№9-10(44-45)(2015)

The regulation mechanism of the sphere of audit activities in Ukraine requires immediate reforming, all market players agree on that. The only thing is – how to reform? – in this respect many people have their own opinions. The draft reform, developed by the Ministry of Finance and already approved by the European Commission, caused serious confrontation with the pool of the Audit Chamber of Ukraine and their associates: one of the main claims is that the market has converted from self-regulated to fully accountable to the Ministry of Finance.

If the supervisory authority over auditing activities, formally accountable to the Ministry of Finance, can be considered “public”, what control mechanisms are envisaged for risk minimization of the abuse of power by the regulator, how the model of public supervision over the audit works in EU countries and what advantages Ukrainians will gain from it – we have interviewed the expert of the European Union Jon Hooper, who directly participated in the development of the model and the draft reform, prepared by the Ministry of Finance. 

Mr. Hooper, who primarily creates demand in quality auditing services in the developed countries of Europe? Are there such “clients” in Ukraine? What do you think of the financial literacy of Ukrainians versus EU citizens?

The demand for high quality auditing is a by-product of the demand for high quality financial reporting, reporting that can be relied on due to the credibility provided by independent audit. All countries, developed or not, need financial information as an essential underpinning to a transparent and efficient economy; corporate financial reporting is essential for external and internal investment which drives economic growth and is also essential for policy makers and the public to be able to govern the economy and wider society effectively. So yes, there are clients for audit in all societies including Ukraine where good governance and effective economic management is such a priority. I do not know specifically of Ukrainians’ financial literacy versus EU Citizens, but there is a high level of public interest in economic matters and in transparency of companies and conglomerates in Ukraine where citizens are very keen to inform themselves on aspects of the economy, either directly or through the media. This level of interest is as high or higher than in many EU countries.

Currently the auditors’ community of Ukraine has been split up into two groups: one group supports the draft audit reform, proposed by the Ministry of Finance, other – totally against: they find risks in it, give pessimistic forecasts, bring forward alternative projects. Have you ever come across such opposition to reforms from society? Do you see any way how to start a constructive dialogue?

I have always found that society is in favour of the reforms represented by the MoF’s draft audit Law, which reflects the recent EU developments in audit oversight to add credibility to statutory audit. The reforms seek to help society to be able to have faith and confidence in the audit of financial statements particularly of public interest companies such as banks. They do this by establishing independent oversight and quality inspections on the previously self-regulated audit profession, seeking to regain public trust in audit that has been lost as a result of recent corporate scandals in all EU countries as in Ukraine. However, in almost all EU countries and across the world, parts of the audit profession (not society) have opposed any such reforms as they have feared any such oversight; this is slightly ironic that auditors fear to be in effect audited. These fears are reasonable – companies themselves fear the audit too. Without exception, however, these fears have proven to be groundless and the establishment of independent audit oversight in over 50 countries has not led to any negative impacts for the audit profession in each country. Rather the opposite – such oversight has actually helped auditors to gain the trust they desperately need from society. Constructive dialogue on finalizing the draft legislation is already started and is ongoing, and I am confident that appropriate compromises will be found to reassure the audit profession that these reforms are actually in their interest, as has proven to be the case worldwide and across the EU.

One of the main claims against the working group of the Ministry of Finance from representatives of the Audit Chamber of Ukraine and their associates consists in that during the process of development of the reform all issues regarding audit market regulation were resolved behind the scenes. Have any constructive proposals on improvement of the draft been submitted to the Ministry of Finance from the colleagues from other ministries, ACU representatives, other professional organizations, and is the team ready to amend any provision of the draft law? (If yes, then which one?) Is this possible considering that the draft reform has been approved by the World Bank and the European Commission?

The MoF has presented their draft of the Law for public consultation and many comments have been received, including comments from many of the organisations mentioned. The MoF is considering all the comments received and amending the draft accordingly. The large majority of the MoF’s draft Law was prepared to approximate to the relevant EU Law in accordance with the Association Agreement, and I sincerely hope and believe that no amendments will be made to the draft that reduce the compliance of the Law with EU Law, which was  confirmed by the international organisations. I do not believe that any comments which the MoF has received aim to affect such compliance. However, in areas addressed by the Law which are not specified in the EU Law there is additional  discussion and amendments are to be expected.

Which essential requirements for the reform in the sphere of auditing activities in Ukraine does the World Bank impose?

I cannot speak for the World Bank, but I am sure that the World Bank does no impose any requirements. However, World Bank policy is to support the implementation of the Association Agreement in this area and to assist the Ukraine government in approximating legislation to EU Law in this area; this is the basis on which   the World Bank has commented and approved the MoF’s draft Law. World Bank staff also share their experiences from observing and assisting other peer countries’ efforts to implement similar reforms.

You have participated directly in preparation of the model, the draft law of audit market reform and, for certain, can allay some fears of auditors and business. So, the first thing, which is disturbing for market, is creation of the institution for public oversight over the profession “under the hood” of the Ministry of Finance. How does it comply with European practices of creation of the model for public regulation of audit market? How can we minimize the risk of abuse of power by the regulator? Will any control mechanisms be created?

All EU audit oversight bodies come under the jurisdiction of a government ministry – the government represents the ‘public’ in Public Oversight. In the UK, the Department of Business appoints the Oversight Board’s Chair and Vice-Chair; in France the Oversight is under the Ministry of Justice and in Germany it is under the Ministries of Justice and Economy jointly. In Spain the oversight function is actually part of the Ministry of Finance and all employees are civil servants. There will be control mechanisms throughout the system; in fact the creation of an Oversight Board is itself protection from abuse by regulation through a potentially conflicted self-regulatory body (as currently exists). However, the Oversight Board must also be able to perform effectively and be free from undue influence from both the profession and from the sponsoring Ministry, and the Law will be drafted to ensure this to the degree possible.

According to the reform the procedure for professional clearance will be changed. Is it planned to implement new (tougher) requirements for auditor’s qualification? In your opinion, is there any deficit of qualified employees on the Ukrainian audit market?

Implementing the Association Agreement, the Law will bring the procedures for audit registration, including qualification, into compliance with those in all EU countries. This may represent an increase in standards compared to some audit qualification standards seen previously, as was the case in EU countries when the common standards were introduced. I do not know about the demand/supply balance for audit services in Ukraine generally but I do believe that there is an unsatisfied demand for the highest audit quality across the market which these reforms will help to meet by seeking to raise audit quality across the market. 

The draft sets a bar at the complete secondary education as the compulsory level of educational background for auditor (for receiving a certificate). In your opinion, is it sufficient?

This is the EU requirement in EU Law, so the draft Law complies with that. The reason for this is not to exclude the practice which exists in some EU countries including the UK (but is increasingly rare) of some candidates joining an accounting firm straight from school and studying for their professional qualification while working, rather than taking a degree from university in what may be an unrelated subject. However, the EU Law states that the professional audit qualification must be at the level of a university final examination, so candidates that have passed such a professional audit qualification will in effect have obtained a degree. I personally believe the requirements are sufficient – the profession is enriched by admitting a variety of entrants, providing they have met sufficient standards to join (i.e. a professional audit qualification). Having studied at university is not a necessary precondition.

What are the requirements for entry to auditor’s profession in European countries? (Educational background, qualification, practical experience). 

The legal requirements for qualification to perform (be responsible for signing of) audits in EU countries are set out in the EU Law. These include passing tests of theoretical knowledge in a number of given subjects and relevant aspects of other subjects, and passing a test of professional competence that tests a candidate’s ability to apply such theoretical knowledge in practice. There is also a requirement for a minimum of three years’ practical experience, two of which must be under the supervision of a registered auditor. These requirements are mirrored in the MoF’s draft audit Law.

According to the draft law, the qualification requirement for conducting audit of public interest entities is the availability of five auditors and two experts, certified as per IFRS. Along with this, it is not specified in the document that the key project partner or reviewer should have this certificate. Will it be stipulated in the draft law, considering that absence of such requirement could give grounds for manipulations and pose a risk to auditing quality?

It is a requirement in the EU Law that all auditors be competent, and have sufficient capacity, to carry out the audits they perform. This is confirmed in practice in EU countries through the audit quality control inspection which all auditors undergo – in the case of PIE auditors at a minimum every three years. This requirement in the draft Law seeks to specify minimum requirements for such competence to perform PIE audits in the Ukraine environment. If it is believed that further requirements should be specified and such additional measures are drawn to the attention of the MoF then I am sure they will be considered.

The draft law of the Ministry of Finance does not specify the certificates of which namely organizations will be considered acceptable, leaving it for approval by the Oversight Board? Wouldn’t it become a loophole for appearance of light versions of certificates on the market?

Ultimate responsibility for the system of audit oversight, which includes auditor qualifications, should be designated to a single competent authority according to the EU Law; the draft Law mirrors this and gives such responsibility to the Oversight Board. The oversight Board will consider any qualifications which wish to be considered for approval, either for full or partial exemptions from requirements under the Law. The Board and its staff is expected to have considerable audit experience and expertise. If the Board is effective, it will act to raise considerably the standard of audit qualifications and act to eliminate any risks of false or ‘light’ qualifications that may have existed previously.

Have any specific, more stringent, requirements been envisaged for auditors, who audit the public interest entities in Europe, specifically banks? Is the possibility being considered to amend the Ukrainian draft law by adding strict requirements to auditors, permitted to audit primary banks or, for example, top ten Ukrainian banks?

As previously mentioned, auditors of PIEs, including banks, are stringently inspected by the Audit Oversight function at least every three years to assess and ensure their competence to perform the audits they undertake. This is not specific to the auditee but rather the oversight is of the auditor. If the inspection indicates that the auditor is not sufficiently competent or resourced to adequately audit a client then the Oversight Board can instruct them to stop that audit at the risk of losing their licence. So the requirement is the same for all auditors – they must be competent and capable of performing the audits they undertake.

What will be the average salary of quality control inspector of public interest entities? What is the salary of this job position in European countries? It is also of interest if you will recommend raising salaries of inspectors of the Audit Chamber of Ukraine, who will verify the quality of auditors, who audit the entities, which are not of public interest (is it possible, considering that the Audit Chamber of Ukraine will lose main income sources – from conducting certification and maintaining a register of auditors).

I do not know the salaries of either current audit inspectors around Europe or the intended salaries in either the Oversight function or the Chamber. However, the key issue is that the inspectors be competent in their job, and that they have sufficient expertise and experience to perform the inspections. For inspection of PIE audits this competence and experience requirement will be higher than for non-PIE audits. The issue of funding the costs of inspections is a difficult one whih the Law will have to address to the extent possible; the EU Law states only that the Oversight function should have adequate funding and that the funding should be free from undue influence from the profession.

Due to the new reform, the audit market should additionally receive about 3 thousand large and 13 medium-sized companies, which will be obligated to undergo compulsory audit on annual basis. This definitely is a positive moment; however, won’t it lead to much larger increase of disbalance between Big Four and national auditors on the market?

All audit firms should compete on quality and not on price – this is the conclusion of many studies of competition in the audit market, including a major enquiry recently in the UK. International audit networks outside of the Big 4 and high quality national audit firms can and do compete effectively with the Big 4 in all countries for all but the very largest multi-national audits. Increasing the size of the audit market does not in itself affect this competition; all auditors should seek to continuously raise their quality to compete with all other auditors in national markets.

In Ukraine the cost of auditing services of Big Four companies and national auditors differs a lot. How big is this difference in western European countries? And what share of market do Big Four representatives occupy at the average?

I do not have the statistics for Big 4 market shares. However, the cost of auditing services should reflect the quality and resources required for the audit. In general, non-Big 4 audit firms can and do compete with the Big 4 in market segments other than the very largest multi-national audits, However, they often have similar costs for audit services reflecting the similar audit quality – if quality is the same then costs will be similar or at least comparable. The challenge is for national and other non-Big 4 audit firms to invest in quality and capacity to develop the reputation that will allow effective competition. Independent audit oversight and inspections will help with this as it provides helpful and practical advice for leading national audit firms as to how to improve quality, and it enhances all auditors’ reputations.

As per your forecasts, what is the real time required for implementation of the reform (what was the average time required in European countries for transition to the model of public oversight over the profession)? When will the auditors and their service users be able to see first results?

It typically takes six months to a year to establish the Oversight function and then up to a further 3 years to complete the first full round of PIE auditor inspections. All auditors will see immediate benefits in terms of public reputation and trust from even the agreement to the establishment of auditor oversight. Opposing it adds to negative views of the profession and public doubt over the independence and effectiveness of the profession – how can you believe in independent audit when auditors themselves oppose oversight (i.e. being audited)?

Have any assessments been made on how the number of auditors and auditing companies in Ukraine can decrease in consequence of implementation of the reform? And will it also impact the increase in cost of auditing services?

The answer to both lies in audit quality. It has been seen in many other audit markets where audit oversight and effective quality control has been implemented that the overall number of those holding the audit licence does reduce as a result of auditors being required to perform higher quality audits at a minimum standard. For some, the investment in training and resources needed to meet the challenge of a minimum standard of audit quality is too great and they willingly give up audit in favour of other services, such as accounting and tax. As noted previously, higher quality can and should allow auditors to charge appropriately for the service they provide and costs will properly reflect the service, whereas previously costs may have been artificially low. This does not mean costs rise, rather that costs reflect the work done in accordance with standards.

In 2011, for the reason that in our countries the reforms on adaptation of national legislation to EU legislation were not implemented, Ukraine was downgraded to “developing” countries, and our auditors lost an opportunity to undergo a simplified procedure of registration on EU capital markets during the benefit period. If the new law is enacted by the parliament in the near future, then how soon will Ukrainian auditors gain access to European market?

I cannot say for sure, but given that the EU has approved the draft Law in principle and that it reflects closely the EU Law as required by the Association Agreement, I would imagine that such approval will be granted by the European Commission when they re-examine the Ukraine system following its implementation. This is one reason among many why the Law should be finalized and passed without delay.

Some auditing companies, caught in issuing of fake qualified audit opinions to banks and professional participants of securities market, have already been delisted by the Securities and Stock Market National Commission and National Bank of Ukraine from their records. Besides that, it is expected that the Audit Chamber of Ukraine will conduct investigation and revoke licenses of the firms, deliberately committing fraud. In your opinion, are these sanctions sufficient for auditors?

Auditors found guilty of serious professional misconduct, such as that described, should certainly lose their licences and it would be very unlikely they could ever regain them on reputational grounds. Removal of audit licence is the maximum appropriate sanction for audit regulators (as they regulate audit), together with an appropriate fine where indicated. It is for the government to decide in law whether any criminal or civil offence should be committed in such fraudulent audit.

Mr. Hooper, you have been working with representatives of Ukrainian auditing business and state authorities for a long time – what distinguishes our specialists from European experts professionally and personally?

There is no such thing as a standard European expert – English differ from French, Germans from Greeks and so on. With regard to auditors, I have found Ukrainian auditors to be very colourful – full of enthusiasm, lively and interesting people, which contrasts certainly with the stereotypical UK auditor who is reputed to be rather grey. Professionally there are more similarities than differences – auditors in Ukraine are highly skilled and educated and demonstrate a high level of knowledge and interest in technical auditing developments. I am less able to comment on state authorities, though again I might suggest more similarities than differences as the government officials I have dealt with in London, Brussels and Kiev have been similarly competent, busy, over-worked and stressed!

What cities and sights have you already been able to visit in Ukraine? What did you like and remember, and what definitely not?

I have unfortunately not yet had the opportunity to visit much of Ukraine outside of Kiev and the vicinity but would very much like to soon, especially to see Odessa and Lviv which I have heard many good thing about. I have loved seeing cosmopolitan Kiev in both summer and winter, which are respectively hotter and colder than we get in London. I liked and remember chiefly the approachability and friendliness of the Ukrainian people I have been privileged to get to know. There is not much I haven’t liked other than getting very cold once watching a Dynamo vs Shaktar game in the snow!

What would you like to wish Ukrainian auditors and businessmen – readers of “Independent AUDITOR”?

I would wish them continued, justified success and that they enjoy enhanced reputations for delivering truly independent, effective and valuable audits which are trusted and believed by all society; embracing these reforms rather than opposing them will help to ensure this and I hope all Ukrainian auditors will support the reforms.

Jon Hooper

• Senior Accounting and Auditing Expert for the EU-funded project “Technical Assistance in the Ukrainian Financial Sector’s Priority Areas”.
• He is specializing in assisting governments, oversight bodies, professional accounting organizations, SAIs and other stakeholders to drive real sustained improvements in corporate and public sector financial reporting regulation and practice in both the public and private sectors.
• Jon is a former Head of International Relations for the UK's Financial Reporting Council and Secretary of IFIAR, the International Forum of Independent Audit Regulators.
• During 10 years at the FRC, Jon spent two years on secondment to the World Bank, co-leading its accounting and audit reform programs in Eastern Europe and Central Asia. Jon delivered the World Bank's diagnostic  assessments (Accounting &Auditing ROSC reports) in 9 countries and scoped follow-up Country Action Plans in each country.
• Since leaving the FRC, Jon is working with World Bank financial reporting reform projects finalising legislative reform and a Country Strategy and Action Plan in Armenia, completing an A&A ROSC in Bangladesh and developing a virtual regional knowledge management and e-learning Centre for the South Asia region.
• As well as first-hand knowledge of worldwide best practice in audit and accounting, education, oversight and quality control, Jon has supported both the UK's audit and ethical standards Board and the International Accounting Education Standards Board, serving on the IAESB Consultative Advisory Group for 6 years.
• Jon completed a Masters degree in engineering at Cambridge University before joining KPMG in London, working in both audit and transaction services and qualifying as a Chartered Accountant and a prize-winning member of the ICAEW in 2000.
• Jon has also worked in corporate finance and for BASF in Germany, and speaks German.