The conflict in Ukraine and sanctions against Russia have highlighted the importance of due diligence of your supply chain – and for audit committees and company boards, the stance of your auditors as a key business service provider is no exception.

For all the talk of audit firms withdrawing from Russia, the devil as always is in the detail, and audit committees are being encouraged to seek assurance from their auditors about what their statements of intent relating to Russian operations and customers mean in practical terms.

Mike Power, Professor of Accounting at the London School of Economics and a former director of its Centre for the Analysis of Risk and Regulation (CARR), says: “Audit committees will need to press management to reflect on the new reputational and sanctions-related exposure to Russia both in their own businesses and for all material suppliers, including auditors, and the implications of all this for operational resilience. This should be approached in the same way as any potentially major shock to the business.”

He says some audit networks may not wish to pull the plug completely to see how events play out: “There could be reputation and even sanctions risks for companies and their boards while the audit firms wind down their Russian presence. If I were on an audit committee, I would want to know my current auditor's position and I would also be exploring emergency options in the market, that is smaller firms, just as contingency. Many smaller audit firms could see this opportunity.”

Power, who is also a Non-Executive Director of RIT Capital Partners and a member of its Audit and Risk Committee and the Valuation Committees, says the issue could present a significant challenge for audit committees if they want to change auditors quickly, due to the intricacies of the tender process and limited choice among the larger firms.

Fiona Hotston Moore, Forensic Services Partner at FRP Advisory and audit chair of The Cambridge Building Society, says: “Boards clearly need to think, are their suppliers trading in Russia. One supplier that is relevant to all boards, companies and Public Interest Entities is their auditor.” She agrees that the complexity of the situation and differing legal structures spanning global networks and partnerships means that one size does not fit all when it comes to cutting ties with Russia.

The structures in place will play a role in dictating the challenges of severing relationships with Russia, Hotston Moore warns. “For a global network where the arrangement is done on an introducer’s fee basis, they could potentially terminate the relationship with their local Russian firm. However, for firms that are integrated global partnerships, the process of unravelling could be a bit more tricky.”

If you are not entirely happy with the stance the auditor is taking on this issue, the challenges of wanting to distance yourself and potentially extricate yourself from the audit relationship should not be underestimated, particularly for those organisations mid audit, Hotston Moore warns. “It’s a massive decision and given we’re in the audit season, I would imagine not many firms would be able to extricate at this point in time. But if you’re coming up for a retender, you might be thinking about this for next time round.”

When the invasion started, the Big Four firms alone collectively employed around 15,000 people in offices across Russia and they were deeply entrenched in the country’s economy. Add to that the intricacies of shared branding, systems and technology platforms to further complicate the process of national firms exiting. This certainly is not as straightforward as simply pulling the plug.

Hotston Moore says the onus is on audit committees to do their due diligence and make sure they are comfortable with the arrangements their auditors have in place or risk a potential reputational backlash. “It’s important that you understand what the position is, because they will all have subtly different legal structures,” she says. “I certainly think that it’s something that boards should be thinking about in relation to their key suppliers, including auditors.”

Since Russia’s invasion of Ukraine, many of the biggest firms have issued statements about their plans to step back from Russia. Hotston Moore says: “They’re effectively saying that they’re not doing business in Russia any more, but when you look at the detail, many say they’ll exit in a timely manner – and that could be up to 12 months. Some are saying they won’t do any more business with state-owned entities in Russia, but they’ll continue to service international clients who have interests in Russia and need to comply with international requirements.”

She says the situation is not clear cut. “If your international clients have local interests in Russia, you’ll need to find a way to audit the global firm and meet local compliance obligations, whether through a local Russian auditor or by continuing the relationship with your Russian network firm.

“Ask yourself if you’re happy with the position they’ve taken, bearing in mind some corporate entities are taking a strong position on this and have closed down their units in Russia completely. I’m not sure that auditors have quite taken the same stance.”