Russian IPOs – Changing Perception of Audit

THIS POST WAS ORIGINALLY PUBLISHED MARCH 09, 2007

Russian IPOs – Changing Perception of Audit

During my last five years working with the Russian companies, one of the most delicate issues was the necessity to present an audit statement according to international standards. This was the major obstacle in ANY transaction, besides usual stuff (like consolidation, both legal and financial).

This week KOMMERSANT BUSINESS GUIDE featured “Financial Reporting” and has some nice numbers. I wrote earlier about EXPERT-RA ratings. Now KOMMERSANT adds to earlier reported facts:

- Ernst & Young has 21% of the surveyed companies and is oriented towards the ones that are controlled by the government

- KPMG and PWC like any sector and ownership

- out of 13 biggest companies in Russia – 10 use IFRS reporting, while oil, telecoms and metallurgy companies use US GAAP

- the Russian companies that are getting ready for IPO try to shorten preparation time for audit opinion (e.g. ROSNEFT cut short the time by 40 days)

- gradually the time for release of annual audit opinion are shifting towards the first quarter of the year, as opposed to the 1H earlier.

When speaking about the whole picture, auditing was the prerogative of the BIG FIVE (changed later to BIG FOUR), and this was the only feasible solution for any Russian company that was involved in fundraising with foreign investors. Yes, this was a tedious task to persuade the owners to allocate funds for the audit. BIG players were not very timid in their pricing. A couple of years ago, a typical BIG auditing company asked for about $70K -$90K for the annual audit and that might take as long as 150-250 days. While these numbers are not drastically changed right now, we have more and more opportunities.

Now we see a number of Russian accounting companies that are members of international auditing chains (BKR, DFK - just to name a few of them).

This changes the picture drastically.

The Russian accounting companies can make a highly qualified audit of their Russian clients, at the same time they may stamp their opinion by their peer of one of the international chains. Why it is so good?

- the Russian companies (especially the ones that are existing for long) have a solid background in auditing domestic companies

- they do the job much quicker and with (in some cases) higher quality than their BIG peers (everyone knows here that the BIG players assign to a routine audit the novices, the ones that are less experienced, and then they just stamp their opinions)

- and of course – expenses – they differ

So, in our day-to-day operations the clients find it very very practical to use the Russian firm, rather then spent money on the BIG. I am working for a number of years with a couple of such Russian firms (e.g. BKR-INTERKOM-AUDIT ) which do excellent job and satisfy all the required needs.

So, I guess that we now witness a gradual shift from the BIG to domestic auditors. As one of the owners complained to me recently: “Well I asked one of the BIGs – we need to stand in line for about three months, pay a lot and them wait another three months for the results. This is no good.”