Comeback of mandatory audit

The requirement of mandatory audit for big companies is coming back, i.e. big companies will have to publish their reports after they are inspected by an independent auditor. This is a rather crucial event in the economic life, which remained in the shadow of pre-election turmoil.

By what is it important and what will it give to economy and business? Prior to developing the topic, it’s worth reflecting to its background.

Mandatory audit was one of the crucial initiatives by former PM Tigran Sargsyan (current Chairman of the Board of the EEC). He was sure that import of mandatory audit will raise transparency and accountability of big companies. On October 2009 the Government gave positive conclusion to the draft on making amendments to the RA Law on Accounting.

Pursuant those amendments, hereafter big companies were obliged to publish annual financial reports. Big were considered the companies, proceeds of which from the activity of a reporting year exceed AMD 1 billion. In 2011 legal claim of mandatory audit was invested. Its main purpose was complying RA legislation to best professional experience in EEU.

The system functioned for 3 years. It’s difficult to say what its contribution was. In any case, the Government attempted to make the system work at any price. Names of companies not passing mandatory audit were being published, and in 2013 the Government went even further and decided to deprive the companies from the right to participate in state procurement, which hadn’t passed mandatory audit, submitted unreliable financial report or had serious shortcomings upon the conclusion of mandatory audit.

However, the contrary was recorded. The Government of Hovik Abrahamyan, which came to follow Tigran Sargsyan made a decision to eliminate the requirement for mandatory audit in May 2014. As David Ananyan, Deputy Finance Minister, told Banks.am 3 years ago it was anticipated to adopt other legal norms (including alternative inspections), and within it a proposal was made to eliminate mandatory audit. However, the planned legal initiatives weren’t brought into life and mandatory audit norm was eliminated. These were official comments.

And in the so-called backstage, other comments were being circulated regarding both mandatory audit and eliminating it. For instance, during making investments some stated that mandatory audit is an additional burden and will serve only a group of financial organizations, i.e. demand for audit services with this change was considerably growing, also adding the number and incomes of audit companies. By the way, opposition powers and several experts were against the requirement on elimination of mandatory audit.

For instance, Levon Zurabyan, ANC faction secretary, stated that elimination of mandatory audit has three purposes: first, freeing the wealthy from additional burden, second, destroy influence of former PM Tigran Sargsyan in the financial world, and third, prepare audit absorption by the Ministry of Finance. And, e.g. NA MP Artsvik Minasyan (current Minister of Nature Protection) considered elimination of mandatory audit is beneficial to big companies, functioning in the shadow.

And now, 3 years later, again the requirement for mandatory audit is being restored, as David Ananyan, Deputy Finance Minister, said demand for mandatory audit is still up-to-date. It should be stated that official statements on “return” of mandatory audit were heard yet in late January, when the proposal by MP Elinar Vardanyan on “Audit activity” was being debated in NA Standing Committee on Finance and Budget. And on February 14 David Ananyan told reporters that the Finance Ministry intends to restore the legal norm of mandatory audit.

However, that requirement will be restored not in its former shape. The Government promises to restore it with reviewed and more balanced conditions. “We propose to restore the norm of mandatory audit. With one crucial exception: we want to change and make description of a large company compliant to European standards on accounting. Instead of current two conditions we’ll propose three, in case of simultaneous occurrence of two of them the company will be qualified as big. They are: proceeds index, regarding which threshold of AMD 2 billion is being touched upon, and average index of the number of employees for each of previous three years, currently 100 employees are being touched upon,” Ananyan said.

Upon his assessment these changes will function on around 250-300 big companies out of 1000 (in an interview with Banks.am he mentioned 300-350).

The requirement for mandatory audit will be restored very quickly—in a period of 1.5-2 months. According to the Deputy Minister this draft related to regulation of the field of audit will be totalized, and after professional debates wide public discussions will be held 10 days later. It’s planned that the draft will be submitted for Government’s approval from mid-April or early May, after which it’ll be debated in the NA.

So, what will it give to the business? First, it should be stated that audit is a rather expensive pleasure, which may cost from 1 million to 10 million or more, i.e. for a few hundred companies this is an additional burden, which somewhat contradicts PM Karen Karapetyan’s approach on not creating additional headaches for the business.  However, it refers to supergiant companies, compared with the turnover of which it isn’t a big sum.

On the other hand, restoration of mandatory audit will again activate the market of audit services. Firstly, incomes of three dozens of audit companies will grow, and besides, new audit companies will emerge on account of the fact that requirements toward audit companies will be mitigated, reducing the number of qualified auditors in  the company from 5 to 2.

How will it contribute to transparency growth? It’s difficult to say, as everything will depend on what mechanisms the state will invest to provide implementation of that requirement and what penalties will be defined for violation of that requirement.

A simple example should be brought. The norm of mandatory audit, as stated, was eliminated in 2014, however, the norm of publication of financial reports remained under current law.

Thus, pursuant Article 24 of RA Law on Accounting big companies must publish annual reports (definition of a big company remained the same—assets or turnover comprising USD 1 billion).

However, those interested may consult the list of top 1000 taxpayers and check reports of how many of them are available on the internet. As we have repeatedly checked, it should be stated that number of such companies is a few dozens (not counting organizations, accountability of which may be published in the press, on the internet or provided through booklets, i.e. nothing prevents big companies from printing a booklet in 1000 samples and keep them in safes (practically it’s impossible to clarify whether they’ve been disseminated or no).

However, let’s not be pessimistic, as it seems there is an intention to fill that gap. In particular, the Ministry of Finance proposed that reports of the companies were published in the register of the National Statistical Service of Armenia. Thus, it’ll be possible to find them not only in a separate newspaper or on its website, but in the single register led by the National Statistical Service.

This is really a step forward. It’s also possible to implement other not expensive steps towards raising transparency, to touch upon which perhaps will be possible after the elections, proposing them to the developing new Government after the elections.

By Babken Tunyan