University of Latvia
Artūrs Prauliņš
THEORY AND PRACTICE OF
STANDARTIZATION OF ACCOUNTING
Summary of the Promotion Paper
developed for the promotion to the degree of
Doctor of Economic Science (Dr.oec.)
Branch- theory of accountancy and bookkeeping
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Riga 2006
General Description of Promotion Paper
Topicality of Research
Over the past years considering multilateral and rapid development of international economic cooperation, free capital flow and traditional activities of corporations, actively supporting the growing role of
international accounting and accounting standards in the national accounting system of every state, paying
special attention to research on accounting standardization process, keeping in mind in particular that this issue
has not been investigated sufficiently in scientific literature on the subject. This is explained by big concern of
society, companies and other users and producers of financial statements only in the process output, and this
concern encourages the researchers to analyze only the standards, paying much less attention to standardization
itself as to the dynamic process, within which new standards elaboration and existing standards upgrading is
taking place. Such an approach is inconsistent and is considered to oversimplify' the process of accounting
standardization. It is impossible to judge upon the necessity or unacceptability of standards establishment, if
there is no understanding about historical accounting traditions of a particular state, cultural factors, business
environment and other factors influencing standardization. Only by researching the reasons for standards
elaboration and upgrading, their transformation process for decades back, it is possible to make conclusions on
consistent pattern of standardization development and point out its future trends.
The essential role of accounting standardization process in Latvia is extensively studied within the
framework of this research. Already more than 15 years since restoration of Latvian independence has passed,
and during this time there were developing hastily accounting regulating normative acts and standards. Not
always this growth was sufficiently successful and by its special ‘‘bottle-neck" may be considered elaboration
and adoption of Latvian national accounting standards. Due to the reasons hardly explicable until now there is
not any research work in Latvian scientific literature that would be dedicated to such a vivid and topical issue.
In its turn the absolute majority of articles in periodicals is dedicated to analysis and critics of accounting
standards contents, paying no attention to accounting standardization problems, weaknesses and errors. It is
worth to remember the words of philosopher D.Hume: ,,If we look at the things from a distance we give the
advantage to the one, which is worth of it." Research of Latvian accounting standardization historical
development and its separate milestones comparative analysis as among themselves as with appropriate
processes in Estonia and Lithuania, gives a chance to comprehend not only the process architectonics, but also
to identify the reasons of failures, estimating repeated error tolerance, and to elaborate suggestions for increase
of process efficiency. Although until now it was impossible to give the unique answer to all the questions
related to accounting standardization process at international and national level, the important role in their
investigations is given to research in accounting standardization theory, the first task of which is to show the
conceptual background for accounting progress in practice and to guarantee its dynamic growth and upgrading.
Research subject and topic
The Research subject is accounting standardization process.
The Research topic is theory and practice of accounting standardization.
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Research objectives and tasks
Research objectives is to investigate and to evaluate historical origins of accounting standardization and
contemporary trends at international and national levels, making suggestions for solving the problems related to
Latvian accounting standards elaboration and adoption and to process improvement.
The tasks put forward to achieve the objective:
• To investigate theoretical aspects of accounting standardization;
• To run the analysis of factors impacting accounting standardization;
• To evaluate the meaning of "true and fair view" concept as fundamental requirements to financial
statements in accounting standardization at regional level;
• To investigate the trends in development of accounting standardization within the European Union;
• To run the comparative analysis of Latvian, Lithuanian and Estonian accounting standardization process;
• To run the research of Latvian national accounting standardization regulating legislation development and
its possible obstacles, elaborating suggestions for increase of standardization process efficiency.
Research limitations
The given paper has characteristic feature, as soon as such an investigation has not been carried out in
Latvia before that is why all the issues related to it are not being analyzed. There is no detailed investigation of
International Accounting Standards Board structure and activities, because this accounting standardization
aspect is traversed widely in other dedicated to these matter publications. Taking into account that during the
last years in particular states the essential changes have taken place in accounting regulating procedures, the
author analyses in detail the process of national accounting standards elaboration in Australia and Germany.
Methodological background and methods of research
Methodological and theoretical background of research are the of foreign and Latvian scientists; scientific
conferences and seminars materials; international, regional and national accounting regulating authority
documentation and developments in the field of accounting theory touching accounting standardization legal
and material aspect.
Literature and sources set in research work:
1. published scientific works;
2. materials from periodicals;
3. Normative acts and projects of their revisions for accounting, preparation and presentation of annual
financial statements, chartered auditors activities as well as minutes of Saeima of the Republic of Latvia,
the Cabinet and its commissions, accounting standardization institutions sessions;
4. summaries of international organizations research results;
5. Documents of International Accounting Standard Board, European Union directives and regulations;
6. results of the author's independent research work;
7. Internet sources.
Writing the paper the standard economical research quantitative and qualitative methods were used,
including induction and deduction, synthesis, comparative and historical analysis, as well as defined with
administrative legislation methods of interpretation for translation of legal norms (philological, systematical,
historical and teleological).
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Period of research
The author has been carrying out research in the field of accounting standardization process since year
2001.
Taking into account that the paper is written in the style of historical research, the topics related to the
paper subject in the basics are analyzed starting with end of XIX century in the USA and Great Britain (first
attempts to standardize accounting) until nowadays. Main attention is paid to the period after 1965, when
elaboration of European Union IV directive project was started.
Research originality and theoretical meaning
The paper has many scientific novelties:
1. the author worked out and advised to apply plenty of new concepts into accounting theory (paradox of
standartization, phenomenon of mercantilism, indirect policy of accounting harmonization as well as monism,
dualism and quasidualism period of accounting standartization in Latvia);
2. for the first time there is done research of Latvian accounting standardization process historical
development as a result of close interaction between several legislation (e.g. the Accounting Law, Enterprise
Annual Accounting Law, Sworn Auditors Law, Standartization law), using systematic principle;
3. there was created Latvian accounting standardization historical milestone periodization;
4. cultural value theory thesis of G.Hofstede – S.J.Gray are used in practice of Latvian accounting
standards adoption for failure explanation;
5. results of Latvian, Lithuanian and Estonian accounting regulation comparative analysis are used to
work out the suggestions for Latvian accounting system functioning improvement;
6. there are identified so far unknown collisions and terminological mismatches in the normative acts
regulating Latvian accounting;
7. there was created a mechanism of enforcement of International financial reporting standards and
Latvian accounting standards in order to provide their observance in practice,
8. the suggestions were given to improve the quality of Latvian accounting standards and to increase
comparability of their contents with International financial reporting standards;
9. the suggestions were given to perfect the activities of Latvian Accounting Board;
10. it is motivated the necessity to elaborate the long-term concept of Latvian accounting and audit system
development;
11. there are defined the trends of accounting standardization development in Anglo-Saxon and
continental European accounting system groups in the appropriate states.
Hypothesis and abstracts claimed for defense
Hypothesis: there is observed growth of state influence and decrease in influence of Anglo-Saxon
accounting standardization model in Latvia. Therewith is being implemented standardization system
widespread in continental Europe.
Abstracts claimed for defense:
1.
Contemporary accounting standardization process is impacted by plenty of factors, among which
exactly the cultural factors have crucially important meaning.
2. International and national accounting standards uniform application is possible to be provided if in the
companies exists effective internal control system, is carried out independent audit, but at the national level
there is created and functions standards observance control mechanism.
3. The primary task of research in accounting standardization theory is to show the conceptual background
for accounting standardization progress in practice and to guarantee its dynamic growth and upgrading.
Practical significance of the Paper and practical approval of the results
Elaborated by the author and addressed to the lawmaker suggestions will provide the proper and precise
practical observance of Latvian national accounting standards, as well as will reduce the existing discrepancies
among national and international accounting regulations. In its turn the suggestions addressed to Accounting
Board will improve the contents of Latvian accounting standards and will increase the process efficiency. This
is why there is a reason to suppose that there is expected growth of financial statement information
correspondence degree to the needs of investors and creditors in the future and complete integration of Latvian
accounting system with international financial standards and European Union normative acts.
The results of the work are published in 6 original contributions in English and in Latvian in recognized
reviewed scientific publications, 4 contributions - in popular-science journal ‘‘Bilance" and 9 articles in
scientific conference abstracts publication.
Wide circle of concerned got familiarized with main results of research both in process of studying,
reading lections and seminars for Latvian University Faculty of Economics and Management students, and
participating in scientific conferences and seminars. The author participated in Latvian University conferences (
years 2003-2006) with reports on research results, as well as in plenty of scientific conferences abroad,
including Tallinn Technical University conference ‘‘Problems of Accounting in Private and Public Sector"
(2004) and Tallinn Technical University' college conference ‘‘Education and Economy 2005" (2005), Tartu
University Economics and Management faculty conference .Accounting and Performance Management
Perspectives in Business and Public Sector Organizations" (2005), Lithuanian Chamber of Auditors
conference ,,Accounting & Audit System Integration into European Union Area. New Challenges and
Opportunities" (2005).
Theoretical and practical results of work were discussed at Institute of Accountancy of Latvian University
Faculty of Economics and Management.
Main scientific development of Promotion Paper
1. Theoretical aspects of accounting standardization
1.1. Concept of accounting standardization
As literary sources comparative analysis speaks, there is no consensus among the researchers in the issue
about accounting standardization and other nearly related to it processes. The absolute majority of the scientists
marks the concept of accounting standardization and harmonization out, but foregoes to give these processes
definition, confining themselves only to contrasting the concepts. For example, such worldwide famous
international accounting theoreticians as L.H.Radebaugh and S.J.Gray point out that harmonization has more
flexible approach than standardization, which aims unification. In his turn C.W.Nobes defines harmonization
as creation of coherent, still not obligatory' standardized accounting practice. According to his idea this is the
way to achieve the general financial information commensuration. In practice this term normally is used by
European Commission, at the attempt to reconcile with help of appropriate directives the accounting regulating
normative acts of member countries. Russian scientist S.Stukov connects the concept ‘‘harmonization" directly
with the ways of possible development of European continental accounting, which historically bases itself on
German accounting traditions, but refers ‘‘standardization" to the process of international accounting standards
elaboration and application, which still is influenced greatly by Anglo-Saxon accounting practical experience.
In his turn J.S.Arpan defines harmonization in a very picturesque way, in particular, ,.feasible, yet slow and
wandering process".
By the author's opinion very precise and comprehensive explanations are given by K.S.Most:
# unification is denial of alternate accounting methods for business operations, activities and
circumstances;
# standardization are limited optional possibilities of alternative methods, to provide flexibility of
accounting;
# harmonization is coordination of different accounting systems, creating common classification, i.e. form
standardization, which saves the essential specifics.
The author recognizes for rather weak the definition of harmonization made by Russian theoretician
M.Balashova - that it is a process, in the course of which International Accounting Standards Board or state
national regulating institution is searching for the task solution, which gives possibility to unify national and
international standards. The author is convinced that confinement accounting harmonization within national
and international standards interaction is unreasonable narrowing of the concept. Also it is hard to agree with
M.Balashova who does not distinguish harmonization and unification, considering the last only as the aim of
harmonization process. The identical objections the author would like to appeal against explanation given by
L.Shneidman, saying that harmonization is elaboration of qualitative solutions of accounting problems, which
should form the basics for national standards unification.
The author is convinced that nowadays harmonization is close connected with standartization. The most
important feature of harmonization is an attempt to achieve comparability of financial information. The
coloration of unification is a tendency to obtain uniformity. This fact complicates its use for integration of
national and international accounting standards remarkably. Thus unification can't be defined as the aim of
harmonization process.
1.2. Factors influencing accounting standardization
Accounting standardization is not just a mechanical process, which is expressed as summary or
compilation of existing accounting methods. This is creative work, being under influence of plenty of factors.
None of the accounting theoreticians deny this thesis; still complete consensus has not been reached in the
question of factors range. The author nominally defines two groups of opinions:
1. C.W.Nobes, R.H.Parker, D.P.Tweedie et alias suggest direct recitation of particular factor influencing
accounting standardization (e.g., political, social and cultural or economical events, international influence,
spreading of theories and ideas, historical contingency and codificators personal opinions);
2. J.D.Daniels, H.Gernon, G.Meek, G.G.Mueller, L.H.Radebaugh et alias consider, that standardization
process is influenced by factors essential for certain state national accounting system.
The author of the paper is convinced that differences in opinions of the mentioned groups in a certain
degree are contrived, because accounting standardization by no doubt is an integral part of national accounting
system. In the same time there exist separate factors, which only and entirely define accounting standardization
development (e.g., already mentioned before codificators personal opinions) and do not touch other aspects of
accounting system. Having research plenty of literary sources the author came to a conclusion that the most
important factors influencing accounting standardization are as follows: state legislative and taxation system,
business financing sources and international corporate activities, organizations of professional booking
accountants, economical and cultural factors. It should be admitted, that the meaning of the last factor in
process of accounting standardization has not been studied comprehensively enough in scientific literature.
If, in pursuance investigations in anthropology, sociology and general psychology since XX century 50's a
number of authors has pointed out the meaning of cultural factors (T.Parsons and E.A.Shild, F.R.KIuckhohn
and F.L.Strodtbeck, A.Inkeles and P.J.Levinson, M.Douglas), then in accounting theory till published in 1980's
works of G.L.Harrison, J.L.McKinnon and SJ.Gray the role of these factors remained obscure. Resting upon
G.Hofstede cultural orientation parameter classification and defined in 1985 J.S.Arpan and L.H.Radebaugh
specific social values directly connected with accounting practice (conservatism, privacy, attitude to business,
attitude to accounting), S.J.Gray defined main accounting sub cultural values (professionalism, uniformity,
conservatism, privacy) for evaluation of cultural factor influence and accounting system development. The
author, using G.Hofstede – S.J.Gray theory thesis for specification of Latvian accounting standartization
process failure reasons, has come to a conclusion, that these are to be looked for in attempts to apply in Latvia
specific to Anglo-Saxon accounting standardization system, when preference is awarded to professional selfregulating process (the standards are elaborated and adopted by independent from the state institution - in
Latvia this would be Association of Sworn Auditors or Association of Accountants), contrary to continental
Europe (which member is Latvia), in terms of which goes on the process of accounting regulating normative
acts (laws, management rules) elaboration. In its turn, if still national standards are being elaborated, they
should be approved with normative acts, thus overtaking partly the force of these documents.
1.3. True and fair view
True and fair view (further TFV) performance is one of fundamental requirements to financial accounts,
which in the same time is considerable parameter of their quality. Surface simplicity of these requirements is
illusive, and the opinion that exactly this criteria may serve as the joining origin for prepared in different states
financial accounts and as a supporting element for standardization or harmonization of accounting looks
unreasonable on legislations multitude background.
TVF is one of most commonly used accounting definitions, but it is not defined nor in EU IV Directive,
neither in international financial account or revision standards, neither in state national legislation. That is why
there is an opinion in accounting theory' that on one hand scarcity of definitions shows actually symbolic
meaning of definition, but on another hand it reveals unlimited and comprehensive character of definition. The
author completely agrees with opinion of English researcher B.A.Rutherford, saying that at the moment TFV
doctrine is short of grounded, and wide-recognized explanation and it seems, that in the nearest future it will be
impossible to fill this gap.
"Motherland of phrase ,.true and fair view" is Great Britain, where it was used for designation of some
household habit starting with XVIII century. In English normative acts this definition was stated first time in
1947 in Companies Act, but at international level - in EU Directive IV (1978), which first project (1971) was
prepared under strong influence of German accounting philosophy. Though German legislation did not
recognize TFV concept, as a result of Anglo-Saxon accounting theoreticians pressure in 1974 it was included
into the second project of the coming directive. Still the project did not give the answer to the question how to
proceed if observance of directive automatically does not provide TFV. There existed two separate points of
view:
ft German approach - observance of directive automatically leads to TFV, but requirement to provide TFV
refers only to the cases, which are not regulated by directives.
# English approach - TFV is super-norma always having prerogative.
Officially won English approach that was stated in final edition of IV Directive. Still the author puts in
doubt this fact having researched the texts of Directive in English and in German.
Table 1
________ Comparison of English and German texts of EU Directive 4 Article 2 Part 3 ____________
Research shows that requirements of German national legislation IV Directive Article 2 were stated with
essential changes. German Trade Code ( Handelsgesetzbuch, 1986) considers that if according to ‘‘appropriate
principles of accounting procedures" (Grvndsatze ordmmgsmassiger Buchfuhrung) the prepared financial
account do not give TFV, additional data should be given in notes (im Anhang). It should be mentioned, that
Directive does not consider such restrictions. Point of view, that presentation of additional information in notes
is enough to provide the sufficient TFV, was stated in so called doctrine of ‘‘separation-uncoupling thesis"
(German - Abkopplungslhese). Its radical voters (H.Beisse, A.Mohter etc.) are convinced that TFV refers only
to notes, but balance sheet and profit and loss account should be prepared according to stated in German
normative acts ‘‘appropriate principles of accounting procedures". By author's opinion this statement comes
into strict contradiction with contents and meaning of IV Directive Article 2. In their turn other German
theoreticians (W.Budde. G.Forschle, J.Hartle, D.Ordelheide), accepting the need to correct the balance and
profit and loss account due to TFV, in the same time consider that this correction should not contradict
‘‘appropriate principles of accounting procedures".
In the result of comparative analysis the author concludes, that TFV definition has its specifics in national
legislation of other EU member states (Table 2). The table shows that in the text of IV Directive the absolute
majority of member states as national analogue for definition ‘‘true and fair view" uses ‘‘plausible" (excluding
Greece - ‘‘real" and Germany - ‘‘corresponding to real facts"). Definition is dual only in Great Britain and
Ireland (true and fair view) in other states it is monostructural. In national legislation of member-states this
definition is dual in Great Britain and Ireland (‘‘true and fair"), in Italy (‘‘plausible and correct"), in Netherlands
(,,plausibie, fair and logical") and in Portugal (‘‘plausible and proper"). In the same time in other member states
monostructure is used.
Table 2
National analogue for definition "true and fair view" in legislation of some EU member states
Literature gives different forecasts of TFV concept development trends within the European Union. The
most powerful and scientifically grounded is opinion of C.W.Nobes, who determined 3 scenarios of
development:
TFV prerogative - exists in Great Britain and Ireland, where it is actively used by executors of financial
accounts, but also national accounting standardization institutions. By the authors opinion this brings serious
challenge to unique understanding of the concept in the European Union, because there is a contradiction with
Contact Committee explanation, in particular, TFV prerogative should be used only in special cases for certain
companies, not for all companies or for certain category of companies. In its turn in Great Britain this ‘‘special
case" became a legal pattern in national accounting standards.
2. orentation.to.TFV prerogative - takes place in Denmark, with some stipulations - in France, Spain and
Portugal. Still in the last 3 states yet is felt very strong impact of legalism. For example, the widespread opinion
in France is that concept of ‘‘image fidele" should be used only in the cases when the issue has no normative
regulation.
3 normatiye.regulation prerogative - is observed in Germany and in Italy. Though some German
scientists (e.g. H.-H.Otte) stipulate optimistically that interpretation of existing TFV concept may change with
time, still by the author's opinion German lawmaker yet in less degree that French colleagues is trying to
accelerate this process. Such a position should not be criticized, more likely it would be needed to join the
opinion of D.Ordeiheide, saying that German national regulation tends to resist harmonization processes within
the European Union.
Concluding, the author states, that formal stipulation of TFV concept in IV Directive did not provide real
uniformity in its interpretation, which significantly differs in the states belonging to Anglo-Saxon and
continental Europe accounting systems
2. Accounting standardization process
2.1. National level
Growing popularity of accounting standardization process both at international, and at regional and
national level, impresses in a certain way also the states belonging to accounting systems of continental Europe,
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such as Germany, where historically the only source of accounting regulation were considered to be normative
acts. In the same time German accounting standardization process has plenty of essential peculiarities.
Elaborated by German Accounting Standards Committee (Deutsches Rechnungslegungs Standards
Committee) national standards (Deutsches Rechnungslegungs Standards) according to German Trade Code
{Handelsgesetzbuch) Article 342 are necessary for all the companies, which annual accounts are regulated by
this Code. Starting with 31 December, 1997 Article 292 of the Code allows German mother companies to
prepare consolidated annual accounts according to international accounting standards (including US GAAP)
and not to follow German national accounting standards, if at least one of consolidated enterprises sells
securities at regulated markets. National standards dedicated to non-stipulated in internationally recognized
standards (for example, to show the aspects connected with risks), furthermore also will save its binding force.
Mentioned before means that only and just German national normative acts continue to regulate earnings
distribution and separate tax annual account preparation. Along with this it is not planned in Germany to
change neither to national nor to international accounting standards, confining their field of use only in terms of
consolidated accounts. This shows retention of normative acts priority as of the main accounting regulation
source also in the coming years.
Totally opposite situation is observed in Australia, one of the first world's industrialized states, which
completely changed over to international accounting standards system. Starting with 1 January, 2005 according
to Australian Financial Reporting Council elaborated in 2002 strategy international standards replaced national
ones and became the so called Australian equivalents of international standards. Still the author's research
shows that speaking about complete identity of these equivalents to international standards may be only
nominal and with certain conditions. Though general approach of Australian Accounting Standards Board
considered maximum reservation of both international standard terminology, both the contents, still in separate
cases the standards were subject to serious editing process: alternative accounting methods were put out of
them, as well as requirements to submit additional information were included, its submission was considered
till 1 January, 2005 by existing Australian national accounting standards.
In the same time may be appraised ambiguously the requirements to accounting standard elaboration
process in Australian Securities Commission Act to meet general objectives specified in Article 12 (support of
Australian economics development, care about trust of investors, etc.). Though in the report ‘‘Australian
Accounting Standards Board adoption of IASB standards by 2005" the institution informed about complete
conformity of transitional process to legal requirements, there is a chance that in the future the Board will not
adopt some of international standards, considering that its taking over will come into contradiction with some
of the law objectives. Though up to now there has not been occurred such a case, the author concludes, that
such position of Australia reminds a lot the position of the European Union, when normative acts comprise a
denial mechanism to reject some of International financial reporting standard to be liable.
2.2. The European Union
First step on the way to accounting harmonization in Europe was done on 25 March, 1957, when in Rome
was signed European Economical Community Foundation Agreement. Despite the issues referring to
accounting were stipulated separately neither in that, nor in the further agreements, their importance results
from united market creation task. During the first years accounting harmonization had more political objective
- to establish the united market positions, to increase its meaning and to provide free flow of capital from one
state to another, stimulating in such a was development of enterprising within the Community, which is
impossible in case financial reporting of different states can not be comparable. One of the most important
means to achieve the goal were Directives, as one of Community's normative acts types. Opposite to the rule
this does not require unification of rights, but reconciliation or harmonization of rights, which is the most
essential element of integration. At the moment harmonization of accounting forms part of member states
Company Law reconciliation programs (Table 3).
Table 3
Directives regulating accounting in the European Union
The biggest meaning in harmonization of accounting process had IV and VII Directives. By opinion of
some researchers (B.Giner, A.Mora, E.Rees etc.) the most essential changes in influence of directives happened
exactly in formulation of financial reporting preparation objectives - if initially it was simply a basement for
calculation of tax and paid dividends, then later became an important data medium for creditors and potential
investors. Particularly bright these changes designated in the states, belonging to continental Europe accounting
cluster (Austria, Belgium, Spain, Germany, etc.), where financial accounts orientation to outer users was
historically minimal.
In its turn one of the VII Directive most essential achievements was consolidated financial reporting
popularity growth in Austria, Belgium, Greece, Italy, Spain and other member states, where they were not
widespread before. Mentioned Directives significantly influenced also Latvian normative acts, especially
Enterprise Annual Reporting Law and Consolidated Annual Reporting Law.
Comparative research shows that IV Directive is very much alike US Securities and Exchange
Commission rules S-X, which required from the listed companies to present their annual and quarter reports on
net turnover and changes in sales. IV Directive did not comprise the last issue, because at EU level it was
historically regulated by Directive to Publish Interim Financial Reports from 15 February, 1982.
Taking into account, that IV Directive appeared as a result of compromise between Anglo-Saxon and
continental European (mostly German) approach, there was not achieved any univocal agreement concerning
different issues, regulated by this normative act. As a result the Directive allows to apply multitude of
accounting methods. By calculations of A. Haller and P. Walton there are at least 76 alternatives considered by
this directive at the moment. Similar multitude exists in other directives. Along with this the author concludes
that implementation of IV Directive into national legislation of member states still did not provide complete
commensurability of financial reporting from different EU member states and yet persist to exist the necessity
to consider the specifics peculiar to accounting system of each state. Still by the author's opinion normative act
sufficiently enough succeeded to achieve the Directive objective mentioned in the preamble- ‘‘it is necessary to
stipulate legal requirement for unique minimum of finance data, which is presented to society by the
companies".
2.3. Growth of International Financial Reporting Standards influence
Though the input of directives into reconciliation of EU member states normative acts regulating the
accounting and into improvement of financial accounts comparability is indisputable, during the last years
globalization processes taking place in the world sufficiently decreased their meaning. Free flow of capital was
one of the reasons of attempts to conquer foreign (first of all American) Stock Exchanges by European
companies. This needed financial reporting not only according to EU directives, but also according to
International financial reporting standard and/or US GAAP. In its turn US Securities and Exchange
Commission liability to permit in the nearest future quoting of such companies which prepare their financial
accounts according to international standards, yet decreased the meaning of EU directives both in the
community and worldwide, in particular, taking into account that attempts carried out by European
Commission in 198O's-1990's to achieve similar privileges for financial accounts prepared according to
directives requirements failed.
That is why since the beginning of 1990's EU politics has dual character: on one hand it is orientated to
diminish the differences between the directives, US GAAP and International financial reporting standards, on
another - to reservation of union's influence upon accounting development process worldwide as big super
national organization (Table 4).
Table 4
Most significant milestones of European Union accounting adaptation to
International Financial Reporting Standards
In its report for year 1995 European Commission clearly stipulated its politics concerning further
improvement of accounting, specifying that growth of international standards and US GAAP meaning makes
unreasonable further development and improvement of European accounting. Along with this it is necessary to
approximate the directives regulating European accounting to international financial reporting requirements. In
1996 Contact Committee research aiming to appraise correspondence of the directives to international
standards showed that directive requirements with some exceptions in general do meet international standards,
but under condition that the alternative methods they comprise will be applied in a standard friendly way.
In April of year 2000 Summit of member states in Lisbon accepted the particular plan of activities, where
was stated mismatching of directives with contemporary requirements and was recognized the necessity of new
unified high quality accounting standards. On 13 June, 2000, the adopted ‘‘European Union Financial Reporting
Strategy" legally approved a very important resolution - not later than year 2005 all the EU member state
companies, participating in share quoting at stock exchange, as well as banks and insurance companies should
prepare their consolidated financial accounts according to International financial reporting standards.
To achieve the task stipulated in the strategy European Commission published on 13 February, 2001 the
project of rules, and on 19 July, 2002, European Council and Parliament adopted Regulation 1606/2002 ,,On
the application of International accounting standard", which is binding not only for EU members but also for
members of European economical zone (e.g., Norway). The document obliged all of registered in any member
state companies, selling their shares at some of member states regulated markets (e.g., stock exchanges) or if
their shares are sold in public, to prepare consolidated accounts according to accepted in EU International
financial reporting standards starting from 1 January of 2005.
In the same time the European Union has a tool, which can help not only to support, but also to resist
observance of such international standards, which comes into contradiction with union's politics. This is
European Union Approval Mechanism, which assigns EU legal status to International financial reporting
standards. For maintenance of the mechanism a special control group was established - European Financial
Reporting Advisory Group or EFRAG, that directly helps to implement the Committee intentions not only to
match the directives with international norms, but also to save its influence on International Accounting
Standards Board activities and elaboration of new standards. Along with this the author considers Advisory
Group to be a consolidating element between European Commission as public legislative entity and the Board
as a private author of accounting standards. In its turn establishment of ‘‘approval mechanism at political level"
or Accounting Review Committee in February of 2001 shows, that European Union plans to reserve the right to
use only such International financial reporting standards in the future, which will be approved with this
mechanism and thus will meet the unions interests.
The author is convinced that this "selection method" policy will constitute a menace to International
financial reporting standards as a unitary criterion of accounting information all over the world. At the same
time mentioned policy will have bad influence on some countries (for example, the USA) and slow down the
pace of convergence process.
2.4. Accounting standards requirements observance control mechanism
If till the end of 1990's in discussions about international financial accounting standards mostly was used
English term ‘‘endorsement" (=approval), in the last time it was replaced with ‘‘enforcement" (=violent
implementation). The author agrees with opinion of some researchers (C.Leuz, D.Nanda and P.D.Wysocki) that
accounting regulation may limit abilities of company management to distort results of financial activity; still
degree of management control depends on efficiency of forced implementation of mentioned regulations.
In practice observance of legal requirements and uniform application of standards in general is guaranteed
by a 3-level system:
1. internal company control system and orientation of management to qualitative financial reportingcompanies, which quote their securities at foreign stock exchange have bigger motivation to observe the
standard requirements, because being at the same time the subject of different states legislation control brings it
a bigger risk to get into court and pay the penalties in case of any breaking the rule or mismatch.
2. independent audit - results of many research works [e.g., M.L.DeFord and J.Jiambalvo (1991-1998);
C.L.Becker and K.R.Subramanyam (1998); P.Gore, P.F.Pope and A.K.Singh (2001); J.Francis and D.Wang
(2003) etc.] show that audit made by big international audit companies is able to decrease the range of incomeloss distortion methods, still the limiting effect in different states worldwide is not identical.
3. creation and functioning of observance control mechanism
The author suggests dividing the organizations participating in process of accounting regulation into 3
groups:
1. elaborate regulations (‘‘organizations-lawmaker") - for example, International Accounting Standards
Board and US Financial Accounting Standards Board,
2. implement regulations ("organizations-executors") - for example, Committee of Stock Exchange
Operations in France;
3. elaborate, implement and control regulations observance (complex type) - for example, US Securities
and Exchange Commission.
As European Federation of Accountants-experts (Federation des Experts Comptables Europeens) stated in
2001. structure and functioning principles of organizations responsible for company's observance of financial
45
accounting requirements differ much depending on European state. In separate states such institutions were not
established at all (Table 5).
Table 5
Consolidated annual reporting supervision mechanisms in Europe in 2001
Both in criteria published by European Federation of Accountants-Experts in April, 2002, and in standard
Nr. 1 "Financial information: observance of financial information standards in Europe" issued by Committee of
European Securities Regulators is frequently pointed as to the necessity to establish observance control
mechanisms in the states without the one, as to necessity to increase the efficiency of existing mechanism. The
summary on functioning of existing or planned mechanism in some European Union member states is given in
Table 6.
Table 6
Comparative description of observance control mechanism of several EU member states
By the author's opinion business community and financial market members should not indulge in special
illusions, because effective functioning of certain observance control institution does not mean that such model
will be applicable in other state. In the same time as universal and referring to absolutely all states may be
recognized the consistent pattern revealed as a result of R.Ba/1, A.Robin and J.S.Wu and south-east Asian states
research (2003). In the same time as universal and referring to absolutely all states may be recognized the
46
revealed consistent pattern saying that motivation of the companies to observe the requirements of accounting
standards depends directly on the penalties, threatening for breaking the standards. As soon as the costs of
observance of financial account requirements exceed the penalties for mismatch, this problem will remain
actual.
2.5. International level
International financial reporting standards are result of independent private organizations work International Accounting Standards Board. The reason for establishment of this institution was recognized
necessity of unified accounting ‘‘language", which would help companies from different states to communicate
with potential share-holders and creditors, attracting necessary resources to capital markets, tending to
globalization. This would decrease number of financial account agreement procedures with accounting
regulations of different states for transnational corporations and international audit companies, as well as the
costs of consolidated annual reporting and revision preparation. Thus these standards were considered to be a
good solution of the problem for the states without a sufficiently detailed and qualitative national accounting
legislation.
Initially International accounting standards had descriptive character and they comprised big range of
alternative accounting methods. This lowered comparability of financial reporting. In reply to active critics in
the middle of 1980's International Accounting Standards Committee (predecessor of International Accounting
Standards Board) started in 1987 realization of Comparability Project. The number of options was decreased
and requirements on transparency of information were put more strictly in the revised standards (in force since
1995).
Since 1987 committee successfully cooperated with International Organization of Securities Commissions
with regard to make observance of international standards be a primary condition for quoting the shares of
appropriate company at stock exchanges of all the states members of this organization, without revision of
accounts according to national accounting standards of a certain state. Signed in May of year 2000 agreement
substantially increased the meaning of international standards, encouraging free flow of capital.
Author's research show that nowadays in different states worldwide exist 3 main options of international
financial account standard application:
1. volunteer application - big transnational companies (e.g., Microsoft, IBM, etc.) are interested themselves
to attract foreign capital and to simplify appraisal, summarization and analysis of branch activity- results in
different states.
2. primary condition of capital market resource use - in Switzerland, Turkey, as well as in European Union
listed companies and banks are required to prepare their consolidated financial accounts according to
International financial reporting standards. By the author's opinion a disadvantage of such an approach is
separation of capital market into nominally constant system, which would parcel out unified regulation of
national economics.
3. coexistence with national documents for regulation of accounting process Haws, national standards, etc.)
- normative acts of separate states (e.g., Austria, France, Netherlands, Sweden, etc.) allow to prepare financial
accounts not only according to national requirements, but also according to international requirements.
In most cases the requirement of national documents are agreed with international standards (states with
long history of national accounting standard elaboration - the USA, Great Britain, Canada, etc. are
exemptions), but in the same time:
#
have certain specifics (Iran, China, Slovenia, etc.);
# requirements of some national documents are more detailed that international standards (Brazil, France,
India, Ireland, Portugal, Switzerland, etc.);
# each national document has an enclosure, with comparison of national requirement and analogue
international standard text (Australia, Italy, Sweden, former Yugoslavia countries).
4. replacement of national standards with international standards - the author considers that complete
denial of independence in regulation of accounting and financial accounting obstructs the state to
influence and to control the development of accounting regulation. That is why this option is widely used
in the states with low developed accounting system, which having lost their independence may only
improve the quality of financial accounting (e.g., Brunei, Jamaica, Kenya, Trinidad and Tobago, etc.).
Some states practice to elaborate additionally their national accounting standards for regulation of the
issues, non-stipulated in international analogues (e.g., Australia, Papua-New Guinea, etc.).
Research by international audit companies organized in 2000-2001 showed, that national requirements
regulating consolidated annual reporting of the companies, which quote their securities still differ much from
international ones. Anyway in terms of GAAP Convergence 2002 project aiming to revise the contradictions in
planned activities of different states, was stated that governments or national standardization institutions of
almost all the states, participating in the research (95%), excluding Iceland, Japan and Saudi Arabia, had
already taken resolution on coordination of accounting systems or on complete-partial transfer to international
financial account standards.
But in the result of comparative analysis may be stated that there is multitude of strategies of planned
coordination:
• more than a half (58%) of respondents plan to replace national standards with international ones at 1
stage, referring the last only to listed companies, and to complete the cluster of international standards
with such national standards, that meet the specifics of certain state accounting system. By the author's
opinion the governments of these states are aware about possible problems that arise from rapid
replacement of national standards. At the same time author doesn't consider this strategy as a perfect
one. In the case of basic unconformities it is advisable to apply rapid replacement method because the
adoption and amendments of international standards will extend the process of approximation of national
and international regulation.
• part of respondents (22%) chose the way of gradual, but complete transfer. The study indicates that this
strategy is popular in states, where national regulation is in line with international standards on the whole
(e.g. Australia, New Zealand and Republic of South Africa).
• The rest of respondents (20%) plan to liquidate the differences between national and international
standards by way of improvement - typical example is the USA. Keeping in mind, that basics of manyInternational financial reporting standards are taken from US GAAP, any additional motivation of such a
decision is excessive. Memorandum signed by International Accounting Standards Board and US
Financial Accounting Standards Board in October of 2002 (so called Norwalk Agreement) assured the
organizations to continue cooperation, coordinating their activities and implementing common projects:
# -Short-term projects- achievement of convergence only such fields (aborted transactions, income
taxes, interim financial accounts, non-cash turnover accounting), where high quality solutions may be
found in short time, i.e. making choice between international or US GAAP accounting methods.
# long term and coordination.projects_- elaboration of principally new accounting standards (revenue
recognition, share payment accounting), thus liquidating the possibility of any difference between new
standards.
48
3.Standardization of accounting in the Baltic States
3.1. Standardization of accounting in Latvia
3.1.1. Pre-standardization period
Adopted on 14 October, 1992, Accounting Law IV part item 15 obliged the government of The Republic
of Latvia to establish Accounting Tutorial Board and defined its competence, which was not limited with
elaboration and appraisal of draft laws, but in addition comprised issues of professional education, certification
of accountants and analysis of computer program compatibility. Comparative analysis shows that none of the
Boards' successors had such a diversified field of activity.
By the author's opinion abrupt demolition of soviet governing mechanism and the need in new system
meeting requirements of market economics was the reason to establish the limited number of new institutions
(including Accounting Tutorial Board), to widen the scope of competence.
Certain specifics had the Cabinet Regulations Nr.34 ,.On Accounting Tutorial Board" from 21 December,
1992, which appeared in forgotten today casuistic air and determined not only general principles of Board
activities, functions and rights, but also particular members of the Board. As positive aspect of board member
assignment the author would like to mention active involvement of scientific research institutions. None of
other Latvian Accounting Tutorial management institution used so many academics, which by the author's
opinion is one of the reasons of Latvian accounting standardization mechanism failure.
3.1.2. Latvian Accounting Standards Consultative Board
Though some of literary' sources bind the origin of Latvian national accounting standards with
amendments to Saeima Accounting Law from 6 November, 1996, the author's research shows that definition
‘‘Latvian accounting standards'' and idea of national accounting standardization were used much earlier- when
Regulations Nr.270 ‘‘Amendments to the Accounting Law'' were issued by the Cabinet according to item 81 of
the Constitution on 23 July, 1996, which considered to delegate the rights of standard elaboration, amendment
and publishing to Latvian Association of Sworn Auditors. There was planned to establish Accounting
Standards Consultative Board with much less number of representatives than in Accounting Tutorial Board,
which decreased from 12 to 3 organizations. Along with this none of higher educational establishments or
scientific institution was represented in the Board.
It is impossible now to give clear answer why the Cabinet decided to change the existing tutorial
management of accounting system and to create standardization mechanism. The author thinks that one of the
most important reasons was insufficiently detailed and different from international accounting standards
regulation, as well as gradual merger of financial tax accounting, making financial account a tool in definition
of taxable item.
Comparing the main tasks and functions of Accounting Tutorial Board of the Republic of Latvia, Latvian
Association of Sworn Auditors and Accounting Standards Consultative Board the author concludes that the
goal of the Cabinet's law alteration was to change completely the existing at that time tutorial management
system. The Cabinet planned to split Tutorial Board's tasks and functions into 2 parts. Advisors functions in
limited scope were planned to be delegated to new establishment Latvian Accounting Standards Consultative
Board, and legislative functions (elaboration, adoption and amendment of standards) - to Latvian Association
of Sworn Auditors.
Recognizing the necessity to ensure binding character of the criteria for producing financial accounts to
accounting standards of the Republic of Latvia mentioned in amendments to Accounting Law, the Cabinet
made respective amendments to the Enterprise Annual Reporting Law on 30 June, 1996. Unfortunately the
author has to state that essential inconsistency in terminology was typical even of these amendments. For
example, it was not practically possible to meet the commitment set for auditors to approve the relevance of
annual reports to commonly recognized accounting standards of the Republic of Latvia because such concept
was not mentioned neither in the Enterprise Annual Reporting Law nor in the Accounting Law.
Taking into consideration that this stage of Latvian accounting standardization has not been investigated
in scientific literature the author decided to clarify the reasons of rejection of suggested project and studied
short-hand notes of Saeima autumn 1996 session. To avoid the suspicion of coming back to soviet governing
rules it was decided to include issuing of Latvian accounting standards into the Cabinet competence, but to
authorize Latvian Association of Sworn Auditors to work with draft standards elaboration and agreement with
International accounting standards and European Union Directives.
The author considers Saeima Enterprise Annual Reporting Law to be a contradictory issue. Lawmaker
gave the advantage not to united criteria (as was considered in amendments of the Cabinet), but introduced the
whole 3 compliance criteria combinations:
1. Accounting Standards of the Republic of Latvia (cash flow accounting);
2. Accounting Law and Enterprise Annual Reporting Law, as well as originating from them accounting
standards of the Republic of Latvia.
3. Enterprise Annual Reporting Law and Accounting Standards of the Republic of Latvia (audit report on
results of inspection).
The purpose of such diversity is difficult to understand. It is possible that Saeima used definitions developed by
Cabinet and did not correct them in order to achieve necessary correlation.
The study indicates that Enterprise Annual Reporting Law edition after amendments by Cabinet and
Saeima was the only period, when the obligation to observe national accounting standards was incorporated in
the above mentioned law: It was possible to identify this obligation only from the Accounting law during the
other periods.
3.1.3. Latvian Technical Committee of Financial Accounting Standardization
There was not clarified in the Accounting Law the procedure by which draft standards of Latvian
Association of Sworn Auditors may become the binding standards by means of the Cabinet regulations. This
disadvantage of the normative act has become a long-term and serious obstacle on the way of Latvian
accounting standardization.
With regard to accelerate the process of standard "legalization" in result of discussions among the
concerned in accounting standardization institutions which took place in September of 1998 there were made
conclusions that adoption of Latvian accounting standard by means of the Cabinet regulations makes
substantially longer not only their implementation process, but also the procedure of amendments. Though
participants of the discussion made a lot of suggestions to improve the situation, the biggest interest caused one
of Ministry of Finance concepts, in particular, to change the legal status of Latvian accounting standards and to
transform them into recommendations issued by professional associations, accelerating in such a way the
process of standard adoption, but liquidating the ground their obligatory application in practice. One of the
most essential disadvantages of this variant considered by the Ministry was the necessity to make amendments
in the laws (for example, "On accounting", "On enterprise annual accounts", "On investments societies", etc.)
and in some regulations of the Cabinet, excluding from their texts the words "accounting standards of the
Republic of Latvia", which would lead to "complete separation of financial accounting from tax accounting and
to their development in different directions".
By the author's appraisal this quotation with no doubt indicates the problem of Latvian accounting
standardization and complete misunderstanding of the objectives from the part of Ministry of Finance, because
the Ministry has not recognized yet that basic task of national accounting standards is to provide separate
existence of financial and tax accounts, diminishing the influence of politics and scope of data, contents and
quality of financial accounts.
Establishment of Technical committee of financial accounting standardization on 14 May, 1999 realized
the concept of the Ministry of Finance. Comparative analysis shows that the committee was founded no only as
Accounting Standards Consultative Board successor and function performer, because its competence and scope
of issues to be solved was substantially enlarged (for example, elaboration of unique terminology, search for
financing, etc.).
Further the process of Latvian accounting standard elaboration was regulated by Standardization Law.
Though national standards adopted by the committee were based on International accounting standards, there
was attempted in separate cases to coordinate their contents with Latvian normative acts. The author found that,
for instance, evaluation method "LIFO" was excluded from the standard "Stocks", because its application was
not specified in item 31 of the Enterprise Annual Reporting Law. But in some cases the committee made
serious mistakes, completely contorting the meaning of relevant international standard.
In result of performed research the author concluded that the most substantial reasons of problems met by
Latvian Technical committee of financial accounting standardization in process of elaboration and
implementation of Latvian accounting standards were as follows:
1. status of standards - the standards adopted by procedure defined in Standardization Law did not have
obligatory observance status;
2. insufficient and miserable..state financing- Standardization Law considered provision of state financing
for elaboration of national standards in regulated field. In non-regulated field (including accounting)
standardization process had to be financed by legal and physical entities, which are concerned in the standard
application. As the practical experience shows this source of financing was insufficient to provide normal
functioning of the committee.
3. inaccessibility, of the.standards to.wide.audience of accountants - state non-profit organization "Latvijas
Standarts Ltd." had exclusive rights of Latvian accounting standards, which substantially limited spreading of
these documents, because they were not distributed in trading network and they were possible to receive by
individual order in the mentioned institution for the fee unreasonably exceeding its self cost.
4. separation of competency - lack of effective coordination in activities between ministry of Economics,
realizing the state politics in the field of standardization and Ministry of Finance, responsible for state politics
in accounting methodology.
3.1.4. Accounting Board
Amendments of Accounting Law from 15 May, 2003, for the third time during the last 7 years principally
changed Latvian accounting standardization system. With their help was performed one of the most essential
novelties in accounting theory, in particular, there was introduced Latvian accounting standards definition.
Using of system translation method, the author concludes that it was elaborated on the basis of existing
definition of general standard in Latvian legislation (Article 12 of Standardization Law), yet considering the
specifics of certain branch (in this case - accounting), in the same time reserving the basic statements of
general definition (in particular, commonly and frequently used instructions for optima) functioning of the
named branch).
Comparative analysis of Accounting Board and its predecessors tasks and functions shows that field of
newly established institution has substantially enlarged due to the better regulation in the Cabinet Regulation
Nr. 437 "Accounting Board Statutes". The author suggests to define 3 main fields of Accounting Board
activities:
51
# passive functioning - appraisal of drafts or being in force normative acts elaborated in the field of
accounting and presentation of suggestions for their amendment to Minister of Finance;
# active support and promotion of standardization process - promotion of quality improvement and of
coordination with International accounting standards of accounting standards and regulations;
# headway of standardization - organization and management of elaboration, discussion and agreement of
draft Latvian accounting standards and their amendments, issue and implementation of Latvian accounting
standards.
By the author's opinion issue of amendments to the Accounting Law and to Accounting Board Statutes
solved two biggest problems in functioning of Latvian Technical committee of financial accounting
standardization - on one hand - lack funds provision procedures un consequently failure to invite technical
specialists and linguists to provide the proper operation of the committee, as well as - on another hand precisely defined liability of ministry of Finance to provide operation of Accounting Board (not a single
supervision of standardization process by Ministry of Finance and Ministry of Economics). The author is
convinced that these amendments are preconditions of successful further development of Latvian accounting
standartization, whose aim is not only the regulation of financial reporting, bet also the integration of Latvian
national accounting system, European Union directives and International financial reporting standards.
3.2. Standardization of accounting in Estonia
Development of national accounting in Estonia may be divided into 3 stages:
1. 1991-1994 - the Accounting Regulations issued by Estonian Government on 6 July, 1990 (in force
since 1 January, 1991) was first normative act, specifying the start of transfer from planned economics to
market economics in the field of accounting. This normative act is characterized by mixture of soviet past (old
terminology and view of authorities as main users of accounting information), contradictory present
(implementation of new accounting methods and accounting principles) and unclear future (use of terms, the
meaning of which became clear much later). Serious problems of this stage were caused by low quality of
financial reporting, as well as by close interaction of financial and tax accounting model.
2. 1995- 2002 - the Accounting Law issued by Estonian Parliament on 8 June, 1994 (in force since 1
January, 1995) introduced the new concept - "Estonian commonly recognized accounting principles". Article 3
of the Law obliged all the entities subordinated to this law and despite of their activity and other quantitative
criteria, to perform accounting and produce financial accounts according to the mentioned principles, which
had to reply on the standard adopted by International Accounting Standards Board and on its interpretation
requirements.
The content of these principles originated from Estonian Accounting Law norms and National Accounting
Board guide-lines (or accounting standards). In the same time there should be specified that Estonia was the
first European state, which declared with the law international standards to be the basics for national
accounting.
A separate part of the law regulated in detail the establishment procedure and activity of National
Accounting Board. In 1995-2005 the Board elaborated and adopted 16 Estonian national accounting standards,
but on 30 December, 2002 there were adopted 11 modified versions of accounting standards. Also the Board
actively used its authority to elaborate and to adopt definitions of accounting standards, as well as other tutorial
recommendations to complete the Accounting Law (on accounting principles, financial accounting, revenue
recognition, unification of commercial activities).
3. since 2003 - by the Accounting Law from 22 November, 2002 (in force from] January. 2003) National
Accounting Board was assigned to have status of independent authority. At the moment 17 standards adopted
by the Board are in force in Estonia (12 of them - in new edition 1 January, 2005), which may be characterized
as "mini version" of International financial reporting standards. The law allows to apply international standards
in place of national ones, producing both individual and consolidated accounts. Estonia is one of the first
European states, which gives the companies such right of choice. At a certain degree this is a result of financial
and tax accounting isolation since 1 January, 1994, when came into force the new Income Tax Law. At the
moment not all the income, but only the amount paid in dividends is taxable in Estonia. Thus company activity
results determined in financial accounts do not influence the tax base and state budget revenues. As the
practical experience shows big companies normally choose the complete version of international standards, but
small and medium enterprises stay loyal to national regulations.
The most essential differences between Latvian and Estonian accounting systems found by the author are
shown in Table 7.
Table 7
Differences between Latvian and Estonian accounting system regulation
Estonia considerably outdistances Latvia not only in area of national accounting standardization, but also
conferring the right to make a choice between national and international accounting standards. The author is
convinced that this option is preferable in Latvia also, but till the reform of tax system and limitation of
interaction of financial and tax accounting the mentioned proposal can't be fulfilled in practice. At the same
time it is necessary to analyze the possibility to derive from Estonia practice of adopting national accounting
standards without international analogue (i.e. combination of several international standards in order to create
one national standard).
3.3. Standardization of accounting in Lithuania
Development of national accounting in Lithuania may be divided into 3 stages:
1. 1990-1992 - the origins of Lithuanian accounting system transfer to market economics may be found in
1988-1992, when was started discussion about the necessity of elaboration of Lithuanian Accounting Law.
With this regard a specially established working group finished elaboration of first edition of draft law in July
of 1990. In attempt to avoid the specific for instructions style, was created normative act which determined
only general accounting procedures and basics of financial accounting. Draft law discussion continued
unreasonably long time - almost 2 years. In its turn Government resolution ,,On Accounting organization and
responsibility" adopted on 17 December of 1991, declared that Lithuanian accounting reform will rely on
International accounting standards and authorized Ministry of Finance to implement the first 5 standards, and
did not come in force.
2. 1993-2001 - On 18 June of 1992 Lithuanian Parliament accepted resolution ,.On accounting principles'"
(in force since ] January, 1993), which authorized the Government of Lithuanian Republic to run general
tutorial management of accounting. Keeping in mind, that the law itself had rather general character,
government actively used its authority. As a result a sufficiently important part in the reform acted Government
Resolution Nr. 804 from 27 October, 1993 ,,On Financial accounting in the companies with legal entity status"
and Government Resolution Nr. 8 from 4 January, 1995,,On Financial accounting in the companies without
legal entity status". These normative acts were successfully completed by other government resolutions, as well
as by instructions from Ministry of Finance and state fiscal institutions.
Still the quality of accounting regulating documentation was rather low. Exactly that is why accepted on
10 June, 1997 concept of Lithuanian accounting system reorganization and development considered a scope of
important measures, including elaboration of new Accounting Law and preparation of national accounting
standards. After active discussions taking place in the end of 1990's, which concerned accounting
standardization necessity, feasibility and its possible trends of development ( elaboration of national standards
or taking over of international standards) there was taken a decision to start a two-kind national accounting
standards elaboration: Ministry of Finance was responsible for budget institution accounting standards and
Lithuanian Accounting Institute was authorized to elaborate the standards for revenue oriented enterprises.
Till year 2001 the Institute managed to prepare 15 projects of national accounting standards, which met
EU Directives IV and VII, as well as International accounting standard requirements. This process was
especially active in the second half of 2002, when on 19 December first 11 national accounting standards were
adopted. On 20 December, 2003, 9 more standards added, and on 10 November, 2004 - the following 5
standards. The process standards elaboration goes on.
3. from 2002- on 6 November, 2001 Lithuanian parliament adopted Accounting Law, Financial Accounts
Law and Consolidated Financial Accounts Law, which were under edition for many years. In parallel stayed in
force as some of adopted before Government Resolutions (e.g., ,.On inventory procedure, ,.On cash-desk
operation organization"), as newly elaborated government and Ministry of Finance documents (e.g., ,.On
accounting of insurance societies", ‘‘On Accounting of profit-free organizations").
The author thinks that the most important of the mentioned normative acts novelties was Accounting Law
requirement to each group of entities to observe the scope of regulating documentation referring to accounting
and financial accounts:
1.
all the limited liability societies, aiming to gain the profit are bound to fulfill the adopted by
Lithuanian Accounting Institute accounting standards;
2.
state and municipal institutions are bound to fulfill the adopted by Ministry of Finance budget
institution accounting standards:
3.
Starting with 1 January of 2004 listed enterprises have to comply with International Financial
Reporting Standards.
Performing comparative analysis of definite aspects of Latvian and Lithuanian accounting systems, the
author found a number of differences (Table 8).
Table 8
Differences between Latvian and Lithuanian accounting system regulation
Several Lithuanian accounting standards haven't international analogues because are composed of different
international standards. The author appreciates the activities of Lithuanian Accounting Institute, which
elaborates tutorial recommendations and accounting standards interpretations. As to Latvian Accounting Board
it doesn't exercise analogous rights in order to develop methodical directives. The author is of the opinion that
the most important achievement of Lithuanian accounting system is the adoption of the main trends of
Lithuanian accounting and audit system progress in 2002-2020. This document is able to eliminate the chaos
and facilitate the further development of accounting in Lithuania. It is necessary to reflect up on a possibility to
use the Lithuanian experience in Latvia.
Conclusions and Suggestions
Having analyzed the work the author made the following major conclusions:
The main forms of accounting system regulation nowadays are:
# unification- denial of alternate accounting methods;
# standardization- limited optional possibilities of alternative methods;
# harmonization- coordination of different accounting systems;
# convergence- selections of the best of existing methods created by regulating parties or, in case of
absence of such a compromise, consolidate elaboration of completely new method.
Not only variety of accounting methods used in different countries obstructs accounting standardization at
international and regional level, but also different understanding of basics of financial statement
preparation, including the requirements to present "the true and fair view" in financial statements. If in
Anglo-Saxon states exists the prerogative of presenting "the true and fair view", then in continental Europe
the priority is given to requirements of normative acts. In Germany the dominating doctrine of ,,separationuncoupling" is a serious obstacle on the way to unique understanding of the mentioned concept within the
European Union.
In the states with close link between tax and financial statements the politics defining accounting
procedures provides application of international standards only for preparation of consolidated statements,
leaving separate financial statements subordinate to national regulations.
Nowadays in the world two kinds of convergence processes may be distinguished: open convergence,
which occurs due to close cooperation of national and international accounting standardization institutions
(e.g., US Financial Accounting Standards Board and International Accounting Standards Board), and latent
convergence, when did not manage to find answers to questions of interest and solution of raised problem
in one of accounting standards groups (e.g., in International Financial Reporting Standards), financial
statement users and executors look for explanations, using regulation included into different standard group
(e.g., US GAAP).
There should be distinguished accounting harmonization de facto or member-states national companies'
financial statement gratuitous preparation according to International Financial Reporting Standards and
56
6.
7.
8.
9.
10.
11.
12.
13.
14.
harmonization de jure, when it is obligatory to meet international standards, because it is stated in
European Union legislation, for example, in ,,EU Financial Reporting Strategy: The Way Forward".
The politics of the European Union concerning accounting during the last years have had dual character: on
one hand it was geared to save the Union influence in International Accounting Standards Board versus
growth of US Securities and Exchange Commission and Financial Accounting Standards Board influence;
on another hand the process of regulating normative acts convergence to International Financial Reporting
Standards intensively proceeded.
In Latvia the most significant reasons for start of accounting standardization may be considered financial
and tax statements gradual merger, defined by normative acts very generalized financial statements
preparation regulation and its essential difference from International accounting standards.
The most important arguments for elaboration of good Latvian national accounting standards is possibility
of their adaptation to specifics and needs of Latvian economics, complicacy of International accounting
standards formulations and complex and contradictory understanding in the world of some standards (e.g.,
Nr.32 ‘‘Financial Instruments: Disclosure and Presentation" and Nr.39 ‘‘Financial Instruments: Recognition
and Measurement"), as well as possible difficulties of small and medium enterprises with practical
application of international standards.
The main objective of the project developed by Cabinet and Latvian Association of Sworn Auditors in
1996 was an attempt to change principally the existing in Latvia accounting tutorial management system,
by splitting the dissolved Accounting Tutorial Board competence into 2 parts: to hand over the consultancy
functions in strictly limited scope to newly formed Latvian Accounting Standards Consultative Board, but
constitutional functions (i.e., elaboration, adoption, alteration and publishing of national accounting
standards) - to Latvian Association of Sworn Auditors.
The period from 7 August till 10 December 1996 is the only stage in development of Latvian accounting
standardization, when bound by normative act liability to follow national accounting standards (material
aspect of standardization) existed along with absence of any regulations on standards elaboration
(processual aspect of standardization).
The main reasons of Latvian Technical Committee of Financial Accounting Standardization failure is
status of elaborated standards (without the appropriate adoption of regulations by the Cabinet they were not
valid), necessity of state financing, limited availability of standards for wide audience of accountants, as
well as sharing of competence and lack of activity coordination between Ministry of Economics (realized
national politics in the field of standardization) and Ministry of Finance (worked out politics in the field of
accounting tutorial).
Difficulties in practical observance of Latvian national accounting standards to a high degree were
connected with ignoring of G.Hofstede - S.J.Gray cultural values abstract - it was tried to implement
standardization model peculiar to Anglo-Saxon system in the state with French-German accounting
system, though the requirement to follow accounting standards fundamentally rests upon authoritarian
essence of standards.
Though the degree of compliance of Latvian normative acts regulating accounting procedures and financial
statements preparation with International Financial Reporting Standards and European Union directives is
high, there persist to existing insufficient specification of regulation and ample opportunities to use
creative methods of accounting may become in the future the reason for ,,potential contradiction".
Yet in Latvia there is no an effective control mechanism to monitor practical following international and
Latvian accounting standards requirements. In its turn relying only upon revisions of swom auditors, which
do not cover at all the whole range of accounting standards users, contradicts the preamble requirement of
European Union Regulation Nr. 1606/2002 ,.On application of International accounting standards", main
criteria of effective observance control published by European Federation of Accountants-experts in 2002
57
and basic statements of European Securities Regulator Committee standard Nr. 1 ,,Financial information:
Control of financial information standard observance in Europe".
15. Estonia is one of the first European Union member-states, where due to separate financial and tax
statements enterprises have right to define themselves both consolidated and individual financial statement
preparation regulation, choosing among national or International Financial Reporting Standards. In Latvia
and in Lithuania such freedom of choice does not exist and is not considered to be implemented at all.
16. As opposed to the nearest neighbor states the peculiarity of Estonia consists in monism of main normative
acts regulating accounting and financial reporting - here operates only the law ,.On accounting". In its turn
Lithuania is characterized by dualism of national accounting standard system - for association of
businessmen, aiming to make a profit should follow the standards elaborated by Lithuanian Accounting
Institute, but for state and municipal institutions - standards adopted by Ministry of Finance.
The author makes the following suggestions:
Historical Digest of accounting
1.
Further it is recommended to carry out research work in the field of Latvian accounting standardization
keeping in mind the following periodization:
14 October 1992 - 6 November 1996 the origins of contemporary accounting system establishment financial
and tax statements merger;
6 November 1996 -1997
establishment of Latvian Accounting Standards Consultative Board;
1997-September 1998
development of projects of Latvian accounting standards by Committee of
Methodology of Latvian Association of Sworn Auditors;
September 1998- 1 4 May 1999
establishment of working group and development of Latvian accounting
standards conception;
21 May 1999 - 1 5 May 2003
activities of Latvian Technical Committee of Financial Accounting
Standardization, development and adoption of Latvian financial accounting
standards;
since 15 May 2003
establishment of Accounting
Board,
Latvian accounting standards
development and adoption.
Using the chronological limits of activities of accounting standartization institutions as a criteria for
classification it is possible to develop the following periodization:
• ‘‘institutional quasidualism" milestone (10 December 1996 - 5 February 1997)- liquidation of
Accounting Tutorial Board wasn't accepted by Cabinet and caused the coexistence with Accounting
Standards Consultative Board;
• ‘‘institutional dualism" milestone (14 May 1999 - 3 August 1997) - foundation and activities of
Latvian Technical Committee of Financial Accounting Standardization before the liquidation of
Accounting Standards Consultative Board;
• ‘‘institutional monism milestone- the activities of single accounting standartization institution.
It is recommended to introduce the concept ‘‘standardization paradox" into accounting theory - the bigger
are differences between some national accounting standard and international standards, the faster occurs
national standard compilation with international standard requirements and rapidly grows number of
companies preparing their financial statements according to international norms (e.g. in Germany and in
Austria).
Reluctance of European Union member states national companies to continue the widespread in the end of
1980's - beginning of 1990's practice of preparing the financial statements as according to normative acts,
as due to process labor intensity and high costs and to resulting need in assistance to companies, for
international standards and accounting harmonization with regard to designate them at international level
58
rather that at regional one, it is rational to use the term ‘‘phenomena of mercantilism", which is the main
reason for transformation of harmonization de facto into harmonization de jure.
5. To nominate the method, used by Latvian Ministry of Finance since the end of 1990 to agree national
legislation regulating accounting with international accounting standards, applying rules and instructions
adopted in terms of European Union convergence strategy, as ‘‘intense politics of accounting
harmonization".
6. Allocation of obligatory applied standards status to Latvian accounting standards by the Cabinet rules
makes them the analogue of normative act, for definition of which all the legal regulation interpretation
methods, in particular, philological, system and teleological method should be used.
7 With regard to increase efficiency of accounting standardization process in Latvia more attention should be
paid to research of experience in other states of continental Europe and to estimation of its use possibility,
taking into account peculiarities of Latvia.
8. Higher educational institutions have to reflect up on possibility to expand curricula and offer the
opportunity to study new course "Theory of accounting standartization", which will impart knowledge on
historical development, influencing factors and peculiarities of accounting standartization process in
different countries all over the world.
9. It is necessary to continue research in the field of both Latvian and foreign accounting standardization
theory, considering that they have an important role in implementation of new standards and improvement
of being in force standards. The first task of such research is to create conceptual basis for accounting
standardization process in use and to guarantee its dynamic growth in the future.
To the lawmaker
10. To provide the proper and precise observance of Latvian national accounting standards in practice, there
should be established a similar to English Financial Reporting Review Panel Supervision Board competent
institution being under control of Ministry of Finance or Accounting Board authorized to monitor
correspondence of company financial statements to standard requirements.
11. It is necessary to create the special working group, which in close cooperation with Accounting Board will
identify, appraise and give certain suggestions (elaboration of amendments for normative acts and defining
the scope of issues to be regulated with help of existing or future national accounting standards) to
diminish initially and then to eliminate completely in the future prospective the existing yet difference
between Latvian normative acts (especially in the field of insurance business and bank accounting) and
International Financial Reporting Standards
12. Latvia needs to prepare the concept of national accounting and audit system development for the coming
10-15 years, paying special attention to plan of accounting standard elaboration, as well as to expected
interaction with International Financial Reporting Standards and European Union instructions.
13 It is recommended to turn back to terminology used in item 15 of law ,,On accounting" in edition from 14
October 1992, changing the III part of item 15 of being in force law ,.On accounting" with regard to
stipulate the authority given to Accounting Board as ,,to consider common accounting tutorial issues".
To Latvian Accounting Board
14 Allocation of Latvian accounting standards projects in web home page of Ministry of Finance is not
considered as informative enough for high readership that is why there is also desirable project publication
in specialized accounting periodical editions.
15. Latvian national accounting standards need to be translated into English and to be supplemented by special
enclosures, reporting the differences between national and international accounting standard requirements.
59
Such an approach will essentially simplify the comparative analysis of financial statements, as well as will
let foreign investors know and understand better the specifics of Latvian national accounting standards.
16. Should be rised informative value of Accounting Board minutes, which is extremely low due to
immoderate laconism of these documents. It is recommended furthermore not only to state the fact in the
minutes, but also to include the comments of participants, their objections, argumentation around the
adopted resolutions and analysis.
17. It is recommended to Accounting Board to consider the possibility to diminish the number of national
standards, elaborating them by topical principle, not only fixing and confining them with discussed issues
about a certain international analogue.
18. Latvian Accounting Board should actively participate in accounting tutorial management and should start
using its authority given by the law as ,.to consider accounting and other common tutorial issues and to
publish methodological editions of Latvian accounting standards and their application", going beyond the
only elaboration of Latvian national standard texts
19. Although the normative acts do not seal Accounting Board to agree its references, recommendations and
definitions with other institutions concerned, such a turnover of information among Ministry of Finance,
Latvian Association of Sworn Auditors and Latvian Association of Accountants would simplify much the
process of unified tutorial approach establishment.
20. With regard to clarify the degree of national accounting standard observance it is recommended to
Accounting Board to select every year by random principle the number of annual reports from Enterprise
Register data base for more detailed analysis. Achieved in such a way results will help to determine the
further activity fields, will identify scarcities of national accounting standards and will show the necessity
of improvement of certain standards.
21 Accounting Board has to develop projects involving not only experts-practitioners, but also academicals
and teaching staff of higher education institutions. Thus it is possible to provide close cooperation of
accounting standartization theory and practice.
Publications about the results of research
1
2.
3.
4.
5.
6.
Prauliņš A. Par atsevišķiem grāmatvedības uzskaites sistēmu klasifikācijas aspektiem- Latvijas
Universitātes Raksti, 2003., 659.sējums Ekonomika II, 180.-197.lpp. (with co-author)
Prauliņš A. Eiropas Savienības 4.direktīva un grāmatvedības harmonizācija - Latvijas Universitātes
Raksti, 2004., 671.sējums Ekonomika III, 263 -277.lpp. (with co-author)
Prauliņš A. Kultūras vērtību ietekme uz grāmatvežu profesionālo darbību un uzskaites standartizāciju Latvijas Universitātes Raksti, 2005., 689.sējums Ekonomika IV, 252.-264.lpp. (with co-author)
Prauliņš A. "Patiess un skaidrs priekšstats" kā finanšu pārskatu sagatavošanas koncepcija- Latvijas
Universitātes Raksti, 2004., 674.sējums Vadības zinātne, 348.-363.lpp. (with co-author)
Prauliņš A Latvijas nacionālo grāmatvedības standartu attīstības process- Rīgas Tehniskās
Universitātes Inženierekonomikas fakultātes Zinātniskie raksti, 2004., 2.sējums "Ekonomiskie pētījumi
uzņēmējdarbībā", 78.-88.lpp. (with co-author)
Prauliņš A. Problems in Developing National Accounting Standards- Humanities and Social Sciences.
Latvia, 2004, volume 1 (41), pp. 64-79. (with co-author)
Conferences, in which the author has reported on the content of the Promotion Paper
International conferences
l.Prauliņš A. Kultūras vērtību ietekme uz grāmatvežu profesionālo darbību- Grām.: Latvijas
Universitātes 62.konferences Grāmatvedības un audita sekcijas referāti / L.Kaires red - Latvijas Universitāte,
2004., 72.-83.lpp.
2.Praulinsh A. Problems of National Accounting Standards Development in Latvia- Gram.: Actual Problems
of Accounting in Private and Public Sector. Proceedings of the Conference - Tallinn University of
Technology, Department of Accounting, 23.04.2004., pp. 3-16. (with co-author)
3.Prauliņš A. Education and organization of Latvian accountants- Grām.: "Haridus ja majandus 2005.
Rahvusvahelise teaduskonverentsi materjalid" (Education and Economy 2005. The materials of
international scientific conference).- Tallinn University of Technology, Tallinn College, Educational Research
Centre, 05.05.2005., pp. 91-93. (with co-author)
4.Prauliņš A. Standartization of Accounting in Latvia.- Gram.: "ECOMA 2005. Economy and
Management of Enterprises in Transition Economies in the Global Market Environment. Proceedings of the
International Scientific Conference. Part II".- University of Pardubice, Faculty of Economy and Management
of Chemical and Food Industry, Czech Marketing Association, Czech Society for Chemical Industry.
Chech Republic, Lazne Bohdanec, June 29-30, 2005, pp. 381-384.
5. Prauliņš A Standartization of Accounting in Latvia- Development, Problems and Solutions- Gram.:
‘‘Accounting and Performance Management Perspectives in Business and Public Sector Organizations.
Conference Proceedings".- Tartu University, School of Economics and Business Administration, Institute
of Finance and Accounting. September 29-30, 2005, pp. 84-91. (with co-author)
6. Prauliņš A. Opганизации методическово руководство бухгалтерским учетом в Латвии после восстановления
независомости.- Grām.: ,,Accounting & Audit System Integration into European Union Area. New Challenges and
Opportunities The Papers of International Conference" - Lithuanian Chamber of Auditors and Lithuanian
Accounting Educators and Researchers Association. October 6-7, 2005, pp. 175-191. (with co-author)
7 Prauliņš A. The Influence of Culture Values on the Accounting Profession and Standardization-Gram.:
‘‘Accounting & Audit System Integration into European Union Area. New Challenges and Opportunities.
The Papers of International Conference".- Lithuanian Chamber of Auditors and Lithuanian Accounting
Educators and Researchers Association. October 6-7, 2005, pp. 192-202.
8. Prauliņš A. The Enforcement of International Financial Reporting Standards in the European Union-Gram.:
‘‘Accounting, Audit and Taxes: Development and Trends of Theory and Practice. International Conference".University of Latvia, Faculty of Economics and Management, Institute of Accountancy. February' 10, 2006,
pp. 44.
Latvian conferences
Prauliņš A. Eiropas Grāmatvedības asociācijai-25gadi- Grām.: Latvijas Universitātes 61.konferences
Grāmatvedības un audita sekcijas materiāli /L.Kaires red- R.: Latvijas Universitāte, 2003., 69.-80.lpp.