Speaking at a packed lecture in the spring of 2016, Adomas Audickas, the former Lithuanian economy minister and advisor to Ukraine’s Economy Ministry, outlined his vision for reforming Ukraine’s state-owned enterprises, or SOEs.
Reforming such companies, increasing their oversight and making them more transparent was vital, he argued, if Ukraine wanted to attract investment, level the playing field and make the market fair for all enterprises — both private and state-owned, foreign and domestic.
‘Ukrainian referee’
“The state should create rules and enforce them. In Ukraine the reality is very different,” he said. “To use a football analogy, not only does a Ukrainian referee engage in the game as a player, but he also fails to observe the rules.
“This referee takes the ball into his hands, runs to the goal posts and says ‘goal’. When you wonder ‘Why is it a goal?’ — He replies ‘Because I say so. I am the referee.’ Until this problem is fixed, it doesn’t matter what kind of rules are in place — since nobody will be working according to them anyway.”
Many agreed with Audickas and while it’s widely argued that all enterprises in Ukraine need better auditing and inspection — searches for company information in public registers too often return the message “no data available” — many say it’s state-owned companies that need more oversight.
“In the years since the collapse of the Soviet Union, state-owned enterprises here were seized by several individuals and have been a great source of corruption in Ukraine,” says Svitlana Zalishchuk, a member of parliament in President Petro Poroshenko’s bloc, the largest Rada faction with 135.
Audickas highlighted that Ukraine has around 3,000 state-owned companies, but only 100–150 of them really matter, jointly accounting for about 90 percent of all state-owned enterprise revenues.
He argues that Ukrainian state enterprises are still largely loss-making and in urgent need of reform, even though they have the combined capacity to generate up to $6 billion in yearly profits.
That loss in profit and tax revenue for state coffers is frustratingly avoidable, some observers say, and can be blamed on inefficiency, bad corporate governance and blatant corruption.
Revising legislation
Since 2016, Ukrainian lawmakers have been proposing and revising legislation on auditing and accounting that would even the playing field and make all companies accountable and transparent.
For their part, Ukraine’s European allies seem to strongly agree and in accordance with requirements outlined in the EU-Ukraine Association Agreement, Ukraine was told to adopt a strict law on statutory auditing that aligns with EU standards.
After significant back and forth, such a law was finally adopted on Oct. 1 this year.
“Reforming state enterprises is one of the key objectives we face as a country,” said Zalishchuk. “I align with our European partners in the belief that proper oversight and auditing is important to fight corruption within these state enterprises and, as a result, to make them more efficient.
“This Law on Auditing takes into account the best international practices in the area and we expect it will significantly improve the quality of oversight and auditing of companies in Ukraine,” Zalishchuk concluded.
Experts in the field are also optimistic, although they warn that significant improvements can’t be expected overnight.
Substantial benefits
According to experts from KPMG — one of the world’s Big Four financial auditors — Ukraine can expect to see substantial benefits from the new legislation. Eventually.
“According to our experts here in Ukraine, it will take at least one or two years for businesses to adapt to the new legal requirements,” said Yulia Tereschenko, director of auditing for KPMG in Ukraine.
Ultimately, the market can benefit from “greater transparency in business operations” that will “increase confidence in foreign investors” who are considering doing business in Ukraine.
According to Tereschenko, the new directive, that significantly updates existing auditing laws, has “completely changed the rules of the game” and finally takes control away from referees with a potential conflict of interest, and into the hands of independent auditors.
“The new law strengthens the requirements for auditing and the process of preparing and publishing financial statements of companies,” said Tereschenko. “Together with financial statements, companies will also have to provide management reports that reflect the state and development prospects of the enterprise and discloses the main risks and uncertainties regarding its activities,” she added.
Until now, Ukrainian companies and state-owned enterprises had demonstrated a troubling lack of transparency in their financial reporting and often didn’t have independent supervisory boards or independent, impartial observers. The new law, if enforced properly, changes that.
But auditors will also be held to a much higher standard too, ticking the same boxes and making the same evidence-based declarations as would be expected of auditors in EU countries, according to Tereschenko.
“They’ll need to disclose what procedures they have performed and what conclusions they came to. In addition, for the purpose of their conclusion, auditors will need to provide information about the consistency of the report on the management of the financial reporting itself, as well as the independence of the auditors, including the provision of certified auditing services,” she said.
After the implementation of better oversight and auditing for its state-owned enterprises, some lawmakers and experts are saying that Ukraine needs to have a more urgent conversation about whether particular state-owned assets should be state-owned at all.
While Ukraine’s privatization drive has resulted in some notable assets moving from public to private ownership — about 100 so far — it hasn’t gone far enough, some argue.
Transparency of assets
“We need public policy that explains the rationale behind a certain state ownership,” says Member of Parliament Svitlana Zalishchuk. “It should set a clear framework of steps we take, in subjecting the asset’s ownership to a proper review.”
“State ownership should be an exception rather than the rule,” says Adomas Audickas.
“In each case the government has to understand why it owns a certain company. If the only reason is to make profit, then this company should be sold — because the government is always a less efficient owner than a private one.”
For many observers of the Ukrainian investment sphere in general, the carefully-watched end-game is mass privatization of enterprises that can and should be profitable.
European businesses, ready to invest in Ukraine only under the right conditions, are paying close attention to regulatory reforms like auditing and accounting — even if they’re something of a snoozefest to the general public.
“The business community hopes that significant privatizations can start soon,” says Anna Derevyanko, executive director of the European Business Association, a business association with around 1,000 members.
Enterprises in Ukraine, and the regulatory environment that surrounds them, should be made as attractive as possible to outside investors — but those investors themselves can also play an important role in ongoing reforms here, she suggested.
“It’s important to kick-start large-scale privatization,” Derevyanko said.
“But an important focus must be not only on enterprises directly, but on the quality of investors too. These companies need strategic investors, who will assume responsibility for both the enterprise and the team and try to reform its processes and procedures.”
