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“The team was recently visible advising on a number of pharmaceutical cases. Sources agree that the team is “moving in the right direction” and are particularly impressed by its work in the pharmaceutical sector”.

 

Audit of the State Enterprises: Who Will Profit from Engaging International Companies

22.06.2015

Maksym Kopeychykov, Partner at Ilyashev & Partners Law Firm
Source: Dzerkalo Tyzhnia

At the beginning of June of this year the Minister of Economy left a notice at his Twitter page that the Cabinet of Ministers of Ukraine has passed a Resolution on engaging international audit forms to the audit of key state enterprises. The Resolution has not yet been published at the official web-site of the Cabinet among the newly adopted legislative acts, but there are no reasons not to trust the words of the Minister – why would a European citizen lie to the public? Engagement of international audit and law firms for analysis of certain activities or documents in Ukraine has become trendy (at the same time, as can be judged from public reports, certain foreign specialists love Ukraine so eagerly that they are ready to work here 24/7 and even free-of-charge). It can be assumed that the audit of the state enterprises shall really be carried out by foreign agents, more particularly, by Ukrainian offices of international companies. Does engagement of foreign consultants represent anything more but perfect newsworthy event?

As for the audit of key state enterprises it is evident that what the Cabinet is planning has several goals, as any balanced and reasonable political decision requires. The goal number one is to obtain the audit results to provide substantiation to Ukrainian people (who, let me remind you, ideally are the beneficiaries of any state-owned enterprise) of the necessity to sell the state enterprises as quick as possible. The second goal is to provide an additional reason to the appraisers to decrease the price as soon as now it is easy to make a prognosis that probability of positive auditor’s conclusions will be extremely low.

It is no secret for no one that overwhelming majority of the state enterprises are managed ineffectively, have bulky organizational structure; system of contractual arrangements and price formation, as a rule, are not transparent and many enterprises have their community expenditures (which do not yield balance profits, but require constant flow of expenses) “suspended”. The state enterprises located at the objects of social infrastructure (related to bookable reserves) are rarely profitable, but certain officials manage to considerably improve their earnings at the expense of “right” exploitation of such objects, which is also not a secret. In such method the results of the audit shall be closely described in the media as a proof that the state is not the effective owner and the state enterprises must be urgently sold. It is evident that an option “to change the management system, replace the head officials, decrease personnel and expenses for the social infrastructure objects” shall not be proposed.

In addition the fact of engagement of international auditors will be actively used as an example of readiness of the Ukrainian authorities to be transparent in privatization matters. It is hard to judge to what extent it corresponds to reality as soon as to ensure openness and transparency more important is the choice of assessors and non-discriminating terms of sale of the state property. But from PR point of view such step is a safe bet. Open nature and engagement of international consultants will be good signals for potential foreign investors who traditionally have trust in the “BIG FOUR” and other international companies rather than local Ukrainian auditors (although among the later there are many qualified specialists able to perform the required functions; however, there are not many local companies with outstanding reputation and world-known names. It may be also surprising to out declare aloud about engaging Ukrainian companies to audit of Ukrainian state companies).

And finally it is clear that references to the results of the audit performed by international auditors (who are presumed to be impartial) may be used as a typical appeal to solid credibility. It means that both the Minister of Economy and his subordinates will shift the responsibility to non-accountable third persons reputation of whom is almost spotless.

 What will an ordinary Ukrainian citizen get from this? The answer is simple: nothing.

 
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