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During the Ukraine crisis, sanctions, anti-money laundering and reputational risks may present ethical and legal considerations for even the smallest audit firm.

Responding to recent developments in Ukraine is something even the smallest audit firm may need to do. Considerations include sanctions and anti-money laundering legislation, the potential for reputational risk and the competence and resources needed to deliver high-quality audit in potentially complex and uncertain circumstances.

Reviewing your client base

Many audit firms will have reviewed their client bases to ensure that there are no links to sanctioned entities or individuals, that information held on their clients is up to date and that any clients with connections to Russia and Belarus are identified. Once identified, if they have not already done so, firms will be screening or rescreening for sanctions.

Sanctions are a complex legal area, says Angela Foyle, Head of Risk Management and Economic Crime at BDO. In some instances, firms may have to seek legal advice. Some firms will consider local sanctions, others will consider sanctions imposed in multiple jurisdictions. Firms will also re-examine ownership and control structures to ensure that all possible links to sanctioned persons or entities are identified.

“A lot of smaller firms would say, ‘What has this got to do with me?’ And for some, if they’ve got an entirely local client base, it’s probably nothing,” says Foyle. But all firms may want to take the opportunity to make sure their client base is clean. “Some people who may be closely linked to sanctioned individuals might use a small local firm for some aspects of their compliance – or possibly as a registered office address,” says Foyle.

Foyle explores these and other related issues, particularly in relation to UK law, in an ICAEW Insights article.

Acceptance and continuance

Audit firms may need to consider their position in relation to engagements for company audits, charity audits and independent examinations, where owners, donors, key customers or suppliers, beneficiaries and/or operations have close links to Russia and/or Belarus. All UK company and charity audits still need to be conducted by a registered auditor, but individual firms must themselves decide whether they wish to undertake a particular statutory audit.

Firms will be conscious of the need to act ethically and not disadvantage a client without good reason. It is possible that following a decision to resign from an audit at short notice due to reputational risks from Russian connections, the audited entity might take legal action against the audit firm and/or complain to ICAEW. In these cases, ICAEW would need to understand the precise circumstances behind the resignation and that the correct process was followed. Firms should be reassured that we would not seek to challenge their reasonable judgements in such a case.

In making these difficult decisions, firms should always ensure that they consider legal and contractual obligations to the client, but ICAEW views these principally as commercial matters rather than matters for regulatory oversight or interference.

Further guidance is available for ICAEW-regulated audit firms in an alert from ICAEW Professional Standards.

Recent faculty guidance Driving more informative auditor resignation statements is available at www.icaew.com/technical/audit-and-assurance/audit/appointment-and-engagement-terms/driving-more-informative-auditor-resignation-statements

A central hub offering resources, news, features and opinions on the impact of the Ukraine crisis on accountancy, business and the wider economy.

Audit & Beyond

This article was first featured in the May 2022 edition of Audit & Beyond.

Audit and Beyond May 2022 cover