Lack of access could hamper audits of companies with Russian ties

Auditors evaluating the financial statements of US-listed companies operating in Russia and Ukraine face a complex web of difficulties, including a possible lack of access to key documents or people.

Western accounting firms, including Big Four Ernst & Young, KPMG, PricewaterhouseCoopers and Deloitte, announced last month that they would sever ties with their local network firms in Russia after its attack on Ukraine.

As a result, U.S.-based or international auditors may not be able to access corporate books and records from either country, said Sara Lord, lead auditor at RSM US. LLP, a professional services firm. The records may have been destroyed or unavailable for other reasons, she said.

Also, due to government sanctions, accounting firms will likely have less access to auditors in Russia than before, according to audit experts. In Ukraine, companies may have to work with local auditors who cannot find some records due to damage to servers or storage locations from bombings, they say.

The consequences of the harsh economic sanctions against Russia are already being felt around the world. The WSJ’s Greg Ip joins other experts in explaining the significance of what has happened so far and how the conflict could transform the global economy. Photo illustration: Alexandre Hotz

This complicates matters for companies wishing to have their financial statements reviewed and audited. “Scope limitations,” or constraining an audit when information is out of scope or evidence is insufficient, usually results in an audit opinion with a disclaimer. The Securities and Exchange Commission does not accept notices with disclaimers, which may prompt stock exchanges to delist a company’s stock.

More than 600 international companies reduced operations in Russia, with some of them closing completely, since the invasion of Ukraine began in late February, according to the Yale School of Management. Still, more than 200 companies from around the world continue to operate there, according to the data.

Businesses can take other steps to avoid scope limitations. Auditors should work closely with company executives and audit committees to, for example, determine whether the legal ownership rights of certain physical assets have changed based on the Russian government’s decree, Ms Lord said. . Auditors should fully understand why executives decided they no longer had legal rights to those assets and wrote them off, she said.

The Public Company Accounting Oversight Board, which regulates audits of companies listed on US stock exchanges, last month warned of range limitations related to audits of companies with large operations in Russia or Ukraine. Some lead auditors working for an international network who rely on former member firms in Russia for audit work may find it difficult to communicate with them, the US audit watchdog said. Auditors may need to come up with an alternative plan to oversee the work of their local partners, the PCAOB said.

The Big Four are in the process of untying their ties with their Russian units. The Big Four Network companies operate as separate legal entities in each country, using a common global brand, and are bound by an agreement that governs certain arrangements. Soon, Russian members of these global networks will no longer be part of their brands. Local companies pay an annual fee to the global network for sharing technology and branding, an arrangement that will further delay the severing of ties.

San Francisco-based Levi Strauss & Co. suspended sales of its jeans in Russia in March. Now it is assessing how to handle those accounts as its auditor, PwC, has announced its exit from the country.

“We’re waiting to see how things develop and we’ll find out,” chief financial officer Harmit Singh said. “We have time to do this, as our accounts for the previous year are close to finalization.”

Levi’s, which before the invasion generated about 2% of its annual revenue in Russia, has about 800 employees there and will continue to pay them, Singh said.

Audit risks

Auditors of companies with ongoing operations in Russia will likely rely on the former member of their network to audit financial results in the country, said Jim Peterson, a securities lawyer and former partner at the former accounting firm. Arthur Anderson.

Auditors, however, should exercise more caution than before when relying on information they cannot verify directly, which they often have to do, said W. Robert Knechel, director of the International Center for Accounting and Auditing at the University of Florida. .

“It seems like an impossible situation for audit firms potentially and there could be very, very strong situations to support a scope limitation,” he said.

US auditing standards for cooperating with an unaffiliated company are stricter than with an affiliate, for example, to verify the independence of its partner during an audit, Knechel said.

Several professional services firms, including the Big Four, Grant Thornton LLP, BDO USA LLP and Marcum LLP declined to comment.

The war poses other pitfalls for listeners. They will have to study the exposure of companies to new risks, for example boycotts of suppliers, the suspension of sales to certain customers or the cessation of investments in Russia.

Companies also face reputational risk to continue doing business in Russia. Some of their customers might choose to go to a rival that has cut ties with Russia.

Auditors will have to wade through the companies’ estimates of writedowns on Russian asset and joint venture disposals. Companies subject to US and international reporting standards must take impairment charges, or impairments, when the sum of an asset’s estimated future cash flows is less than its carrying value.

Auditors of companies over a calendar year have several months to gather the necessary elements for their work in 2022. These problems could be solved because companies judge their level of activity in Russia to be insignificant after canceling their operations there. , or because the auditors determine they can rely on information provided by the companies’ local auditors, experts said.

Auditors will need to keep an eye out for many of the same risks associated with the coronavirus pandemic: fraud, supply chain grunts and economic volatility.

“The past two years have been a perfect opportunity to hone our skills in uncertainty,” Ms Lord said. “We have an unusual level of uncertainty. We must ensure that we do our best to evaluate the estimates made by management and determine whether they are reasonable.

Write to Mark Maurer at [email protected]

Copyright ©2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8

Comments are closed.