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May 18, 2009

Russian mid-tier leader posts startling results

BDO’s Russian member firm bucked the credit crunch in 2008 with revenue growth of 42 percent to more than RUB4.11 billion ($129 million) but the firm is predicting much tighter results in 2009.

BDO Unicon is regarded as Russia’s fifth-largest firm in terms of revenue, but is often ranked as number two in national tables as PricewaterhouseCoopers is the only Big Four firm that publishes results.

It has a uniquely dominant position in the mid-tier, with more than four times the fee income of the next largest firm, RSM Top Audit, according to the 2008 International Accounting Bulletin Russia survey (see issue 436).

While 2008 growth of 42 percent was dramatic compared with results from most markets worldwide, it is a significant drop from the 65 percent fee income growth the firm experienced in 2007. Furthermore, partner Alexander Verenkov expects fee income will remain static, or grow just slightly in 2009.

This decline in fortune is not due to reduced client numbers, but fee pressure as Russia’s public sector and corporates look to cut their spending in the face of the economic crisis.

Competition is tough and Big Four firms are pricing their services two or three times lower than before, Verenkov said.

“Big corporations are choosing their auditors or their consultants based on the current competition. They arrange tenders so we are pitching to clients together with Big Four companies and sometimes they propose lower fees than we do,” he said.

Verenkov said BDO is unlikely to drop its fees at similar rates because it does not change the same brand premium as the Big Four and generally has a tighter profit margin.

Services lines that are seeing shrinking demand include the consultancy services the firm provides to public authorities, because their funding has diminished. Demand for large IT system development programmes is also dropping.

However, there is stable demand for the implementation of SAP projects for large companies and the firm is also expanding its services to other Commonwealth of Independent State countries where there are new BDO offices, including Azerbaijan and Georgia.

Other strong-performing business lines included financial advisory services, particularly valuations and due diligence, purchase price allocation and special advisory services.

The firm’s tax and legal services received a significant boost from a project supporting the development of Russian oil and gas giant Gazprom’s Shtokman gas field.

“We were developing a budgetary system for Gazprom, all kinds of IT consultancy, tax and legal support for certain projects and now we are doing a project on managing subsidiaries abroad… working with other BDO firms,” Verenkov said.

Verenkov said the firm’s growing reputation has also helped its growth.

In 2008, the firm saw a lot of demand for IFRS services and for the past two to three years it has begun to offer more services to the capital markets. Several large IPOs also added to revenue. Another steady but not financially lucrative line is consulting and advisory services for big state corporations, which Verenkov noted play an increasingly important role in the economy.

The firm does not earn high fees for this work but it is very prestigious and establishing relations with the state is valuable, Verenkov said.

“We are positioning ourselves as a purely national company, orientated to the national economy and to the support of Russian enterprises,” he explained.

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