CEOs don't like uncertainty. Moreover, boards of directors don't have much patience with financial statements that don't clearly present the financial health of an enterprise. All of which makes doing business in Russia a unique challenge, where the traditional focus has not been on profit, but on control.

State Control...and Reform

This focus is well stated in Pulitzer Prize-winner Thomas L. Friedman's recent book, The Lexus and the Olive Tree. He writes: "The purpose of the Soviet economy was not to meet the demand of consumers, but to reinforce the control of the central government... At a Soviet company that made bed frames, the managers were paid by the central government not according to how many bed frames they sold, but on the basis of how much steel they consumed. The number of bed frames sold is a measure of consumer satisfaction. The amount of steel produced and used is a measure of state power. In the Cold War, the Soviet Union was only interested in the latter."

As a result, reports BISNIS, the section at the US Dept. of Commerce that is the primary resource center for US companies exploring business opportunities in Russia, "Russian accounting regulations (RARs) were drafted and used for tax calculation and bookkeeping purposes and not designed for use by potential investors as a measurement of a company's financial performance. With the increased interest of Western investment, however, the need for understandable, comparable, transparent, detailed, and reliable financial statements has become apparent and the Government of the Russian Federation has taken steps to promote accounting reforms."

Emphasis on Process, Not Results

The main goal of Russia's accounting reform program is to bring Russia accounting and auditing regulations into conformity with international accounting standards (IAS). Although some progress is being made, traditional thinking still prevails in many quarters. Says Bob Akright, a partner with Arthur Andersen in Moscow, "The preparation of Russian Accounting Standards (RAS) financial statements remains very form driven and has not adopted all of the accrual-based accounting techniques common in Western business. Additionally, the Russian accounting system has developed no standards to try to mitigate the effects of high levels of inflation on the usability of RAS historical financial statements. Overall, bookkeeping is more rigid here, and is done in accordance with legislation, which tells you how to keep the books. There is greater interest in the process than the result of getting the right tax or performance measurement."

Multiple Reporting Requirements

The situation is further complicated given the many different currencies used throughout the 15 countries comprised of the former Soviet Union. One major telecommunications company that provides service throughout Russia, several countries in the Commonwealth of Independent States, and more than 20 European countries, using one Russian chart of accounts and another Western chart of accounts, tracks transactions in 23 currencies and prepares three kinds of financial reports: Russian, IAS, and GAAP (General Accepted Accounting Practices). Another major company, reporting transactions in nine currencies using RAR, reported a number of "horror stories," the worst being that the ending balance sheet for one year and the beginning balance sheet for the next year did not match. "Suffice it to say, we were in the dark ages as to reliable accounting reports and accuracy of source data for our GAAP results."

These multiple reporting requirements give rise to other significant challenges, according to Donald Beskine, CEO of the International Center for Accounting Reform (ICAR), a non-profit, non-government Russian legal entity: "Technical (finding the means to maintain accounting records that comply with several incompatible sets of standards, regulations, reporting, and annual audit requirements), economic (employing staff and systems in cost-effective ways), and political (in the sense that RAR are based in part on laws, regulations, traditional processes, etc., and directed/administered by competing agencies, without adequate coordination or clear definition of authority)."

In this environment, it is only normal for US companies to strive harder to bring order and stability to the reporting activities of their companies. In the process, however, one critical truth cannot be forgotten: It is still essential that timely reports be made to the appropriate Russian tax authorities. Says Arthur Andersen's Akright, "Non-compliance, if discovered, still may carry severe penalties. A number of companies have been fined up to and including $1 million. And given the confusion in Russian tax regulations, it is often difficult to determine whether the omission was deliberate, a mistake, or just different interpretations of the facts."

Apples to Apples?

The accounting-reform plan is to have RAR, and the newer country-specific Russian accounting standards (RAS), become similar to IAS. However, according to ICAR, the current "gradual, piecemeal approach will present a 'moving target' over a number of years (estimated 5-10) during which there will not be a stable set of standards to be applied by enterprises, independent accountants, regulators, tax authorities, courts, or training and research entities."

Advice from the Experts

1. For the foreseeable future, dual accounting procedures will be required. Says Akright, "Integrate your RAS and US GAAP reporting. Segregation of these activities can quickly result in US GAAP reporting that does not reflect reality. Additionally, facilitate an atmosphere that allows for the financial staff to stay abreast of changes occurring in RAS and tax accounting, which may require further transformation for reporting to US stockholders."

2. Cautions ICAR: "Carefully research accounting software packages. As new Russian standards emerge, they will need frequent modifications and additional training. Systems should have such features as: a large capacity to add new accounts and sub-account detail, automatic referencing (forwarding) capability to other accounts to which IAS details can be accumulated, extensive report-generation features, and built-in spreadsheet capabilities or easy interface with external spreadsheets."

3. Do not underestimate the management and staff time and high degree of technological competency necessary to understand, design, install, and operate dual accounting systems. This also necessitates hiring a financial manager or chief accountant who is fully knowledgeable in IAS. Suggests ICAR: Because such people are hard to find locally, it may be necessary to bring in a qualified foreign accountant, at least as an interim step, to set up systems and provide some ongoing supervision.

Sidebar:Examples of Russian Taxes

Several different types of taxes are pertinent to U.S. business activity in Russia.

The Russian corporate profit tax generally is 35 percent, although it can go as high as 43 percent for some activities (banking). Since 1996, this tax consists of a 13 percent Federation tax and a regional tax of up to 22 percent (up to 30 percent in the case of banks and insurance companies).

Companies may expect to pay a variety of other taxes, depending upon the geographic location, legal structure, and sector of planned activity. Examples of additional federal taxes include a road-usage tax, an assets tax, a tax on securities firms, and a tax on the name "Russia." Examples of supplementary regional taxes include: a tax (for industrial enterprises) on water resource utilization, a property tax, and a forest tax. Companies may also be faced with taxes levied by local administrative bodies.