International assistance to Ukraine is contingent on financial sector reform, not only of banks, but also the companies that audit them.
The International Monetary Fund, for instance, identified tax auditing as a problem, writing: financial audits of budget reports (do) not entirely comply with international standards.”
The Ukrainian government pledged to adopt a new audit law, coming into compliance with European Union standards, by July. It missed the deadline, but lawmakers are shooting for Sept. 22 to pass the law.
The PrivatBank scandal put audit and accounting into the spotlight. Ukraine’s biggest bank was owned by oligarchs Ihor Kolomoisky and Gennadiy Bogolyubov before the state took it over in December.
In July, the National Bank of Ukraine withdrew auditing rights from PwC audit firm in retaliation for its failure to identify practices that left PrivatBank with losses approaching $6 billion. PwC audited PrivatBank from the mid‑1990s to December 2015.
The central bank claimed that “the audit findings by PwC failed to highlight risks faced by PrivatBank, which led to the bank being declared insolvent and nationalized, with substantial recapitalization costs borne by the state.”
PwC called the NBU’s decision unjustified and pledged to “examine all options to reverse the decision.”
On Sept. 12, in an interview with Reuters, Finance Minister Oleksandr Danylyuk did not rule out taking the auditors to court to recover the enormous multibillion-dollar costs to taxpayers for PrivatBank’s bailout.
The exclusion of PwC from NBU’s Register of Bank Auditors in July could dissuade other international auditing companies from working in Ukraine, but experts say that is unlikely as the new legislation on auditing and accounting will increase demand for their work.
Viktor Galasiuk MP, chairman of the Industrial Policy and Entrepreneurship Committee, told the Kyiv Post that the new legislation, if passed into law, will have a “positive effect on investment climate, even though it’s a drop in the bucket. It will contribute to the harmonization of our national legislation in the sphere of accounting and financial reporting with the EU standards and International Finance Reporting Standards. The implementation of some of its provisions will help to raise awareness and reduce investor risks.”
Vitaliy Kravchuk, a senior research fellow at the Kyiv-based Institute for Economic Research and Policy Consulting, cautiously welcomed the proposed changes, saying they were “not perfect,” but steps to increase transparency “through wider availability of financial reports.”
Kravchuk said the envisaged changes will only moderately increase the reporting burdens of larger companies, while smaller ones should benefit from “simplified reporting” requirements.
But Galasiuk raised concerns about an alternative draft law he said would be “extremely detrimental” and “pose a threat to independent auditing in Ukraine.”
It also imposes unrealistically high requirements on the size of an audit firm, stipulating a minimum of 15 qualified employees. “Practically all firms based anywhere except Kyiv will not be able to fulfill this requirement,” Galasiuk said.
