Accounting in the Soviet Union

In the Soviet Union accounting was considered a means of safeguarding socialist property and of meeting the goals of state plans. Accordingly, the authorities exerted strict control and monitoring over firms’ business activities and financial performance. Enterprises were monitored on how well they managed their assets, used the factors of production, and complied with norms regulating the amount and composition of current assets. Control also extended to the production of goods and services, the cost of production, and financial profit and its use.

Beginning in 1985, when Gorbachev announced the transition from a centrally planned economy to a market-oriented one, accounting became subject to change once more. These changes, which came from above, were inconsistent, evasive, and prone to error.

A New Accounting System Emerges

The unified Soviet system of accounting that had been developed over many decades began to disintegrate as soon as the Soviet Union broke apart. As early as 1991 crucial accounting changes were made. These changes included tighter adherence to international accounting norms, publication of a new national chart of accounts, and passage of a requirement that companies issue new financial statements, similar to those used in industrial countries. At the same time, preparations were underway for radical changes in accounting and auditing regulation and methodology. In 1992 the government approved by decree the principle normative documentation "Regulation on Accounting and Reporting in the Russian Federation," which essentially created a new Russian accounting system.

Most of the work of transforming the accounting system in Russia is being done by the Ministry of Finance, with the assistance of international institutions, including the World Bank, the United Nations, the European Union, and the major international accounting firms. The legislature is considering a multilevel system of accounting:

The Soviet constitution mandated that a single accounting and statistical system be adopted, under the direction of the government. Accounting in Russia is still regulated by different governmental bodies, and a variety of accounting methods can be used in practice. The level of centralization has been declining, however, and a well-shaped system of accounting regulation has been created.

The New Phenomenon of Auditing

Auditing—that is, an independent accountant’s review of a company’s financial statements to ensure that they were prepared in compliance with generally accepted accounting principles—is new to Russia and the former Soviet Union. Throughout Russian history, the pervasive power of the state and the limited existence of private ownership hampered the emergence of an auditing profession. The notion of an independent controller was completely alien.

The situation has gradually changed since 1987. The first step was the creation of the Articles of Association (Charters) for cooperatives. In 1987 the first basic regulations for joint venture operations were issued. Auditing for joint ventures was to conform to Western (international) practice in that audits were to be performed by independent Soviet auditors (commercial auditing organizations) for a fee.

In the past three years Russia’s Ministry of Finance has been working closely with the World Bank to improve auditing. Once approved by the government the Basic Concept of Auditing will cover regulation in all major areas, including preparation and application of auditing standards, quality control of auditing work, and responsibility of auditors. All regulations will be in accordance with international auditing postulates and standards.

A good system of auditing still has some way to go in Russia. Deficiencies include the following:

Soviet and Russian accounting methodology has traditionally focused solely on financial accounting (that is, reporting financial information to interested external parties, such as the Gosplan and ministries). Although cost accounting and cost analysis have been practiced extensively, mostly by enterprise administrators, management accounting (providing internal financial reports to assist management in making decisions) has been largely unknown until very recently. Activity-based costing (which allocates costs back to particular activities or events, reducing the risk of inaccuracies and errors that are prevalent in the traditional costing methods) barely exists. Cost accounting is made more difficult because of the absence of true pricing in Russia, where barter is common.

There is reason for pessimism in the short term and optimism in the long term over the future of accounting in Russia. Russia’s autocratic past together with the Communist experiment between 1917–88 have had a major impact on the frame of mind, the institutional infrastructure, the legal environment, and basic human motivational factors in Russia. It is hard to transform or adapt the Russian scene overnight; considerable patience will be needed by all parties concerned.

In the longer run, there is reason for optimism. The Russian people are highly intelligent and well-educated, and they possess sound skills. They have shown great resilience in the past, and they are well geared to modern socioeconomic norms. The basic propensities are in the right order.

Nonetheless, certain critical issues need to be addressed:

1. The legal infrastructure and legal reforms in all areas of economic activity need foremost attention. No society can work effectively and efficiently without such legal reforms, including commercial laws, tax laws, companies acts, corporate governance rules, and accounting and auditing regulations (acts). Such legal reforms require effective enforcement vehicles, but equally important is the basic acceptance and willingness to adhere to legal norms by all parties concerned.

2. Financial accounting and reporting need to be brought into line with international accounting standards. Greater transparency is needed. While Russia will tend to stick to its uniform charts of accounts (like France and many other countries), accounting measurement and disclosure are expected to be adapted to conform to international standards.

3. Tax reform, which is proceeding very slowly, needs to be accelerated. Too many taxes still prevail, hampering both tax adherence and collection. A more equitable tax system and procedures are warranted. Tax inspectors and administrators need to be upgraded and updated to make them more suitable for modern society. In the past their prime objective was tax collection, and they knew little about tax assessment, accounting or auditing. Tax policy and economic policy also need to be more closely linked.

4. Auditing, a new field in Russia, needs to be improved. Separate examinations for accountants and auditors should be considered.

5. Management accounting and cost management need to be used more widely. Management accounting as practiced in the West is a new area in Russia. Management accounting for planning and control is now taught at all major universities and institutions. The sound practice of management accounting still leaves much to be desired, however.

6. The theory and practice of corporate finance and banking need to be developed. The notion that bank accounting should involve both accounting and evaluation of investments (project and feasibility studies) is fairly new.

7. Education and training need to continue. Educational institutions in Russia have transformed themselves and now teach modern international financial management methodologies. The eagerness of students to learn new techniques is laudable. The wave of Russia’s future lies in its younger generation, who are very eager to adopt and adapt new methodologies. Accounting has become a favorite discipline at schools.

8. Professional institutions need to be strengthened. The Association of Accountants and the professional auditing bodies remain weak, as the Ministry of Finance still maintains tight controls. Professional bodies can be expected to gain greater autonomy in the years to come. They need to establish closer international links and increase the scope of their activities to include training, publications, continuing education, membership activities, and ethics codes.

The international community should continue to assist Russia (and other countries in the region) in its efforts to establish accounting procedures that are in line with international standards. Better accounting in these economies would benefit not only those countries but investors and trading partners in other countries as well.