How Ukrainian business benefits from new rules for financial reporting and auditing

Last year, Ukraine passed new laws on accounting and audit. European experts explain how these changes can improve trust of foreign investors in financial statements of Ukrainian businesses and, therefore, raise interest in their assets.

When a company goes bankrupt, it’s not just the owners who suffer. For instance, if a bank hits the dust, both depositors and borrowers are at loss. When a company goes down, the first questions asked are these: “Who audited it?”, “What the company was reporting on?” and “Why the government did nothing about it?”

In late 2017, the Verkhovna Rada passed amendments to legislation on accounting and a new law on audit. These documents harmonize Ukrainian legislation with European Union’s requirements and the best international practices. EU Finstar, a European Union’s technical assistance project has been providing support to development of new laws since 2015. As soon as the new legislation fully takes effect in Ukraine, investors will finally be able to trust financial statements of Ukrainian companies.

These laws took a while to pass, and not without resistance. Scott Calhoun, EU Finstar Project Head and John Hooper, Senior Expert in Accounting and Audit spoke about why certain politicians tried to preserve status quo and how the new laws can change the old system. 

What would the new laws change for businesses?

After these laws fully take effect, financial statements of Ukrainian companies will be conformant with international standards.

It means that shareholders, potential investors, creditors and other stakeholders would be able to trust financial statements, because figures would reflect the actual state of affairs in a company and its real financial results.

A new regulatory authority will also be established to make sure that auditors checking financial statements have required qualification.

The biggest resistance was because of the new regulator, a public supervisory body taking over certain functions previously performed by the Audit Chamber. It will be directly responsible for regulating audits of financial statements of the largest Ukrainian companies that present public interest. The first task of the new regulator is to make sure that companies keep accounting and prepare financial statements the right way. The second task is to ensure that auditors checking financial statements are truly independent and competent.

Are the newly-passed laws meant to fight corruption?

To fight corruption and shadow economy, quality data is needed. How do you know whether you’re improving something if you don’t have real figures at hand? How can you analyze something and draw conclusions if you’re studying incomplete or made-up figures?

Say, here is an oligarch, and everybody knows what companies he owns and what assets he directly or indirectly controls. But how do you identify illegal or suspicious transactions when his financial statements are complete nonsense?

Even if everybody knows that that particular oligarch controls these or those companies, financial ties or suspicious transactions cannot be proved if the company’s credible financial statements are unavailable.

The international accounting and auditing standards must ensure quality of financial information in Ukraine, and that, in turn, must help with fighting corruption.

What would be a long-term effect for businesses?

In the future, businesses will receive access to bank loans on the basis of their financial statements, not assets they use as collateral.

I’m not sure that today, Ukrainian banks issue unsecured loans on the basis of financial statements.

In many developed markets, unsecured loans are nothing new – a borrower can be loaned money solely on the basis of financial statements proving his solvency.

In addition, transparent and credible financial information is important for development of the securities market in Ukraine. A working securities market could provide an alternative to bank lending, and businesses could attract investors. But to make that happen, companies issuing securities must have transparent and credible financial statements.

These laws, seemingly technical, caused strong resistance in the parliament. Why?

There was opposition in the parliament, and also, there were those who opposed changes among auditors. The biggest point of dispute was change of the auditor regulation and licensing model. In the past, the de-facto practice was self-regulation, when practicing auditors were responsible for regulation of activity and licensing of other professionals and audit firms.

During three years, experts of our project spoke to many auditors in Ukraine. We heard a lot of stories about corruption in the old regulation system.

For example, a company could secure a positive auditor’s report for a few thousand dollars. Another example: there were rumors that in the past, one could easily buy an auditor’s license, up to the situation when a husband could buy a license for his wife as a birthday gift. Of course, we could not verify this information, but it definitely indicates bad reputation of the auditor’s profession.

The new law will replace self-regulation with a new oversight model that would not depend on practicing auditors.

How can independence of the new regulator responsible for controlling auditors be actually guaranteed?

Creation of a new regulator is the task of the Finance Ministry. The law states that the new agency will become operational in October 2018. Our project helps the ministry prepare regulatory documents and procedures for the new public supervisory body. The law was just the first step. However, those who oppose changes can switch to another strategy and start looking for loopholes in the law to revive abuses that were typical for the old system.

Who will be the members of the new regulator?

The new regulator will have a supervisory board featuring one representative from the National Bank, National Securities and the Stock Market Commission, National Commission for Government Regulation of the Financial Services Market and Finance Ministry each. It will also have three members with experience in auditing but who are not practicing auditors at the moment.

In your country, a very close attention is paid to those who will become members of the supervisory board. But the specialists who will do daily work in the public supervisory body will be no less important.

What particular businesses do changes in auditing and accounting directly concern?

The law on accounting and financial reporting contains definition of the term “enterprises or organizations presenting public interest”. These include enterprises issuing securities, banks, insurance companies, nongovernmental pension funds and other financial institutions, except small companies. The public supervisory body will directly control the audit of these organizations.

Is it fair to say that with an audit under international standards, the risk of banks or insurance companies becoming insolvent would be lesser?

The purpose of audit is not to stop fraud or prevent insolvency. That’s what regulators (National Bank, National Securities and the Stock Market Commission, National Commission for Government Regulation of the Financial Services Market editor’s note) are for. It is important not to confuse audit and prudential supervision – they have different goals. 

During 2014-2016, the National Bank has ruled insolvent or nationalized over 90 banks, many of which boasted auditor’s reports on financial statements that weren’t bad at all. How would you explain that?

The banking sector didn’t pay proper attention to the quality of accounting and audit, even when audits were performed by large companies. Many auditor’s reports for banks, which were made available to us, were hard to understand, contained complex explanations and reservations, and in the end, offered no useful information. These reports do not meet international quality standards.

By Iryna Gudz