The Expert RA ratings agency prepared a new rating of auditing/consulting groups

Larisa Krashchenko

Tables:

Table 1. Details of the "Big Five" activity
Table 2. 10 most high growth auditor-consulting groups of Russia
Table 3. 10 most effective auditor-consulting groups in Russia
Table 4. Rating of Russian auditor-consulting groups by results of 2001
Table 5. Share of audit in the total volume of receipts of the largest Moscow ACG by years
Table 6. General audit
Table 7. Investment audit
Table 8. Insurance companies audit
Table 9. Bank audit
Table 10. Services in the field of strategic planning and organizational development
Table 11. Services in the field of staff management and recruiting
Table 12. Services in the field of financial management
Table 13. Tax consulting
Table 14. Consulting in the field of industrial and services engineering
Table 15. Marketing and public relations consulting
Table 16. Informational technologies - management consulting
Table 17. Informational technologies - design and systems integration
Table 18. Legal consulting in the field of economic law
Table 19. Evaluative activity

Last year was a momentous one for auditors, when the market passed to an essentially new state. For one thing, an auditing law was passed in August, superceding the Temporary Rules, which had been in force since 1993. Once “temporary”, auditors became law-abiding ones. The law has a rule which regulates the number of certified auditors; therefore, their numbers on the staff of auditing companies increased, often due to companies’ takeover of smaller competitors. On the other hand, the regulation of the main rules of complex professional auditing and consulting services prompted many companies to join hands with a view to offering a wider spectrum of services to their clients. All these factors led to the enlargement of auditing firms and groups.
Second, the market finally recovered from crisis and restored its volumes. The proceeds of auditing/consulting groups (ACGs) in absolute figures topped 5.5 bln rubles, and if the figures for the Big Five companies are added in, the total is 13.5 – 14.5 bln rubles. The growth of the market visibly outstripped all macroeconomic indicators. Strange as it may seem, the slowing of economic growth fostered the expansion of the auditing market. It appears that Russian ACGs made an attempt to rectify the situation by offering consulting services to their clients. As a consequence, in 2001, the auditing business grew 65% (if Big Five companies are left out), whereas in 2000, its growth did not exceed 49%.
However, the effect of consulting services will not be fully visible until the next year, which is going to be a kind of test for auditors and consultants. If the rate of growth of production does increase, it will build a material base for the client to fall back again to pay for consultants’ services, which he badly needs in a period of reform of key branches of the economy. This will, in turn, maintain or increase the volume of the ACG market. In the event of a negative effect, the 2001 “bubble” will burst.
Third, there was a discernible trend toward the leveling of the market positions of domestic and international ACGs. Only two years ago, the latter had a roughly 80% share of the market, a year ago, 72%, and now, it is down to 60%. The fact is that while the market as a whole expanded in 2001, international companies decreased their growth rates. To illustrate, according to 2000 returns, PricewaterhouseCoopers showed an 18.8% growth, and Deloite and Touche (CIS), 36.8%. This year, the Big Five companies demonstrated an even more modest growth (see Table 1), which lags significantly behind the growth of the Russian auditing market. By our estimate, the companies lost some 1.5 bln rubles in Russia.
It is not easy to explain the decrease in the Big Five’s growth rates. With the exception of PricewaterhouseCoopers, none of them discloses their real performance. PricewaterhouseCoopers gave the following comment on their performance: “An insignificant lowering of indicators was caused by technical fluctuations of our profits, which were computed in 2001 by the Russian accounting standards. According to international standards, our 2001 profit was up nearly 10%, which reflects the real growth of our Russian business."

Moreover, big business is known to be less dynamic (it being easier to start from point zero). There is yet another reason, however. Clients underwent a change of priorities. Recently, even foreign companies, when the auditing report is not targeted at international markets, increasingly prefer to turn to domestic auditors. As for Russians, the most vivid example of their patriotic attitude was Unicon/MS. Even State Duma deputies expressed confidence in it, when they ignored the reputation of the Big Five and elected Unicon as the Central Bank’s sole auditor in 2001.

Success Path

At first sight, the pattern of this year’s Russian Audit ratings is almost undistinguishable from last year’s. Auditors are as active as before, they are still struggling for better places in the master tables, and the main actors are the same.
This is so in principle. The list of 150 major auditors (see Table 4) was updated by exactly one-fourth – it has 38 new names. Auditors’ ranking changed but little, a rank correlation coefficient of 0.75 showing that no cardinal shifts occurred. These indicators are characteristic of the Russian economy as a whole: the lists of major industrial companies (Expert 200), biggest insurance firms, consultants, etc. changed at the same rate.
Yet, what appears as uniformity conceals a dramatic struggle for the market.
First of all, the entry threshold of the majors’ club has tripled. The Top 150 did not list companies whose total revenue fell short of 3 mln rubles. This was largely due to the enactment of a new law, which does not encourage small forms of the auditing business. We are not qualified to comment whether this is good or bad in terms of auditing outcomes, but this is an unquestionably positive trend from the point of view of our rating project. Admittedly, it is rather awkward referring to a company as a major one whose annual turnover does not reach even $100,000. The competition for this place in the list has appreciably grown. Out of 17 companies that sent in their questionnaires to qualify for the rating, only nine made it into the list of the biggest companies.
Another feature of this rating is the expansion of Northwestern companies. In this rating, their number increased by six, with two newcomers, ALCO and BANCO, instantly finding themselves in the fourth ten; the last mentioned was, in terms of performance, just behind the rating leader, PricewaterhouseCoopers. In many kinds of audit and consulting services, many a company in this region is already among the top ten. For example, Audit AKAR did it for the first time in investment audit. Thus far, only Moscow companies were leaders in this kind of audit. The Institute of Problems of Entrepreneurship became leader in consulting services in personnel selection and management.
Another feature of this rating is the variety of strategies, which ensured the success of the list leaders. The most notable success was scored by a Moscow-based company, Aval/Joint Consultants FDP. It succeeded in upsetting the applecart and altering the make-up of the leaders, which had become established over the years. As a consequence, the company also joined the ten most dynamic ACGs, and old-timers had to make way. The reasons are two. First, contrary to the worldwide trend, the company brought together auditing and consulting businesses, which previously had been separate. Second, according to returns from the last two years, Aval regularly held leading positions among the best performing ACGs (Table 3). The application of advanced management techniques finally produced a suitable result.
A similar strategy was employed by the City Expertise Center of St. Petersburg. In terms of dynamics and performance it was in no way inferior to Aval. The net result was that the center shifted to 19^th place from 50^th place in the last year’s rating list.
A different course was chosen by the leaders of a new association, BalEN. Thanks to the pooling of efforts of the “strong middling” companies of our rating, Balance Ltd and ENPI Consult, the new ACG managed to move up to eighth rank in the list. The collective service mark, BalEN, under which the auditors are going to work in the future, tells of their serious intentions.
A similar course was taken by the managers of the 31^st ranking new group, TsBA-Auditor-Ch. Moscow-based TsBA was given the opportunity of wider use of accumulated experience and methods, and the Naberzhnye Chelny-based Auditor-Ch shared its client database with the Muscovites.
Finally, another path to success, an extensive one, was not forgotten. For instance, by increasing its specialist pool by 154% auditing firm FinExpertiza topped the fastest growing companies, rising in the rating from 98^th to 28^th place.

Consulting Prevails

For several years now, the ACG market has owed its growth mainly to the broadening of its range of consulting services. The year 2001 was no exception. The share of consulting services accompanying auditing services in the total ACG revenue was up 80% on a year before, which led to a new alignment of forces in the market. Based on 2000 returns, the audit sector declined by six percentage points, and consulting for the first time began to dominate, accounting for 53% of the total volume of auditing/consulting services (see above Graph 1)

This came as no surprise to all the market participants, because this had to happen sooner or later. We have repeatedly analyzed the reasons behind the gradual rise in consulting’s share; see Expert publications, “The Triumph of Consulting” (2000, no.10), “Positional Fighting” (2001, no.12), and “Dual Stake” (2001, no.3). The last publications discloses the growth mechanism of the Russian auditing/consulting services market. The trick is that in the first half of 2001, the average auditing fees of the Russian Audit rating participants doubled fourth-to-fourth to $21.8/hour. The reason for their advance was the increased demand for consulting, the highly intellectual services of strategic planning, financial management, and tax consulting.
Usually, it is companies leading in rating figures that shape market tendencies. Therefore, their performance dynamics in the last few years is revealing (see Table 19). The share of audit in the profits of Moscow-based auditing companies, which occupy top places in the rating, declined by an average of 10% over the last three years, which by and large bears out our conclusions. The decline was particularly visible in 2000 – 7%. For the time being, Muscovites, being more experienced, professional, and informed, are ahead in consulting services.
The requirement of obligatory audits at Federal state-owned enterprises, which revealed shortcoming in their finances and business activities, necessitated the recruitment of additional consultants for the elimination of these errors. This was an extra factor in the growth of the auditing market due to consulting.
Among consulting services, tax and legal consulting accounted, as usual, for the highest share (20.7%) in the ACG revenues in 2001. These are the most favorite activities with auditors. For example, the tax consulting profits amounted to 682 mln rubles for the year. And this is not a limit. In the future, auditors will have an even broader playing field due to the passing of Chapter 25 of the Tax Code of the Russian Federation. In addition to tax planning another issue of importance for Russian enterprises in 2002 will be tax reporting. As for the legal services in the field of business law, their share increased 98% on a year before.
Appraisal was, however, the fastest growing segment. Witness ACGs’ earnings in this service: 187 mln rubles in 2000 and 424 mln rubles in 2001. The top ten made a sizable contribution, 70%, to the total revenues of the 77 companies offering this service. The winner among them was auditing/consulting group BalEN. According to its specialists, evaluation will enjoy high demand in the current year as well because, in a period of general restructuring of industry, there has been a sharp rise in demand for the valuation of assets and businesses. Companies are increasingly forced to request the services not only of assessors but also financial analysts, auditors, lawyers, and systems integrators, who play a rather important role in decision making concerning the need for, and volume, of appraisal services. RAO Unified Energy Systems (EES Rossii) is one of the main clients of the BalEN group, formed in 2001.

Audit’s Faithful Followers

Despite the prevailing trend, most of the rating project participants (an over 50% share of auditing services) show preference for auditing services. There were 99 companies among 150, of which 41 auditing companies had an 80 to 100% share of audit in their annual revenues.
Because of an appreciable increase in earnings from audit’s accompanying consulting services during the year, the auditing sector of the market shrank to 48%. Although audit is growing slower than consulting, 49% a year, some of its varieties stayed at the top. The share of general audit in ACG revenues is the highest, 43.1%. Its annual growth was 54%, which is 15 percentage points higher than a year before. The leaders here for several consecutive years have been Unicon, Rosexpertiza, and FBK.
The reason for this firm standing of the chief auditing service are as follows. First, auditors have finally concluded a protracted verification of state unitary enterprises for 1999 and 2000. Most of them are, of course, subject to obligatory audit. Second, many auditors’ clients now stand firmly on their own and are in a position to choose a more professional auditor. The price of quality services is markedly higher. The third reason is the scaling up of auditing firms thanks to the expansion of the group of affiliated companies and the growth of the affiliates’ network.
However, while general audit is doing quite well, this is not the case with other kinds of audit. Although receipts from banking and investment audit grow from year to year, this 22% groth is small in comparison with all the auditing services.
The audit of insurance institutions is faring much worse. Its share contracted three times during the last three years. There are several reasons. The first is a decrease in the number of companies participating in our rating project that offer this service. There were 32 such companies in 2000, and 26 this year. Another reason is the decrease in the number of insurance businesses to 1176 from 1259 in 1999. But the most important factor is that an overwhelming majority of insurance firms do not care much about their image. They are much more concerned about cost reduction. Therefore, they turn not to the Big Five, not to our rating participants, but to small and often more tractable companies or else hire private auditors. Moscow-based Marillion is the only large auditor who enjoys continuous success with insurance businesses and who is three steps ahead of its pursuers.

On the Russian Audit rating methodology

The Expert RA ratings agency compiles lists of major auditing/consulting groups operating in the Russian market based on yearly and semi-yearly returns.
Russian Federation, whose income from auditing examinations is no less than 20% of the total revenue, is eligible for the Russian Audit rating.
To enter the rating project, an applicant must complete a questionnaire and send a confirmation form attested by the signature of the CEO and the stamp of the parent company.
At the beginning of every half-year, fuller information about the terms of participation in the rating project can be found at the Expert RA Web site: www.raexpert.ru.
Attention of auditing/consulting groups. You are invited in the near future to take part in a discussion of the Russian Audit results and methods at the Expert RA Web site.

As for banking audit, there is a very special situation there. Until September 2001, the Central Bank awarded bank audit licenses. With the coming into effect of the audit law, the power to award licenses was transferred to an authorized body, which was not established until early 2002. It was the Ministry of Finance, which will not start issuing licenses until May. Many auditors were unable to complete their audits under contracts that had been signed prior to the expiry of their licenses. Most importantly, they have so far been unable to conclude contracts for the next year either. So, main losses in this kind of audit will be footed up by companies at the end of 2002.
A decrease in the share of the audit of stock exchanges, nonbudget funds, and investment institutions is due to the fact that, starting in 1998, there has been a plunge in the number of both operating exchanges and investment companies. Nevertheless, Marka-Audit has, for two years running, sustained leadership in this area.