First-Ever Inspection of Russian Audit Firms Is Credit Positive for Russian Banks

First-Ever Inspection of Russian Audit Firms Is Credit Positive for Russian Banks

Starting today, Russia’s Federal Service of Financial and Budgetary Oversight (Rosfinnadzor) begins inspecting audit companies working in Russia for the first time ever after the Central Bank of Russia (CBR) raised concerns that some audit companies audited banks that later failed. Rosfinnadzor said it will inspect 123 audit firms this year out of the more than 5,000 auditors operating in Russia.20 The inspections are credit positive for Russian banks as it shows that local regulators are willing to improve the transparency and quality of local business and as it may cleanse the market of those auditors that neglected their responsibilities.
In August 2011, Mikhail Kovrigin, deputy head of the CBR’s banking regulation and supervision department, said that the regulator will pay attention to banks that were audited by what he called “accommodative” firms that signed the financial reports of banks that lost their licenses during the crisis (see exhibit below). According to Rosfinnadzor’s plan, it will inspect most such auditors.

Rosfinnadzor’s inspections are not likely to affect Russia’s largest banks as they typically rely on International Financial Reporting Standards and use internationally recognised auditing firms. Among the banks we rate, there are only few that have been audited by the companies from the accommodative list, including Moscow Mortgage Agency (Ba2 stable; E+/B3 stable),21 Rossiysky Kapital Bank (Ba1.ru), and Stroykredit Bank (Caa1 stable; E/Caa1 stable), all of whose ratings reflect the potential issues inherent in the quality of financial reporting in the region.

The heightened attention to bank auditors suggests the beginning of a market clean-up of the weaker and poorly performing firms. We expect the CBR’s action will discourage Russian banks from using auditors whose audits have been associated with failed banks. And while the CBR’s first round of inspections will only focus on a relatively small number of audit firms, we expect the list will be expanded and more auditors, including large international players, will be scrutinised.

As a result of the strengthened oversight over audit firms, Russian banks will benefit from improved quality of their financial reporting, which has been discredited by the failures of several large banks during the global financial crisis. In fact, weak reporting quality contributed to around half of all bank defaults in the Commonwealth of Independent States (CIS) over the past three years.