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A RUSSIAN SUCCESS STORY By Edwin J. Kliegman,... Current Issue!    Navigation Tips!
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By Edwin J.
Kliegman, CPA

There have been tremendous changes in Russia since 1991 when I first taught American business methods to Russian entrepreneurs, directors of collectives, cooperatives, and government officials.

Although the government owned everything in 1991, the first inklings of privatization were beginning to be discussed. There were shortages of all products. Gypsies and other groups were everywhere, pick-pocketing and molesting visitors and citizens alike.

Today, the lines for food and clothing have disappeared, street gangs and marauders have been substantially reduced in St. Petersburg, and a spirit of excitement for the future is evident.

Still, on an almost daily basis, the western media reports the bleakest news from Russia. Besides the uneasy political situation, the narratives indicate that crime is rampant, shortages are prevalent, and the business climate is tenuous, at best.

Having recently returned from Russia, where I taught "International Standards of Accounting and Auditing," "Reading and Understanding Financial Statements," and "Preparation of Business Plans" to Russian accountants, I can offer some personal observations about the business and general environment in Russia today.

One of the most dramatic changes in the St. Petersburg business population has been the growth of the professional accounting community. In 1991, the only recognized Russian accounting organization was "Inaudit," a quasi-government arm which verified information as the government directed. Late in 1991, I helped organize a join venture, International CPA Corp. (ICPA Corp.), which was the first privately held accounting firm in St. Petersburg. The firm has grown to be one of the largest and most respected accounting businesses in the city. Since 1991, approximately 150-200 other accounting companies have been established in St. Petersburg.

Recently, the Russian government decreed that accountants should be licensed. Accountants are now required to pass a test, similar to the CPA exam in the U.S., in order to obtain a license to practice. Although the central government promulgates the rules and regulations concerning accounting, auditing, taxation, and ethics, there is no question that Russia is moving toward acceptance of western accounting standards, procedures, and principles. I had the good fortune to have dinner with Andrew Krikunov, the head of the Russian Federation Department of Auditing, who is working on the updating of accounting and auditing standards. His observation is that it will take time, but the future of Russian accounting and auditing will basically comply with western methods.

At present, Russian auditing is primarily used to uphold and enforce the tax laws. Businesses are audited for compliance with Russian law. Penalties for deviations are harsh. Most small, privately held businesses do not yet realize the importance of the profit-and-loss statement as a tool to their success. They are too concerned about the taxes and enforcement.

A Russian audit differs greatly from the American procedures. For example, the Russians examine every document for authenticity, signatures, stamps, and amounts. Sampling and materiality are usually not a factor in conducting an audit. The major concern is that the records comply with governmental regulations.

An important question raised by Russian accounting practitioners is, "if a company is examined by the taxing authorities and a deficiency results after an audit has been completed by an accountant, should the accountant be liable for any penalties?" Some of the accounting firms have been absorbing the penalties as a gesture of goodwill in order to keep the client happy. Others do not. The legal procedure for malpractice is not clearly defined, and the lawyers in Russia have not yet reached the same level of aggressiveness as those in the States.

The multinational accounting organizations (Big Six) do not generally compete with the smaller, local accounting firms. As a matter of fact, they seem to have worked out an accommodation with each other. It is not unusual for the major firms to recommend local accounting firms to conduct the "Russian audit" and to deal with local taxation and consultation problems.

A new type of business has developed in St. Peterburg. Every business, from the largest corporation to the local grocery store, pays a "protection agency" and has a security person on the premises. In many cases, the security people are armed. In addition, alarm systems and surveillance cameras are in general use. Most business people are pleased with the protection that they pay for and consider it a cost of doing business. Although speculation is rampant about organized crime being involved in larger, cash-type businesses, the general feeling of most entrepreneurs is, "Who cares?"

Prices in Russia are high (for foreigners). Costs are equivalent to the higher priced restaurants and shops that are found in New York City. Prices, for the most part, are stated in U.S. dollars, and are paid in rubles.

In St. Petersburg, most people seem to ignore the political situation that commands so much media attention in the States. Gorbachev is passionately disliked by the populace. Everyone believes that Yeltsin is a temporary caretaker who will take the country through the current period of adjustment and will then be replaced, peacefully, by someone who is not presently in the forefront.

Although there is media information about the situation in Chechnya, little time is spent on the subject by the business community, or the public. Talk is usually devoted to subjects closer to home, such as taxes, local bureaucracy, the exchange rate of the ruble, and business opportunities. It is apparent that the private sector has grown to such an extent that the "government" no longer dominates events. Small, closely held businesses create new jobs, arrange financing, and develop the excitement and progress that is needed to bring Russia into the twenty-first century.

Investing in business in the former Soviet Union is risky unless you understand the culture and the ground rules. Privatization is creating untold opportunities. In spite of what is read in the press about ventures that have gone sour, and bribes, payoffs, and protection services that are part of everyday life, major banks, big business, and the Big-Six accounting firms are doing business in Russia. Those who are willing and able to take the time, invest their money, and learn to respect and deal with the Russian people as equals will reap huge rewards. The challenge is to learn how to play the game.

It will take a generation to completely overhaul the old system, but there is a "can do" attitude in St. Petersburg that bodes well for the community and the country.

The changes during the past four years have been remarkable. Most businesses are now owned by private citizens. St. Petersburg is a busy, exciting, cosmopolitan city that will be one of the most beautiful areas of the world when the buildings are cleaned and the potholes in the roadways are filled. *

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