The Big Six Who Could

The Big Six accounting firms came to Russia at the beginning of the decade at the behest of curious and deep-pocketed multinational clients. But as Russian reforms advanced at a crawl and political upheavals came and went, foreign capital failed to enter the market at the pace expected.


Unruffled, the Big Six began putting to good use their years of experience in markets leaner than Russia, creating their own gold mines from which to extract wealth.


Now, the world's leading accounting houses employ a range of services above and beyond traditional tax and legal consulting and audits, plumbing the market with broad-based business planning, governmental work, corporate finance, executive search and training.


The growth has been spectacular.


Representative offices which opened in 1989 and 1990 -- in some cases only four guys sitting in a hotel room with laptop computers -- blossomed into full-fledged operations within a year or two.


Staffing levels have shot up, driving Russian payrolls for the Big Six alone to more than 3,100 employees, with work forces at times doubling annually and the resulting dash for new office space proving a boon for the real estate industry.


"We've moved four times in the four year's I've been here," said Bill Kirst, the Price Waterhouse managing partner who left Russia in late June.


While the growth has yet to slow, it has been more ad hoc than intended, as the accounting firms adjust to the fact that there has been substantially less foreign investment than anticipated. Most came to Moscow following the oil business, but slow progress on issues like production-sharing agreements, as well as political uncertainty, have stifled the sector.


"Oil companies hate political instability," mused Kirst. "They just get very uncomfortable."


Given the low volume of foreign businesses moving into the Russian market, the accountants have turned to other means.


Government services contracts -- doing due-diligence and auditing projects for such bodies as the World Bank, USAID or the European Bank of Reconstruction and Development -- provided one quick pool of funds. But the contracts are not as lucrative as the private business sector. More importantly, weak foreign investment has forced the Big Six to scrutinize the market of Russian corporates. The scrutiny was returned in kind starting in 1994, when Russia's future blue chips gazed across the chasm 70 years in the making which separated them from world markets and the cash desperately needed to restructure and rebuild.


They saw that international markets don't give money readily. Enticing foreign banks and fund managers into a land where things are rarely as they seem requires transparency and information on the part of Russian companies.


And information, in the form of audits to international standards, is what the Big Six sell.


"It's not difficult getting Russian clients," said Karl Johansson of Ernst & Young. "The issue is whether it makes sense for a Russian client to have us, or for us to work with them."


Primarily, international standards are needed for companies trying to lure foreign direct investment, strengthen overseas ties for trading, win the respect of international colleagues -- as is the case with Russia's banks -- and to earn a position on international capital markets.


The New York Stock Exchange, for example, requires two years of audits based on the Generally Accepted Accounting Standard used in the United States for its most basic form of listing.


Russian companies "need money," said Stewart Siewert, chief operating officer of Deloitte & Touche. "And they need information to get money."


As the Big Six strike out into Russia's hinterlands, deploying their hundreds of Russian graduates in a bid for information, they leave behind them a wake which can act as a guide for other foreign companies.


"I think their employment base is like a leading indicator of times to come, in terms of investment opportunities and real market activity," said Alex Goodwin, chief executive officer of Sector Capital.


"The more people they ... send out to see all these companies, the closer we get to transparency, the closer we get to capital, the closer we get to liquidity, the closer we get to real markets," he said.


But as the Big Six increase their role in Russian companies, they are also opening themselves up for attack from competing Russian auditors angered at losing large corporate clients and being snubbed by international lenders.


Articles in Russian newspapers such as Segodnya, Izvestia and Commersant-Daily have attacked the foreign firms, accusing them of handing out favorable audits for a price, and or being given preference in handling international projects like the World Bank tenders. Izvestia carried an article last June claiming that in certain cases the Big Six turned a blind eye to banks' irregularities to produce good reports for supervisory bodies or the media.


"All bankers had to do was phone and say what kind of report they wanted on their desks the next day," the article said.


"For me it's clear... it's the reality of the competition," said Mikhail Kislyakov of Arthur Andersen. "Only the markets can show who has knowledge, who can perform quality work... Only the clients can decide."


"It [tension] does seem to be growing, and I would judge that by some of the articles that have appeared in the press, which try to totally discount the Big Six -- rubbish them, in fact. I don't think it's a planned attack ... I think it's off-the-cuff comments, sometimes by people who used to be at the Big Six," said Murray of Coopers & Lybrand.


He added that he saw the same thing when he worked in Italy. As more Russian partners join the forms, the criticism will go away, he said.


However, Lubov Khodakova, marketing director at a Russian auditing company ARNI, said competition was growing as the Russian companies were becoming more experienced.


There already are cases when the clients of the Big Six give preference to Russian firms, looking for the best deal at an affordable price.


Lebedinsky GOK, one of Russia's most profitable ore smelters, picked the Russian auditing company Rosexpertise to do the company's next financial revision after paying over $200,000 to Deloitte & Touche last year, Lebedinsky's director Anatoly Kalashnikov said.


NK Surgutneftegaz, Russia's third biggest oil producer, also picked Rosexpertise for this year's audit of the company's financials after floating the idea of a possible issue of American Depositary Receipts, or ADRs, by the end of the year following a comprehensive international audit.


Unicon, one of the top non-Big Six auditors, has already competed unsuccessfully against Coopers & Lybrand in a World Bank tender for maintenance and support of the Russian food market.


"We hope that some day, probably not tomorrow or the next year, the Russian companies will be able to compete with the Big Six the way they compete against each other," Khodakova said.


Khodakova, who worked for more than four years in one of the Big Six companies before moving to ARNI, said one of the indicators of the growing competition was migration of personnel from the Western to Russian companies.


"Still," she said, "the stamp of a Big Six company is highly valued, and makes life easier when you talk to the West."The Russian audit market is diverse, with a clear borderline between the so-called "black audit," or small firms created "to rubberstamp the report," and "white audit," or companies that "work by the international ethical standards," Khodokova said.


She said that while some of the Russian companies were able to audit a company to an international standard or offer relevant taxation and accounting advice, "the West would not recognize this report."


To make a report credible in the eyes of a Western company, the Russian auditors team up with a Western partner, sometimes a Big Six firm, Khodokova said.


But Alexei Ruf, director general of one of the top Russian auditors Rufaudit, said the Big Six rarely clash with local companies because they target a different sector of the market and charge premium rates that only a few companies can afford so far.


He said Russian subsidiaries of major international corporations would be automatically audited by the company that has the contract with the head office.


"So now matter how good I am, I will never be able to audit a [Russian subsidiary] of Adidas because their international auditors are Arthur Andersen," Ruf said.


Ruf said that while the Big Six have the edge over their potential Russian competitors due to better personnel training, expertise and client work experience, they lacked competence in Russian accounting and taxation standards.


He said it was likely that relations between the Russian and Western auditors will develop into cooperation rather than conflict.


"Eventually the Big Six will choose some local companies as co-auditors and start working together," Ruf said.


For the past six years Rufaudit has been working together with BDO Binder, an association of leading international audit companies, which is listed seventh in the ranking of top international auditors.


Regardless of the criticism from some Russian auditors, the Big Six have continued to expand throughout industry, snapping up Russian clients wherever possible.


Most have focused on oil and gas, financial services, telecommunications, mining -- the raw materials and infrastructure sectors most in need of money and international recognition.


Work with manufacturers has gone slower, as one would expect after a quick glance across Russia's industrial sector.


"These guys have really blazed a trail, and it's why they have hundreds and hundreds of employees," said Jack Orchard, director of corporate finance for the United Financial Group.


But it is a trail that will likely take years to follow, as few if any Russian companies have managed to publish statements meeting international standards despite the legions of accountants in the field.


It generally takes a company four years to get their financial statements up to international accounting standards, according to Lawrence Wilson, senior partner of accounting and audit at Arthur Andersen. Some companies may be able to do it in two, he said, but usually going back through past financial statements is not enough.


"How do you get old, historical rubles into a modern format? Generally speaking, it's impossible to do it," Wilson said.


Appraising a company's stock is another issue which confounds auditors, particularly in the energy sectors, where aging oil wells and pipelines make estimates difficult. The end result is a document with caveats.


"We're issuing Western reports, but they're qualified," said Mark Maurer, audit partner at Ernst & Young.


Finding Russian companies that want to meet Western standards and can afford to pay for them is one thing. Actually gathering the information in a useful form is something else. The Big Six have proven happy to oblige.


Consulting on information technology, both hardware and the programs needed for gathering and converting information, has become a big business. KPMG even has a department named for the German company which produces the data processing software it pitches -- SAP, or Systems Applications and Products for data processing.


But even after a company buys the product, it has to use it.


"The question is whether a company accepts the technology and uses it for management, or sees it as a once a year exercise to produce Western accounts," said Richard Murray, managing partner at Coopers and Lybrand.


Stories abound of computers lying dormant while payrolls are calculated by hand, or being utilized by a suspicious bookkeeper who double checks every figure on an abacus.


"Many Russian companies still have a room of 75 or 80 accountants, and they are still pushing numbers around with a pencil," said Wilson. "There are many companies with significant amount of the accounting still done by hand ... You never know what these companies are going to have."


Russia's industrial and commercial vacuum likewise has created opportunities for the Big Six to dabble in services toward which they might not otherwise devote as much attention.


"We have, in this Price Waterhouse office, the broadest menu of any office in the world, and that's due to our Russian clients," said Price Waterhouse's Kirst.


Executive search is a substantial business for Price Waterhouse, Kirst said, and Arthur Andersen holds seminars and training courses for employees from other Russian companies and offers "contract accounting" to clients for payroll and bookkeeping.


But while the Russian companies may represent a massive void in need of filling, most of the Big Six maintain that their multinational clients -- links to which have been forged through years of working with these companies around the world -- continue to come first.


"Our focus was, is and always will be our international clients," said Murray of Coopers and Lybrand. "Making sure we provide the services they need in the territories in which they invest."


This work involves everything from registering a company to opening a bank account. Basic hand-holding, as some consultants put it -- taking care of the lonely Westerner sent by corporate headquarters to open an office.


But even firms experienced in the Russian market need traditional accounting services such as audit and legal advice, and tax preparation in Russia has become an event so Byzantine and risky that everyone wants a full-time number-cruncher to blame should things go wrong.


Perhaps the biggest obstacle to Big Six growth in Russia -- apart from an unforseen and unexpected shift in the political winds -- is their ability to staff their offices with qualified university graduates.


Given the shortage of locals trained in Western audit techniques, the accounting houses have become prime hunting grounds for Russian banks and multinationals.


"This is a problem that we're used to around the world," said Wilson of Arthur Andersen. "We are fertile ground for people coming in and farming our employees. If a company wants one person, sure, they're going to be able to pay the guy a lot more."


While the trend may be nothing new, locating recruits in Russia obviously is much more difficult than in Europe or the United States. Most of the Big Six are currently mining their talent from Moscow's universities, usually Moscow State University. But increasingly, they expect to find their employees at regional universities, particularly as they expand.


"We in fact see a lesser growth in Moscow and a greater growth in other cities," said Marko Rus, a partner at Price Waterhouse. "And we have yet to tap outside universities."


And continued growth is indeed in the works. An election win by President Boris Yeltsin could finally spur the massive foreign investment of which managing partners dream. Russian companies likewise may use the stability to step from a survival mode toward serious growth.


Regions such as the Volga, Urals and Far East -- areas widely expected to establish themselves as financial centers -- will likely host satellite offices for some of the accounting houses. And while the battle for Russia's top firms may bloody a few noses -- domestic and foreign -- most agree that the playing field overall is big enough to handle everyone.


"I think competition will remain very strong," said Murray of Coopers and Lybrand. "The market, on the other hand, is pretty large to say the least ... the biggest problem has to be finding the resources to provide the services."


Ernst & Young Price Waterhouse Deloitte & Touche Arthur Andersen Coopers & Lybrand KPMG


Opened in Moscow 1989 1989 1990 1990 1990 1992


Number of employees 500 750 475 600 400 400


% of expatriates 25-30% 25% 15% 20% 25% 16%


Office locations


Moscow, St. Petersburg


Moscow, St. Petersburg, Toliatti/Samara, Vladivostok, Sakhalin Island, Nizhny Novgorod. (Khabarovsk due to open in July.)


Moscow, St. Petersburg, Kiev, Tashkent, Almaty


Moscow, St. Petersburg, Novosibirsk, Kiev, Almaty, Tashkent


Moscow, St. Petersburg


Moscow, St. Petersburg


Major sectors of involvement


Energy, financial services, telecom, manufacturing, consumer products


Oil and gas, financial services, utilities, ports and shipping


N/A


Oil and gas, financial services, manufacturing, hotels, real estate, telecommunications


Consumer industry, mining, financial services


Oil and gas, financial service, manufacturing retail and distribution





Major clients


Coca-Cola, McDonald's, ABB, American Express, Mobile, British Petroleum, Amoco, Shell


Gazprom, Avtovaz, Sberbank, Unified Energy Systems, FESCO


RJR Tobacco, KamAZ


Bank Menatep, Troika Dialog


Norilsk Nickel, Rostelecom, Novoship, Yukos, Rosneftegazstroi


N/A


Business breakdown


15-20 % international aid/lending agencies, 30% Russian companies, 50 % foreign investors / multinationals


15 % aid/lending agencies, 65 % Russian companies, 20 % foreign investors/multinationals


50% Russian, 50% foreign investment / multinational


40 % Russian, 60 % foreign investment / multinationals


50 % Russian, 50 % foreign investment/ multinationals


N/A


Scope of business:


Audit, tax, consulting, corporate finance


Audit and accounting, tax and legal, management consulting (information technology, integration) corporate finance, executive search


Audit, tax and legal, management consulting, corporate finance, business advisory


Audit, tax and legal, corporate finance, business consulting, contract accounting, external training, government services


Audit, tax, corporate finance, management consulting, information technology consulting


Audit, tax, corporate finance, SAP, information technology