Import Substitution: Implications for Auditors

• In Event: Audit Quality: International Evidence

Abstract

Import substitution efforts have been tried in a number of jurisdictions with the aim to replace purchases from foreign producers with locally-made alternatives. Related to audit, Russia has pursued informal import substitution and is used as a setting for our study to examine implications for the Big 4 firms that tend to be positioned as ‘foreign’ providers. In Russia, listed companies are required to prepare financial statements of parent companies in accordance with Russian Accounting Standards (RAS) and consolidated statements according to the International Financial Reporting Standards (IFRS). Overall, it remains more important to keep Big 4 on IFRS as compared to RAS audits. We find that informal attempt at import substitution had greater impact on companies with significant state ownership (greater than 25%) which were more likely to switch away from Big 4 on IFRS and RAS audits. Also, in the post import substitution period, enterprises with state ownership were less likely to get modified opinion on IFRS audits. The likelihood of switching away from the Big 4 was strengthened for companies with state ownership in strategic industries, including national resources and defense. However, such auditor changes did not occur at the cross-listed enterprises. Overall, it is questionable whether the aim to move away from foreign auditors was achieved as companies tended to switch to the next tier of audit firms that are also a part of transnational audit networks but it did reduce market concentration as a greater range of firms audit listed companies.

Authors

• Oksana Kim, Minnesota State University - Mankato

• Anna Alon, University of Agder