxation and Customs Policy, MPs accepted the more pro-European draft law, which was also received positively by European institutions and supported by the National Reforms Council.
“The resistance began to decline when we started to work together in a working group with the Parliamentary Committee on Taxation and Customs Policy,” says Hooper. “The fears that the reform will hurt the audit profession are obviously completely unfounded.”
The draft law is now in the final stages and is expected to be submitted for government approval at the end of the month. It is anticipated that the parliament will quickly approve the law at its January 2016 plenary session.
The EU-FINSTAR project has started its work on March, 2015. Its duration 36 months. The project is running by a consortium led by Hulla & Co.Human Dynamics KG (Austria). Project budget 3.6 mln. Euros. The project’s aim is to support financial sector reforms in Ukraine through the implementation of nine components that strengthen transparency in private sector and develop the capacity for regulation and supervision the financial services sector.
More information on the project’s web-site: www.finstar.org.ua