In an unprecedented move, the tender committee of UkrOboronProm, Ukraine’s state-owned defense company, has agreed to undergo an independent audit that complies with the highest international standards.
The company updated the previous procurement announcement on May 12. The tender is worth about $130 million for procurement of consulting services, and, the selection process ongoing.
The fact that UkrOboronProm’s supervisory board was defunct is the main reason the tendering process was delayed. According to its statute, the supervisory board represents state interests in the concern’s management, and is responsible for initiating the audit. After receiving the audit report, the board is required to ensure the implementation of corrective action and recommendations.
The lack of a functioning supervisory board eventually prompted NAKO to halt its cooperation with UkrOboronProm in relation to this procurement. (NAKO is the Independent Defense Anti-Corruption Committee, a joint venture established by Ukrainian activists and international experts to fight corruption in the Ukrainian defense sector. The NAKO is run by Transparency International Defense & Security and Transparency International Ukraine, and is supported by the Ministry of Foreign Affairs of the Netherlands.)
However, at the outset of 2018 and after extensive input and support from NAKO, and international partners, the supervisory board has finally been re-established. The board’s new chair, Mykhailo Zgurovskyi, is the rector of Kyiv Polytechnical Institute.
Other major Ukrainian state-owned companies, such as Ukrainian Railways (Ukrzaliznytsya), the Ukrainian Postal Service (Ukrposhta), the national oil and gas company Naftogaz of Ukraine have already introduced contemporary corporate governance systems, including independent supervisory boards. To date, UkrOboronProm has excluded itself from these processes. Now, moving to develop an effective corporate governance system, it has updated the tender to include independent audit services. This is a significant move, according to NAKO, because the assessment of UkrOboronProm’s corporate governance system is a major objective of the tender.
The updated tender specifies that the selected contractor shall carefully assess the concern’s corporate structure and the role of the supervisory board. Risks related to its corporate governance and recommendations on how to mitigate them shall be reported after its role, formation and governing procedures have been scrutinized. Following the transformation of UkrOboronProm’s corporate governance system, the supervisory board shall be empowered by recommendations for better governance, and, safeguards for increased, independent managerial decisions. The ultimate goal of corporate governance assessment is the implementation of Organization for Economic Cooperation and Development corporate governance standards.
Updates relating to financial auditing
NAKO, in cooperation with international experts with significant experience auditing defense companies, has also provided recommendations on the formulation of a comprehensive statement of work for an independent financial audit. As a result and in accordance with the International Standards of Audit, the updated tender also includes the procurement of financial audit services. Notably, the retracted version merely referred to financial review and due diligence; financial review and due diligence are not governed by any laws or regulations. In contrast, a financial audit is subject to clear and precise provisions of Ukrainian legislation.
In other words, the amended tender creates grounds for the objective assessment of corruption risks in UkrOboronProm and is designed to ensure the funds allocated for the audit will be used effectively. These much-needed steps set a high threshold for eventual service providers.
Transparency of the audit and access to information
The efficient work of the auditor is facilitated by a guaranteed access to all relevant information. The updated tender stipulates that access to necessary classified information, such access will be provided by the competent Ukrainian authorities in accordance with the applicable legislation. This is a key condition for the delivery of accurate audit results.
The service provider will also carry out a full examination of UkrOboronProm’s member companies. Recommendations for the improvement of corporate governance will be provided to the Supervisory Board which will, in turn, set up an Audit Committee to implement corrective action.
Monitoring and implementation of the audit results, including corrective action, will be ensured by the supervisory board in cooperation with Ukrainian and international partners. Notably, the audit results will be made public.
In light of these developments, NAKO has returned to monitoring procurement. It anticipates leading international companies will partake in the bidding process.
The submission deadline is June 18. More information can be found here.
Olena Tregub is secretary general of NAKU. From 2015 to 2017, Tregub led the national authority for international development assistance coordination as the director at Ukraine’s Ministry of Economic Development. She is a graduate of the Fletcher School of International Law and Diplomacy, the Central European University and Kyiv-Mohyla Academy.
