Op/Ed by Natalia Galdeskaya, Olimpline Consulting
Each legal entity or foreign company operating in international markets knows that effective management and correct financial administration are key to successful business operations. Audit is an independent inspection of bookkeeping and financial reporting aimed to provide a professional report on its accuracy.
In Russia, Statutory Audit is a compulsory annual inspection of bookkeeping, tax & financial reporting regulated by Federal Law #307 from 30.12.2008. Article 5 of this law as well as a variety of other specific laws give the list of the organizations subjected to statutory audit. The following entities are subject to annual audit inspection in Russia:
Any joint stock companies (public joint-stock company, publicly-traded corporation, closely held company etc.) and state and municipal industries have to go through annual audit procedures.
Activity Specific Entities
Insurance organizations, clearance companies, professional competitors on a stock market, credit organizations, credit reference bureaus, goods & stock exchange, mutual insurance associations, non-governmental pension funds and other funds, including non-profit and charity funds, organizations with stocks being traded on stock market, organizations that publish or perform consolidated book-keeping. Exception is applied for the reporting of central and local authorities, government agencies and non-budgetary funds.
Subjected to statutory audit are organizations with revenues more than 400 million RUB (@USD7 million) or with amount of balance sheet assets more than 60 million RUB (@USD1 million) for the year leading up to the reporting year. LLC companies also fit in this category.
Statutory audit is also applied in other cases regulated by the Law. For example:
- Lottery organizers and operators, real estate developers performing participatory construction, subdivisions of foreign non-profit non-governmental organizations.
As a result of the statutory audit, the entity receives an audit report confirming the authenticity of its reporting, together with any detected violations or distortions, a fiscal & commercial risks evaluation and recommendations concerning improvements.
Companies subjected to statutory audit submit an exemplar of annual accounting reporting with audit reporting to Rosstat (Russian Federal State Statistics Service) not later than 10 days after the day that follows the date of the audit reporting but not later than December, 31 of the year following the reporting year. (ie Audit reports for 2016 must be filed latest at 31st December 2017)
International Standards and 2017 Changes
Beginning January 1st 2017, the Russian Federation adopted 30 international audit standards and also brought into force 18 new standards.
Instead of the past form of audit report with standardized text all new reports have to be more informative and contain not only financial statement evaluation but also point out the most important issues in the business activity of the company – those that contain the most noteworthy risks.
These new audit reporting standards will provide more practical information; not only to the company accountants, but also internal and external concerned parties: shareholders, boards of directors etc. – parties participating in decisions on business development strategies.
This new approach will allow investors and directors to improve the quality of their business solutions but at the same time audit costs, as the reporting time terms will have increased to the year end in comparison to past periods. However it may increase financial risks because the upgrade of transparency level and inclusion in the report of business risks could lead to rise in price for the company credit status.
Starting from October, 1 2016 the results of statutory audit of the financial reporting become public. Companies are obliged to submit information on the audit results not later than 3 days after receiving audit report. The information is submitted to Unified Federal Register of facts of activities of legal entities – Fedresurs
Commencing 2018, Russian Audit Privacy Might Be Abolished
A legislative draft concerning increasing transparency of the Russian Audit process and results has been introduced to the State Duma.
According to the current tax legislation, during audit inspection, it is not allowed to collect, keep, use and distribute the information about the taxpayer received by the auditor pertinent to confidentiality regulations concerning professional secrecy (article #82 Russian Tax Law).
However, this new draft legislation would, if passed, exclude audit secrecy from article 82. The draft legislation also suggests to provide the right of Federal Tax Service Inspectorate officials to demand and obtain from auditors the documents (information) on tax payments received by them from the taxpayer during the audit performance. These documents could be claimed as evidence should the taxpayer not have submitted documentation to the Federal Tax Service Inspectorate directly. This puts the auditor in a position of having to report misdemeanors to the Russian Tax Service.
The audit process in Russia is not especially arduous and in most cases allows plenty of leeway over the time frame required in order to properly prepare accounts for inspection. However the new legislation concerning Article 82 expected to be passed into law, the onus is on the company to make sure the accounts provided are true and taxes have been paid. Misdemeanors will be reported to the Federal Tax Service who can levy fines and punishments.
For this reason it is recommended that foreign businesses in Russia appoint an accounting practice to install and help maintain accurate bookkeeping and accounting records. Our previous advice on this subject refers.
Dezan Shira & Associates´ Russian investment brochure offers an overview of the services provided by the firm – both foreign investment into Russia and Russian investment into Asia. It is Dezan Shira´s mission to guide investors through Russia´s complex regulatory environment and assist with all aspects of establishing, maintaining and growing business operations in the region.