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. Last Updated: 07/27/2016

Freeing the Books From Bureaucrats

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Most people associate accounting reform with moving to international accounting standards. However, the problem is really far broader than this. The accounting and financial reporting system in Russia absolutely has to change. And the question of whether this system will take its cues from international standards is naturally very important but is in fact redundant.

The current system is less than satisfactory because it is shaped by the state and designed exclusively to protect the interests of the bureaucracy. I am specifically talking about bureaucrats because the state no longer has any direct or objectively justified interest in financial reporting. Taxes are assessed via tax reporting, and statistics gathered based on statistical reports. Financial reporting is really only of use to investors, who use reports to make investment decisions.

The state, in theory, should be interested only in whether reports are transparent and match companies' actual economic status. For this reason, in most countries, the state does not play a major role in establishing accounting standards and, after setting up the basic foundation for decision making, leaves the rest to the expert community. Experience has shown that this approach works.

Yet the Russian system is very strange and the only one of its kind in the world. Accounting standards are developed solely by the Finance Ministry. As a result, company financial reports, which are prepared according to the state's demands, have almost no influence on investment decisions, as reports do not take actual investor interest into account. Thus, this crucial basis for attracting investment in market economies is extremely underdeveloped in Russia.

Now would be the perfect time to overhaul the system. Government administrative reforms already in progress aim to transfer excess regulatory functions from the state to nongovernmental organizations. Accounting and reporting reform would be relatively simple, and the market is more than ready for it, which makes it an ideal opportunity to test drive this new approach.

The job of developing a national accounting system should be handed over to a new, nonprofit organization that would select the appropriate experts with qualifications clearly established by legislation. These experts should include not only auditors and accountants; they should also include the people who use and who need financial reports.

Accounting standards need to be discussed openly in the financial community. Market players should have a chance to make suggestions and recommendations before standards are finalized. The new regulatory organization, which would function transparently and collegially, would be effectively insulated from any form of corruption. Finally, this organization would be independent from the state and would not cost the federal budget a cent.

To be fair to the Finance Ministry, it did acknowledge the damage done by the current system's exclusion of experts in its plan for developing accounting and reporting in the medium term. The plan went on to emphasize the importance of involving experts in the process. But what concrete measures did the ministry suggest to rectify this? Judging by the plan, basically none. It only recommended waiting a few more years before returning to the issue.

However, the Finance Ministry's first steps toward putting this plan into action proved to be the financial community's worst nightmare. The proposed federal law on financial reporting that recently sprung from the depths of the ministry was created under such a veil of secrecy that even the Central Bank, not to mention experts, found out about it only once it was presented to the State Duma. As a result, there were so many objections to the law that the presidential administration had to step in to fix ministerial mistakes, which seems to be happening with increasing frequency.

Reform of the way accounting and financial reporting are regulated needs to start with better legislation. This means more than making some changes to the current law on accounting. A relic of the command economy days, the current law focuses on narrow technical and methodological problems that would be better solved by companies themselves or the expert community. To make this possible, we need a new law.

The new legislation will have to solve a very difficult problem. It will have to make it possible for Russian companies to move completely to international accounting standards, or IAS. The current law does not allow companies to do so. Companies that use IAS should not have to report according to Russian standards, too. However, the road to this goal will be long and hard. Any attempts to speed up the process that ignore the objective limits of Russian business are doomed to failure and could discredit the whole idea of moving to IAS. The most important thing here is not speed, but a clear and well-considered plan that will allow all participants in the process to get ready for the big change.

Another bill -- the proposed law on accounting and financial reporting regulation -- is being developed by a working group created by the National Organization for Accounting and Reporting Standards. The first draft of this bill will appear on our organization's web site this month, where all interested parties can read, discuss and critique the proposed legislation. The principle of transparency that forms the basis for this new law should be fully reflected in the bill's development.

One thing can be said with confidence: The community of financial experts is more than ready to regulate itself.

Andrei Burenin is a deputy in the State Duma and a member of the Budget and Taxes Committee, as well as chair of the National Organization for Accounting and Reporting Standards. He contributed this comment to Vedomosti, where it first appeared.