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

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.

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.

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.

More than 600 international businesses have curtailed operations 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.

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.

The Public Company Accounting Oversight Board, which regulates audits of companies listed on U.S. exchanges, last month warned of scope limitations 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.

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

& 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.

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.

“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.

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.

Several professional-services firms, including the Big Four, Grant Thornton LLP, BDO USA LLP and Marcum LLP declined to comment.

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.

“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.”

—Nina Trentmann contributed to this article.

Write to Mark Maurer at [email protected]