The Central Bank has prepared proposals on amendments to the law “On audit activity” as part of the transfer to the Bank of Russia powers to supervise a significant part of this market, now controlled by the Ministry of Finance and the Federal Treasury. The responsibility of the Bank of Russia will move companies providing services for statutory audit. By law, the audit shall include joint stock companies, firms, traded on the stock exchange, all financial institutions controlled by the Bank (banks, insurers, pension funds, etc.), companies with annual revenue from RUB 400 million or the assets of 60 million RUB, state and quasicontractual. The Ministry of Finance will be the monitoring of auditors who provide audit services are not required.
Developed CBA proposals submitted to the Ministry of Finance. The Central Bank expects to start working as a regulator in this market from 1 January 2018. Order to transfer some of the powers of the Ministry of Finance and Treasury Central Bank was given on March 29 at a meeting with first Deputy Prime Minister Igor Shuvalov.
What will be the interaction of the regulator with the new wards, said at a press conference on Monday, April 24, Director of corporate relations Department of the Central Bank Elena Kuritsyna.
Five key changes for auditors
For starters, the Central Bank proposes to narrow the range of companies subject to mandatory audit. According to Kuritsyna, we are talking about the exception to the law provisions regarding compulsory audit of enterprises with a certain amount of revenue and assets, regardless of their status. “We have not revealed who is the consumer of such audit, if the company is public interest: public traded, financial or governmental. Unfortunately, the lack of motivated customer leads to the formation of the audit market in quotes, which is carried out for a small fee and is not conducting a normal audit services, and the sale of the signature of the auditor’s report”, — she explained the proposed innovation.
Also, the Central Bank intends to tighten the requirements for entering the audit market. Now to work on it when you enable auditing company in the register of existing on the market self-regulatory organizations (SROs). “Now auditing organization has the right to be included in the register of SRO, if it offers information that she has three auditor certificates who work under an employment contract. But these auditors can work in several audit firms. This leads to the fact that the auditors are 15-20 companies that allows all of them to their status,” explained hen. Central Bank also proposes to state that the auditor with his certificate can only work in one audit organization, and the only way he can sign an audit opinion.
Another tightening will affect auditors who plan to certify the accounts of banks and other supervised by the Central Bank organizations. Instead of three auditors with certificates of the Central Bank will require the audit company to have 12 such specialists, said the representative of the Central Bank.
To allow auditors to confirm the reporting of significant public companies, the Central Bank intends not immediately, as it is now, and consistently, in two stages. “First, the audit organization gets to the register, one of SRO, then with the required experience, she has the right to appeal to the Bank of Russia to be allowed to audit public interest organizations (through the inclusion of a separate registry, which is expected to lead the Central Bank itself. — ), “says hen. According to her, now the Central Bank provides audit firms to submit proposals for voluntary testing for the passage in the securities register.
Another item would be to go the qualification and reputation requirements for organizations that will allow in the securities register. Such organizations must have experience working with companies, supervised securities, not less than three years and have during this period of cases, when they signed the statements was recognized by the Bank of Russia. “Of course, there should be recognition of the audit report misleading, non-compliance with the code of professional ethics or the requirements of independence of auditors in the last three years,” explained Elena Kuritsyna. Leaders of such organizations will be required experience at least five years with supervised Central Bank companies, she says: “they will always have to undergo training”.
In addition, the Central Bank plans to introduce the rotation of auditors from the register when working with one client. According to Hen, the person who will sign the audit report, will not be able to work with one company for more than seven years. After this period it ought to take a break for two years.
Surprise for SRO
The Central Bank also thinks about changing the model of self-regulation in the financial market, because “she does not meet the challenges facing self-regulation.” Now SRO must combine at least 2 thousand audit organizations and (or) not less than 10 thousand auditors-physical persons. “These numbers are driven SRO in the regulatory trap — they understand that some audit organizations do not comply with the standards, but to survive, protect every member,” explains the problem Kuritsyn.
The Central Bank considers that the quantitative requirements for SRO needs to be relative, for example, is not tied to the number of auditors — members of SRO, and for a fraction of the services that members of the SROs jointly provide the market. Also, the Central Bank is thinking about creating a separate self-regulatory organization, which will include companies from the future of the registry of the Bank of Russia.
The Bank of Russia believe that the proposed innovations will increase the audit quality. Representatives of the Central Bank have repeatedly pointed to the low quality of many audit reports. That auditors need additional regulation, said in February the Bank of Russia Elvira Nabiullina. According to her, the self-regulatory system for auditors does not create the necessary grounds for increasing the responsibility of auditors. The head of the Central Bank also pointed out that about 50 audit firms unconditionally assured accounts at 150 banks, where later, the regulator has found evidence of significant unreliability of reporting.
The market reaction
The reaction of auditors on the proposal of the Central Bank is ambiguous.
It’s so revolutionary situation, what impact on the market difficult to predict, says Vice President, audit SRO “Commonwealth” Daria Dolotenkova. “I can definitely say that there will be a reduction of the market as companies in which more than 12 auditors, not so much. Also reduced the number of companies that will be subject to mandatory audit. This will change the demand and supply in the market, which could change the pricing. But in what direction all this will move, now to tell difficult” — she assesses upcoming changes.
Now in the audit market works many small businesses, and amendments to the law will primarily affect on them — some of them would lose revenue, which they will have to leave the market, said the Deputy General Director of “FinExpertiza” Natalia Borzov. In her opinion, to fulfill the condition of 12 certified auditors of small audit firms will be difficult. Auditors certificates is not so much the profession has ceased to be popular: wages are not growing, and qualification requirements are high, says vols. According to the President of the Russian Union of auditors Alexander RUF, the certification, which was in 2012, it’s only 1/7 part of the total audit market. “Some people have taken these exams at seven to ten times,” he says. In his view, of small audit companies can unite, but due to lack of personnel, the market decline approximately three to four times.
Due to the reduction in the market value of audit services will continue to grow, says vols.
There is another controversial point in the proposals of the Central Bank, adds Ruth. “The current amendments conflict with the interests of the Central Bank: the Central Bank itself is subject to audit, and how the organization subject to the audit, control audit, it is not clear”, — concluded the expert.