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Western accounting arrives in Eastern Europe; even in the Soviet Union, managers are being taught to measure profit and loss.

Eastern Europe is hot. The iron curtain is down, markets are opening up and Western companies are rushing in to set up shop. The six largest international accounting firms and a handful of smaller ones are moving in, too, sometimes on the heels of clients, sometimes forging the way and encouraging clients to follow.

Though the Soviet Union and its former satellites are by no means prepared for a capitalist invasion, Western investors can't resist the tempting market of over 300 million new consumers, a continent of raw materials and European know-how offered at Latin American wages. The location isn't bad, either. The European Community is right next door and Europe 1992--the single market initiative--is around the corner.

"This is probably as big as Commodore Perry opening Japan," says Paul Hoffman, a partner and Eastern European liaison in the New York office of Arthur Andersen & Co. "A whole new section of the world is entering the global economy, and the movement is coming on fast."

Arthur Andersen itself came on pretty fast in Moscow, opening an office there in the days of detente, and then closing it in the darker days of the cold war. Today the firm is back again, holding a 70% interest in a joint venture with Promsroy Bank, the Soviet Union's largest industrial bank. In late June the firm announced it would be the first Western accounting firm permitted to perform audits acceptable to the Soviet government. The following day, Ernst & Young announced it, too, would perform official audits. Previously, all certified auditing of transnational joint ventures was carried out by Inaudit, a Soviet agency established for that express purpose.

But business is booming too much for Inaudit. With 1,800 joint ventures taking shape, the Soviet agency simply cannot keep up with the workload. In fact, the agency's situation worsened when Ernst & Young hired Inaudit's second-ranking official and Arthur Andersen took on three others from the agency's staff.



All of the six largest accounting firms have or will soon have offices in Moscow, and Ernst & Young already has a second office operating in Kiev. All the firms, however, are experiencing a predictable problem: the conversion of financial information into forms useful to Western companies and investors. The Soviet Union's centrally controlled economy does not deal with such concepts as profitability and stockholder equity. Financial information there is aimed at measuring performance against production goals, not measuring profit and loss.

C. Richard Eigenbrode, senior tax manager at Price Waterhouse, says that when he spoke to a group of upper-level managers at a seminar in Moscow, one of their questions was "What is an operating loss?"

"Even at that upper level," says Eigenbrode, "they're struggling with basic concepts."

To alleviate the accounting education problem and set things in motion for a compatible system of international accounting, theUnited Nations Center for Transnational Corporations (UNCTC) organized several brainstorming sessions and helped found an ongoing educational program in the Soviet Union. CPAs "donated" by the largest CPA firms are teaching in Soviet universities and institutions, using a special curriculum developed by Dr. Adolf J. H. Enthoven, director of the Center for International Accounting Development at the University of Texas--Dallas. The programs in Moscow, Leningrad and Kiev graduated their first 170 students this June.

Raymon de Reyna, a Deloitte & Touche partner who taught an intensive two-week course at Moscow State University, was invited to march in the famous May Day parade in Red Square, perhaps the first Western CPA to receive such an invitation.



Being part of the educational program may be part of what de Reyna means when he says his firm is "moving ahead on several fronts" in Eastern Europe. Deloitte & Touche, with no offices fully operational in Eastern Europe as this article goes to press, is certainly intending to establish a major presence there. J. Thomas Presby, a board member of Deloitte & Touche and former director of operations in Western Europe, recently moved back to Brussels to supervise developments in Eastern Europe and the Soviet Union. The Brussels office is now offering a data bank that has up-to-date information on the economic and political developments in all Eastern European countries.

The Soviet Union may have a basic problem solved by early next year, according to Lorraine Ruffing, secretary in charge of the UN's working group of experts on International Standards of Accounting and Reporting (ISAR). By the spring of 1991, ISAR and the Soviet Union will have hammered together a system compatible with standards established by the International Accounting Standards Committee and with other Western international accounting systems.



Corporations and accounting firms moving into East Germany, Poland, Hungary, Czechoslovakia, Bulgaria, Romania, Yugoslavia and Albania face even bigger problems than those in the Soviet Union do. In most of these Eastern European countries, little has been done to adapt to the requirements of international accounting standards. There certainly is no coordinated . effort as each country ventures into its own brand of capitalism.

Thanks to an open market system that operated until World War II and a relatively early decision to lean toward Western economics, Hungary is years ahead. The Hungarian government has contracted with Price Waterhouse to help modernize the country's accounting system. That firm is now pursuing similar agreements with other governments.

Poland is attempting a cold turkey shift into the open market and probably will make rapid progress. A task force led by Cyrus Vance visited Poland early this year and urged the establishment of a comprehensive accounting system suitable for an open market economy.

East Germany, of course, is already reapping the benefits of the expected unification with West Germany. The shift to the deutsche mark facilitated a parallel shift in accounting systems.

Czechoslovakia, with perhaps the most advanced industrial establishment, is moving cautiously, afraid of giving away too much too soon. Romania and Bulgaria are not yet in the running, and Albania remains in a quasi-feudalistic system not likely to change soon.

Yugoslavia may be the sleeper, according to Arthur Andersen's Paul Hoffman. The Yugoslavian government has sanctioned joint ventures with Western companies for some time and, as a result, there are long-established accounting standards. The dinar, unlike the ruble and other Eastern European currencies, is convertible to hard currencies. Profits from joint ventures may be repatriated to the home countries of foreign investors.



The lack of such basic benefits continues to plague other countries, including Hungary, where 600 joint ventures are under way and the six largest firms have bustling offices with scores of people. Despite the passing of Hungary's Transformation Act, which allows the privatization of state-owned companies, the accounting and reporting systems are inadequate for the demands of Western investors. But this may be good for Western accounting firms.

"We are finding lots of work determining the fair value of assets in state-owned companies," says Rom Fitzpatrick, national director of mergers and acquisitions at Coopers & Lybrand. "Their records are woefully inadequate for Western purposes. Though assets might have been valued when the companies were taken over in the 1950s, there has been no accounting for such thing as depreciation. To determine the value of assets, we have to get an expert on the scene to look at the goods and estimate the value. Once we determine that, we can deal with the figures through the generally accepted accounting principles Western investors use."

Despite the tremendous and growing need for Western accounting practices and qualified accountants in Eastern Europe, accounting firms face frustrating impediments and expensive hurdles in their race into the region. Payment in hard currency is perhaps the biggest issue. Local currency can pay local expenses but to receive scarce supplies of hard currency to send back home, accounting firms usually have to turn to the Western partner of transnational joint venture customers.

Aidan Walsh, director of international marketing for KPMG Peat Marwick, warns that companies should go into Eastern Europe with an eye on long-term profits only. Since the recent developments in accounting are unprecedented, Western companies can expect surprises as their Eastern partners and governments emerge from decades of communism into economies driven by capitalist concepts of profit and loss.

The same goes for accounting firms. Since they have to transfer people to their new offices and local personnel will have to be trained from scratch, expenses are high. BDO Seidman has opened an office in Budapest, and Moore Stevens, with the help of an established client contact in Warsaw, has managed to open an office there. Few other midsized firms, however, have the resources to establish operations in Eastern Europe.

A central problem is the lack of a viable accounting profession in these countries, according to Raymon de Reyna. "They don't have accounting standards or the concept of the independent audit. The ethical implications are new to them. They tend to think that once they've got a stock market, they're operating in an open market. But so far, they aren't."

They don't have much in the way of stock markets, either, but they are moving to establish some. In February, a roundtable discussion on stock exchanges in Zagreb, Yugoslavia, drew over 100 participants. Since then, a rudimentary stock market has opened in Budapest, Hungary. So far, fewer than 10 stocks are traded there, but as privatization continues to Budapest exchange will play an important role in the shift to capitalism. Poland and the Soviet Union also are making plans to open their own exchanges, though they will have a difficult time if accounting standards are inadequate.


Many of the problems involved in integrating Eastern and Western economies stem from a lack of communication, according to Daniel Hrisak, president of Communication Resources, an Atlanta-based consulting firm specializing in international accounting issues. "Accounting is essentially a communicative process," says Hrisak. "It is the language of production and transaction. Until definitive standards are established in Eastern Europe, East and West will be talking different languages, as they have for decades. In the absence of a common language, financial negotiations and economic progress will be slow and difficult, if not impossible."

GLENN ALAN CHENEY is a professor of business writing at Fairfield University, Fairfield, Connecticut. He is the author of 10 books and several Journal articles.
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Author:Cheney, Glenn Alan
Publication:Journal of Accountancy
Date:Sep 1, 1990
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