The Moscow Audit Chamber, established following a presidential decree on auditing activities in Russia, celebrated the first decade since its founding last autumn. From the start, its goal has been to improve auditing practices and protect the rights and interests of auditing organizations, independent auditors and chamber members.

Vladimir Kolbasin has headed the chamber since 1993. He is also a member of the expert and consultative council attached to the chairman of the Russian Audit Chamber and first deputy chairman of the Moscow mayoral commission on co-ordinating auditing activities.

Kolbasin spoke to The Russia Journal about the development of auditing activities in Russia.

The Russia Journal: Common auditing standards are an essential part of organizing domestic capital flows and attracting investment from abroad. What is the Finance Ministry doing to draw up auditing standards for Russia that meet international ones?

Vladimir Kolbasin: Everyone involved in auditing in Russia realized that the old standards approved by the Presidential Commission on Auditing Activities needed to be thoroughly reworked and brought into line with international standards and that there had to be a clearer distinction between compulsory requirements and recommendations. Over recent years, Russian auditing has made great strides in its development, and many Russian auditors have been using international standards in practice for some time now.

Domestic auditors are often better-equipped for conditions in the Russian business world than foreign ones

The Finance Ministry, along with the help of professional auditing associations, has prepared new standards. Six of these new requirements were approved in September 2002 and are being successfully implemented by our auditors. Work is near completion on a number of other basic standards. Once they are approved, this will regulate the basic audit procedures.

TRJ: How do companies choose an auditor? Do the various ratings of auditing companies play any part in this, and can companies really use these ratings to objectively assess auditors’ work?

VK: I don’t think that ratings can play a major role in choosing an auditor. For a user of auditing services, what is most important is the quality of service, the qualification level of the people providing it and their experience at carrying out audits in similar enterprises, and you can’t get this information from ratings.

This was illustrated by one tender for an auditor for state-owned or partially state-owned enterprises. As one of the professional audit associations accredited with the Finance Ministry, the Moscow Audit Chamber sent representatives to more than 170 tender commissions. The ratings results played no substantial role in deciding the winner at any of these tenders.

This doesn’t mean that the idea of compiling ratings is wrong in principle. They are a part of auditing companies’ image policies and an indicator of stability in auditors’ work over the long term.

TRJ: Most audit companies are set up to provide accounting and auditing services, but, sooner or later, end up focusing more and more on consulting. What do you see as the main problems between clients and the companies providing consulting services?

VK: If we’re looking at accounting and tax consulting, this is an integral part of auditing activities, and all auditing companies are to a greater or lesser degree involved in it.

Consulting on corporate and financial management, information technology, marketing and human-resources management is something that only large, multiprofile auditing companies can get into, taking their activities beyond the framework of auditing and accounting alone.

For most auditing companies, accounting and tax consulting account for a not-very-large share of their earnings – 10-20 percent – but management consulting accounts for up to 70-80 percent of the earnings of large auditing and consulting companies. This is because these services are highly complex and costly and because these companies shift their focus from routine auditing and accounting services to more creative consulting.

If the rules of professional and business ethics are adhered to, then the clients of auditing companies should have no problems in their relations with them. The only thing to keep in mind is that you can’t get a company to help you organize your accounting and have that same company carry out an independent audit of your firm.

‘[Y]ou can’t get a company to help you organize your accounting and have that same company carry out an independent audit of your firm’

Problems arise if the client starts to see the consultant’s advice as a panacea for all his problems and loses sight of the fact that the effectiveness of proposed solutions depends to a large extent on how well they are implemented.

TRJ: Public auditors’ associations are tasked with monitoring the quality of work of auditing companies. What do you think of the fact that these public professional associations are headed by people who have their own businesses in the audit sector?

VK: Control over the quality of auditing companies’ work is above all the purview of the Finance Ministry. The ministry sets the rules for checks into whether audit companies and individual auditors meet the requirements of the law. I think it is perfectly justifiable for the Finance Ministry to delegate the right to carry out checks of self-regulating auditors’ organizations.

I think that representatives of the professional community are best-qualified to carry out checks according to the procedures set by the Finance Ministry and carry out informal analyses of the control systems of the companies in question.

But it would be good to set up independent expert bodies within these auditors’ associations that would be headed by authoritative figures without their own business interests in the audit sector.

TRJ: How justifiable is it to compare the activities of Russian and international companies on the Russian market? Is there competition between them? Do foreign companies that require audit services tend to use foreign auditors?

VK: It is entirely possible to compare Russian and international companies providing auditing services on the Russian market. Some Russian companies have already become members of international consulting- and auditing-company associations, and Moscow auditors are opening their offices in Europe.

Today, the market is not divided into segments that are accessible or inaccessible to Russian auditors, as was the case in the early 1990s. The largest and best-known Russian auditing companies now have sufficient authority to carry out audits of even the largest Russian clients.

There are cases when Russian companies use the services of both foreign and Russian auditing companies. This happens in cases when an international audit is necessary for relations with foreign investors, but when, for the purposes of making a management decision, it is better to work with Russian auditors who know the specifics of the Russian legislation and mentality.

The difference in quality of service provided by Russian and international auditing companies has been virtually eliminated by this point. Of course, this goes above all for large and medium-sized companies that already have some experience on the auditing market. Leading Russian companies find themselves in constant competition with the Big Four companies nowadays, and, if they’ve been managing to do this for several years now, that says something in itself.

TRJ: Most market players say that the majority of Russian companies will have to implement international financial-reporting standards over the next few years. What are the prospects for Russian auditing companies in this respect? Will the big Russian companies be able to compete with the Big Four?

VK: Of course they will. For a start, the question of bringing reporting into line with international standards is more of an organizational issue. First, we need to train the accountants, then train the auditors.

TOP RUSSIAN AUDITING AND CONSULTING GROUPS  Company name Revenue, thousands of rubles1BDO Unikon Ruf265,303.02Rosekspertiza258,042.03FBK (PKF)145,914.84Top-Audit94,922.55Rusaudit Dornkhof, Yevseyev & Partners83,969.16Finekspertiza 78,225.07Gasaudit76,461.08Gorislavtsev and Co.76,001.19Auditinform65,088.010Marka Audit 63,641.7

Many Russian auditing companies already provide services to help companies bring their reporting procedures up to international standards on the request of directors who have long-term vision and want to get a picture of their business in accordance with them.

Also, the international accounting and reporting standards that are to be introduced here soon will be above all for internal use. The question of competition should be asked from a different angle, then. It’s more about whether the international auditing companies, with the "international pricing policy" they practice, will be able to compete with Russian companies on the domestic market. I think it’s more of a rhetorical question. The director of a large Russian company who decides to use an international auditor will have carefully weighed up the economic opportunities to be gotten out of getting a costly report – attracting additional investment, for example – and the cost of the service.

TRJ: What is the aim behind the idea of creating a union of auditing companies? Which companies have already joined, how will it get bigger, and which companies are set to join it?

VK: Looking at the mergers of the largest auditing organizations that have gone through the accreditation process, I think it’s too early to talk about this.

For a start, any monopolization removes the competition factor and leads to stagnation of development.

Second, hasty mergers, like any radical organizational change, could destroy auditing organizations’ already-formed teams and their traditions.

Finally, is it really necessary to break apart what has been created with no little effort, especially as we have not yet even really had the chance to work in the new legal environment and use all the possibilities that the new law on auditing activities gives?

Our Western colleagues, by the way, prefer to break up monopolies. In France there are two such organizations, and in Britain there are six, while the United States has more than 20 different associations, and they all coexist and co-operate when necessary.

The most effective means of co-operation for the auditing community, as I see it, is for large auditors’ associations to get together to solve specific problems, not a hastily carried-out organizational merger.