AUDIT OF THE EFFECTIVENESS OF CONSTRUCTION ORGANIZATIONS WITH A SHARE OF STATE PARTICIPATION IN THE RUSSIAN FEDERATION

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1 International Journal of Civil Engineering and Technology (IJCIET) Volume 9, Issue 13, December 2018, pp , Article ID: IJCIET_09_13_017 Available online at ISSN Print: and ISSN Online: IAEME Publication Scopus Indexed AUDIT OF THE EFFECTIVENESS OF CONSTRUCTION ORGANIZATIONS WITH A SHARE OF STATE PARTICIPATION IN THE RUSSIAN FEDERATION Irina Sergeevna Egorova, Svetlana Nikolaevna Milovidova and Maria Mikhailovna Basova Financial University under the Government of the Russian Federation, Moscow, Russian Federation ABSTRACT The article is devoted to efficiency assessment of invested funds in the course of performance audits in construction companies with state participation, as well as to the problems of determination and identification of performance indicators. The authors emphasize the peculiarities of determining the efficiency of the state funds usage indicators and their interaction with the going concern assessment. Key words: Efficiency, Performance Audit, State Resources, Construction Companies, Going Concern, State Audit Standards. Cite this Article: Irina Sergeevna Egorova, Svetlana Nikolaevna Milovidova and Maria Mikhailovna Basova, Audit of the Effectiveness of Construction Organizations with a Share of State Participation in the Russian Federation, International Journal of Civil Engineering and Technology, 9(13), 2018, pp INTRODUCTION In both Russian and international auditing practice, the efficiency assessment of invested funds has become extremely important. Despite the fact that according to Russian auditing standards, a user should not take an auditor s opinion as a confirmation of the efficient conduct of business, this assessment is one of the primary in making managerial decisions. Moreover, performance assessment is paramount when conducting internal control and internal audit in accordance with professional business standards. Issues related to performance audit are quite well examined regarding the assessment of the use of state funds when conducting a state audit, as well as identifying a system of key performance indicators for state-owned companies. Performance audit plays an important role in the specific structure of audit measures of the Russian Audit Chamber editor@iaeme.com

2 Irina Sergeevna Egorova, Svetlana Nikolaevna Milovidova and Maria Mikhailovna Basova In the international state audit practice, performance audit issues are considered in the following standards: ISSAI 100 Fundamental Principles of Public-Sector Auditing, ISSAI 300 Fundamental Principles of Performance Auditing, ISSAI 3000 Standards for Performance Auditing, and ISSAI 3100 Performance Audit Guidelines [1]. When determining the place of construction companies with state participation among companies that are subject to a performance audit, several problems can be identified: 1. the problem of identifying construction companies with state participation; 2. the problem of determining the share of state participation; 3. the problem of determining the organizational-legal form of a construction company with a share of state participation in order to apply Key Performance Indicators (KPI); 4. the problem of identifying types of an audit of companies with state participation in various statutory and legal acts and highlighting a performance audit as an independent area of control; 5. the problem of identifying the notion of performance in various statutory and legal acts. The first four problems are specified in Table 1. Table 1. The problems of determining the place of construction companies with state participation among companies that are subject to a performance audit Problem 1. Development of definitions Definitions, size of state share Public-sector enterprises Economic entities with a share of state participation Interpretation of a statutory and legal act According to Law No. 402-FZ On Accounting dated December 6, 2011 [2], public-sector companies are as follows: government (municipal) institutions, public bodies, local self-government bodies, governing bodies of government off-budget funds, governing bodies of territorial government off-budget funds. According to Law No. 261-FZ On Energy Saving and Improving Energy Efficiency and Amending Separate Legislative Acts of the Russian Federation dated November 23, 2009 [3], the following legal entities are considered enterprises, shares of which are held by the state or a municipal formation: - enterprises, in the charter capitals of which a share held by the Russian Federation, a constituent entity of the Russian Federation, a municipal formation exceeds 50%; - enterprises, regarding which the Russian Federation, a constituent entity of the Russian Federation or a municipal formation is entitled to directly or indirectly control over 50% of the total votes, which fall to voting shares (stakes) that constitute the charter capital of such legal entities; - state or municipal unitary enterprises, state or municipal institutions; - state-owned enterprises; - state-owned corporations; editor@iaeme.com

3 Audit of the Effectiveness of Construction Organizations with a Share of State Participation in the Russian Federation Identification of the share of state participation Identification of the organizationallegal form Over 25% Over 50% Civil Code of the Russian Federation [5] All-Russian Classifier of Organizational Legal Forms [6] Federal Law No. 261 dated November 23, legal entities, whose assets or more than 50% of shares or stakes in the charter capital, are held by state-owned corporations. According to Article 5.3 of Federal Law No. 307 On Auditing [4], when characterizing companies that can be examined only by auditing organizations, and those enterprises, agreements of which on the mandatory audit of accounting (financial) reports are signed upon results of an open tender at least once every five years, organizations are mentioned, in the charter capital (joint stock) of which the state holds at least 25%. Methodical guidelines to KPI application are as follows: to identify a share held by the Russian Federation and a Russian constituent entity that exceeds 50%. Law No. 261-FZ dated November 23, 2009 provides the following identification of economic entities: - entities, in the charter capital of which a share held/contributed by the Russian Federation, a constituent entity of the Russian Federation or a municipal formation exceeds more than 50%; - entities, in respect to which the Russian Federation, a constituent entity of the Russian Federation or a municipal formation is entitled directly or indirectly to dispose of more than 50% of total votes; - legal entities, in which more than 50% of shares or equity stakes in the charter capital are held by state-owned corporations. According to Article 65.1 Corporate and unitary legal entities, the following corporate legal entities (corporations) are considered legal entities: - legal entities, founders (participants) of which are entitled to participate (be members) in them. Legal entities, founders of which do not become their participants and do not acquire rights of membership, are unitary legal entities. There is no definition of the organizational-legal form of economic entities with state participation. Subjects classified in the All-Russian Classifier of Organizational Legal Forms are organizational legal forms of legal entities that are for-profit or non-profit organizations; organizations established in accordance with laws with no rights of a legal entity, international organizations, and individuals who conduct for-profit activities or activities not classified by law as entrepreneurship. Legal entities: - state or municipal unitary enterprises, state or municipal institutions; - state-owned companies; - state-owned corporations; - state-owned legal entities of other organizational legal forms, as indicated in Clause editor@iaeme.com

4 Irina Sergeevna Egorova, Svetlana Nikolaevna Milovidova and Maria Mikhailovna Basova 4. Identification of audit types for companies with state participation Methodical instructions for KPI application [7] An audit conducted according to Federal Law No. 307 On Auditing State audit State-owned corporations, state-owned companies, stateowned unitary enterprises, and economic entities, in the charter capital of which the Russian Federation, a constituent entity of the Russian Federation, in the aggregate, hold more than 50%. A performance audit is not distinguished as a separate type, but it is necessary to execute the going concern assessment according to ISA 570 Going Concern [8]. Going concern means that an entity is able to operate for at least 12 months after the reporting date (i.e. it is necessary for the auditor to make a forecast). ISA 570 provides only a list of indicators, based on which this assessment should be conducted, but there is hardly any methodology of application. Methodical recommendations on the organization and conduct of the mandatory audit of financial (accounting) statements, as approved in Order No. 12 issued by the Russian Federal Agency of State Property Management. According to Article 15 of Federal Law No. 41 On the Audit Chamber of the Russian Federation [9], State Audit Standard 104 Standard of External State Audit (Control). Performance Audit (approved by Resolution No. 4PK of the Collegium of the Audit Chamber of the Russian Federation on November 30, 2016) [10], performance audit is distinguished as a separate type, but there is no indication in statutory documents that the going concern assessment is necessary. Having analyzed the problems of determination of construction companies with state participation among performance audit subjects, as provided in Table 1, one can draw the conclusion that it is necessary to do the following: 1. to consider as audit subjects economic entities with any stakes (not only those exceeding 25%); 2. to use unified methods for this type of audit, which are based on the calculation of impact and performance indicators with a clear differentiation; 3. to assess and analyze impact and performance indicators together with creditworthiness and financial stability of entities under audit. This will make it possible to take into account the risk associated with the failure to achieve them; 4. to supplement performance assessment by the going concern assessment of economic entities with state participation by events and conditions of financial and operational nature, and by other events and conditions according to ISA 570 Going Concern. When the Audit Chamber of the Russian Federation conducts state audit, one of the fundamental standards is State Audit Standard No. 104 Performance Audit, which defines efficiency of the use of federal (1). and other (2) resources and characterizes the ratio between the achievement of goals and solution of problems related to Russia s socio-economic development and the spending of federal and other resources to achieve them. The efficiency of the use of federal and other resources and its characteristics are given in Table editor@iaeme.com

5 Audit of the Effectiveness of Construction Organizations with a Share of State Participation in the Russian Federation The fact that the standard does not give a formalized view of the performance indicators is also a problem. For this reason, we propose to formalize the performance definitions by these standards (economy, efficiency and productivity). Economy is understood as a situation when a company under performance audit achieves specified results by using as little federal and other resources as possible. According to State Audit Standard No. 104, the economy condition for federal and other resources can be shown in the following formalized form: FIR1 < FIR0 with R0 = R1, where FIR0 is the amount of federal and other resources in the base period (data of the plan, of the previous period); FIR1 is an actual amount of federal and other resources; R0 is the planned results; R1 is the achieved results. Table 2. Efficiency indicators for the use of federal and other resources according to State Audit Standard No. 104 and their characteristics Efficiency of the use of federal and other resources Economy Efficiency Productivity Characterized by the amount of resources specified by a performance audit subject per unit of work performed and services provided. Characterized by specified results achieved by a performance audit subject, using as little federal and other resources as possible. Characterized by the best results achieved by a performance audit subject using a specific amount of federal and other resources. The efficiency condition for the use of federal and other resources according to State Audit Standard No. 104 can be shown in the following formalized form: RU0 / FIR0 <= RU1 / FIR1, Where FIR0 is standards and indicators, which are used by budgeting participants when planning budgetary allocations; FIR1 is the amount of resources spent; RU0 is the planned work, services; RU1 is the actual scope of work performed and services provided. The productivity condition for the use of federal and other resources according to State Audit Standard No. 104 can be shown in the following formalized form: FIR0 = FIR1, with R1 >= R0 For this reason, we propose to present the assessment of the economic use of federal and other resources as part of performance audit in construction companies with state participation in the form of the following working document (Table 3) editor@iaeme.com

6 Irina Sergeevna Egorova, Svetlana Nikolaevna Milovidova and Maria Mikhailovna Basova Table 3. The proposed form of the working document for the assessment of efficient use of federal and other resources as part of performance audit in construction companies with state participation Indicator Symbol, calculation method Plan, standard, previous period Actual Deviation, +, -, RUB thousand 1. Amount of federal and other resources, RUB thousand FIR 2. Result (work, services), RUB thousand R (RU) Performance indicators 3. Economy (Ea), RUB thousand FIR 1 < FIR 0, with R 0 = R 1 4. Efficiency (Ef), RUB/RUB RU 0 / FIR 0 <= RU 1 / FIR 1 5. Productivity RUB thousand (Er), FIR0 = FIR1, with R1 >= R0 The analysis of various definitions of the efficiency of federal and other resources use leads to the conclusion that the efficiency indicator is the performance indicator, while the economy and productivity indicators are impact indicators. A question arises about the identification of non-performance indicators. For this reason, in accordance with Paragraph 4 of Clause 23 of Resolution No. 23 On Some Issues Related to the Application by Courts of Arbitration of the Standards from the Budget Code of the Russian Federation passed by the Plenum of the Supreme Arbitration Court of the Russian Federation on June 22, 2006 (as drafted in Resolution No. 17 passed by the Plenum of the Supreme Arbitration Court on February 26, 2009), a specific expenditure item can be recognized as the inefficient use of budget funds only if an authorized body proves that problems faced by a budgetary participant could be achieved by using a smaller amount of funds or that a budgetary participant might achieve better results by using an amount specified in the budget [11]. However, the mechanism of determining these possibilities and the procedure for proving them are not established in a legislative manner and are not unified so it is quite problematic to audit performance indicators. Performance audit stages are fully presented in State Audit Standard No. 104 (Figure 1). We believe that the performance audit of the state funds use by construction companies with state participation should be solidified by going concern assessment. For this reason, we propose a number going concern assessment indicators as given in ISA 570 (revised) Going Concern and their interpretation based on construction companies with state participation, namely PJSC Stroymontazh, PJSC Nadezhda, PJSC Avtostroy, and PJSC Rosstroy. Application of analytical procedures in the analysis and assessment of the activity of the entity being audited (construction organization with state participation) within the framework editor@iaeme.com

7 Audit of the Effectiveness of Construction Organizations with a Share of State Participation in the Russian Federation of financial events or conditions for the existence of a to the going concern, in our opinion, should be started with the analysis of the statement of changes in capital. Stages of performance audit Identification of performance indicators Preparatory stage of the audit Preliminary examination of the performance audit subject Collection and analysis of information about the performance audit subjects, analysis of current risks associated with inefficient use of resources, consultations with external exper ts Performance audit goals and questions Formulation of the goals specifying the main issues related to performance audit, which will be solved by its conduct and the preparation of the project program Criteria for assessment of the use of federal and other resources Qualitative and quantitative characteristics showing which results point to the efficient use of resources and how the operation of performance audit subjects should be organized in order to use them Methods and approaches applied during performance audit examination, revision, analysis, inspection, monitoring Main stage of the audit Collection and analysis of actual data and information. Obtainment of evidence Collection and analysis of evidence representing sufficient actual data and reliable information Ways to obtain and methods to examine actual data and information inquiry, use of several sources, survey, conversation, etc. Comparison with a reference standard, comparative analysis, factor analysis, data analysis, including measurement, calculation and analysis of financial and economic indicators of the performance audit subject Final stage of the audit Conclusions Recommendations Preparation of a report on the results Control of the execution of the performance audit results Figure 2. Organization and methodology of performance audit in construction companies with state participation Proposals on assessment of the presence/absence of a to the going concern of based on the analysis of the net assets held by suppositive modeled construction companies with state participation (PJSC Stroymontazh, PJSC Nadezhda, PJSC Avtostroy, and PJSC Rosstroy) for 2017 are presented in Table editor@iaeme.com

8 Irina Sergeevna Egorova, Svetlana Nikolaevna Milovidova and Maria Mikhailovna Basova Table 4. Proposals on assessment of the presence/absence of a to the going concern of based on the analysis of the net assets held by the construction companies with state participation (PJSC Stroymontazh, PJSC Nadezhda, PJSC Avtostroy, and PJSC Rosstroy) for Company under audit PJSC Stroymontazh Line code There is a to the going concern negative net assets There is no to the going concern positive net assets ,150, PJSC Nadezhda ,237,344, PJSC Avtostroy ,214, PJSC Rosstroy (calculated based on the balance sheet) - 1,059,918,453 Conclusion (no /) No to the going concern No to the going concern No to the going concern No to the going concern In this case, a company s net assets were taken to determine whether there is any to the going concern. Net assets constitute the real value of a company s assets, which is calculated annually and excludes debt, i.e. the difference between the company s assets and liabilities. A positive number means that there is no, a negative number means that there is a. Of the aforementioned construction companies with state participation, the highest value of net assets is held by PJSC Nadezhda, while PJSC Stroymontazh holds the lowest value. Consequently, PJSC Nadezhda is characterized by the strongest standing. However, based on the obtained audit evidence, one can conclude that the positive number of net assets held by all companies under audit excludes a to the going concern. There is no doubt that the organizations can maintain the continuity of business. Proposals on assessment of the presence/absence of a to the going concern of based on the data from its Balance Sheet and Statement of Changes in Capital for 2017 are given in Table 5. Table 5. Proposals on assessment of the presence/absence of a to the going concern of PJSC Stroymontazh in 2017 Item Line code 1 Net assets 3600, Statement of Changes in Capital RUB thousand 20,150,714 2 Charter capital 1310, Balance Sheet 83,254 Assessment criterion Net assets > charter capital there is a Net assets < charter capital there is no Conclusion (/no ) Threat Proposals on assessment of the presence/absence of a to the going concern of PJSC Nadezhda based on the data from its Balance Sheet and Statement of Changes in Capital for 2017 are given in Table editor@iaeme.com

9 Audit of the Effectiveness of Construction Organizations with a Share of State Participation in the Russian Federation Table 6. Proposals on assessment of the presence/absence of a to the going concern of PJSC Nadezhda in 2017 Item Line code RUB thousand Assessment criterion 1 Net assets 3600, Statement of Changes in Capital 4,237,344 2 Charter capital 1310, Balance Sheet 2,144,315 Net assets > charter capital there is a Net assets < charter capital there is no Conclusion (/no ) Threat Proposals on assessment of the presence/absence of a to the going concern of PJSC Avtostroy based on the data from its Balance Sheet and Statement of Changes in Capital for 2017 are given in Table 7. Table 7. Proposals on assessment of the presence/absence of a to the going concern of PJSC Avtostroy in 2017 Item Line code RUB thousand Assessment criterion 1 Net assets 3600, Statement of Changes in Capital 377,165,818 2 Charter capital 1310, Balance Sheet 12,285,499 Net assets > charter capital there is a Net assets < charter capital there is no Conclusion (/no ) Threat Proposals on assessment of the presence/absence of a to the going concern of PJSC Rosstroy based on the data from its Balance Sheet and Statement of Changes in Capital for 2017 are given in Table 8. Table 8. Proposals on assessment of the presence/absence of a to the going concern of PJSC Rosstroy in 2017 Item Line code RUB thousand Assessment criterion 1 Net assets 3600, Statement of Changes in Capital 1,059,918,453 2 Charter capital 1310, Balance Sheet 97,231,067 Net assets > charter capital there is a Net assets < charter capital there is no Conclusion (/no ) Threat Based on the analysis of performance audit of the enterprises one can determine whether there is a to the going concern of PJSC Stroymontazh, PJSC Nadezhda, PJSC Avtostroy and PJSC Rosstroy since the analysis the net assets indicators are higher than their charter capitals indicators (20,150,714 > 83,254; 4,237,344 > 2,144,315; 377,165,818 > 12,285,499 and 1,059,918,453 > 97,231,067, respectively). Next, we will analyze the operation of construction companies with state participation based on the condition Presence of negative operating cash flows using their Cash Flow Statements for Proposals on assessment of the presence/absence of a to the going concern upon analysis of the condition Negative operating cash flows based on the Cash Flow Statements editor@iaeme.com

10 Irina Sergeevna Egorova, Svetlana Nikolaevna Milovidova and Maria Mikhailovna Basova of construction companies with state participation (PJSC Stroymontazh, PJSC Nadezhda, PJSC Avtostroy, and PJSC Rosstroy) for 2017 are presented in Table 9. Table 9. Proposals on assessment of the presence/absence of a to the going concern upon analysis of the condition Negative operating cash flows based on the Cash Flow Statement of construction companies with state participation (PJSC Stroymontazh, PJSC Nadezhda, PJSC Avtostroy, and PJSC Rosstroy) for 2017 Economic entity Line code Threat to going concern negative operating cash flows No to going concern positive operating cash flows Conclusion: (/no ) PJSC Stroymontazh ,868,081 No PJSC Nadezhda ,494 No Cannot be PJSC Avtostroy 4100 n/a n/a determined PJSC Rosstroy ,953,345 - Threat With regard to the two the given construction companies with state participation (PJSC Stroymontazh and PJSC Nadezhda), there is no to the going concern since their operating cash flows total 1,868,081,000 RUB and 202,494,000 RUB respectively. As for PJSC Rosstroy, there is a to the going concern since its operating cash flow equals - 44,953,345,000 RUB. It is not possible to determine if there is a to the going concern of PJSC Avtostroy since its Cash Flow Statement for 2017 is not available, which raises doubt about the efficiency of its operations since the company is state-owned and operates using funds from the state budget, which, in turn, is accumulated by taxpayer funds. In conclusion, we examined the features of a performance audit of construction companies with state participation conducted by both the Audit Chamber of the Russian Federation and auditing firms. Each of these institutions conducts an audit within a specified area of business, however, in the situation under study, their authorities overlap. Moreover, there is also the problem of the low level of methodological support of Russian supervisory authorities at the level of the performance audit. In connection to this, we have set forth a number of relevant proposals [11-15]. REFERENCES [1] International Standards of Supreme Audit Institutions (ISSAI). [2] Federal Law No. 402-FZ On accounting dated December 12, 2011 (edited July 29, 2018). [3] Federal Law No. 261-FZ On Energy Saving and Improving Energy Efficiency and Amending Separate Legislative Acts of the Russian Federation dated November 23, 2009 (the latest edition). [4] Law No. 307-FZ On Auditing dated December 30, 2008 (the latest edition). [5] Civil Code of the Russian Federation (Part I) No 61-FZ dated November 30, [6] OK The All-Russian Classifier of Organizational and Legal Forms (approved by Rosstandarts order No 505 dated October 16, 2012) (edited December 12, 2014). [7] Guidelines for the application of key performance indicators by state-owned corporations, state-owned companies, state-owned unitary enterprises, as well as business societies, in the authorized capital of which the share of participation of the Russian Federation, a subject of the Russian Federation in total exceeds 50% (approved by the Federal Property Management Agency) editor@iaeme.com

11 Audit of the Effectiveness of Construction Organizations with a Share of State Participation in the Russian Federation [8] International Auditing Standards approved by the Russian Finance Ministry s Order No. 207n On Enacting International Auditing Standards in the Russian Federation dated November 9, [9] Law No. 41-FZ On the Audit Chamber of the Russian Federation dated April 5, 2013 (the latest edition). [10] State Audit Standard 104. The standard of an external state audit (control). Performance audit (approved by Resolution No. 4PK of the Collegium of the Russian Audit Chamber dated November 30, 2016). [11] Egorova, I. S. Peculiarities of the method to audit efficiency of state funds use. Audit, 12, 2017, pp [12] Egorova, I. S. Practical implementation of the going concern assessment according to ISA 570 Going Concern based on data from financial statements. Auditorskie vedomosti, 8, 2017, pp [13] Egorova, I. S. Peculiarities of a shift to international auditing standards. Auditor, 5, 2018, pp [14] Egorova, I. S. Peculiarities of a performance audit: problems of identification and implementation. Auditor, 1, 2017, pp [15] Egorova, I. S. Features of evaluating the effectiveness of internal financial audit. Auditor, 4, 2018, pp [16] G. Delorme, G. Srivastava and M. Shanmugasundaram, Some Considerations of the Actual Problems Related to Good Corporate Governance, and the Impetus for Law Enforcement. International Journal of Civil Engineering and Technology, 8(9), 2017, pp [17] A. Premavasumathi and Sivasankari. A Study on Effectiveness of Employee s Training and Development In Rane Brake Lining Limited, Viralimalai, Trichy. International Journal of Management, 7(2), 2016, pp editor@iaeme.com