Auditors ask to be allowed to open subsidiaries in “friendly” countries
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The auditors are asking to be allowed to open subsidiaries in “friendly” countries while maintaining the possibility of providing services to Russian PJSCs and defense industry enterprises. Currently, such opportunities are limited by government regulations. Entering the market of “friendly” countries can improve the financial results of Russian companies. However, experts warn of serious competition from international networks and local audit firms.
On September 27, SRO Sodrugestvo sent a letter to the Central Bank and the government (Kommersant has reviewed it), in which it asked to adjust the existing restrictions on the activities of audit companies.
According to government decree No. 622 adopted in April 2021, public joint-stock companies (PJSC) and defense industry enterprises cannot provide information to an audit organization that is under the direct or indirect control of a foreign citizen, legal entity, international company or a member of the same group of persons.
The auditors proposed not to apply the provision of Resolution No. 622 if the audit company is not under the direct or indirect control of a foreign entity, is the main business company in relation to a subsidiary established in the territory of a member of the EAEU or another friendly country, and is not part of the same group of persons with foreign entities from unfriendly states. A similar solution has been discussed since last year, but has not been implemented. The Central Bank did not promptly respond to Kommersant’s request. The Russian government has not yet received the letter.
The letter notes that there is now a growing demand for auditing and consulting services from Russian companies with subsidiaries abroad, organizations that are just about to enter the international market and “audited entities operating in the territory of the EAEU and other friendly countries.” Providing services abroad would allow auditors to “actively expand their presence” in friendly countries and create international groups controlled by Russian audit organizations, the authors of the letter note.
According to the Ministry of Finance, at the end of 2022, 2.7 thousand organizations operated in the audit market. The volume of services provided over the past year exceeded 58 billion rubles, of which the largest audit companies accounted for almost 31 billion rubles. The number of clients of audit services amounted to almost 69 thousand.
The current provision is criticized primarily for the vagueness of the wording, so companies in this legislative interpretation will take a great risk if they want to open branches, even in friendly countries, notes Dmitry Kletochkin, partner of the law firm Rustam Kurmaev and Partners.
According to market participants, entering friendly countries is beneficial for Russian auditors. Partner B1 Igor Buyan notes that when auditing Russian groups under IFRS, it is often necessary to check foreign subsidiaries of the client, which is difficult to do without your own structure in a particular country. “You either have to send a team of auditors, which means high costs, or involve a local audit company, which is not always justified from a quality point of view,” and clients are against subcontracting, he explains. In addition, if a subcontractor is involved, you have to share profits with him, Mr. Buyan points out.
As Polina Viksne, managing partner of the Marillion group of companies, notes, the presence in the market of friendly countries and EAEU countries will be a competitive advantage in the struggle for large clients between key players in the Russian audit market. However, it will be difficult to compete for customers in friendly countries. The size of the audit services market in other countries that are members of the EAEU is smaller than in Russia, and all the key players are already present on it – international networks, local companies, Ms. Viksne points out. Entering into competition for local clients “from scratch,” she believes, “is unlikely to bring a large number of profitable projects.”
Nevertheless, in the short term, branches and subsidiaries of Russian audit firms may occupy 15–20% of the EAEU audit market, estimates independent expert Andrey Barkhota. In the future, expansion will continue, and the revenue volume of representatives of Russian auditors in the EAEU countries may reach 50–70 billion rubles.
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