Bloomberg Tax
Free Newsletter Sign Up
Bloomberg Tax
Welcome
Go
Free Newsletter Sign Up

Why the Big Four’s Russia Pullout Isn’t a Clean Break: Explained

March 11, 2022, 9:45 AM

The largest global accounting firms have announced they are pulling out of Russia to comply with an ever tighter ring of sanctions and to protest the country’s war against Ukraine. It’s an extraordinary move that breaks ties with member firms and thousands of employees based there.

But removing Russian affiliates from the global networks—and the branding, training and access to staff that comes with it—doesn’t completely wall off these newly independent firms. The global giants could welcome them back in the future, and in the meantime they may still need to refer work to Russian accounting firms—especially for multinational companies that don’t pull out of Russia.

Here’s what the pullout means in practice.

Have they really left?

Legally yes. The Big Four will no longer be represented in Russia once their local affiliates have left the international network. However, the Big Four firms can continue to use local Russian auditors for multinationals’ Russian subsidiaries.

Former Arthur Andersen lawyer Jim Peterson said the pullout could lead to very little change on the ground in Russia. And Sheffield University accounting professor Richard Murphy called the split “whitewashing,” a gesture aimed at avoiding political pressure rather than a big operational change as they as could continue to operate beneath the radar in Russia.

SIGN UP for The Exchange, our free weekly tax newsletter

What happens to the former affiliates?

The former Russian arms will continue to operate as independent accounting firms, but without the branding and resources they enjoyed when they were part of the international networks.

The break-up could also safeguard the Russian firms. They can continue working with state-owned banks or energy companies in a way that was becoming difficult for the international firms even before the Ukraine war. For example, KPMG’s affiliate audited Transneft and EY’s Russian arm audited Rosneft.

Longer term, it would be possible for the Big Four’s former Russian arms to rejoin an international accounting network, either as a member of a Big Four firm or by joining the network of a smaller firm.

What about the Big Four’s multinational clients?

Big Four firms in countries outside Russia such as the U.S. and Germany can continue to rely on the work of Russian auditors, including their former Russian colleagues, to check the books of multinational companies still operating there, such as Renault-owned auto maker Avtovaz, which is audited by EY and Mazars in France.

A spokesman for KPMG LLP said in a call Wednesday that it was confident it could continue to service multinationals with operations in Russia,

“If you have cross-border economic connections, then you’re probably going to need cross-border audits,” said Robert Knechel, director of the International Accounting and Auditing Center at the University of Florida.

Can the Big Four continue to work with their former affiliates?

Yes, although it might be difficult politically. The Big Four’s global arms say they are still working on the details of the separation and they might choose to work with different Russian auditors rather than their former Russian arms. The Russian affiliates say they will continue to work for existing clients.

Big Four firms in other countries may be reluctant to work with the Russian firms, and audit work related to publicly traded companies could decline, even while tax and other consulting referrals may continue quietly out of public view, said Robert Cox, an accountant liability lawyer and partner with Briglia Hundley P.C. based outside Washington, D.C.

Who owns the Russian firms now?

The Big Four operate as a global network made up of individual accounting firms that are separate legal entities and locally owned.

The legal separation between the national firms provides a buffer against lawsuits and regulatory liability. It also means the global firms can break ties with any individual country with little impact to the international operation, said Mark O’Connor, CEO of Monadnock Research LLC, which tracks the consulting industry.

How long will it take to separate the Russian affiliates?

Taking the firms’ logos off the front door is easier than rebuilding websites, or replacing servers and IT systems. The networks also share accounting methods, policies and staff and it could take several months to unwind that complex relationship, Cox said.

“It will be some years before we will learn the full cost of these exits, not just for their bottom lines, but for many of their longstanding employees left behind in Russia,” Oxford University business professor Karthik Ramanna said by email.

Expelling member firms is rare, and a sweeping departure from a single country even more so. When other affiliates have left, the firms typically transferred clients to a different company. When PwC shut its Japanese arm in 2007 it subsequently set up a different firm in the country to take over its clients, for example.

To contact the reporter on this story: Amanda Iacone in Washington at aiacone@bloombergtax.com
To contact the reporter on this story: Michael Kapoor in London at correspondents@bloomberglaw.com
To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergindustry.com; Bernie Kohn at bkohn@bloomberglaw.com