Alexei Kredisov, Ernst & Young’s managing partner in Ukraine

Alexei Kredisov says Ukraine performed extremely poorly in the last 20 years in comparison to how country should've performed.

With more than 17 years of experience in the accounting and auditing sector in Ukraine, Ernst & Young's managing partner in Ukraine, Alexei Kredisov, has a privileged view of domestic companies and, as a result, a unique understanding of the country's development.

In a Kyiv Post interview, Kredisov shares his insights on where the country is going, what is holding it back and the state of the auditing and accounting industry in Ukraine.

Born in Kyiv, Kredisov entered Ukraine's nascent auditing industry almost at its very inception, joining Arthur Andersen in 1994. After the latter collapsed in the wake of the Enron scandal, its Ukrainian affiliate merged with Ernst & Young, where Kredisov later became the country managing partner.

While satisfied with Ernst & Young's performance on the Ukrainian market, where it has grown to dominate its competitors, Kredisov believes the company still has far to go when compared to offices in neighboring countries.

"If I compare our practice here in Ukraine to the Polish one, we are not performing too well. I don't believe this is the result of our management team, but rather the result of our country's development. By comparison, in Ukraine we have 500 people, while in Poland they have 1,500, which shows that we are way below where we should be," he said.

The main obstacles to further growth are the poor conditions on the Ukrainian marketplace.

These come in two groups: general problems with the business climate and rule of law, and the unwillingness to implement easy, practical solutions, like adopting International Financial Reporting Standards (IFRS) or eliminating loopholes.

Kredisov also acknowledges that the industry itself has room for improvements.

In the fallout from the 2008 crisis, auditors have been blamed for failing to see the economy's weak links.

According to a recent leak, the European Union is now eying a reform that would create pure audit companies, aiming to boost independence and competition.

Admitting regulators are right to look at the work of auditors, Kredisov is on the fence regarding the proposals, unsure of the upshot for costs and quality of services provided.

"It is inherent to the audit profession that there will be audit failures," he asserts. "I think both the profession and investors need to understand this and we need to learn how to live with it."

In the case of Ukraine, however, his focus is on improving the training and education of auditors, as well as increasing their independence. "We have to turn auditors into professionals," he said.

Kyiv Post: You have been here for many years and have a unique view on the companies, their books and how they are performing. In a few sentences, how would you assess the road that the country has covered, where are we now and where are we heading?

Alexei Kredisov: I believe that Ukraine is performing very poorly on the road to success and building a better market economy. Essentially, the business climate, business practices, and business environment is extremely difficult.

Ukraine is not only doing badly in terms of its business climate, but what further worsens the situation is that it is at the mercy of the global economy, which is very volatile, and it is a playing ground for major powers — this is not good for the country or for the business climate.

KP: What are the specific problems with the business climate?

AK: I think the biggest issues are the rule of law, the court and legal system, and the ease of doing business – various permissions, opening a company, opening a bank account, paying taxes, hiring and firing labor, red tape and corruption, which is overwhelming. As a result, very few decent businesses come here and succeed under conditions of fair competition, as there is no level playing field.

KP: The biggest event, for accountants, of the past year was probably adopting the tax code. Is it an improvement or a headache for accountants and companies?

AK: A bit of both. It is an improvement in the sense that it clarifies certain things. The previous tax legislation had a lot of gray areas left at the mercy of the tax authorities to interpret. So if a company's management was prepared to negotiate with the tax authorities – and we all know what negotiating with the tax authorities means – they would flip a gray area into white.

But they could always come back and say: 'Guess what, the interpretation was wrong. This should be black.' There were many gray areas, and I think the new code closed them, making things a little clearer. Yet I am afraid to say that, very often, when the gray areas were made clearer it was done in a way favoring fiscal policy and the state, not businesses.

Effectively, tax authorities increased the tax burden on businesses. They will not recognize it, saying that some tax rates went down, but it is a fact that since the introduction of the tax code, in the first quarter of this year, tax revenues increased by 40 percent. So businesses pay 40 percent more to state coffers. Does it seem like businesses grew by 40 percent? This means they are taxed more heavily.

So no matter what people in the government say, the tax burden went up, which is bad. It is bad for businesses, bad for the country, bad in a time of crisis. Moreover, I do not believe this tax burden was spread evenly. Some businesses were taxed way above 40 percent, while others were left big loopholes.

Thus, the new tax code was good because it closed some loopholes and eliminated gray areas. It was bad because it increased the tax burden. And it further divides businesses in terms of fairness and a level playing field. For most the tax burden went up and for some it remains very low. And I believe this was a conscious decision by policymakers to leave these loopholes.

KP: What sectors benefit from the most, relatively speaking, favorable tax and legal environment?

AK: I wouldn't differentiate by sectors. There are some minor sectors [that benefit from preferential treatment], like hotels, which received a tax holiday, or some types of light industry. For a majority of businesses it became tougher. But those that are connected to the state, those who know how to negotiate, or those who are among this world's "untouchables" use the loopholes which still remain. So it is not the sector but the connections to the state that matter.

KP: A handful of Ukrainian companies have conducted initial public offerings on foreign stock exchanges and adopted international accounting practices. Has the adoption of these standards had a positive impact on the functioning of these companies?

AK: This has definitely been beneficial. Yes, it may have created some constraints, but this is what accounting is all about. These are the rules that are complied with internationally, and the beauty of international accounting standards is that they are beyond the reach of the Ukrainian state, which can flip-flop depending on what is favorable for it at a given point in time.

IFRS may have added some complications for businesses, in terms of keeping books, educating personnel, and educating management on how to understand IFRS numbers and talk to investors — because investors read IFRS numbers to make their decisions. We can criticize this back and forth, but up to now there is no better set of rules for investors to base their decisions on. In this sense IFRS have been very useful for the country and its companies.

It is unfortunate that it is taking so long to implement IFRS in Ukraine more aggressively. We know the banking industry follows IFRS rules, as mandated by the National Bank of Ukraine, and in respect of the largest banks I think this has been going very well. International financial institutions, like the World Bank and the International Monetary Fund, have praised Ukraine's banking sector for this.

Right now there is an additional push to implement IFRS rules for companies of public concern: listed companies, insurance businesses, entities which issue bonds. So there is this extra push. I only wish that Ukraine was a little more aggressive in implementing IFRS for entities of public concern, as well as for small and medium businesses, for which there is a separate set of IFRS rules. They are much easier, with less disclosure, and the world uses them. Speaking about the investment climate: this would be a very quick and easy fix to improve it.

KP: Would this have to be implemented from above, through state legislation, or are companies willing to adopt these rules of their own accord?

AK: Right now it is bottom-up. Companies themselves choose whether or not to implement them. Normally, they implement them when they go for capital, to international or domestic lenders, or when they speak with strategic investors with whom they want to join forces or create a joint venture. But ideally it should be mandated, top-down.

KP: If you had presidential powers, what would be your top decisions?

AK: IFRS, we already mentioned. I am not saying this is the top issue, but it is a very easy fix. Tax legislation needs to be improved, and areas for improvement are easily identified.

KP: Can you give some examples?

AK: Yes, introduce transfer pricing rules. This is how money is siphoned out of the country. Create a special regime for dealing with offshore jurisdictions. Deal with private entrepreneurs, because right now the new tax code basically outlaws them. All these people are unhappy about the new tax code because it made taxing them extremely inefficient, and therefore it is pushing all the private entrepreneurs out of business.

Why did this happen? Because there were abuses by these people and corporations. But the solution is not to kill this whole class of entrepreneurs. Work on the abuses rather than outlawing the whole segment.