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Exodus from Russia a Tangle for the Big 4

Thomas Adams, CPA, PhD, CGMAC. Andrew Lafond, CPA, DBAKristin WentzelBy Thomas Adams, CPA, CGMA, PhD, C. Andrew Lafond, CPA, DBA, and Kristin Wentzel, PhD

Accounting firms – including the Big Four of Deloitte, Ernst & Young (EY), KPMG, and PricewaterhouseCoopers – announced in March that they are leaving the Russian market following Russia’s invasion of Ukraine. The specific wording in the announcements varied among firms, but the expressed sentiments proved incredibly similar: based on the firms’ corporate values, they could no longer support Russian clients in any way. They did, however, express that the separation was disheartening in that their exits would end longstanding relationships with local firms. KPMG, for example, wrote:

We believe we have a responsibility, along with other global businesses, to respond to the Russian government’s ongoing military attack on Ukraine. As a result, our Russia and Belarus firms will leave the KPMG network. KPMG has over 4,500 people in Russia and Belarus, and ending our working relationship with them, many of whom have been a part of KPMG for many decades, is incredibly difficult.1

Map of Russia with "caution" tape across it reading "sanctions"Similarly, EY stated:

In light of the escalating war, the EY global organization will no longer serve any Russian government clients, state-owned enterprises, or sanctioned entities and individuals anywhere in the world. EY has commenced a restructuring of its Russian member firm to separate it from the global network.

This is not something we take lightly. This is heart-breaking as we have over 4,700 colleagues in Russia who have been a part of our global network for over 30 years and worked side-by-side with our global, Eastern European, and Ukrainian colleagues.2

The process of removing Russian affiliates from the Big Four’s networks is not a simple task, and it poses a number of negative consequences. The global accounting groups operate as networks of locally owned partnerships, meaning each local accounting firm in Russia is a separate legal entity. Local firms pay a licensing fee to participate in the global brands and share intellectual property, including audit methodologies.

Typically, if a member firm leaves the network it would be subject to a large penalty. However, in this situation, it is the network dissolving the relationship with the local firm. While no penalty will be incurred, the complex process is in the hands of lawyers who must disentangle the partnership; a legal process that will likely take months. In the meantime, the Big Four firms are obligated to complete any audit work in Russia to which they are contractually committed via engagement letters, even though sanctions will likely prevent the firms from accepting any payment at the completion of their work.

The Big Four will suffer financial losses following their exodus, but the Russian firms represent less than 1% of the accounting firms’ global revenues.3 The loss to the Russian firms, and to the Russian economy, will surely prove much greater. After the separation, local Russian firms will need to either reestablish themselves under different brands or operate as stand-alone entities. Collectively, the Big Four’s affiliates in Russia employ about 16,000 accountants.4 Without the ability to rely on their networks for technical support and intellectual knowledge, the local firms will likely lose value.

From a practical perspective, it would have been difficult for the Big Four’s Russian affiliates to continue to operate in-network. A recent White House statement announced that “The United States will prohibit U.S. persons from providing accounting, trust and corporate formation, and management consulting services to any person in the Russian Federation.” The question remains, however, of what will happen down the road. If the situation in Ukraine stabilizes, it is unclear if these relationships can be reestablished or even if the Big Four or local Russian firms will want to reenter partnerships.

1 KPMG (March 6, 2022) 
2 EY (March 7, 2022) 
3 Jean Eaglesham and Mark Maurer, “Why Audit and Consulting Firms Are Battling to Pull Out of Russia,” Financial News (April 25, 2022). 
4 Deloitte, EY, KPMG, and PwC stated they employ approximately 3,000, 4,500, 4,700, and 3,700, people in Russia and Belarus, respectively. Jasper Jolly, “Big Four Accountancy Firms Cut Off Businesses in Russia and Belarus,” The Guardian (March 7, 2022). 

Thomas Adams, CPA, CGMA, PhD, is assistant professor of accounting at La Salle University in Philadelphia. He can be reached at adamst1@lasalle.edu.

C. Andrew Lafond, CPA, DBA, is associate professor of accounting at La Salle University. He can be reached at lafond@lasalle.edu.

Kristin Wentzel, PhD, is chair and associate professor of accounting at La Salle University. She can be reached at wentzel@lasalle.edu.

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