Lack of Access Could Hinder Audits of Companies With Ties to Russia

Auditors are worried they may have spotty access to information or insufficient evidence to support a company’s financials

Moscow’s International Business Center. The Public Company Accounting Oversight Board has warned auditors of companies with operations in Russia and Ukraine of the possibility of ‘scope limitations,’ or constraints on an audit when information is out of reach, which typically result in an audit opinion with a disclaimer.

Photo: -/Agence France-Presse/Getty Images

香蕉视频苹果下载Auditors that assess the financial statements of U.S.-listed companies operating in Russia and Ukraine face a complicated web of difficulties—including possible lack of access to key documents or people.

Western accounting firms, among them Big Four Ernst & Young, KPMG, PricewaterhouseCoopers and Deloitte, last month said they would be cutting ties with their local network firms in Russia after its onslaught on Ukraine.

As a result, U.S.-based or international auditors could be unable to access companies’ books and records from either of those countries, said Sara Lord, chief auditor at RSM US LLP, a professional-services firm. Records might have been destroyed, or unavailable for other reasons, she said.

香蕉视频苹果下载Also, due to government sanctions accounting firms will likely have less access to auditors in Russia than they previously did, audit experts say. In Ukraine, the firms might have to work with local auditors who can’t track down certain records due to damage to servers or storage locations from bombings, they say.

The consequences of harsh economic sanctions against Russia are already being felt across the globe. WSJ’s Greg Ip joins other experts to explain the significance of what has happened so far and how the conflict might transform the global economy. Photo Illustration: Alexander Hotz

That complicates matters for companies in getting their financial statements reviewed and verified. “Scope limitations,” or constraints on an audit when information is out of reach or evidence is insufficient, typically result in an audit opinion with a disclaimer. The Securities and Exchange Commission doesn’t accept opinions with disclaimers, which can prompt stock exchanges to delist a company’s shares.

香蕉视频苹果下载More than 600 international businesses in Russia, some of them closing completely, since the invasion of Ukraine began in late February, according to the Yale School of Management. Still, over 200 companies from around the world continue to operate there, the data showed.

香蕉视频苹果下载Companies can take other steps to avoid scope limitations. Auditors have to work closely with company executives and audit committees to, for example, to determine whether legal rights to ownership of certain physical assets have changed based on Russian government decree, Ms. Lord said. Auditors would have to fully grasp why executives decided they no longer have legal rights to these assets and have written them off, she said.

香蕉视频苹果下载The Public Company Accounting Oversight Board, which regulates audits of companies listed on U.S. exchanges, related to audits of businesses 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 might have trouble communicating with them, the U.S. audit watchdog said. Auditors might need to come up with an alternative plan to supervise their local partners’ work, the PCAOB said.

香蕉视频苹果下载The Big Four are in the process of unwinding their ties to their Russian units. Firms in the Big Four networks operate as separate legal entities in each country, using a common global brand, and are bound by an agreement that governs certain arrangements. Soon, the Russian members of those global networks will no longer be part of their brands. The local firms pay annual fees to the global network for shared technology and branding—an arrangement that will further delay the severing of ties.

Levi Strauss香蕉视频苹果下载 & Co., which is based in San Francisco, in March suspended sales of its jeans in Russia. Now it is evaluating how to deal with those accounts as its auditor, PwC, has announced its exit from the country.

“We are waiting to see how things evolve and we will figure this out,” Chief Financial Officer Harmit Singh said. “We have time to do this, because 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, Mr. Singh said.

Audit Risks

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

香蕉视频苹果下载Auditors, however, should exercise more caution than they might have in the past when they rely on information they cannot verify directly, which they frequently must do, said W. Robert Knechel, director of the international accounting and auditing center at the University of Florida.

香蕉视频苹果下载“It seems like it’s an impossible situation for the audit firms potentially and there could be very, very strong situations to support a scope limitation,” he said.

香蕉视频苹果下载U.S. audit standards for cooperating with an unaffiliated firm are a higher bar than with an affiliated firm, for example, in verifying the independence of its partner on an audit, Mr. Knechel said.

香蕉视频苹果下载Several professional-services firms, including the Big Four, Grant Thornton LLP, BDO USA LLP and Marcum LLP declined to comment.

香蕉视频苹果下载The war poses other pitfalls for auditors. They will have to study companies’ exposure to new risks, for example, boycotts of suppliers, suspended sales to certain customers or halted investments in Russia.

Companies also face reputational risk for continuing to do 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 company estimates of write-downs on divestments of Russian assets and joint ventures. Companies under U.S. and international reporting standards have to take impairment charges, or write-downs, when the sum of estimated future cash flows from an asset is less than its book value.

Auditors of companies on a calendar year have several months to gather the materials they need for their 2022 work. Those issues might be solved because companies deem their level of activity in Russia to be insignificant after writing off their operations there, or because auditors determine they can rely on information provided by companies’ local auditors, experts said.

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

香蕉视频苹果下载“The last two years has been a perfect opportunity to hone our skills in uncertainty,” Ms. Lord said. “We have a level of uncertainty that’s unusual. We have to make sure we’re doing our best to evaluate the estimations management has done and determine whether it’s reasonable.”

Write to Mark Maurer at Mark.Maurer@wsj.com

香蕉视频苹果下载Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8