Accounting / auditing for foreigners
with businesses in Eastern Europe

Audits - Legal necessity or useful tool?

Much of accounting is perceived as being necessary to comply with legal requirements. However, we view this as a minor function for the medium and smaller companies operating internationally.

In reality, today's form of audits undertaken by the multinational auditing firms relies so heavily on test sampling and "materiality" levels, that an audit has become meaningless, except in a "marketing sense". If one analyses corporate losses / frauds, arguably audits have never prevented or identified such problems. However, just like the reason why IBM continued to be so successful before its "fall" in the 1980's the same applies to international audits and advice from the Big 5. For many years, executives would routinely buy IBM. Why? Because if anything went wrong, the executive could never be blamed. The answer was always .... I bought the best .... IBM. In our opinion, today, the same applies to the Big 5. Loan officers, executives and other users of their services can always argue, when things go wrong ... we used the best .... do not blame us. Just like IBM, where eventually it was proved that there were better alternatives to IBM and IBM fell from grace, so the same may eventually happen to the Big 5.

So in today's environment, it may be a fact of life that the Big 5 have to be used in certain circumstances.

It may also be that a "vanilla" audit will not provide a double check of management or employees.

If shareholders or management want to have risk management / control, then discuss with your "auditors" / accountants what services they can provide in this area.

Remember, the morals, ethics, traditions and legislation in the former "communist / centrally planned economies" are very different from the USA. So in operating in such markets, business practices have to be changed accordingly. For example, in the Czech Republic, it was said that the only way to obtain a bank loan was to make a "deal" with the loan officer. Indeed, if one looks at the level of bank bad debts (prior to privatization by foreign owners), it is arguably proof that such a system operated and that the quality of the borrower had nothing to do with the level of loans granted by the "local" banks.

Additional form of management.

When foreign operations are small, it can be difficult to have the necessary breadth of local or visiting management. If the critical management mass has not been achieved, consider supplementing it with resources from your external advisors.

You can use our affiliated professionals to report on financial and other operations

Whilst it is always best to produce financial and management accounts internally, the problem in many of the Central and Eastern European countries, is that there is a vast under supply of competent staff, especially those with experience, training and language skills. The result is comparatively overpriced staff.

We suggest supplementing your internal skills with pre-agreed procedures on a regular basis.

Create management reports to be generated by management

If you have staff who can undertake bookkeeping and reporting functions, they may not understand the purpose of management accounts or the critical issues. Because historically, accounting was not important (think about it, in a planned economy accounting is almost irrelevant and was only really useful to the government, consequently it was seen as a dead end job), even today, the quantity and quality of financial staff with a good experience and knowledge of free market accounting may still be below the needs of the western world.

Let us help find professionals who can create useful management reporting formats. They will help you generate useful information from systems which are designed for the government and tax purposes.

Create and manage internal controls

Safeguarding one’s investment can not just be left to the honesty of local management. A fundamental aspect of "internal control" is that one should not place temptation in front of employees. By ensuring that all aspects of the business are subject to double or more checks, it reduces the chance that one or more individuals will steal property or income which belongs to the company.

Western companies entering the former eastern block countries have taken the attitude that one must trust management. Investors, including the international funds, have frequently taken the same view.

It is a nice, but naive concept. In many cases the local laws and business practices do not conform with international expectations. It is the responsibility of the investors to make up for such deficiencies by making sure that there are proper controls and that there are opportunities for local management and employees to earn a satisfactory remuneration.

So What type of services should you seek?

Independent auditing. Not only to comply with statutory requirements, but to provide financiers, stockholders, suppliers, management and investors with a way of independently assessing and understanding your business.

Due diligence of the financial / commercial, historical and planned position of businesses in which foreigners are considering investing in.

Creation of consolidated financial statements according to International Standards or for management purposes.

Conversion of  East European format financial statements to American or International format.

Creation of business plans and budgets for businesses.

Regular financial management review and analysis of businesses in which investors have invested and reporting back to them.

Creation of internal controls for businesses in which foreigners have invested.

E-mail us for assistance. If you need guidance, assistance or technical advice with a specific issue, we can help you via e-mail or refer you to an affiliate. Our charge will be based on time.