Time to stop preaching and start working as one

How ready are the 10 accession countries' accounting systems, policies and standards? Michelle Perry writes

For the young accountants entering the profession in the new European accession states it�s proving difficult to shake off their countries� negative image.

The Western world seems to be labouring under the illusion that the new EU accession countries are stuck in the Dark Ages, particularly in their financial controls.

At the World Economic Forum�s European Economic Summit in Warsaw in May, the 10 accession countries were urged to ensure strong corporate governance structures are in place.

Malta and Cyprus, due to their Commonwealth links and lack of Communist history, suffer less from the criticisms than the former Soviet bloc states.

But in the last 12 months with a series of corporate scandals, such as Parmalat, it has been made slightly easier for accountants of the new EU countries to defend themselves against Western righteousness.

Simon Thompson, ACCA�s head of corporate development for Central and Eastern Europe, says: �There�s a general rolling of eyebrows when Western countries criticise Eastern Europe. Now you have bright, young people coming up and, yes, there�s perhaps a slight feeling of �we don�t need to be preached to�.�

But he adds: �There�s also an appreciation of help that Western Europe has given to Eastern Europe in helping set up bodies and provide training.�

The problem is that, for many, the region�s image is stuck in a time-warp. In reality, in the 14 years since the Berlin Wall fell, the former Communist bloc countries have made tremendous progress.

Thompson says: �The region does suffer from a negative perception, especially from those who haven�t been here, or worked here.

�They have made enormous strides in the last 10 years. There�s been this great push to get ready with all the standards over the last four or five years. It�s not been a last minute struggle to get things done.�

How active the largest accountancy firms are in the region is also a good indicator of how the profession and the general economy are faring. The Big Four has a presence in practically all of the accession countries. And fewer offices are now staffed by expatriates, but rather with highly skilled qualified local accountants.

In accounting terms, they have leapfrogged many Western European nations.

With just six months to go before the 1 January deadline, findings from a new survey show that a worryingly low 11% of Western European companies have completed work so that they can use international accounting standards.

And a massive 80% haven�t decided how to explain to the markets the potentially large impact the rules will have on their income statements and balance sheets.

The survey, carried out by PricewaterhouseCoopers, examined the readiness of more than 300 European listed companies to use international financial reporting standards (IFRS).

Of the survey results, Ian Dilks, partner responsible for PwC IFRS conversion services in the UK, said: �Ideally, companies should be further ahead with their preparations for IFRS conversion. Companies that have made only limited progress will need to move fast - for them, the next six months are crucial.�

While the picture in places like Spain, Germany and Italy might cause concern for the markets, the new accession states are way ahead in understanding and explaining the application of IFRS.

Many companies in Central and Eastern Europe have been using international rules for the last 10 years.

Petr Kriz ACCA, PwC partner in Prague and President of the Czech Audit Chamber, says: �Central European countries are well prepared, as IFRS has been used as secondary reporting for nearly a decade now. The main markets all require IFRS reporting.

�The Czech stock exchange has required IFRS for the last six years now. Generally, compared to Western nations where there�s no practical experience, we are well ahead.�

Several states have gone even further and required IFRS for all companies, listed or otherwise.

Bernard Cook, executive director of membership services at ICAS, explains: �The three Baltic states have very much moved to IFRS. The Czech Republic and Poland are very close with their standards. Many have leapfrogged other European nations.

�Other countries have been looking at each standard individually and diverged on some standards, like the UK. But what are we expecting of them - perfection?�

As Kriz says, the switch to IFRS is a great challenge for all affected. But he reckons it�ll be easier for the new accession countries than it will for some Western Europeans.

The countries� economies are, however, much less sophisticated than Western Europe�s, with fewer listed companies and complex business structures, so many of the new rules won�t apply to the region yet. In Poland, which boasts the region�s biggest exchange, there are roughly 200 publicly listed companies.

�One issue that is typical for all these countries, except perhaps Poland, is that most of the companies are less dependent on capital markets - most use bank loans. There are few IPOs in these countries. And pressure from shareholders is less than you would find in England or Germany,� explains Kriz.

Indeed, the worldwide push towards adoption of IFRS and other global financial benchmarks has come at an auspicious time for the region.

International auditing rules are also given the same attention as IFRS. Their philosophy being �why waste years developing their own unique set of accounting and auditing rules when the rest of the world is converging?�

Kriz says: �Over the next two years we have decided to move to international auditing standards. The Polish will move to these standards as well, as will Slovakia, but perhaps later. In most countries we will be complying before the EU requires it.�

Still, there are obstacles to overcome. It seems it is taking longer to change a mindset steeped in a tradition of control and prescriptive rules.

Kriz acknowledges the problem in overcoming the rule book mentality. �It�s a big cultural move. IFRS follows principles - people here were used to having guidance - especially before the 1990s there was a rule book to follow. That�s probably one of the key changes for those countries.�

It is an issue raised by most experts in the region.

Cook, who is well travelled in the region, says even at some public bodies, such as the equivalent of a Companies House, attitudes remained founded in secrecy and subterfuge.

Jean Ethridge, head of international affairs at the ICAEW, says: �I would suspect the biggest shift is an attitudinal one. Most professions don�t spring like a phoenix from the ashes. Increasing professional judgement is crucial.�

Enforcement is also an issue that raises a few eyebrows.

Cook says: �The issue with those countries is whether it will actually happen. Will legislators enforce those rules?�

Thompson agrees. �The problem is one of enforcement. The stock exchanges are small and the oversight bodies are understaffed and fairly weak.� But he adds: �It�s a problem in some Western European countries too.�

Plans are however afoot to deal with these issues. FEE, the European accountancy body, has called for a European enforcement co-ordination body with a key role for CESR, the Committee of European Securities Regulators.

And in June, the CESR and the Securities and Exchange Commission announced plans to increase co-operation and collaboration between the two bodies.

Plain sailing it won�t be, but many of the concerns for the region overlook the progress in financial regulation, oversight and corporate governance that has already been made.

There is still much work to be done to ensure investor confidence, transparency and fluid capital markets. But, together with the established EU nations, the new accession states can learn from their neighbours� mistakes and develop into confident, safe capital markets.

�We�ll see those countries playing a bigger role as more and more young people come through the profession,� assures Thompson.

Michelle Perry is a freelance journalist specialising in financial and business issues.