In 2015, the revenue of the accounting and auditing industry witnessed a six-percent increase, supported by the Russian companies’ ensuring business growth through exports and changes in tax regulations. However, the industry’s growth was constrained by the decline in domestic demand and business confidence, which negatively affected investments in the country. The cargo handling, and warehousing sectors, as well as travel agencies, increased spending on accounting and auditing services by 17 percent in 2015 in large measure because the weak rouble improved the competitiveness of Russian production in foreign markets. The accounting and auditing segment was dominated by firms with more than 100 employees. From 2015 to 2020, the industry’s revenue is projected to see a six-percent compound annual growth rate (CAGR), driven by a growing business activity of Russian companies in foreign markets. At the same time, expansion is expected to be restricted by declining domestic consumption and a continuing economic downturn.

Trends

In 2015, the revenues in Russia’s accounting and auditing sector grew by six percent, driven by the Russian companies’ entering foreign markets for business growth, as well as new tax regulations and amendments easing business registration in Russia. However, revenue growth was restricted by declining business confidence and a plunge in foreign investment inflows into Russia.

During the year, the confidence of businesses in Russia was hit by the continuing economic downturn in the country, which negatively affected the demand for accounting and auditing services. The greatest confidence decline was registered among domestic manufacturers. The depreciation of the rouble has negatively affected the manufacturing industry by raising its production material costs. A decline was recorded in both manufacturing output and new business inflows into Russia.

A decline in business confidence was also registered among local service providers. Western sanctions on the Russian economy, the rouble’s depreciation and low oil prices have restricted new service providers from entering the Russian market. Contracting disposable incomes forced consumers to focus only on their basic needs, especially among the households of limited means.

Low business confidence resulted in a decline in business activity and investments, which led to a lower volume of work for accountants and auditors. A decline in investments was especially evident in industrial and residential construction. In addition, a fall in domestic consumption resulted not only in a decline in business confidence and investments, but also a plunge in foreign investment inflows in Russia in 2015.

On the other hand, accounting and auditing providers saw an increase in work from local companies searching for new business opportunities. Due to the weak rouble, Russian-made goods became cheaper in foreign markets, thus stimulating expansion of Russian manufacturers overseas. As a result, accounting and auditing service purchases from cargo handling, warehousing, and travel companies jumped by 17 percent in 2015.

In addition, the accounting and auditing segment was positively affected by changes made to improve the business climate in Russia. In the ease-of-doing-business rankings Russia stood at the 62nd position out of 189 countries in 2015. In the category of contract enforcement and property registration, Russia stood at the 14th and the 12th place respectively in 2015. In 2015, Russia made the process of registering a business easier by eliminating the requirement to notify the taxing authorities about opening a bank account and eliminating the requirement of depositing charter capital before business registration. In addition, regulations regarding the transfer of property were also reduced by eliminating the time limit for property registration and the notarization requirements. These changes had a noticeable effect on new business startups in Moscow and St. Petersburg.

Revenues from tax advisory services in Russia rose as a result of a number of changes in tax regulations in 2015. First, the time limit for electronic reporting on employee social tax was enlarged. At the same time, more companies were obligated to report social taxes electronically. In addition, penalties for failing to submit tax declarations became stricter and allowed the tax office to block the companies’ bank accounts. Changes were also made to the value-added tax (VAT) reporting form, which now has new sections requiring the disclosure of purchases and sales ledger data in VAT reports. Such data allows a quick automatic cross-audit by the tax office.

Despite the difficult macroecono-mic conditions, the profits of accounting and auditing firms grew by six percent in 2015, while profitability remained unchanged, standing at 13 percent of total revenue since 2013. More than a third of total expenditures was attributed to labor costs in 2015. This cost item increased by eight percent over the year due to four-percent increases in both the average wage and the number of employees.

Competitive landscape

The number of Russian companies in the industry grew by three percent in 2015. The highest increase in the number of firms was witnessed among providers with 100 to 249 employees. The number of these companies grew by 12 percent over the year, and the industry witnessed an increasing concentration. The revenue share of enterprises with more than 100 employees grew from 64 percent in 2010 to 80 percent in 2015.

In 2015, the overall revenue of KPMG from tax services increased by 10 percent, driven by a growing demand for tax compliance and advisory services. Revenues from audit services increased by six percent over the year. Due to a growing competition in the audit market, KPMG has invested in audit quality programs. KPMG has nine offices in Russia.

The Revenue of Ernst & Young (EY) in the emerging markets region (emerging Europe, Middle East, Africa) grew by 12 percent in 2015. Revenues from assurance services grew by eight percent, whereas revenue from tax services recorded a 10-percent increase in 2015. In 2015, EY continued its Assurance Sustainable Audit Quality program by investing in audit service quality. The company added a number of new audit tools, which improved the audit quality of complex cases, as well as bolstered risk management capabilities. In 2015, EY Russia launched the Turkish Business Center, designed to provide expertise on the Russian market for Turkish companies.

The revenue of Pricewaterhouse-Coopers in Central and Eastern Europe grew by six percent in 2015. PwC’s global revenue growth from assurance services remained flat compared to the performance seen in 2014, whereas the revenue from tax services increased by two percent. In 2015, PwC expanded its assurance business by adding data and IT assurance services, as well as by investing in audit quality improvements. Assurance over business risks experienced growing demand in 2015. In 2015, PwC’s team in Russia advised Avielen A.G. on its 70-million-euro sale of two office towers at Airportcity St. Petersburg.

Deloitte Russia employs over 1,700 people across five cities in the country. In 2015, Deloitte’s global revenues increased by eight percent. Deloitte focused on improving its auditing services by investing in data analytics, natural-language processing, and machine learning technology, saving the auditors’ time and allowing them to focus on higher-value processes. In 2015, Deloitte Russia signed a cooperation deal with the Government of the Ulyanovsk region regarding developing strategies to attract investors and implement investment projects in the region.

BDO Russia employs over 1,500 specialists in five cities in Russia. In 2015, BDO’s revenue from the emerging markets region increased by three percent, accounting for 35 percent of worldwide revenue for the company. Due to the rising competition and a growing consolidation in the market, BDO continued its investment in infrastructure, technology, and talent acquisition. In 2015, BDO established the audit innovation oversight committee responsible for the launch of initiatives to keep up with the changing technology and business environment.

Prospects

From 2015 to 2020, the accounting and auditing sector’s revenue is expected to increase by a six percent CAGR, supported by the increased activity of Russian companies in foreign markets. However, the growth is expected to be slowed down by the continuing economic downturn, a contracting domestic demand, and a further decline in business confidence and investments.

Over the next five-year period, business confidence is still expected to be pressured by continuing low oil prices, economic sanctions, a weak rouble, and low domestic consumption, all of which are likely to negatively affect demand for accounting and auditing services in the country. In 2016, Russian consumers are expected to experience a further struggle in satisfying their basic needs, as consumer confidence is set to reach a record low.

In addition, a further decline in investments is expected to restrict the accounting and auditing industry’s growth over the next five years. Russia is anticipated to be negatively affected by the Russian companies’ unwillingness to reinvest in the domestic market from offshore businesses due to low disposable incomes and the economic uncertainty in the country. In addition, a lack of security in property rights is projected to restrict foreign investment inflows into Russia.

However, the industry’s growth will be bolstered as a result of the Russian companies’ seeking ways to ensure business growth through entering foreign markets. In addition, the weak rouble, which is expected to experience a further decline against both the U.S. dollar and the euro due to a fall in oil prices, is expected to fuel Russia’s export activity.

The demand for insolvency services is expected to be supported by a growing number of bankruptcies in Russia if the Central Bank does not cut interest rates in the market, as companies will continue to struggle to repay loans.

By 2018, Russia is expected to fully adopt IFRS standards, thus improving the quality of accounting and auditing services. In addition, transparency in the accounting and auditing market is expected to increase as a consequence of stricter administrative penalties for violations in accounting and financial reporting announced in December 2015.