With auditing today, 10 years after the term arrived on the Russian market, it turns out that everyone understands it differently.
The Federal Securities Commission gathered the Big Five auditors and managers of some of the country´s biggest companies in the same room on Wednesday to discuss ways to prevent an Enron-type scandal in Russia. While no decisions were made, participants aired a whopping number of concerns during the three-hour session. Auditors pointed to management for not disclosing more information, and management said that disclosing information was not always an option. Sometimes it´s a state secret. In Russia, the Big Five, Andersen, Deloitte & Touche, Ernst & Young, KPMG, and PricewaterhouseCoopers, or PwC, found themselves in the spotlight not only after the collapse of Enron last year, but also after an investor launched a crusade against Gazprom´s auditor, PwC. PwC has been accused by minority shareholders of approving several murky deals that resulted in asset losses worth billions of dollars. The accusation appears to have provoked the Audit Chamber to look into the way Gazprom and other natural monopolies are being audited. PwC, which had kept quiet as the press was filled with discussion of its role at Gazprom, responded Wednesday with full-page advertisements in the Vedomosti and Kommersant business dailies calling the reports groundless and damaging to the investment climate in Russia. "Especially in recent times, the term ´audit´ has become a synonym of such subjective terms like beauty or conscience," Leonid Shneidman, a partner at PwC´s office in Moscow, said at the meeting Wednesday. "With auditing today, 10 years after the term arrived on the Russian market, it turns out that everyone understands it differently. This is where the misunderstandings come from," he said. Shneidman said that auditors are limited in their work and are neither allowed nor equipped to run complete checks of all financial operations. "It would have been naive to expect from an auditor an evaluation of the financial performance of the company or its financial results," he said. In conclusion, Shneidman said the accuracy of the financial documents presented to auditors is the responsibility of a company´s management and board of directors. Representatives of the companies, however, said transparency was not always possible. Officials at Gazprom and Norilsk Nickel both said there are various reasons certain information cannot be released. In some cases, it is because it is considered a state secret. For example, Gazprom is not allowed to disclose the production cost for 1,000 cubic meters of gas, according to Andrei Nyupenko, deputy head of the gas giant´s accounting department. Norilsk Nickel, the world´s leading producer of platinum group metals, meanwhile, is unable to publicize output. Gazprom, while not openly admitting that it gave in to investors´ pressure, said it has launched an open tender to pick an auditor for 2002. The results of the tender are unlikely to be known before May or June. Boris Fyodorov, an independent member on Gazprom´s board of directors, has called for auditors to be prohibited from working for more than five or six consecutive years for a particular company. He proposed last year that Gazprom stop working with PwC and hire Deloitte & Touche. At Wednesday´s meeting, Deloitte & Touche said changing auditors was not necessary and could even backfire. "While an audit of the debits and credits is fairly routine and can be transitioned [to another auditor] easily, a deep understanding of the business risks builds up over time, as does historical knowledge of transactions," said Deloitte & Touche partner Vadim Sorokin. "The most likely time for an audit failure is the first three years after a change in audit firms." Stephen Moosbrugger, managing partner at Ernst & Young, suggested that no quick decisions be made. "I worry about a quick reaction to an event like this," he said, referring to Enron. "Everybody now is rushing out with a bunch of quick fixes. In my opinion, quick fixes can be just as bad as the problem originally was." Fyodorov urged the gathering not to demand too much from auditors. "There is no need to confuse auditors with investigators from the Prosecutor General´s Office," he said. Practically all participants complained about the imperfections of Russia´s auditing standards and noted that knowledge of international standards is not widespread. Hans Jochum Horn, country managing partner at Andersen, said accountants at Russian companies struggle with international accounting principles to the point where Andersen on a number of occasions has declined to audit the companies and instead has offered training courses to the Russian staff. FSC Chairman Igor Kostikov said an Enron scenario is unlikely in Russia today. "The Russian market is fantastically undervalued, but we have to introduce mechanisms that will prevent such things in the future." Wednesday´s session, he said, was the foundation for work that should eventually lead to greater confidence on the market when it comes to financial reports and audits. Fyodorov agreed. "There are some real [positive] moves, like that fact that we are talking about all these issues," he said. "The next step is to introduce concrete measures."