Moldova - Country Financial Accountability Assessment

Document of The World Bank FOR OFFICIAL USE ONLY CONFIDENTIAL 14994-MD MOLDOVA COUNTRY FINANCIAL ACCOUNTABELITY ASSESSMENT September 26, 1995 FILE COPY Country. Operations Division 2 Country Department IV Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EOUIVALENTS Currency Unit - Le (L) - Introduced November 29, R993 EXCHANGE RATES US$ 1 = 4.52 L (August 1995) FISCAL YEAR January R - December 32 ACRNM AND ABREVIATIONS AA Accounting Association AES Academy of Economic Studies BAFS Broadly Adapted Financial Statements CFAA Country Financial Accountability Assessment EU European Union IPG Financial Guard FSU Former Soviet Union lAS International Accounting Standards EDF Institutional Development Fund ISA International Standards on Auditing IMF International Monetary Fund GDP Gross Domestic Product MBA Moldovan Banking Association MIPA Moldovan Institute of Public Accountants MoF Ministry of Finance NBM National Bank of Moldova PW Price Waterhouse UA Universal Audit UN United Nations USAID United States Agency for International Development USIA United States Information Agency VAT Value Added Tax WG Working Group MOLDOVA: Country Financial Accountability Assessment Table of Contents Executive Sum m ary .................................................. i I. Background .................................................. 1 II. Objective and Scope ............................................. 1 M. Legal and Regulatory Framework Decree 710: The State Program of Transition in Moldova to the International System of Accounting and Statistics .................. 2 Law on Accounting ......................................... 3 Draft Law on Auditing ...................................... 4 Temporary Statue on Auditing of the Banking System ................... 4 Recomm endations .......................................... 5 IV. Financial Reporting in Private and State Owned Enterprises Financial Accountability Framework .............................. 5 Accounting Standards ....................................... 6 Action Plan for Accounting Reform .............................. 7 V. Financial Reporting in Commercial Banks Financial Accountability Framework .............................. 9 Broadly Adapted Financial Statements ............................ 10 Action Plan for AccountingReform ............................. 11 VI. Central Government Infrastructure Reporting to Parliament ..................................... 13 Reporting to the Ministry ofFinance ............................. 13 Recommendations ......................................... 14 VII. The Accounting Profession Local Accounting and Auditing Firms ............................ 15 Recommendations ......................................... 16 VIII. Education and Training Needs Assessm ent ........................................ 16 Recommendations ......................................... 17 IX . Conclusion .................................................. 17 Annexes: 1. Legal and Regulatory Framework 1.1 Decree 710: State Program of Transition in Moldova to the International Standards for Accounting and Statistics ......................... 18 1.2 Law on Accounting ..................................... 56 1.3 Draft Law onAuditing ................................... 66 1.4 Temporary Statute on Auditing of the Banking System ............... 74 MOLDOVA: Country Financial Accountability Assessment Table of Contents Annexes (continued): 2. Existing and Pending Technical Assistance Efforts in Moldova 2.1. Targeting the PublicSector ................................ 82 2.2 Targeting the PrivateSector ................................ 82 2.3 Targeting the Commercial Banking Sector ....................... 83 3. Public Sector Infrastructure: Organization Charts of Accounting and Auditing RelatedEntities ....................................... 85 4. Financial Reports 4.1 Private and State Owned Enterprises .......................... 89 4.2 Commercial Banks....................... 105 4.3 Notes on Soviet Style Financial Statements for Enterprises ............ 107 MOLDOVA COUNTRY FINANCIAL ACCOUNTABILITY ASSESSMENT Executive Summary Background 1. In Moldova, as in all of the former Soviet Union, the transition from a centralized to a market- driven economy has created a need for change in the financial accountability and reporting framework. The accounting framework is of long term importance to the government and public and private enterprises as it underlies decision making capability in all sectors and it provides the analytical tool to evaluate the efficiency and effectiveness of resource allocation. 2. Under the previously centralized economy, the primary function of accounting was stewardship. With stewardship as the underlying principle, financial reporting supported central planning and control by allowing the state to evaluate the use of resources against a pre-approved plan and protection of state property. The government, as regulator, owner and end-user of the financial statements, dictated its information needs as legal classification, recording of transactions and maintaining documentary evidence. The resulting bookkeeping and statistically-oriented approaches have largely ignored qualitative characteristics essential in providing an effective decision making tool: understandability, relevance, reliability and comparability. Further limitations exist in the accounting capability and infrastructure in Moldova, as a result of its historical dependency on Moscow for accounting developments and initiatives. Objectives and Scope 3. The objectives of this report, based on the results of a Country Financial Accountability Assessment (CFAA) mission' to Moldova, are to: (i) define and evaluate the existing financial accountability framework; (ii) make a preliminary assessment of the level of transparency in financial reporting; and (iii) formulate an action plan, in collaboration with government and banking officials, outlining both the technical assistance needed and the sequencing of the reforms to strengthen the existing accounting and auditing framework. 4. The CFAA examines the following elements of the accountability framework in Moldova: (i) legal and regulatory framework; (ii) financial reporting for private and state owned enterprises; (iii) financial reporting for commercial banks; (iv) central' government infrastructure; (v) the accounting profession; and (vi). education and training. Legal and Regulatory Framework 5. With the transition to a market economy, changes have been made in the legal and regulatory framework in Moldova; however the previously centralized approach still exists: charts of accounts, accounting standards and reporting formats all remain under central government directive. The Ministry 1/ The mission, comprised of Ms. Joelle Le Vourc'h, EC3AI as Mission Leader and Ms. Sandy Durham, EC4C2 as Task Manager, was conducted in Moldova from February 4-15, 1995. 2/ Due to its embryonic nature, the local governmental infrastructure for accounting and auditing has not been reviewed at this time. of Finance (MoF) has the responsibility for administering and regulating accounting for the private sector and the National Bank of Moldova (NBM) for the banking sector: no national independent professional accounting body yet exists in Moldova. 6. In response to the need for reform in the accounting framework, the MoF and the NBM, in conjunction with the Ministries of Economy, Justice and Statistics and specialists from the Academy of Economic Studies (AES), prepared Decree 710: "The State Program of Transition in Moldova to the International System of Accounting and Statistics". Adopted by Parliament in September 1994, this Decree outlines a comprehensive cross sector reform program to bring the existing reporting systems for statistics and accounting into alignment with international standards. The Decree covers a broad set of reforms covering many sectors: public, private and state owned enterprises, banking and education. This comprehensive approach is essential as it takes into consideration the nature of accounting reform, in which reform in one sector often triggers the need for reform in other sectors. For example, revisions in the financial reporting standards for private enterprises may require corresponding revisions in lending qualifications and requirements from the banking sector, in addition to tax revenue implications for the public sector. 7. At this stage, only a preliminary review of Decree 710 has been completed; a more detailed analysis of this Decree and other existing and pending laws and regulations will be needed with the assistance of international expertise. This detailed analysis should result in. proposed changes in legislation enabling Moldovan accounting and auditing standards to be fully compatible with international standards. 8. A systematic plan of legislative development for accounting and auditing should be devised in conjunction with development of an independent. private sector managed, professional Accounting Association (AA)I in Moldova. This professional AA'would provide an advisory role to complement the regulatory roles of both the MoF and the NBM. With a market economy, the needs of shareholders, management, state budgeting and national data requirements differ; therefore, these topics would need to be developed and addressed independently and separate legislation would be required to fulfill the different needs. Financial Reporting in Private and State Owned Enterprises 9. Many differences exist between the Moldovan accounting framework and that of International Accounting Standards (IAS). One of the major differences involves the method of recording revenue and expenses. An underlying assumption in IAS is the preparation of financial statements on the accrual basis. Under the accrual basis, transactions are recorded when they occur, as opposed to when cash or its equivalent is received or paid. This manner of recording financial activity informs the financial statement reader of both future obligations and future resources to be received, thus providing a more useful tool in making economic decisions. 10. An additional major difference between the Moldovan framework and that of IAS involves the 3/ Such a body exists in embryo, but very much under the control of Government. It is headed by a Deputy Prime Minister. ii presentation of financial statements for both financial and tax purposes. Typically, under IAS, or a Western framework, if accounting and tax requirements differ significantly, separate financial statements to meet the two needs would be prepared. Under the existing framework in Moldova, one set of financial statements commingling tax and financial requirements is prepared, resulting in a highly distorted presentation. 11. The two primary financial statements required by the MoF are a Balance Sheet and a Statement of Financial Results and Uses (i.e. Income Statement); a cash flow statement has neither been required or defined. As the Moldovan enterprises are oriented towards the fulfillment of MoF requirements, the only financial statements or reports currently being prepared by an enterprise are those required by the MoF. 12. In order to improve the level of transparency in financial reporting for private and state owned enterprises and outline the path to adopting financial reporting in aligninent with IAS, an Action Plan was developed in collaboration with the MoF and the AES. This Action Plan, complementary to the reforms outlined in Decree 710, would commence with the establishment of a cross-sector Working Group (WG). This WG, under MoF direction with assistance from foreign accounting consultants, would: provide a forum for discussion, review and research on accounting reform; promote the use of IAS and International Standards on Auditing (ISA); and provide the initial membership to form an independent professional AA in Moldova, as mentioned in paragraph 8. The development of the AA is a critical element in the accounting reform process as it provides an on-site, long term resource to promote the cross-sector reform effort and provides a resource to keep the accounting community in Moldova current on future IAS and ISA developments. 13. This WG/AA would: (i) review the existing and pending accounting and auditing legislation for compliance with IAS and ISA; (ii) finalize a conversion software package which enables conversion of existing financial reports to be more in alignment with IAS; and (iii) as a medium term objective, revise the existing chart of accounts and financial reporting formats to enable financial data to be prepared and presented in alignment with IAS. Financial Reporting in Commercial Banks 14. The charts of accounts, guidelines for financial statement preparation and financial statement formats are all regulated and issued by the NBM. The NBM has not introduced a strict timetable for the adoption of IAS, although commercial banks are aware of this need. Several of the banks are preparing financial statements in accordance with IAS as guided by their international 'Big 6' accounting firms; however the process differs between banks. A systematized format and process would provide a common comparative basis on which to evaluate financial performance. 15. The Broadly Adapted Financial Statements (BAFS), originally developed for use in Russia and adapted to Moldova, enable commercial banks to present financial statements more in alignment with IAS. The BAFS instructions include: (i) a conversion key, which maps data prepared under the existing chart of accounts to financial statement line items more in alignment with IAS; (ii) the identification of required 4/ A Bank financed Institutional Development Fund (IDF) grant to support the MoF in executing the Action Plan for Accounting Reform in Private and State Owned Enterprises, was approved by the Bank on September 26, 1995. For additional information on existing and pending technical assistance efforts, refer to Annex 2. iii adjustment entries; and (iii) financial statement presentation formats in alignment with IAS. Thus, BAFS provides a learning tool and builds a 'bridge' of understanding between the existing framework and that of IAS and should be utilized, for a limited period, by the NBM as a minimum requirement in the transition to financial reporting in full compliance with IAS. 16. An Action Plan outlining the path for the commercial banking sector to adopt financial reporting in alignment with IAS has been developed in collaboration with the NBM. This Action Plan for Commercial Banks&, very similar to the Action Plan for Private and State Owned Enterprises (SOEs) outlined above, also commences with the development of a WG. This WG for the commercial banking sector would coordinate and promote accounting reform initiatives in the banking sector and provide a mechanism to enhance the cross-sector coordination required with the WG/AA established under the Action Plan for Private and SOEs. Central Government Infrastructure 17. The Accounting Chamber, a body reporting to Parliament, was established in December 1994 for the purpose of ensuring control over the management of public resources, expenses and property. In this role, the Accounting Chamber has the right to audit any enterprise related to obtaining state funds. The Chairman of the Accounting Chamber has indicated that the existing tax policies and procedures and their respective modes of enforcement need to be revised as enterprises are avoiding taxes and the current enforcement system is not effectively detecting these occurrences. At present, the Accounting Chamber lacks the staffing and equipment necessary to conduct an effective operation of financial control. Once staffed, training would be required in order to carry out the designated responsibilities. 18. The accounting and auditing entities reporting to the Ministry of Finance, which were reviewed during the CFAA mission, included: the Auditing Chamber; Financial Guard, Methodological Council on Accounting and Auditing; and the Department of Methodology on Accounting and Reporting. The Auditing Chamber, established in 1991, is responsible for administering and regulating licensing procedures and examinations and regulating auditing firms and the auditing profession. The Financial Guard, a paramilitary organization, was established in June 1992 for the purpose of ensuring that operations are being conducted in a legally acceptable manner, as licensed. The remaining entities, the Methodological Council and the Department of Methodology are embryonic at present, with minimal staffing. 19. The existing central government infrastructure for accounting and auditing allows for considerable overlap in the duties and responsibilities to be performed by each entity. In addition, the roles defined for specific entities are in some cases better suited to the previously centralized form of government (i.e. the policing function of the Financial Guard). 20. Development and implementation of a training program in the form of a twinning arrangement between both the MoF and the NBM in Moldova and a country with a more advanced infrastructure for accounting and auditing would assist in the establishment of an infrastructure best suited to its needs. 5/ Under USAID funding, two foreign experts arrived in Moldova in August to coordinate the development of a Commercial Bank Working Group and to initiate the reform efforts corresponding to the Action Plan for Commercial Banks, as outlined. For additional information on existing and pending technical assistance efforts, refer to Annex 2. iv This style of training would enhance the Government of Moldova's knowledge and understanding of the accounting and auditing needs of a market economy and help to define both the bodies required within the central government infrastructure and the separate roles needed between the public sector and that of the accounting profession (i.e. regulatory vs. advisory). The Accounting Profession 21. The development of accounting in any country is contingent upon the development of an independent accounting profession. The accounting profession, in the form of an independent accounting professional body, serves public interest by providing an advisory, educational and professional role. In its advisory role, the national accounting professional body, or AA, as mentioned in paragraph 8, would conduct research and define methodology in conjunction with public sector regulatory bodies, educational institutions and other entities. In addition, the AA would promote uniform certification and licensing standards consistent with both IAS and ISA methodologies. In its educational role, the AA would promote a high level of educational requirements for its members by disseminating information and coordinating training programs to assist the accounting profession in keeping current on international developments. In its professional role, the AA would establish and monitor professional standards to improve the conduct, performance and expertise of its members. At present, no national independent accounting body yet exists in Moldova; however an embryonic body exists under the control of the Deputy Prime Minister. 22. At present, eleven local accounting firms are registered and licensed with the Audit Chamber to audit enterprises and one local accounting firm is licensed by the NBM to audit commercial banks. The primary needs expressed by the local firms included obtaining training on both IAS and ISA. This training is needed in all sectors; however, as the commercial banks are not presently required to maintain an internal audit function, the training of the bank auditors becomes even more critical to ensuring compliance with banking regulations. In addition, one of the local firms licensed to audit enterprises expressed a desire to obtain a license to conduct audits in the banking sector. As this may represent a common desire amongst the local accounting firms, a more efficient licensing system may involve combining the ability to obtain an audit license for both enterprises and commercial banks under one licensing body. Combining the licensing under one body should enhance the capacity to promote cross sector knowledge, coordinate training programs, advise and disseminate information regarding accounting and auditing developments and potentially reduce administrative costs through avoidance of duplicative staff. 23. In addition, in order to strengthen the quality of audits conducted by the local accounting firms, an independent 'Quality Review Board' should be established in the medium term. This Quality Review Board, comprised of representatives from the combined licensing body, several local accounting firms and educational institutions should provide a review process to evaluate audit opinions rendered, financial reporting presentation formats and procedures undertaken by the local accounting firms. A broad representation on the Board would serve to further promote cross-sector knowledge. In addition, in order to maintain an independent perspective critical to the Board's effectiveness and credibility, the local accounting firms represented on the Board would need to be rotated on a regular basis (e.g. semi- annually). The Quality Review Board should also have the ability to penalize accounting firms in order to promote compliance with its recommendations. v Education and Training 24. Three levels of education and training for accounting specialists currently exist in Moldova: (i) a university degree program of five years; (ii) a secondary special college degree program of up to five years; and (iii) a trade program of approximately three months. In addition to the degrees and certifications in accounting offered by universities and trade programs, ministries and private companies also offer training programs in accounting. 25. The CFAA mission concluded, based on limited observations, that the teaching style in the classroom should be changed to allow greater interaction between the students and the professor. Textbooks, which were published in 1993, were outdated and comprised of strictly government documentation and regulations, with no examples or alternative methodologies indicated. 26. Presentations and discussions of alternative methodologies and reasons for their occurrence. both -in the textbook and in the classroom, would enhance the student's development of analytical skills. contribute to a more comprehensive understanding of accounting issues. and strengthen Moldova's approach to the 'substance over form' methodology designated under IAS. which indicates that information should be presented in accordance with its economic reality and not merely its legal form. Conclusion 27. Development of an effective independent accounting professional body, the AA, is the key to a successful accounting reform program. The AA would provide a permanent, on-site body to promote the understanding and use of IAS and ISA; communicate, train and keep all sectors current on international accounting and auditing developments; and provide an advisory resource complementary to the regulatory role of the public sector. As the AA develops, it would also serve an essential role in the tailoring of IAS and ISA to the specific needs of Moldova. 28. More training and better programs are needed in all sectors on IAS and ISA. The orientation of the training programs should serve to promote 'demand sustained' accounting and auditing development. This demand can be created by educating management on features of profitability: how it is defined and how it is critical to decision making (e.g. defining production vs. non-production costing components and linking these costing components to price setting to achieve a targeted profitability for both the product and the entity overall). The training should emphasize the benefits derived from enhancements in transparency resulting from the use and understanding of IAS and ISA and promote the use of financial reporting as a management tool. This training will also serve to strengthen the local capacity for accounting and auditing, which, in turn, results in cost savings by reducing reliance on external accounting firms. 29. It is important to note, that while much of the reform efforts can be spearheaded by the AA, the Government of Moldova will need to provide a cross sector coordinating role to reduce the possibility of duplication of efforte. 30. The benefits from these accounting and auditing reforms will be substantial in all sectors. One 6/ Refer to Annex 2 for the identification of existing and pending technical assistance efforts being conducted in Moldova on behalf of accounting and auditing reform. Vi of the most important benefits to be gained is the ability to communicate with the international community in a common business language; an essential element to economic survival in a competitive, internationally dependent marketplace. M:\sandy\cfa\excsumIm vii MOLDOVA Country Financial Accountability Assessment I. Background 1. As noted in a recent trade journal, Moldova "is a small wonder in the making. In the first half of [1995], the government held the budget deficit to 3.5% of GDP, kept inflation low, and made the currency broadly convertible, enabling the growing private sector to plan ahead"'. With such critical acclaim of the progress being made in Moldova, why would an assessment of the accounting framework be important? 2. Accounting is the language of business. It is the manner by which financial results are obtained and communicated, not only for businesses but for government entities as well. A lack of accurate, reliable or timely financial information contributes to the mismanagement of resources and impairs or delays decision making, which in turn undermines the effectiveness of development assistance efforts. 3. The financial statements that represent this economic decision making tool are designed to present information regarding financial position, performance and changes in the financial structure of an entity. The environment in which these financial statements are produced is a critical element in the assessment of their usefulness. 4. In Moldova, as in all of the former Soviet Union, the transition from a centralized economy to that of a market-driven economy has created a need for change from the existing financial accountability and reporting framework. This accounting framework is of long term importance to the government and public and private enterprises as it underlies decision making capability in all sectors and provides the analytical tool to evaluate the efficiency and effectiveness of resource allocation. 5. Under the previously centralized economy, the primary function served by accounting was that of stewardship. With stewardship as the underlying principle, financial reporting has been oriented towards central planning and control in the form of evaluation of resources as measured against a pre- approved plan and the protection of state property. The government, as regulator, owner and end-user of the financial statements, has dictated its information needs to be in the form of legal classification, recording of transactions and maintaining documentary evidence. The resulting bookkeeping and statistically oriented approaches have largely ignored the qualitative characteristics essential in providing an effective decision making tool: understandability, relevance, reliability and comparability. In addition, further limitations exist in the accounting capability and infrastructure in Moldova as a result of the historical dependency on Moscow for accounting developments and initiatives. II. Objective and Scope 6. The objectives of this report, which is based on the results and findings of the Moldova Country The Economist, August 26, 1995, p. 44. 1 Financial Accountability Assessment (CFAA) mission2, are to: (i) define and evaluate the existing financial accountability framework (i.e. laws and regulations, standards for financial reporting preparation and presentation, roles and responsibilities of regulatory institutions and capacity for enforcement, and educational institutions and practices); (ii) evaluate the level of transparency in financial reporting (i.e. financial reports should represent a true and fair view of operations); and (iii) formulate an action plan, in collaboration with government and banking officials, outlining the technical assistance needed and the appropriate sequencing of the reform efforts needed to strengthen the existing accounting and auditing framework. 7. The scope of the CFAA encompassed an examination of the following elements of the accountability framework in Moldova: (1) legal and regulatory framework; (2) financial reporting for private and state owned enterprises; (3) financial reporting for commercial banks; (4) central3 government infrastructure; (5) the accounting profession; and (6) education and training. 8. Each section is followed by a set of recommended actions, the most important of which are captured in the Executive Summary. M. Legal and Regulatory Framework 9. The economic reforms which have been brought about in Moldova by the transition to a market economy have spurred changes in the legal and regulatory framework for accounting; however, the previously centralized approach still exists: charts of accounts, accounting standards and reporting formats all remain under central government directive. The Ministry of Finance (MoF) has the responsibility for administering and regulating accounting for the private sector and the National Bank of Moldova (NBM) for the banking sector: no national independent professional accounting body yet exists in Moldovae. Decree 710: The State Program of Transition in Moldova to the International System of Accounting and Statistics5 10. In response to the need'for a revised accounting, auditing and statistical framework, the MoF and the NBM in conjunction with the Ministries of Economy, Justice, Statistics and specialists from the 2 The mission, comprised of Ms. Joelle Le Vourc'h, EC3AI as Mission Leader and Ms. Sandy Durham, EC4C2 as Task Manager, was conducted in Moldova from February 4-15, 1995. 3 Due to its embryonic nature, the local governmental infrastructure for accounting and auditing has not been reviewed at this time. 4 Such a body exists in embryo, but very much under the control of Government. It is headed by a Deputy Prime Minister. * Refer to Annex 1.1. 2 Academy of Economic Studies (AES), a state owned educational institution, have prepared Decree 710. Adopted by Parliament in September 1994, this decree outlines a comprehensive cross sector reform program to bring the existing reporting systems for statistics and accounting into alignment with international standards. 11. The decree contains two sections: (i) a main conceptual overview; and (ii) an attachment which outlines the timeframes for implementation and identifies the estimated costs and the entities responsible for coordinating and implementing each element of the reform program. The objectives of the program are to develop the procedures, methodology and technological capability to, inter alia: (i) present official statistics on indicators (e.g. financial, social, labor, economic, etc.) in alignment with international standards; (ii) collect, process and distribute accounting and statistical data in alignment with international standards for both internal and external (e.g. UN, IMF, EU, etc.) use; (iii) introduce a national registry of statistics; and (iv) develop and provide training curricula for education on new accounting and statistical procedures developed as a result of the program. 12. The first steps of the program outlined in this Decree were to be initiated in 1994, with the ground work to be completed by 1996, for implementation and program completion by 1997. The total cost of the program has been estimated at approximately 7.8 million lei and financing is currently being sought'. 13. Beneficial features. Decree 710 incorporates a broad based involvement from many sectors: public, private and state owned enterprises, banking and education. This approach is essential as it takes into consideration the nature of accounting reform, in which reform in one sector often triggers the need for reform in other sectors. For example, revisions in the financial reporting standards for private enterprises may require corresponding revisions in lending qualifications and requirements from the banking sector, in addition to tax revenue implications for the public sector. Decree 710 also includes the involvement of educational institutions in the implementation of the reform process, thus providing a long term benefit by linking the theoretical features of accounting reform with the classroom environment. 14. Issues. The tirneframes for initiating statistical reforms are not linked on a timely basis with that of accounting reforms. In order to provide meaningful, comparative data, the statistics involving financial information should begin with the preparation and presentation of data in alignment with International Accounting Standards. In addition, the accounting standards are being established as a legislative mandate. Legislating accounting standards is an inefficient process as this will require constant amendments and changes. The decree also addresses operational level details, such as an accounting standard for a vouchering system. This type of operational procedure would typically be defined by the entity itself, not by government directive. Law on Accounting' 15. Adopted by Parliament in April 1995, the Law on Accounting mandates the methodological principles of bookkeeping, record keeping and financial reporting for all sectors. The Law, which was prepared by the MoF, states that, inter alia: (i) records must be kept in the national currency and in the 6 Refer to Annex 2: Existing and Pending Technical Assistance Efforts in Moldova. ' Refer to Annex 1.2 3 State language; and (ii) the MoF has the responsibility to define the standardized charts of accounts, methodology for financial reporting preparation and financial reporting formats for enterprises and state budgetary institutions; the NBM, in coordination with the MoF, has the responsibility for these same topics in the banking sector. 16. Beneficial Features. The Law on Accounting imposes restrictions on the types and frequency of changes to the accounting methodology during an accounting cycle in addition to requiring that the changes be identified in the explanatory notes accompanying the financial statements. 17. Issues. The Law mandates operational level details which are typically defined at the entity level. For example, Article 18 defines the staffing titles and corresponding signature responsibilities for specific documentation and Article 38 designates personnel procedures for an accounting service company if a manager is to be dismissed. In addition, the Law mandates details which are typically defined by international standards and at the entity level, for example, Article 41 dictates that the rules and procedures for physical inventory are to be confirmed by the MoF. Draft Law on Auditing! 18. The Draft Law on Auditing, which has not yet been adopted by Parliament, was prepared by the MoF, the Audit Chamber and the SNC Pragmaticus Company, for the purpose of establishing the legal, economic and organizational framework for an audit. The provisions include specifications on, inter alia: which entities are required to be audited; the scope of an audit; and requirements for auditor independence. 19. Beneficial features. The law initiates and defines the establishment of an Auditor Board to serve a regulatory role which includes the licensing of the profession. The law also allows for confidentiality between the client and the auditor and defines requirements for independence. The features of independence disallow an auditor to conduct an audit if an ownership or management interest in the firm exists or if the auditor is providing services related to the establishment or management of the financial reporting system. 20. Issues. Confusing issues exist; for example, in Article 4, it is stated that an audit firm may provide services for, inter alia, preparation of financial reporting, consulting on financial and business matters and general management. In Article 5 it states that "an audit firm may not perform any type of activity other than auditing". In addition, the law does not allow for much flexibility in discussing unusual circumstances or events as Article 7 states that the economic entity audited must "correct all violations revealed by the auditor related to bookkeeping and reporting procedures". Temporary Statute on Auditing of the Banking System of the Republic of Moldova' 21. This temporary statute, dated January 11, 1995, was prepared by the National Bank of Moldova (NBM) for the purpose of establishing regulations, licensing and procedures for audits to be conducted on banks; lending institutions and the founders and shareholders thereof. The statute establishes the NBM as the licensing and regulatory body for audits conducted on banks and lending institutions in Moldova; defines the requirements for audit report content and submission procedures; outlines 8 Refer to Annex 1.3. 9 Refer to Annex 1.4. 4 requirements for auditor independence; and defines the rights and obligations of both the auditor and the entity to be audited. 22. Beneficial features. This law is very similar to the Law on Auditing and includes much of the same beneficial features indicated for the Draft Law on Auditing. 23. Issues. This temporary statute conflicts with the Law on Auditing. The Law on Auditing establishes that the auditors licensed by the Auditor Board may audit banking institutions. This temporary statute defines the NBM as the body to license auditing firms for banks and lending institutions. Recommendations 24. Decree 710 lays much of the groundwork necessary for accounting and auditing reform; however a detailed review and analysis of the existing legal and regulatory framework, with the assistance of international expertise is needed. This review should identify the deficiencies of the legal and regulatory framework as compared to IAS and International Standards on Auditing (ISA) and initiate the draft or amended legislation needed to be compatible with these international frameworks. A systematic plan for legislative development for accounting and auditing should be devised in conjunction with the development of a professional accounting body in Moldova. The professional accounting body should promote the understanding, use of and adherence to IAS and ISA and provide an advisory role complementary to the regulatory roles of the MoF and the NBM. 25. In addition, as the topics of accounting, tax and statistics have not been addressed independently, these topics would need to be reviewed with the assistance of international expertise. In a market economy, the needs of shareholders, management, state budgeting and national data requirements differ. These frameworks would need to be developed and addressed independently and separate legislation would be required to fulfill the different needs. IV. Financial Reporting in Private and State Owned Enterprises Financial Accountability Framework 26. The chart of accounts, accounting standards and financial reports for private and state owned enterprises are all developed and regulated by the MoF. The financial reports are submitted to the MoF in compliance with MoF instruction #11-3-16-93 dated December 23, 1993. The required financial statements include a Balance Sheet and a Statement of Financial Results and Uses"o (i.e. Income Statement); a cash flow statement has neither been required or defined. The financial reports are required from all enterprises involved in entrepreneurial activity that are registered as legal entities, regardless of the form of ownership. 27. All enterprises, except for joint ventures with foreign capital, are required to submit annual financial reports by February 15. The annual financial report includes an attachment for explanatory notes regarding factors that influenced the results and financial status of the entity for the year reported. The annual financial report is submitted to: (i) owners (i.e. bodies authorized to manage the entity and founders of the organization); (ii) the State Tax Inspection Department; 10 Refer to Annexes 4.1 and 4.2 for template formats. 5 (iii) banking institutions (in accordance with credit agreements); and (iv) the Department of Statistics in the corresponding region or town. 28. For joint ventures with foreign capital, the annual financial reports are to be submitted to the four entities above by March 15. 29. At present, the financial reports generated are in response to the requirements of the MoF; rarely are additional reports generated within the particular enterprise for management or decision making purposes Accounting Standards 30. Discussions were held with the Ministry of Finance and academicians from the AES to determine differences between the theory currently being utilized for financial reporting in Moldovan enterprises and that of IAS. The following differences were noted: Selected M0or Differences Between International Accounting Standards and Moldovan Accounting Standards intern-,atnlMloa I tem Accounting Standards Acutn tnad A. Disclosure and Reporting Requirements Reporting Period Allows calendar or fiscal year Allows calendar year only Chart of Accounts Not regulated; customized by entity in Government regulated alignment with prescribed 'norms' Disclosure of Must be disclosed Not required principal accounting policies Cash flow statement Required Not required Contingent liabilities Must be disclosed Need not be disclosed Financial statements In cases where the accounting and tax Commingled and represented in one set for accounting and tax methodologies being applied at an of financial statements purposes enterprise significantly differ, two financial statements, serving the two separate needs would be prepared B. Accounting Measurements Method of recording Accrual basis Cash basis revenue and expenses 6 Seled 1ajor Differences Between International Acconiting Standards and odon Accounting Standards Iter Accounting Stdards Accoting Stanidrds Reconciling income For any given accounting period, the For any given accounting period, the statement activity to income statement activity equals the income statement activity, as indicated change in retained change in retained earnings on the on the Statement of Financial Results earnings on the balance sheet and Uses, does not enable computation balance sheet of the change in retained earnings on the balance sheet. This is due to individual accounts being used for multiple purposes (e.g. one account may be used for both expenditures and. uses of retained earnings)". Depreciation Based on the useful life of an asset Based on government regulation Inventory. Valued at the lower of historical cost or Valued at historical cost net realizable value Late payments for Recorded as a financing cost Not recorded as a financing cost; Interest Expense recorded as a non-tax deductible expense Value Added Tax Liability due is recorded on the balance No liability recorded sheet 31. With the current economic situation in Moldova, access to capital can be limited; therefore, reliance on a barter system is common. Barter, a trading system in which one commodity is traded or exchanged for another, can be highly distortive to the financial statements as fair market values for items traded and received in return may be difficult to establish. Action Plan 32. Based on the findings identified above, as a complement to Decree 710, the following Action Plan was developed in collaboration with the MoF and the AES. This Action Plan2 was developed to provide further detail to the process of implementation for accounting reform, that had not been addressed in Decree 710, for the purpose of furthering the effort to improve the level of transparency and to outline the path to financial reporting in alignment with IAS for private and state owned enterprises. 11 For further explanation on this topic, refer to Annex 4.3. n A Bank financed Institutional Development Fund (IDF) grant to support the MoF in executing the Action Plan for Accounting Reform in Private and State Owned Enterprises, was approved by the Bank on September 26, 1995.. For additional information on existing and pending technical assistance efforts, refer to Annex 2. 7 Action Plan for Accounting Reform in Moldova: Private and State Owned Enterprises Objective Description of Activity Output Steps to be Implemented in the short term (next 12 months): Step 1 An independent on-site Create a Working Group (WG), comprised of cross sector representation, to: Working Group/ permanent body for (i) provide a forum for discussion, review and research on accounting reform; Accounting accounting and auditing (ii) promote the use of LAS and ISA; and (iii) provide the initial membership Association development in Moldova. to form an Accounting Association (AA) in Moldova. The WG/AA, under the direction of the MoF, would include foreign accounting consultants and representatives from the MoF, the NBM, the State Tax Administration, commercial banks, academia,.local accounting and auditing firms and enterprises. The cross sector representation would enable all sectors to benefit and contribute to the coordination of the reform efforts across sectors. The inclusion of local accounting and auditing firms and enterprises in the WG/AA would provide the benefit of a 'ground up' representation and contribution to the reform process. This 'ground up' element may accelerate the acceptance and implementation of reform initiatives. Step 2 Legislation that provides an The WGIAA would review existing and pending accounting and auditing Accounting and accounting and auditing . legislation; identify deficiencies as compared to [AS and ISA; initiate the auditing legislation in framework compatible with drafting or amending of legislation; and prepare a systematic plan for alignment with IAS [AS and ISA. legislative development and ISA. Step 3 Create a 'bridge' of A. The WG/AA would receive training on IAS and coordinate the A conversion software understanding between the finalization, implementation and training for a transitional conversion package which enables existing theory and package" which details the conversion of existing financial data and reporting the conversion of the presentation of financial formats to be more in alignment with LAS. The most important element to existing financial reporting and that of [AS; the conversion package, addressing the content of the data, would include the statement data and and identification of adjustments necessary to present the content of the underlying presentation formats to provide an immediate data in alignment with [AS. The second element of the conversion package, be more in alignment mechanism to present addressing the financial reporting format, would include the mapping system with [AS; development financial statements more in to mechanically transfer the existing Moldovan chart of accounts to IAS and implementation of alignment with IAS. format. corresponding training courses. The financial reporting preparation and presentation developed under this conversion package would represent a minimum requlrement in the movement towards immediate financial statement preparation and presentation in full compliance with LAS. B. A sample group of enterprises would be selected by the WG, on a volunteer basis, on which the conversion package would be tested. This testing would allow for the preparation of detailed instructions on the conversion process to be utilized in subsequent training materials. Step 4 Acquisition of needed The WG would coordinate the acquisition of equipment and office supplies Needed office equipment and office (e.g. computers, laser printers, copy machines and software) for use at the equipment and supplies supplies training offices at the Ministry of Finance, both centrally and at the regional available on site. levels. 13 A conversion software package for enterprises has already been developed by World Bank staff. This software converts Moldovan financial statements to a Western format and has been both tested and refined by World Bank and other organizations. It appears to be working well and is likely to provide the initial working model for implementation. 8 Action Plan for Accounting Reform in Moldova: Private and State Owkned Enterprises Objective Description of Activity Output Step 5 Promote understanding. use The WG would purchase, prepare and distribute literature and develop and Accounting and and adherence to IAS and implement training courses to be conducted through the central and regional auditing publications; ISA. offices of the MoF. development and implementation of As a pan of this training program, the WG would coordinate the development training courses on of training materials and the conducting of training classes on the conversion IAS. ISA and the process. The initial target audience for the training program, to be conducted conversion package. by the WO, would be the selected enterprises from Step 3 B. above. The second target training group, also to be conducted by the WG, would address the regional offices of the MoF. The third round of a training program, to be conducted through the regional offices of the MoF, would address the broader scope of enterprises and local accounting firms. Wider distribution of information and techniques on the conversion process would be accomplished through distribution of publications. Steps to be implemented in the medium term (next 12 to 24 months): Step 6 Enhance the transparency of In the short term, see Step 3 above. Same as Step 3 above. financial reporting. In the medium term, the WG would develop and implement revised Revised charts of frameworks for both the charts of accounts and financial reporting formats for accounts and financial application in all enterprises in alignment with IAS. reporting formats for enterprises which are This is listed as a medium term objective, as opposed to short term, due to in alignment with IAS. the complications involved in developing a new conceptual accounting framework for charts of accounts to be used in private and state owned enterprises. Development of an effective conversion package will solve the immediate need for financial statements in accordance with IAS. However, as the conversion package only represents a solution of a temporary nature, a new chart of accounts to allow for preparation and presentation of financial statements in accordance with IAS will be the ultimate end product needed. 33. The adoption of IAS will most likely result in lower profitability in enterprises; however, the existing Moldovan accounting methodologies result in a distortive financial statement presentation due to utilizing the cash basis, in addition to other differences. As an illustration, under the existing Moldovan accounting methodology, the financial reporting for both tax and accounting purposes are commingled and represented in one financial statement. As a result, the costing components of a product do not include expenses which have exceeded the tax deductibility cap imposed by the Government. For example, if salary expense exceeds 108 lei/person/month, the tax deductibility level, the excess expense is excluded from true salaries and recorded in a separate expense category as a non-tax deductible expense. If this excess salary expense was related to the manufacturing of a product, reclassifying the expense to the non-tax deductibility category results in an overstatement of the gross profit margin for the product, as true production salaries are understated. 34. In defining any reform program, it is important to note the benefits to be derived at the micro level, in this case, individual enterprises. Reforms which enhance the transparency of financial reporting enable the presentation of a more true and fair view of operations, which in turn provides a better management tool. Furthermore, the closer the alignment with IAS, the more likely potential foreign partners will be able to understand and evaluate operations, thus improving the opportunity for foreign investment. The transition to IAS should also result in cost savings as a result of not having to rely on international accounting firms to restate financial reporting into an internationally understood framework. 9 V. Financial Reporting in Commercial Banks 35. As in private and state owned enterprises, the commercial banking sector is also severely limited in its relationships with international banking institutions due to the existing lack of transparency in financial reporting and differences between accounting standards utilized and that of IAS. Financial Accountability Framework 36. A standardized chart of accounts, guidelines for financial statement preparation and financial statement formats are all regulated and issued by the NBM. At present, the two main financial statement formatslinclude a Balance Sheet and a Statement of Financial Results and Uses (i.e. Income Statement); a cash flow statement has neither been required or defined. Joint stock and commercial banks submit their consolidated quarterly and annual financial statements to: (1) the owners of the bank; (2) the NBM; (3) the State Department of Statistics; and (4) the Ministry of Finance. 37. The NBM has not introduced a strict schedule of transition to financial reporting in alignment with IAS, and the commercial banks mentioned the need for one. Several of the banks are preparing financial statements on a quarterly basis in accordance with IAS, by converting data prepared under the existing framework, as guided by their international 'Big 6' accounting firms. However, the approach to preparing IAS financial statements differed between banks; a systematized format and process needs to be developed. 38. In terms of applying IAS concepts, several of the commercial banks made reference to the fact that provisioning for potential loan losses was a new concept being applied. However, in some cases, all of the past due loans were being accounted for as a loss and the length of time a loan was past due was not being taken into consideration in the loss provisioning process, thus overstating both the loss provision and the corresponding expense being charged in the accounting period. Broadly Adapted Financial Statements (BAFS)14 39. The BAFS are a set of instructions for commercial banks to prepare financial statements more in alignment with IAS. The BAFS instructions include: (i) a conversion key which maps data prepared under the existing chart of accounts to financial statement line items more in alignment with IAS; (ii) instructions on the preparation of adjustment entries which introduce such IAS concepts as accrual basis accounting and loan loss provisioning; and (iii) instructions on financial statement presentation formats in alignment with IAS. 40. As a mechanism to serve the purpose of providing financial statements more in alignment with IAS, several of the commercial banks in Moldova are utilizing the BAFS instructions and presentation formats. It is important to note that BAFS is based on data prepared under the existing accounting framework for commercial banks. It does not represent. an alternative to having a framework which enables immediate financial statement preparation and presentation in full compliance with IAS. However, BAFS does provide the benefits of introducing IAS concepts, " Initially developed for use by the commercial banks in Russia by an International Advisory Board comprised of representatives from the Supreme Soviet, the central bank of Russia, the EU, the IMF, the World Bank and the 'Big 6' international accounting firms, the BAFS have been adapted for use by the commercial banks in Moldova by a consultant to the World Bank, Mr. Remi Duflot. 10 builds a 'bridge' of understanding between the existing system and that of IAS and therefore provides a learning.tool. BAFS should be viewed as a minimum requirement in the movement towards immediate financial statement preparation and presentation in full compliance with IAS. 41. At present, there is no uniform approach within the commercial banking sector to arrive at financial statements in a Westernized format. Some of the banks are utilizing the BAFS instructions, some of the banks are utilizing information supplied by their international accounting firms. This approach is causing difficulty in the ability to compare financial performance. One standard approach to this conversion process needs to be formally supported by the NBM. In addition, improvements need to be made in gaining internal management understanding of the BAFS process, in particular the benefits which result from enhancements in the transparency of financial reporting. 42. Previous efforts within the NBM had resulted in the initiation of a Working Group for the purpose of organizing the preparation of financial reporting according to an internationally accepted format, as presented by the IMF. In addition, the BAFS format and instructions had also been presented to the NBM; however, due to the current lack of assistance for implementation, neither the IMF format or the BAFS reporting package have been implemented. Action Plan 43. As the central bank, National Bank of Moldova (NBM), regulates the commercial banking sector, discussions were held and an Action Plan developed in conjunction with the NBM regarding the steps needed to strengthen accounting and auditing15 in the commercial banks. 44. In order to have the commercial banks presenting financial statements in alignment with IAS, the following Action Plan', to be implemented by the NBM, has been developed in collaboration with the NBM. Action Plan for Accounting Reform in Moldova: Commercial Banking Sector Objective Description of Activity Output Steps to be kiplemented in the short term (next 12 months): Step 1 Development of a permanent Creation of a Working Group (WG), in addition to the WG created under the Formation of a on-site body to initiate and Action Plan for Enterprises, which would include representation from foreign Working Group implement the steps outlined experts, the NBM, the MoF, commercial banks, the accounting profession in this Action Plan within and relevant training institutions and universities. This WG would coordinate the timeframes noted and to its Action Plan activities with both the WG for enterprises and the WG coordinate accounting initiated at IMF request. reform in the commercial banking sector with private and state owned enterprises. 1s References to auditing refer to external auditing. The topic of internal auditing was not addressed in this mission. 16 Under USAID funding, two foreign experts arrived in Moldova in August to coordinate the development of a Commercial Bank Working Group and to initiate the reform efforts corresponding to the Action Plan for Commercial Banks, as outlined. For additional information on existing and pending technical assistance efforts, refer to Annex 2. 11 Action Plan for Accounting Reform in Moldova: Commercial Banking Sector Objective Descripton of Activity Output Step 2 Legislation that provides an The WG would review existing and pending accounting and auditing Accounting and accounting and auditing legislation; identify deficiencies as compared to IAS and ISA; initiate the auditing legislation in framework compatible with drafting or amending of legislation; and prepare a systematic plan for alignment with LAS IAS and ISA. legislative development. and ISA. Step 3 Create a 'bridge' of A. The WG would select the transitional financial reporting format to be A transitional financial understanding between the utilized during the short term reform period. reporting format and existing theory and preparation instructions presentation of financial B. The WG would test the transitional financial reporting format in all more in alignment with reporting and that of LAS commercial banks through the end of 1995. IAS and international and international banking banking industry industry requirements; and, C. The WG would analyze the transitional financial reports sent in by the requirements. provide an immediate commercial banks and give them feedback in order to improve the quality of mechanism to enable the reports. financial statement preparation and presentation D. The WG would finalize the instructions and make the transitional financial more in alignment with IAS. reporting format mandatory for submission by all commercial banks by the end of 1995. Steps to be implemented in the medium term (next 12 to 24 months): Step 4 Enhance the transparency of A. In the short term, see Step 3 above. Revised financial financial reporting. reporting formats B. In the medium term, the WO would prepare a new financial reporting which fulfill the package(s), which would replace the transitional financial reporting format, in reporting requirements fulfillment of the following different reporting requirements: of the entities noted. * to shareholders and the public in general in accordance with IAS; * to tax authorities; * to the NBM for supervision; * to the NBM for statistics; and * to the NBM for monetary surveying purposes. C. In conjunction with the new reporting formats, the WG would develop new charts of accounts which would allow for information recording and presentation in a format to satisfy the needs of the audiences, as identified in B. above. Step 5 Promote the understanding, Develop, organize and deliver training material on the new financial reporting Training material and use and adherence to IAS package(s) and charts of accounts. The training should be customized for the training courses on the and the international banking bookkeepers, the Chief Accountants and the users of the.information. new financial reporting industry reporting standards. formats and the new charts of accounts. 45. Training programs have been initiated through the Moldovan Banking Association; however, at present, the topics of accounting and auditing have not been addressed. In future, training programs for the commercial banking sector on the topic of accounting and auditing should be developed in conjunction with the Accounting Association which is established under Step 1 of the Action Plan for Private and State Owned Enterprises. 46. Background information to provide an overview of the different Western (i.e. French, German, British and North American) financial reporting systems for banks should be given to the NBM to assist in the coordination of technical assistance by gaining an understanding of how these systems differ. 47. In addition, a lack of independence in auditing currently exists in the banking sector due to only one local 12 auditing firm being licensed to audit commercial banks in Moldova'. As a first step, as the NBM is the regulatory and licensing body for commercial bank auditing firms, increases in the number of audit firms licensed to conduct audits of commercial banks will need to be initiated by the NBM. VI. Central Government Infrastructure' Reporting to Parliament 48. Accounting Chamber. The Accounting Chamber was established in December 1994, upon dissolution of the State Control Department, for the purpose of ensuring control over the management of public resources, expenses and property. The main objectives of the Accounting Chamber are to: (i) identify all financial resources for the budget; and (ii) ensure maximum and efficient use of state monies. Per the Chairman, the current tax situation needs to be revised as enterprises are avoiding taxes and the current enforcement system is not effectively detecting these occurrences. The current sources of tax revenue are: (i) income tax from enterprises (at a flat rate of 38% of net income); (ii) personal income tax; (iii) value added tax; (iv) excise tax; (v) land and property tax and (vi) penalties and fines. The Accounting Chamber has the right to audit any enterprise related to obtaining state funds. If embezzlement or misuse of state funds is detected, the ensuing legal process is handled through the court system. The current difficulties identified by the Chairman include, inter alia: lack of qualified personnel to fulfill the staffing needs of the Accounting Chamber; need for training of personnel on IAS, ISA and governmental audit techniques; and claims that auditors are accepting bribes. To combat the latter, the Accounting Chamber has drafted a law for review by Parliament which would entitle the auditor to retain 5% of the funds detected and returned to the Government as a result of their findings. 49. The Accounting Chamber presently lacks the staffing and equipment resources necessary to conduct an effective operation of financial control; however, the proposed structure includes a total of 140 staff (94 staff at the departmental level and 56 additional staff). The organizational framework for the Accounting Chamber, as proposed, has been approved by Parliament; however due to the limited budget resources available, the allocations necessary to support the infrastructure of the Accounting Chamber have not been made. Once the Accounting Chamber is fully staffed, training would be required in order to carry out its designated responsibilities. Reporting to the Ministry of Finance 50. Auditing Chamber. The Auditing Chamber was established in 1991 for the purpose of preparing, administering and regulating auditor and audit firm licensing procedures and examinations and to regulate the auditing profession. The Audit Chamber regulates auditing activity and licensing procedures for enterprises and the NBM has these responsibilities for the banking sector. At present, the staff of the Audit Chamber is comprised of six members (the Head of the Auditing Chamber and five members from local accounting firms). In addition, an individual from the Audit Chamber is also elected to serve as the head of the Council of the Auditing Chamber, with the responsibility of coordinating the development of an Examination Commission. 51. The Auditing Chamber records currently indicate the licensing of 11 accounting firms and 54 auditors. The auditor licensing examinations are offered when 'enough' are enrolled. The subjects covered in the exam include: legislation, accounting, finance, taxation, and cost accounting. Qualification requirements to sit for the exam include: a university degree or graduate of an academy; three years of field experience in auditing or accounting; or higher education teaching experience; or general experience of five years or more. The specific licenses issued, 7 At present, Universal Audit is the only local audit firm licensed to audit commercial banks. s Refer to Annex 3 for organization charts and descriptions of accounting and auditing related entities. 13 which the Auditing Chamber has the right to revoke, include: insurance, banking, market securities and general. 52. In order to avoid overlapping duties and responsibilities, both the Accounting Chamber and the Auditing Chamber will need to have their roles and objectives clarified. 53. Methodological Council on Accounting and Auditing. The Methodological Council was established for the purpose of developing accounting standards and to coordinate accounting and auditing initiatives for both the public and private sectors. The MoF approves the membership of this Council, which is to include Chief Accountants of various ministries and departments and specialists from educational and other backgrounds. In terms of staffing, the Council is intended to be comprised of nine members; however it is currently operating with six members and has only met one time in six months. 54. Department of Methodology on Accounting and Reporting. The purpose of this Department is to compile and analyze documents, statistics and information on accounting in enterprises. There is currently no staff in this department; however it is intended to be comprised of twenty staff members. 55. Financial Guard (FG). The FG, a paramilitary organization, was established in June 1992 for the purpose of policing enterprises to ensure that operations are being conducted in a legally acceptable manner, as licensed. The FG utilizes two primary reference materials, based on the Russian system of corrections, as operational guidelines: The Criminal Code and Administrative Violations. The FG verifies documentation, such as matching invoices to support inventory on hand, verifies sources of goods and the right to engage in activities. The FG staff do not directly penalize an entity, they file a report and any necessary administrative sanctions go through the court; however the FG does confiscate monies from those entities who do not use the lei currency. Each member of the FG staff is said to generate 10,000 lei in revenue to the budget. 56. The FG is intended to be comprised of 123 staff at both a regional and territorial level; however 60% of its staffing requirements are unfilled due to low salaries and the perception that employment as a FG member places an individual in a dangerous and threatening role. 57. The needs of the FG, per the Director, are primarily: (i) qualified personnel and (ii) access to a computerized information base on entities operating in Moldova which would include legal, tax, statistical and financial information. Recommendations 58. The existing infrastructure allows for considerable overlap in the duties and responsibilities to be performed by each entity. In addition, some of the roles defined are better suited to the previously centralized form of government (i.e. the policing function of the Financial Guard). The development and implementation of a training program in the form of a twinning arrangement between Moldova and a country with a more advanced public infrastructure for accounting and auditing would assist Moldova in the establishment of an infrastructure best suited to its needs. This style of training would enhance the Government of Moldova's knowledge and understanding of the accounting and auditing needs of a market economy and help to define both the bodies required within the central government infrastructure and the separate roles needed between the public sector and that of the accounting profession (i.e. regulatory vs. advisory). VII. The Accounting Profession 59. As stated in a United Nations publication *it is important to recognize that the development of accounting 14 in any country is impossible without developing the accounting profession"9 The accounting profession, in the form of an independent accounting professional body, serves public interest by providing an advisory, educational and professional role. In its advisory role, a national accounting professional body, or Accounting Association (AA), would conduct research and define methodology in coordination with public sector regulatory bodies, educational institutions and other entities. In addition, the AA would promote uniform certification and licensing standards consistent with both IAS and ISA methodologies. In its educational role, the AA would promote a high level of educational requirements for its members by disseminating information and coordinating training programs to assist the accounting profession in keeping current on international developments. In its professional role, the AA would establish and monitor professional standards to improve the conduct, performance and expertise of its members. 60. No national independent accounting body yet exists in Moldova; however a preliminary affiliation was formed with the Association of Accountants in Russia. In December 1994, a first session of this Association was held at Moscow State University. Agreements were made at this meeting in Russia to schedule a meeting in January 1995 for the purpose of setting up an independent Accounting Association in Moldova, however this has not yet been done. 61. The MoF estimates that 50,000 enterprises are currently operating in Moldova with a supply of 29,000 accountants. At present no professional accounting certification exists, however accountants have to renew an industry certification every five years. Local Accounting and Auditing Firms 62. As mentioned previously, auditing activity for enterprises is regulated and licenses issued by the Auditing Chamber, under the MOF, and by the NBM for the banking sector. Eleven accounting firms are currently registered and licensed with the Audit Chamber to audit enterprises" and one firm licensed by the NBM to audit commercial banks, Universal Audit. Meetings and discussions were held with both Audit-Evcor & Euro-In Partners and Universal Audit during the CFAA mission. 63. Audit-Evcor & Euro-In Partners. Audit-Evcor, established in May 1994, became the first international joint venture accounting firm in Moldova by joining with the Italian firm of Euro-In & Partners in December 1994. Euro In & Partners has main offices in Italy and Germany, with subsidiaries in Hungary, Poland, Romania, Czechoslovakia, Slovenia and Moldova. At present, the joint venture's authorized capital is $20,000 with both sides retaining an equal percentage of the partnership's profits. The existing fee structure includes: 200 lei/day for qualified licensed staff; and 140 lei/day for Junior Partners'. 64. Current projects to date conducted by Audit Evcor include, inter alia: collaboration with Price Waterhouse, Chisinau regarding the auditing of auctions for the privatization process; and audits of IBRD Loans (Emergency Drought Recovery Loan #3569, Rehabilitation Loan #3653 and the Structural Adjustment Loan #3815). 19 UNCTC Advisory studies No. 7, UN 1990. 2 Refer to footnote 4. 21 (1) Audit-Evcor & Euro-In Partners; (2) Moldauditing; (3) Audit Fin; (4) Inaudit; (5) Audit; (6) Garant Audit; (7) Audit Const; (8) Revconstaj; (9) Progress; (10) Audit A and (11) Tiras Audit. 2 For comparative purposes, in July 1995, the average wage in Moldova was 6.25 lei/day. 15 65. In terms of needs, Audit-Evcor & Euro-In Partners expressed a desire to obtain a license to conduct audits in the banking sector, in addition to the need for training on IAS and ISA. 66. Universal Audit (UA). Formerly an agency which reported directly to the NBM, UA became independent at the end of 1994, based on an NBM decision, for the purpose of enhancing their independence. In January 1995, UA registered as an independent organization in the form of a partnership currently comprised of eight partners. UA currently audits all of the commercial banks in Moldova except those located in the Transnistria region or those currently being audited by Price Waterhouse or KPMG. According to UA's main partner, "their audit is conducted to emphasize two issues: (i) credibility of balance (accuracy based on source documents) and (ii) payment to budget" The latter reference illustrates a concept for an audit performed under the previously centralized economy. In terms of resources needed, the main partner indicated a need for training on IAS and ISA. Recommendations 67. As noted, the need to receive training on both IAS and ISA was eitpressed by both audit firms. This training is needed in all sectors; however, as the commercial banks are not presently required to maintain an internal audit function, the training of the bank auditors becomes even more critical to ensuring compliance with banking regulations. In addition, one of the local firms licensed to audit enterprises expressed a desire to obtain a license to conduct audits in the banking sector. As this may represent a common desire amongst the local accounting firms, a more efficient licensing system may involve combining the ability to obtain an audit license for both enterprises and commercial banks under one licensing body. Combining the licensing under one body should enhance the capacity to promote cross sector knowledge, coordinate training programs, advise and disseminate information regarding accounting and auditing developments and potentially reduce administrative costs through avoidance of duplicative staff. 68. In addition, in order to strengthen the quality of an audit, an independent 'Quality Review Board' could be established. This Quality Review Board, comprised of representatives from the combined licensing body, several local accounting firms and educational institutions could provide a review process to evaluate audit opinions rendered, financial reporting presentation formats and procedures undertaken by the local accounting firms. A broad representation on the Board would serve to further promote cross-sector knowledge. In order to maintain an independent perspective, critical to the Board's effectiveness and credibility, the local accounting firms represented on the Board would need to be rotated on a regular basis (e.g. semi-annually). The Quality Review Board should also have the ability to penalize accounting firms in order to promote compliance with its recommendations. VIII. Education and Training 69. Three levels of education for accounting specialists currently exist in Moldova: (i) a university degree program of five years; (ii) a secondary special college degree program of up to five years; and (iii) a trade program of approximately three months. In addition to the degrees and certifications in accounting offered by universities and trade programs, ministries and private companies also offer training programs in accounting. 70. Academy of Economic Studies (AES). AES, a state owned educational institution, is the primary leading resource for an accounting education in Moldova and works closely with the MoF in developing accounting legislation and reform. In terms of the classroom curriculum, the five year university degree program offered at AES consists of 200 hours and includes the following subjects: (i) Accounting in Industry (100 hours: 90 lecture and 10 lab); (ii) Accounting Theory (70 hours: 40 lecture and 30 lab); and (iii) Preparatory Documents (30 lab hours). The enrollment of accounting students is approximately 100 students per year. 71. The CFAA mission concluded, based on limited observations, that the teaching style in the classroom should 16 be changed to allow greater interaction between the students and the professor. Textbooks, which were publi$hed in 1993, were outdated and comprised of strictly government documentation and regulations, with no examples or alternative methodologies indicated. 72. Contabil. Contabil is a private company which was established in 1992 for the purpose of publishing educational material and organizing seminars on accounting and auditing. The staff is currently comprised of 12 permanent members, and 20-30 specialists from different fields. Contabil works closely with the MoF and the AES in developing and communicating accounting regulations and guidelines. Recommendations 73. The classroom represents a critical conduit for education on IAS and ISA. As recognized in Decree 710, the accounting and auditing reform measures should be integrated into the classroom on a timely basis. In terms of the approach in the classroom, the analytical skills of the students would be greatly enhanced by a more interactive student/teacher environment. Presentation and discussion of alternative methodologies and reasons for their occurrence, both in the textbook and in the classroom, would enhance the student's development of analytical skills, contribute to a more comprehensive understanding of accounting issues and strengthen Moldova's approach to the 'substance over form' methodology designated under IAS, which indicates that information should be presented in accordance with its economic reality and not merely its legal form. IX. Conclusion 74. Development of an effective accounting professional body, the AA, is the key to a successful accounting reform program. The AA would provide a permanent, on-site body to promote the understanding and use of IAS and ISA; communicate, train and keep all sectors current on international accounting and auditing developments; and provide an advisory resource complementary to the regulatory role of the public sector. As the AA develops, it would also serve an essential role in the tailoring of IAS and ISA to the specific needs of Moldova. 75. More training and better programs are needed in all sectors on IAS and ISA. The orientation of the training programs should serve to promote 'demand sustained' accounting and auditing development. This demand can be created by educating management on features of profitability: how it is defined and how it is critical to decision making (e.g. defining production vs. non-production costing components and linking these costing components to price setting to achieve a targeted profitability for both the product and the entity overall). The training should emphasize the benefits derived from enhancements in transparency resulting from the use and understanding of IAS and ISA and promote the use of financial reporting as a management tool. This training will also serve to strengthen the local capacity for accounting and auditing, which, in turn, results in cost savings by reducing reliance on external accounting firms. 76. It is important to note, that while much of the reform efforts can be spearheaded by the AA, the Government of Moldova will need to provide a coordinating role across sectors to reduce the possibility of duplication of effort'. 77. The benefits from these reforms will be substantial in all sectors. One of the most important benefits to be gained is the ability to communicate with the international community in a common business language; an essential element to economic survival in a competitive, internationally dependent marketplace. m:\sandy\cfaalgreencv 2 Refer to Annex 2 for the identification of existing and pending technical assistance efforts being conducted in Moldova on behalf of accounting and auditing reform. 17 ANNEXES Annex 1.1: Decree 710: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics Government of the Republic of Moldova DECREE No. 710 September 23, 1994 Chisinau State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics For the purpose of integration of the Republic of Moldova into the international community and for the establishment of an efficient information database for comprehensive economic analysis and prognosis under market conditions, the Government of the Republic of Moldova shall hereby DECREE: 1. Approval of the State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics (attached). 2. Ministries, departments and local government agencies to develop the procedures for implementation of the State Program, establish deadlines and appoint responsible staff. 3. The following Government agencies responsible for the development and approval of primary calculation forms, statement forms, appropriate instructions and methodologies, as well as the development of consolidated statements: Primary data and statistical accounting - Department of Statistics; Accounting for business entities and budget agencies - Ministry of Finance; Banking accounting - National Bank of Moldova. 4. The Ministry of Finance, jointly with the Ministry of Economy, National Bank of Moldova and the Department of Statistics, to submit to the Government of the Republic of Moldova, within one month, a proposal regarding financing of the State Program of Transition of the Republic of Moldova to the International System of Accounting and Statistics. 5. The Government Economic Reform Coordination Council of the Republic of Moldova to control the phase-by-phase implementation of the State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics. Deputy Prime Minister Republic of Moldova Ion Gutsu 18 Annex 1.1: Decree 710: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics Decree 710: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics The State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics (hereinafter referred to as the "State Program") shall be developed in accordance with Decree No. 1253-XII of the Presidium of the Parliament of the Republic of Moldova of January 14, 1993, "On Priority Measures for Development of Statistics in the Republic of Moldova in 1993-1995" and Decree No. 513 of the Government of the Republic of Moldova of July 15, 1994, "On the Priority Measures for Implementation of Government Activities Program for 1994-1997". The existing system of accounting and statistics was developed under a centrally controlled economy, and is therefore based on data collection from a centralized planning methodology. The system of indicators was structured to support management functions of Ministries and Departments. Due to the above, the system excluded a whole series of indicators necessary for identification of the country's financial status. Among them are indicators related to money circulation and credits and operation of new entrepreneurial and broker entities. In addition, insufficient flexibility of statistical inspection methods considerably impeded economic changes and created obstacles for efficient regulation of business activities and implementation of social assistance policy. The existing methodology of the accounting and statistical system does not comply with international standards and business guidelines, thus impeding the development of foreign economic relations of the Republic of Moldova and its integration in the international community. All of this requires radical restructuring of the accounting and statistical system of the Republic to adapt to international standards. Initiating efforts have been made by the Ministry of Finance for the implementation of international accounting standards. New methodological standards are being implemented for calculations of the product cost, proceeds and profit from sales of products (work, services), goods, calculation of financial results, foreign currency transactions, etc. In 1993, uniform accounting balance sheets and financial statements were introduced in all branches of the national economy in accordance with the international standards and based on the requirements of financial agencies and commercial banks to control, analyze and provide a prognosis of financial and credit indicators. Methodology and management techniques were developed for implementation of the National Accounts System. Development of a national classification system and calculation of gross national product have been initiated. New methodology has been implemented for price index calculations, employment and wage statistics, and research of households, as well as statistics of income and expenses 19 Annex 1.1: Decree 710: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics of the population. The State Program provides for a comprehensive restructuring effort for the accounting and statistical system of the Republic of Moldova; its adaptation to international regulations; efficient use of previously obtained expertise relating to statistical and accounting instruments; and compliance with international standards. I. Purposes and Objectives of the State Program The main purpose of the State Program shall be to establish an efficient state regulation of country development, based on an objective and true evaluation of the status and potential of various forms of property and economic sectors, timely identification of tendencies and prognosis for their development, as well as evaluation of the consequences of management decisions. Thereby, the Program shall provide for the following: an internationally accepted system of statistical indicators for various social and economic processes; more emphasis on analysis and operative collection, processing and distribution of statistical data by statistical and accounting agencies using new technology; improvement of accounting and statistical procedures through the introduction of a National Register of Statistical Units (RENUS) for all forms of property and business activities, as well as more active involvement of regional statistical agencies in the decision-making process. The State Program shall assist in the timely identification of tendencies in the international labor division, evaluation of the status and potential of the world market and its future development, and shall provide for the following: establishment of a list of indicators, economic context and methods for calculation of indicators used in the international statistics, not included in the existing reporting system of the country; development and implementation of a common statistical system for new forms of primary accounting, and financial, banking and customs reporting in accordance with international regulations; implementation of new methods for primary accounting data processing and classification and forms of data submission to the international statistical agencies in accordance with international standards; 20 Annex 1.1: Decree 710: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics clarification of a list of indicators, periodicity, procedures for submission and forms of publication for statistical data in accordance with international regulations. First priority shall be given to restructuring methodology and management guidelines for official statistics in accordance with the needs of transition to a market economy and implementation of international obligations. Restructuring of official statistical methodology shall be based on: new criteria to divide the national economy into productive and non-productive spheres; a more complete identification of money circulation processes; financial status and credit worthiness of the country. For this purpose, the following important changes are made in the existing statistical indicator system: the national account system indicators shall now include those established as a result of changes that occurred in the structure and list of indicators for accounting, banking and customs reporting, and their integration into official statistics. For sections that .comply with international standards statistical systems, forms are under development. A list of indicators, economic context and methods for payment are also being reviewed. A study of sectoral tendencies and forms of property for the national economic entities is currently carried out on the basis of similarities and differences in the indicators for such entities. Standards for primary accounting, methodology recommendations and management requirements are developed which will allow simplification of the data collection process at the entities (agencies) and increase the reliability of the data submitted. At this time, improvement of the methodology for statistical observation is being implemented and various selective observation types (mass testing observation, monographic research) are being introduced, which shall result in reducing the quantity of statistical information. Establishment of the procedure for interaction between official and departmental statistics during economic transformation shall be a first priority, as part of the official statistical restructuring. Reform of district and central systems for collection and processing of primary statistical and accounting information is being carried out at this time, and includes new radical changes in the structure and functions of administrative agencies. Existing statistical information processing systems are being revised and new systems introduced. Restructuring of the methodological basis for official statistics shall include extensive scientific methodological research and the cooperation of several research institutions for resolution*of theoretical and methodological problems, international evaluation of the decision-making efficiency, and resulting experimental calculations. One of the most important and new tendencies in the development of official statistics in the Republic of Moldova shall be the submission of statistical materials to international organizations in accordance with a concluded and ratified agreement specifying obligations of the country as a member of the United Nations, International Monetary Fund, European Union, etc. 21 Annex 1.1: Decree 710: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics The following measures shall be implemented during the period of transition to the International System for Accounting and Statistics: adaptation of the list of indicators to international requirements; establishment of the National Account System (NAS); development of inter-branch balance sheets in accordance with the National Account System; international comparison of gross domestic product (GDP); introduction of changes into financial, budgetary and banking statistics; development of a balance of payments; adaptation of indicators to international requirements for price statistics, demographic statistics and labor, and foreign trade statistics, including customs; restructuring of accounting and banking accounting systems in accordance with the international requirements; establishment of the National Register of Statistical Units of the Republic of Moldova; development and implementation of a common classification and coding system in accordance with international standards; establishment of a cataloging and product bar-coding system; education and re-education of human resources in statistics and accounting in accordance with the requirements of the National Accounts System; expansion of international cooperation; improvement of the system of household research in accordance with the requirements of market economy; provision of modem coinputer technology to official statistical agencies to improve techniques for collection and statistical data transmission and processing. The next several chapters of the State Program contain descriptions of each of the objectives and measures planned for their implementation. Time frames for implementation and financing are outlined in the attachment. Special attention shall be paid to the indicators related to market economy processes that differ significantly from those used internationally, such as social and economic statistical indicators. II. Restructuring of Accounting and Banking Accounting Systems Accounting and bank accounting systems shall support the establishment of the new statistical information system, which is an important factor in the consistent implementation of the State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics. The main goal of the accounting system restructuring shall be the development and implementation of a special set of accounts which shall enable the following: to generally characterize the volume and flow of fixed and working assets, technical assets, long-term investments, funds and reserves of enterprises; 22 Annex 1.1: Decree 710: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics to collect summary information on expenditures related to the foundation of enterprises and social assistance to the employees; to identify the volume and flow of monetary assets in national and foreign currency deposited on checking, foreign currency and other accounts in the banks of the country and abroad, and securities; to summarize information on the results of financial activities of enterprises and assets received from outside for financing of business activities (bank credits, other financing for implementation of certain measures, etc.). A comprehensive evaluation of the results of financial and business activities, and a common approach to the identification of similar tendencies on accounts subject to accounting shall enable the establishment of an indicator system. This indicator system will allow the evaluation of the financial status of the Republic of Moldova for all types of business activities. The restructuring of balance and account schedules of the National Bank, which shall be implemented to establish the Common Register of Classification for Accounting and Reporting, shall be used to support both accounting control and asset and liability registration within the banking system based on the economic functions of the money circulation entity (enterprises, population, state, credit or financial system), as well- as foreign transactions and liquidity of financial instruments of the money market. The new bank accounting system shall allow for money supply management, in accordance with the purposes of the monetary and credit policy and for the establishment of monetary statistical indicators and NAS financial accounts based on summarized bank accounting data. II. Establishment of the National Account System (NAS) Radical economic reform aimed at the transition to the market economy and acceleration of integration processes shall require the establishment of the National Accounts System in the Republic. Methodological documents are developed on the basis of the NAS of the United Nations used within the European community and include the most recent changes introduced into the NAS of the United Nations in 1993. The main purpose of the establishment of the National Accounts System is to provide a complete and careful registration in the Republic of all economic activities related to technical production and services. Introduction of the National Accounts System shall allow for a more complete registration of data on production of valuables and services, on education, division and use of incomes, capital and financial flows, use of investments and financing sources in the national economy, income and expenditures of business entities, financial and credit relations, foreign economic relations of Moldova and its balances of trade and payments. 23 Annex 1.1: Decree 710: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics The National Accounts System shall provide for a more complete and comprehensive analysis of social and economic development and international comparisons of the most important macroeconomic indicators used in international practice. One of the main goals for the improvement of macroeconomic statistical accounting and analysis shall be making the Gross Domestic Product (GDP) the main characteristic of the status of the national economy. The Gross Domestic Product calculation shall allow for more appropriate international comparisons of levels and rates of economic development and national economy structures, and for the intensification of the economic analysis at a macro level. Gross Domestic Product reflects the overall operation of the economy, including productive (goods) and non-productive (services) spheres. The Gross Domestic Product structure serves as a basis for international economic comparison of the integration level of the Republic in the world economy. The National Accounts System shall be viewed as the only efficient means to achieve a complete and true evaluation of the Gross Domestic Product. Conceptual, management and methodological differences between the National Economy Balance System and the National Accounts System result in different evaluations of indicators of state budget revenue and expenditure, capital investment financing sources and the means of re-distribution of national revenue, as well as the relationship between the end and intermediate product. The above shows the reason for incompatibility of the existing national revenue calculation methodology from internationally accepted practices. The transition to the National Accounts System shall require a fundamental revision of the guidelines of primary statistical data processing and accounting, and financial, taxation and bank accounting. The National Accounts System shall include two types of classifications of business entities: by branch and by sector. Classification by branch shall allow for the evaluation of production, distribution and consumption of products (goods) and services, resource balance and use, and percentage each branch comprises of the Gross Domestic Product. Classification of business entities by economic sectors shall allow the identification of revenue and expenditure flows and the status of asset and liabilities. In this manner, household sector accounts shall provide for all data necessary for the analysis of important social sector changes and standards of life (distribution of income, consumption, savings, etc.) and for the identification of the sector role in the establishment and use of Gross Domestic Product data. Use of the National Accounts System internally shall allow the establishment of a series of important macroeconomic indicators necessary for the evaluation and analysis of the national economic status (e.g. Gross Domestic Product, Gross National Product, National Savings, current revenue, end customer expenditures for goods and services, gross investment, financing sources, and balance of current transactions with foreign countries). This data will serve as a basis for the evaluation of tendencies in the development of the national economy, prognosis of changes in such tendencies, and development of economic policy and measures 24 Annex 1.1: Decree 710: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics for its implementation. For analysis of the national economic status and activities of each group (each branch), economic transactions within the National Accounts System shall operate in terms of the following accounts: internal economic accounts: products and services account, operations account, revenue account, use-of-revenue account, capital expenditures account and financial account; foreign economic relations accounts (the rest of the world), current transactions account, capital expenditures account, financial account. Implementation of the NAS in the national economic accounting and management system shall provide for easier procedures in submitting the necessary data to UN agencies and other international organizations in accordance with requirements and appropriate standards. Management of Development of Inter-Branch Balances In Accordance with the Schedule of the National Accounts System (IBB/NAS) One of the main objectives of the official statistical restructuring process shall be the optimization of the balance macroeconomic calculations in accordance with international standards and the National Accounts System. Inter-branch balances are important components of the NAS due to the fact that they are widely used for the analysis of economic structures, major costs, in-kind material proportions, effects of changes in the price system, international comparisons, macroeconomic prognosis calculations, and evaluations of the effect of proposed management decisions. Inter-branch balances shall be developed on the basis of summary and integration of statistical, accounting and banking reporting data and their revision shall precede the development of inter-branch balances. In order to develop an inter-branch balance system based on the NAS, which shows formation, distribution and use of resources and revenues for all types of activities, information and methodology research shall be carried out in order to implement international statistical regulations in methodology and management. It shall be necessary to resolve several methodological problems in order to establish categories of the necessary data and the calculation methods for data not previously used in balance sheets, and to switch to selective observation of expenditures and outcomes of business and financial activities. In order to obtain data compatible to those obtained in the previous years and to ensure consistency of a dynamic series, it shall be necessary to coordinate two inter-branch balance systems, that of the National Economic Balance and NAS. The transition to the inter-branch balance system based on NAS shall be carried out in the following two phases. The first phase, starting in 1994, shall concentrate on the preparation of the list of data, 25 Annex 1.1: Decree 710: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics calculation techniques and forms of business activity data; and revenues and expenditures of branches and sectors of the national economy. Close attention shall be paid to the data not previously used in inter- branch balance sheets developed in accordance with the methodology of the National Economic Balance. The second phase shall provide for the development of an inter-branch balance system for 1995 in a consistent and detailed manner. Balances shall consider the needs of users within the Republic and international organizations. A special software package for calculations related to a coordinated inter-branch balance system shall be needed to support the restructuring of the management system for official statistics and procurement of modem technology. This software shall support calculations of the coordinated system of inter-branch balances in accordance with the methodology of the National Economic Balance and the National Account Balance. International Economic Comparison of the Gross Domestic Product The purpose of the International Comparison Program (ICP) shall be as follows: evaluation of the general economic development level of the countries; identification of the real parity buying power of the currencies; identification of economic and military potential; study of financial potential of the countries (contributions to the budgets of international organizations, etc.); analysis of the markets (market capacity and buying power of currencies, as opposed to the official currency rate); study of international economic integration; development of economic theories (model of development, etc.). Results of UN PMS are actively used by the World Bank and the International Monetary Fund in their analytical work. At this time, the Republic of Moldova is part of the second European group of the international comparison program, which also includes Austria, Hungary, Poland, Russia, Belarus, Romania and other countries. At this time, consultations are being held with Austrian and Romanian experts regarding processing of data for 1993 by the Republic of Moldova (Phase VI of UN PMS). Austria is the base country in the second group of European countries. An agreement has been reached that indicator comparison for Moldova and Austria shall be made through Romania. In 1994-96 comparisons shall be carried out with assistance from the National Statistical Commission of Romania in accordance with the Nomenclature of Commodity Groups. The scope of comparison activities was approved by the Organization for Economic Cooperation and Development (OECD). 26 Annex 1.1: Decree 710: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics IV. Improvement of the Data Support System Adaptation of Financial, Budgetary and Banking Statistics to the International Standards Under present conditions, the evaluation of the regulating effect of the financial and credit policies of the country on the main elements of economic development is only possible with the implementation of radical changes in statistical data processing and its adaptation to international requirements. The State Program provides for the development of indicators of monetary and financial statistics proceeding from their effect on the market supply and demand, classification of assets and liabilities and financial instruments based on liquidity criteria; inclusion of indicators based on their structure into the system of integrated description of the entire development process; and distribution and re-distribution of the cost of the Gross Domestic Product. A new indicator system shall allow the evaluation of the effect of money supply components, interest policy of the National Bank of Moldova and its system of economic regulation normatives for commercial banks, internal and external debt and the balance of payments of the Republic on macroeconomic proportions. Implementation of measures stipulated in the State Program shall allow the National Bank of Moldova to conduct international comparisons, evaluate and change international liquidity of transactions in the Banking system, actively influence the economic environment of the country, and systematically prepare analytical reports on the effect of the credit policy on the economic policy of the Republic. The system of monetary statistical indicators, comparable to classifications used in international practice, shall fully support the decision making process of the executive and legislative power agencies, and the National Bank of Moldova and the Ministry of Finance with operative information allowing the establishment of an accounting system for budget implementation, regulation and registration of revenues and expenditures in appropriate sections and articles, in accordance with the budgetary classifications at different levels. In addition, inclusion of new financial, budgetary and banking statistical indicators and preparation of the balance of payments shall simplify development of this most complex among all national accounts. Balance of Payments Management External balance of payments is a macroeconomic national account which shall systematically consolidate all foreign economic transactions of the Republic of Moldova. It would be entirely impossible to establish a National Accounts System and coordinate between the domestic economic development indicators and foreign economic processes, without an external balance of payments. Many international organizations classify external balance of payments indicators as most important data. Preparation of the balance of payments is rather complex. It requires coordination of actions between various Republican economic departments, and restructuring of the collection and data processing system, which may take some time. 27 Annex 1.1: Decree 710: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics The State Program provides for the preparation of the balance of payments based on evaluations and calculations of data in its first phase, in 1993. In future, the methodology for preparation of external balance of payments shall be based entirely on the use of primary information. Improvement of Price Statistics Price statistics is an important component of the economic research data in the area of a market economy. In particular, it serves as a basis for the identification of price deflators, necessary for calculations of indicators of Gross National Product, and the evaluation and prognosis of the inflation rate, level of money issuance, etc. The program shall include concrete measures for the development and improvement of methodologies for calculating price levels and indexes for all types of goods and services in several sectors and branches of the national economy. At this time, calculation of consumer price indexes is made based on monthly registration of prices for 1,800 goods and services, representing 742 companies in all forms of retail and services from 14 cities and districts of the Republic. Consumer price indexes shall be used to identify and summarize tendencies in price changes for products sold and tariff changes for services provided, as part of consumer expenses for the basic needs of an average family. Further adaptation of existing methodology to international standards, shall allow the consideration of price change patterns for all types of goods and services, including some new products, to neutralize the effect of structural changes and seasonal prevalence, which shall provide for the establishment of a price indexing system. Implementation of the European Comparison Program of 1993 shall require a large effort for the systematic decoding of represented goods in the manner similar to that used in Romania and Austria, and the management and registration of prices and reporting on prices. In this respect, it is expected to comply with the methodology for price dynamic calculations and indicators developed by the UN and International Monetary Fund. This will allow the identification of actual price changes for goods and services, including those that just appeared on the market. Adaptation of Population and Labor Statistics to International Norms In order to ensure that demographic development data complies with international statistical norms, the State Program envisages gradual implementation of registration for child mortality indicators and mortality causes in accordance with recommendations of the World Health Organization, and registration of migration between countries in accordance with international recommendations. As a result of the economic transition, a labor market shall be formed. In order to provide for 28 Annex 1.1: Decree 710: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics the analysis and prognosis of the labor market, and evaluate its effect on tendencies and proportions of economic growth, and development of social policy measures, implementation of an entirely new information system shall be required. This system should be capable to characterize the level and dynamics of employment, unemployment, wages and labor cost. To ensure that indicators under development comply with international statistical norms used in the countries of a market economy, with resolutions and recommendations of the Convention for Labor Statistics of the International Labor Organization, appropriate methodologies and classifications are developed in accordance with the methodological documentation of the International Labor Organization and based on the expertise of the statistical services of the Organization for Economic Cooperation and Development, Eurostat and national statistical organizations of Germany, France, Austria and Romania. The State Program shall provide for the implementation of household registrations at the time of census, in order to satisfy the requirements of the National Accounts System. The transition of the Republic of Moldova to international norms of labor statistics shall resolve the problem of submitting statistical data to the International Labor Organization and other international agencies, and allow information to be obtained on the labor market and incomes and wages which are necessary for the development of social and economic policy. Improvement of the Foreign Trade Based on International Requirements Foreign trade statistics shall include data on the expanded participation of the Republic of Moldova in international goods circulation. The State Program shall establish the system of indicators for average price indexes and physical volume of export-import, ratio of the foreign trade and internal prices for export and import products, as well as customs statistics management. Adaptation of methodological norms of customs statistics and foreign trade to norms used by the European Community countries and Eurostat shall provide for compatibility and comparability of foreign trade indicators of Moldova and those of foreign partners. Customs statistics management shall be carried out with the participation of the Department of Statistics and the Department of Customs Control for purposes of quality processing and reliability of data, as well as more complete use of the data. Development and Implementation of the Common System of Uniform Nomenclatures Use of the Common system of Uniform Nomenclatures in the sphere of state power and statistics, technical, economic and social information (CSUN) shall provide for compatibility, comparability and reliability of data. 29 Annex 1.1: Decree 710: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics Classification indexes are used for the study of the national economic structure, development of procedures for fundamental economic restructuring, and characterization of the productive forces development, and the level of public labor division. For compliance of CSUN to international standards and its adaptation to the conditions of a market economy, it is expected to revise existing economic classification indexes and develop new ones. At this time, effort is being made to establish the methodological and managerial guidelines for operating and developing the CSUN in order to describe the procedures for development, implementation and introduction of classification indexes. In addition, updating of classification indexes shall be provided by Ministries and Departments, and computerized maintenance of the classification indexes shall be provided by the computer network of the Department of Statistics. At the initial stage (1994-95), it is expected to revise the national economy classification indexes in order to adapt them to the international standards of economic activities, develop a classification index for state power and economic agencies based on a variety of new business entities of the Republic, as well as revise the classification index for enterprises and organizations to include additional classification parameters (type of property, form of legal entity, etc.) in accordance with the legislation of the Moldova. At the second stage (1996-97) it is expected to develop the following classification indexes in accordance with appropriate international classification indexes: occupations, management documentation, professions, and industrial and agricultural products. The coordination of work for the development of classification indexes and the computerized maintenance of uniform classification indexes, and the development of the methodology and normative support, as well as their storage shall be carried out by the Ministry of Communications and Information. Establishment of National Statistical Units Register (RENUS) The National Register of Statistical Units (RENUS) is a complex computerized register for recording of business entities in the Republic of Moldova. The main purpose for the establishment and maintenance of RENUS, is to provide reliable support for statistical observations based on a common system of accounting of business entities for the implementation of new methods of statistical data processing in accordance with international statistical standards. RENUS shall provide accounting for state power and economic management agencies, banking institutions, budgetary organizations, insurance agencies, agricultural enterprises and organizations, enterprises with foreign investment, public associations, religious organization and other business entities regardless of the form of property or jurisdiction. A necessary condition for registration of an entity in RENUS is state registration. 30 Annex 1.1: Decree 710: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics RENUS shall be established by statistical agencies jointly with state registration and state power agencies that will use common classification codes. Use of RENUS shall provide for the following: comparability of social and economic indicators; all-round observation of all statistical indicators at all facilities registered in Moldova; selective statistical observation based on certain indicators; preparation of necessary information for analysis of social and economic situation in Moldova; interaction with registers of other departments and updating of RENUS; accessibility of RENUS data by statistical agencies and other users; continuity of time series upon introduction of changes in territorial division, economic branch and type of property of the facilities observed by RENUS; information exchange with international registers at Eurostat, UN and CIS. At the initial establishment stage of RENUS, a statute on the National Register of Statistical Units shall be developed and approved which shall serve as the legal basis of indicators, methods of calculation, instructive and methodological documents and prognosis of information flow. The second stage shall include information and software support for implementation of each of the goals set by categories subject to RENUS. The third phase shall include coordination of information sources used for various objectives into a common information and technology system for operation of RENUS. V. State Product Cataloging System (SCS) Establishment The State Product Cataloging System (SCS) shall be established for the following purposes: Computerized accounting of nomenclature of products made in the Republic; Analytical information and statistical data support for state power agencies on manufactured products and their characteristics; Supply of reliable information on manufacturers and main characteristics of products to enterprises and other users; SCS shall provide for the following: Evaluation of the competitiveness of developed and manufactured products and identification of potential markets; Control compliance with compulsory requirements of standards for labor safety and environmental protection; 31 Annex 1.1: Decree 710: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics Implementation of a strong technical policy in the area of normative and technical support for development, manufacturing and consumption (use) of products; Cooperation with enterprises, suppliers of parts and materials necessary for end production. The establishment. of the State Cataloging System shall be carried out based on the cataloging methodology of UN and Eurostat, as used in Western Europe. In order to strengthen the technical policy of the Department of Standards, Metrology and Technical Inspection, and Department of Statistics, it is expected to develop procedures for information exchange between the State Cataloging System and the National Register of Statistical Units and the coordination of forms and numbers of input and output documents in the system. In future, the above mentioned system shall also be used for the cataloging of defense products in accordance with orders from the Ministry of Defense. VI. Bar-Coding System Implementation Use of bar-coded computerized identification in other countries provides for an efficient computer-based technology for data processing in retail, banking, health, transportation and other branches. Bar-coding (BC) is used for all types of products to be sold. The State Program shall provide for comprehensive use of bar-coding in the national economy of the Republic at the state, branch and regional levels, as well as at the enterprise (organization) level. In the development and establishment of methodological and informational support for the bar- coding system, the expertise of the Research, Design and Technology Institute of Food under the Ministry of Agriculture and Food shall be used, as well as the expertise from foreign and domestic enterprises of the Republic. In this respect, purchase and operation of appropriate technology is expected, such as code reading technology, master film development technology for application of BC on the label, and equipment for BC printing quality control and BC label printing. VII. Phases and Condition for implementation of the State Program Phases of the State Program Implementation The State Program shall provide for restructuring of accounting and statistics at all levels based on the distribution of responsibilities among appropriate agencies. 32 Annex 1.1: Decree 710: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics Diversity of the State program and the novelty and complexity of problems to be solved shall require a phase-by-phase implementation. It is recommended to start with preparatory research projects. Effort needs to be made to identify the list and calculation techniques for indicators entirely new to the agencies in charge of economic activities, adapt calculation methods for currently used indicators to methods used internationally, develop methods for the establishment of national accounts, identify the requirements for information support; restructure banking accounting and financial statistics; develop an account schedule for the business activities of enterprises and instructions for use of this plan for the National Account System. Effort is made to resolve problems related to fulfillment of obligations of the Department of Statistics and the National Bank of Moldova, related to the submission of the necessary statistical information to the international organizations primarily on the financial status of the country, its balance of payments, national revenue calculated in accordance with the methodology of the UN, for the purpose of the determination of contribution amounts of the Republic of Moldova to international organizations. Monetary and financial statistical indicators are estimated and the balance of payments of the Republic of Moldova are calculated. Required international evaluation is carried out, and requirements for software support identified; classification indexes reviewed and a National Register for Statistical Units established. In this regard, a draft cataloging system outline is to be developed. Education of experts and instructors for high schools and higher educational establishments shall be carried out and programs for the schools with economic, statistical and accounting programs reviewed; re-education of accountants and statisticians shall be carried out based on the newly developed program. In 1994, it is expected to complete the establishment of the social and economic indicators system and to resolve issues of division of functions between official and departmental statistics and to prepare statistical data subject to publication in official publications of international organizations. In 1995-97, after the international evaluation of the developed indicator system, the system shall be implemented in various sectors and spheres of activities. Experimental calculations at a macro level shall be replaced by processing of primary information and calculations of full scale inter-branch balance reporting summarizing major indicators of the national economic development based on the processing of statistical information in all spheres of activities. International Cooperation in the Area of the State Program Implementation The Department of Statistics shall supervise all of statistical activities and provide management for systematization, publication and submission of statistical information in accordance with the obligations of Moldova to the international community. As Moldova is a member of the UN, World Bank, IMF, CSUN, etc., the Department of Statistics jointly with ministries, departments and central economic institutions shall arrange for the following: 33 Annex 1.1: Decree 710: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics Participation of the country in the program of European comparison of 1993 with Austria, and Romania as an agent; Participation in the operations of regular sessions of statistical agencies of UN and Eurostat on projects implemented within the framework of these agencies; Submission of statistical data on issues of interest to statistical agencies of the UN; participation in the meetings of working groups, expert groups and seminars on projects implemented by statistical agencies of the UN and Eurostat. The main purposes of the international cooperation in this regard shall be as follows: Technical assistance from international organizations of UN and Eurostat to develop international statistical norms and standards and education of the human resources necessary to implement the state program, including internship of experts abroad; International evaluation of the state program; Exchange of expertise in the area of methodology and statistical methodology with national statistical service centers of developed countries. The state program provides for the expansion of cooperation with the National Statistical Commission of Romania, which has acquired extensive expertise in the adaptation of statistics to international standards, and for the preservation of the relationship with the statistical services of the countries of CIS and the Statistical Committee of CIS within the framework of the Convention of Independent States. Financial Support for the State Program Transition of the Republic of Moldova to the International System of Accounting and Statistics is an important task which includes: research; methodological and informational support of measures provided for by the.state program; procurement of necessary technology for use by the responsible agencies, education of human resources in the area of statistics and accounting; and international cooperation. During 1994-1997, implementation of this task shall require, as it has been estimated, 7,743 thousand Lei. Expenses related to the implementation of the State Program shall be distributed as follows: Restructuring of statistics - 907 thousand Lei; Restructuring of accounting - 6,356 thousand Lei; For technology, methodology and information support for bar-coding system and its 34 Annex 1.1: Decree 710: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics implementation in the national economy - 269 thousand Lei. Technical support for the state program shall be provided using modem technology for storage, transmission, analytical processing of data, and easy access to data. Due to shortages in technical and financial resources and related expertise and due to the fact that education of specialists, scientific support and evaluation of several projects of the state program may not be carried out in this short period of time based on domestic resources; the State Program may be implemented in the event that serious international support is provided. The State Program provides for establishing of business relationships with Eurostat and Statistical Commission of the UN, International Monetary Fund, European Bank for Reconstruction and Development, OECD, and international organizations which establish statistical standards and requirements for the study of expertise of the developed market economy countries where accounting and statistical systems are undergoing similar changes (Romania, Hungary, Poland, Germany, Czech, Slovakia). Expenses for the education of experts from Moldova, consultations and evaluation with participation of foreign specialists and the acquisition of methodology and informational materials shall be made from the funds provided as part of the technical and financial aid by the international statistical organizations participating in the international cooperation within the framework of the TACIS program. Responsible Executive Agencies for the State Program The following ministries, departments and research organizations of the Republic of Moldova shall be responsible for the implementation of measures scheduled in the State Program: Department of Statistics; Ministry of Economy; Ministry of Finance; National Bank of Moldova; Ministry of Agriculture and Food; Ministry of Justice; Ministry of Industry; Department of Architecture and Construction; Ministry of Transportation and Roads; Ministry of Communications and Information; Department of Trade; Ministry of Trade, Social Protection and Family; Ministry of Health Care; Ministry of Education; Department of Customs Control; Department of Standards, Metrology and Technical Inspection; Economic Academy of Moldova. The above mentioned ministries and departments shall develop detailed management schedules 35 Annex 1.1: Decree 710: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics for the implementation of measures provided for in the state program and determine concrete deadlines and responsible staff. The Coordination Council for the Economic Reform under the Government of the Republic of Moldova shall control the implementation of tasks provided for in the State Program. This Council shall systematically hold hearings of the reports from responsible staff regarding implementation of the State Program, and shall annually submit to the Government of the Republic of Moldova a summary report on this matter. 36 Annex 1.1: Decree 710 Attachment: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics No. Measure Implementation Responsible Agencies/Staff Time frame Expenses I. Development of General Methodological and Management Guidelines for official statistics Development of a statistical indicator annually 1 thou. Lei Department of Statistics, Ministry of system based on the requirements of a Economy, Ministry of Finance, National market economy and international Bank of Moldova, Ministry of Health Care, standards Ministry of Internal Affairs, Ministry of Education and other ministries and departments 2 Development of major methodological 1994-95 1 thou. I.ei Department of Statistics, Ministry of provisions for selective research, Economy, Ministry of Finance, Ministry of preparation of a census schedule, single Labor, Social Protection and Family, registration, and improvement of the Academy of Sciences of Moldova household budget research program. 3 Improvement of the indicator system 1994-1995 22 thou. Lei Department of Statistics, Ministry of and development of uniform inter- Finance, Academy of Economic Studies, departmental forms of primary specific institutions which concluded the accounting in accordance with the agreement requirements of the standards of primary accounting, the approval and adoption by the Department of Statistics 4 Improvement of the indicators system 1994-96 120 thou. Department of Statistics, Ministry of and development of specialized branch Lei Finance, National Bank of Moldova, forms of primary accounting in Ministries, Departments, Academy of accordance with the requirements for Economic Studies, Republican standards of primary accounting, the Methodological Counsel for Accounting in approval and adoption by the the National Economy, National Center for Department of Statistics Terminology under Ministry of Education, SRL Bilant 37 Annex 1.1: Decree 710 Attachment: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics 5 Improvement of the indicators system 1994-95 8 thou. Lei Ministry of Finance, Department of and development of specialized branch Statistics, Ministries, Departments, forms of primary accounting for state Academy of Economic Studies, Republican budget financed institutions in Consultative Collegia for Budgetary accordance with the requirements of Accounting, National Center for standards for primary accounting, Terminology under the Ministry of approval by the Department of Statistics Education and adoption by the Ministry of Finance 6 Development of guidelines for the 1994-95 100 thou. Department of Statistics, Ministry of preparation, use and circulation of Lei Finance, National Bank of Moldova, documents; preparation and publication Ministries and Departments, Republican of albums for primary accounting forms Methodological Counsel for Accounting, and methodological instructions for their SRL Bilant and Contabil-Service, Statistica preparation and completion Publishing House 7 Statistical publications and submission annually - Department of Statistics, appropriate of information to international ministries and departments organizations in accordance with concluded agreements and conventions 8 Comprehensive analysis of economic ongoing - Department of Statistics, Ministry of and social changes in the Republic, Economy, Ministry of Finance, Ministry of using methodology for prognosis of Labor, Social Protection and Family, etc. potential failures and disproportions in the national economy 9 Improvement of text, quality of ongoing - Department of Statistics and Statistica publishing and printing of statistical Publishing House annual publication 10 Quarterly publication and circulation of ongoing 4 thou. Lei Department of Statistics, Ministry of statistical information bulletin Communication and Information 11 Establishment of major provisions for 1994-95 4 thou. Lei Department of Standards, Methodology and uniform documentation systems, their Technical Inspections, Ministry of revision and maintenance Industry, Ministry of Economy, Ministry of Finance, Ministry of Labor, Social Protection and Family, Ministry of Transportation and Roads, Ministry of Agriculture and Food, Department of Statistics, Department of Architecture and Construction, Department of Trade, Ministry of Communications and Information, National Bank of Moldova 38 Annex 1.1: Decree 710 Attachment: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics 12 Improvement of statistical data 1994-95 20 thou. Lei Department of Statistics, Ministry of processing and collection techniques, Economy, Ministry of Finance, Ministry of procurement of technology for statistical Communications and Information agencies, development of new and upgrading of existing electronic data processing centers, in accordance with changes in the list of statistical indicators and methodology for their calculation II. Development of Accounting and FInancial Control a) General Methodological Principles for Accounting Set-Up and Development 13 Development of a draft law on 1994 2 thou. Lei Ministry of Finance, Academy of accounting Economic Studies, specialized institutions which concluded the agreement 14 Development of a draft law on auditing 1994 3 thou. Lei Ministry of Finance, Auditing House under Ministry of Finance, Academy of Economic Studies, specialized institutions which concluded the agreement 15 Development of draft statutes on 1994 4 thou. Lei Ministry of Finance, Academy of accounting and reporting Economic Studies, specialized institutions which concluded the agreement 16 Development of a draft statute on the 1995 10 thou. Lei Ministry of Finance, Academy of procedures for applying the law on Economic Studies, specialized institutions accounting which concluded the agreement 17 Development of a draft statute on the 1994 - Ministry of Finance Republican Methodological Collegia for Accounting 18 Approval of members of the list of 1994 - Ministry of Finance Republican methodological collegia for accounting and budget accounting under the Ministry of Finance in accordance with the established procedures Establishment of the Association of 1994 - Ministry of Finance, ministries, Accountants of the Republic of Moldova departments and public organizations 39 Annex 1.1: Decree 710 Attachment: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics 20 Establishment of the magazine 1995 30 thou. Lei Ministry of Finance, Association of "Accounting and Finance" Accountants, SRL Bilant and Contabil- Service 21 Development of a Statute on Document 1995 6 thou. Lei Ministry of Finance Turnover in Accounting in accordance with international standards and international accounting requirements b) Improvement of Accounting in the National Economy and State Budget Financed Institutions 22 Development of instruction for use of 1995 - Ministry of Finance account schedule for finance and business activities of enterprises in accordance with recommendation of the UN Commission and Center for Transnational Corporations 23 Development and approval of economic 1994 - Ministries, departments, associations, and branch methodological instructions for concerns, other state power agencies calculations of product costs (work, provided for in the Government decree No. services) 340 of June 2, 1993 24 Development of instructions and Special 1994-97 125 thou. Ministry of Finance Standards for Accounting and Financial Lei Reporting in accordance with the account schedule for financial and business activities of enterprises, international expertise and standards for accounting: Accounting standard using bookkeeping 1995 20 thou. Lei Ministry of Finance and voucher system Inventory standard for fixed assets, 1994 10 thou. Lei Ministry of Finance goods and technical valuables, monetary funds and payments Instructions for Accounting in joint- 1994 12 thou. Lei Ministry of Finance, Academy of stock companies Economic Studies, specialized institutions, which concluded the agreement Standard for accounting of fixed assets 1995 12 thou. Lei Ministry of Finance Standard for accounting of low-value 1995 8 thou. Li Ministry of Finance and fast depreciation objects 40 Annex 1.1: Decree 710 Attachment: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics Standard for accounting of materials T 1995 15 thou. Lei Ministry of Finance Standard for accounting of containers 1996 7 thou. Lei Ministry of Finance Instruction for the procedure of re- 1996 5 thou. Lei Ministry of Finance evaluation of goods and materials in accordance with changes in prices and tarrifs, discount reimbursement and price increase distribution Standard for accounting of labor and 1995 12 thou. Lei Ministry of Labor, Social Protection and wages in industry and construction Family, Ministry of Finance, Department of Statistics Standard for simplified accounting for 1995 12 thou. Lei Ministry of Finance, Ministry of peasant farms and procedures for Agriculture preparation of income declaration Standard for simplified accounting and 1994-95 12 thou. Lei Ministry of Finance, Academy of procedure for preparation of Economic Studies declarations by individual enterprises with three or less employees 25 Development of a computerized system 1995-97 100 thou. Managers of Enterprises and Chief for the preparation of accounting Lei Accountants registers at enterprises using personal ____ computers in their operations 26 Study of accounting management and 1994-95 50 thou. Lei Ministry of Finance reporting on implementation of budget and expenditure estimates in state budget financed institutions in developed countries 27 Development of instructions for 1994-95 10 thou. Lei Ministry of Finance accounting and reporting on implementation of Republican and local Budget in accordance with international accounting standards, guidelines for statistics and requirements of international organizations regarding submission of lists of indicators on financial status of the country 41 Annex 1.1: Decree 710 Attachment: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics 28 Reorganization and centralization of 1994-95 5,500 thou. Ministry of Finance, Department of system for acceptance and consolidation Lei Statistics, appropriate ministries and of accounting balances and financial departments reports Preparation of premises and supplies for 1994 2,500 thou. Ministry of Finance, Office of Mayor of offices of agencies providing acceptance Lei Chisinau, Ministry of Agriculture and and consolidation of accounting balances Food, Offices of Mayors of Cities and and financial reports of enterprises District Executive Committees Procurement of personal computers and 1994-95 3,000 thou. Ministry of Finance software for inspection and Lei consolidation of accounting balances and financial reports, as well as monetary funds for their acquisition Centralization of accounting staff, 1994 - Ministry of Finance, Ministry of education of staff and hiring of Agriculture and Food, Department of specialists for centralized accounting Statistics, ministries, departments and offices of financial agencies district executive dommittees c) Improvement and Development of Accounting in Banks 29 Analysis of compatibility of accounting 1994-95 - National Bank of Moldova registers at banks with international . _classifications 30 Development of a new draft chart of 1994 25 thou. Lei National Bank of Moldova accounts for banks in accordance with international standards 31 International evaluation of the new chart 1994 10 thou. Lei National Bank of Moldova of accounts for banks I I 32 Development of a program for the 1994 5 thou. Lei National Bank of Moldova implementation of the new chart of accounts for banks 33 Implementation of new chart of 1995 7 thou. Lei National Bank of Moldova accounts for banks d) Development of Standards for Auditing and Financial Control 42 Annex 1.1: Decree 710 Attachment: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics 34 Development of a draft law on State 1994 - Ministry of Finance, Academy of Financial Control and Auditing Economic Studies and specialized Inspectorate institutions, which concluded the agreement 35 Methodological recommendations for 1994-95 20 thou. Lei Ministry of Finance, Academy of revisions of financial and business Economic Studies, specialized institutions activities of state enterprises and which concluded the agreement organizations, as well as joint ventures and other entities which manage state property 36 Methodological recommendations for 1994 15 thou. Iei Ministry of Finance, Academy of internal auditing of production cost for Economic Studies and Specialized products (work, services) Institutions which concluded the agreement 37 Methodological recommendations for 1994 6 thou. Iei Ministry of Finance, Academy of auditing of valuable goods circulation Economic Studies and specialized institutions which concluded the agreement 38 Methodological recommendations for 1994 15 thou. Lei Ministry of Finance, Academy of auditing of state budget financed Economic Studies and specialized institutions ._institutions which concluded the agreement M. Establishment of a National Accounts System (NAS) a) Establishment of a National Accounts System (NAS) which shall reflect interaction of branches and sectors of the economy. Development of Inter-branch balances in accordance with the NAS. 39 Development of common guidelines and 1994 - Department of Statistics, Center for Market methodology for preparation of national Problems Research accounts in the Republic of Moldova (General outline, major classifications, accounts and indicators, guidelines for L evaluation) 40 Calculations (at the republic level, 1994 - Department of Statistics, National Bank of 1989-1992) for domestic economy Moldova, Minister of Economy, Ministry accounts: goods and services, of Finance production, education, distribution and use of income and capital 41 Preparation of accounts for national 1994 - Department of Statistics economy by economic branches and sectors for 1991-1992 1 1 43 Annex 1.1: Decree 710 Attachment: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics 42 Development of mathematical and 1994-95 - Department of Statistics software systems for preparation and maintenance of NAS at the national economy level 43 International evaluation of methodology 1994 - Department of Statistics, Ministry of for domestic economy accounts Economy calculations (except financial) 44 Development of methodology and 1995 - Department of Statistics, Ministry of quarterly experimental calculations for Finance gross domestic product 45 Development of a methodology for the 1995-96 Department of Statistics, National Bank of preparation of financial accounts and Moldova, Ministry of Finance, Center for experimental calculation.- Market Problems Research 46 Development of methodology for 1994-95 - Department of Statistics, National Bank of preparation and experimental calculation Moldova, Ministry of Finance, Center for of "the rest of the world" sector for Market Problems Research ._ 1990-1994 47 International evaluation of financial 1995-96 2 thou. Lei Department of Statistics, Ministry of accounts and "the rest of the world" Finance sector account 48 Development of a methodology for 1996-97 - Department of Statistics, Ministry of preparation and experimental calculation Economy, Center for Market Problems of balance tables for national wealth Research (table of assets and liabilities), and methodology for inclusion of remainders of assets and liabilities transactions of financial account for entire national economy and sectors 49 Introduction of changes in the Regularly - Department of Statistics, Center for Market methodology for preparation of national Problems Research accounts in accordance with changes in recommendations of UN and Statistical Committee of CIS 50 Introduction of official statistics of NAS 1996 - Department of Statistics (starting with calculations for 1995) 44 Annex 1.1: Decree 710 Attachment: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics 51 Research for informational and 1994-95 2 thou. Lei Department of Statistics, Ministry of methodological support of inter-branch Economy, Center for Market Problems balances in accordance with NAS Research 52 Development of the methodology for 1995 - Department of Statistics selective observation of'production expenditures for interbranch balances 53 Development of informational and 1995 Department of Statistics, Center for Market software calculations for inter-branch Problems Research balances (IBB) (for development of NAS IBB for 1996) 54 Single research of expenditures for 1996-97 4 thou. Lei Department of Statistics, ministries and production of goods in all branches of departments national economy for development of IBB for 1996 55 Development of IBB System of 1997-98 4 thou. Lei Department of Statistics production and use of products1 (services) for 1996 b) International Comparison for Gross Domestic Product (GDP) and its Generalized Indicators 56 Calculation of GDP (by the end use for 1994 - Department of Statistics 1993)' 57 Distribution of GDP (by primary groups 1994 3 thou. Lei Department of Statistics of use for 1993) 1 1 1 58 Submission of calculations of 1994 - Department of Statistics expenditures and non-material services for 1993 to the National Commission for Statistics of Romania 59 Preliminary summary of results of 1995 - Department of Statistics comparison of GDP in Romania, Republic of Moldova and Austria 60 Publication in mass media of the results 1995 - Department of Statistics of comparison for 1993 1 1 1 IV. Improvement of the Informational Support System a) Adaptation of all Finandal, Budgetary and Banking Statistics to International Standards i 45 Annex 1.1: Decree 710 Attachment: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics 61 Establishment of the statistical indicators 1995 - National Bank of Moldova, Department of system, showing position of the Statistics, Ministry of Finance, Ministry of National Bank of Moldova on market Economy demand and supply (aggregate money supply, reserve requirements of the National Bank of Moldova for departments of commercial banks, interest rates of the National Bank of Moldova) 62 Establishment of a system of indicators 1994-95 - National Bank of Moldova, Department of for monetary statistics and bank Statistics, Ministry of Finance, Ministry of reporting in accordance with Economy international requirements (consolidated balance of banking system, monetary surveys based on methodology of IMF, banking survey, cash money issuance, financial instruments of monetary market, currency rates) 63 Development of methodology and 1994-95 3 thou. Lei National Bank of Moldova, Ministry of experimental calculations for 1991-1993 Finance, Department of Statistics, Ministry data of statistical indicators system, of Economy showing effect of National Bank activities on the market demand and supply; indicators systems for monetary and banking statistics, state internal and external debt calculation 64 International evaluation of methodology 1994-96 4 thou. Lei National Bank of Moldova, Department of and experimental calculations of Statistics, Ministry of Finance, Ministry of indicators showing effect of the National Economy Bank of Moldova on market demand and supply, indicators of financial, budgetary and banking statistics, state debt 65 Establishment of financial banking 1994-95 - National Bank of Moldova, Department of reporting, procedure for submission and Statistics, Ministry of Finance, Ministry of publication, development of Economy methodological instructions 46 Annex 1.1: Decree 710 Attachment: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics 66 Introduction of official, financial, 1994-95 - National Bank of Moldova, Department of budgetary and banking statistics, Statistics, Ministry of Finance, Ministry of preparation of reporting and publication Economy of indicators in accordance with international requirements, starting from 1993 b) Management of Balance of Payment Preparation 67 Development of a methodology for 1994 - National Bank of Moldova, Ministry of financial statement reporting and capital Finance, Ministry of Economy, Department flow activity of Statistics 68 Calculation of balance of payments for Annually - National Bank of Moldova, Ministry of trade and nion-trade transactions, Economy starting from 1993 69 Calculation of indicators for preparation Annually National Bank of Moldova, Ministry of of financial statements for international Finance, Ministry of Economy capital flow balance 70 Calculation for preparation of balance Annually - National Bank of Moldova, Ministry of payments on a full scale Finance, Ministry of Economy, Department of Statistics c) Improvement of Price Statistics Consumer Sector Price Statistics 71 Improvement of methodology for 1994-95 - Department of Statistics calculation of representation of price and tariff registration (inhabited sites, retail and service enterprises) . 72 Development of methodological 1994 - Department of Statistics recommendations for seasonal composite in the index of consumer prices 73 Improvement of methodology for 1994-97 - Department of Statistics calculations of price level changes and pattern with consideration to all potential markets of sale of representa- tional goods (services), used for calculation of consumer price index 47 Annex 1.1: Decree 710 Attachment: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics 74 Improvement of the methodology for 1994 2 thou. Lei Department of Statistics observation of prices (tariffs) and. calculation of price and tariff indexes for paid-for services to the population: household services passenger transportation services communications utilities cultural services children pre-school institutions health care 75 Selective research for the identification 1994-95 2 thou. Lei Department of Statistics of a percentage ratio of representational services provided to legal and banking institutions Productive Sector Price Statistics _ 76 Defining the methodology to calculate 1994 - Department of Statistics price indexes for export and import products 77 Preparation of proposal for price pattern 1994 - Department of Statistics accounting for imported products with preparation of consumer prices indexes 78 Improvement of existing methodology 1995 - Department of Statistics for calculation of wholesale price indexes in accordance with international practice 79 In the event expansion of research is 1995 5 thou. Lxi Department of Statistics needed, improvement of methodology for calculation of representation of wholesale price registration d) Adaptation of Population and Labor Statistics to International Norms Statistics of Population 80 Transition to accounting of child 1996-97 - Ministry of Health, Department of mortality levels based on Statistics recommendations of World Health Organization (born alive, born dead) 48 Annex 1.1: Decree 710 Attachment: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics 81 Transition to development of data on the 1995-97 Ministry of Health, Department of causes of death of population based on Statistics the tenth revision of the international classification of diseases recommended by the WHO _ 82 Transition to statistical accounting and 1996-97 2 thou. Lei Ministry of Health, Department of registration of births and deaths based Statistics, Ministry of Justice on medical documentation 83 Development of master plan for 1996-97 3 thou. Lei Department of Statistics population census management in 1999 84 Research and transition to the 1995-96 - Ministry of Internal Affairs, Ministry of international migration accounting based Labor, Social Protection of Family, on the international recommendations Department of Statistics Statistics of Labor 85 Development of program and 1994-95 20 thou. Lei Department of Statistics methodology for selective research of households for study of employment problems based on recommendations of International Labor Organization (ILO) 86 Organization for selective study of 1995-97 60 thou. Lei Department of Statistics households for purpose of employment problems research 87 Development of methodology for 1996 - Department of Statistics, Ministry of calculation of labor costs based on Labor, Social Protection and Family recommendations of the ILO 88 Preparation of methodology for 1997 2 thou. Lei Department of Statistics, Ministry of statistical observation for labor cost Labor, Social Protection and Family, calculation and its evaluation specialist from International Labor Organization, Labor Unions and Union of Entrepreneurs 89 Development of program for statistical 1996-97 - Department of Statistics study of educational and qualification level of labor 90 Selective study of wages of employees 1994-97 4 thou. Lei Department of Statistics in several branches of national economy in October 49 Annex 1.1: Decree 710 Attachment: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics 91 Expansion of the number of indicators 1994-95 - Department of Statistics, Ministry of characterizing medical services for Health population in accordance with the list of World Health Organization (WHO) 92 Improvement of methodology of 1994-95 Department of Statistics, Ministry of accounting of handicapped in Health, Ministry of Labor, Social accordance with recommendations of Protection and Family the WHO Household Budget Study 93 Improvement of selective household 1994-95 2 thou. Lei Department of Statistics network, development and testing of I household budget study program 94 Establishment of database for multi- 1995 - Department of Statistics functional territorial zone selection _ I___I e) Improvement of Foreign Trade Statistics in Accordance with International Requirements 95 Development of methodology for the 1994 - Department of Statistics calculation of average price indexes -and physical volume of export and import by goods and countries 96 Establishment of methodology for 1995 - Department of Statistics calculation of foreign trade and domestic ratio for export and import products 97 Calculation of foreign trade price 1994-95 - Department of Statistics indexes based on the nomenclature of goods prepared in accordance with Harmonized System for Description and Coding of Goods (2nd Edition) 98 Preparation of proposal for coordination 1994 - Department of Statistics, Ministry of of customs activities, economic and Economy, Department of Customs Control, statistical agencies for collection, National Bank of Moldova processing and publication of data for foreign trade [If)iform National Nomenclatures 50 Annex 1.1: Decree 710 Attachment: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics 99 Development of a classification system 1994 1 thou. Lei Department of Statistics, Department of for state power agencies Standards, Methodology and Inspection 100 Development and implementation of a 1994 2 thou. Lei Department of Statistics, Ministry of classification system for economic Industry, Ministry of Communications and activities in Moldova Information, Ministry of Economy 101 Development of a classification system 1994-95 3 thou. Lei Ministry of Education, Ministry of for educational standards Economy, Department of Statistics 102 Development of a classification system 1994-96 3 thou. Li Ministry of Labor, Social Protection and for qualifications, professions, Family, Federation of Independent Trade functions, occupations Unions, Department of Statistics 103 Development of a classification system 1994-95 1 thou. Lei Computer Center of the Department of for social and economic entities (based Statistics, Department of Statistics, on officially registered types) Department of Standards, Methodology and F. I Technical Inspection 104 Development of a classification system 1994-95 1 thou. Lei Computer Center of the Department of for administrative and territorial units Statistics, Department of Statistics, Department of Standards, Methodology and Technical Inspection 105 Development of a classification system 1994-95 1 thou. Lei Department of Statistics, Department of for measuring units Standards, Methodology and Technical Inspection 106 Development of a classification system 1994-95 1 thou. Lei Department of Statistics, National Bank of for foreign economic activities services j Moldova, Department of Customs Control, Ministry of Economy 107 Development of a classification system 1994-95 2 thou. Lei Ministry of Foreign Affairs, Ministry of for citizens (nationalities of the country) Internal Affairs, Ministry of Economy, Department of National Relations, Department of Statistics 108 Developifient of a classification system 1994 2 thou. Lei Ministry of Economy, Department of for foreign economic activities and Statistics, Department of Customs Control commodities 109 Development of a classification system 1994-95 1 thou. Lei Ministry of Economy, Department of for delivery of goods by type of Statistics, Department of Customs Control, payment in foreign economic activities National Bank of Moldova 51 Annex 1.1: Decree 710 Attachment: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics 110 Development of a classification system 1994-95 2 thou. Lei Department of Statistics, Ministry of for products and services Economy, Ministry of Agriculture and I_ Food, National Bank of Moldova 111 1 Development of a classification system 1995-96 1 thou. Lei Department of Statistics, Ministry of for main social and ecofiomic indicators Economy g) Establishment of a National Register for Statistical Units "RENUS" 112 Development of management and 1994 1 thou. Lei Department of Statistics, Ministry of methodological materials for the Economy, Ministry of Finance, Ministry of establishment of a statistical units Justice, Ministry of Communication and register for phase one and two Information 113 Development of methodology for the 1994 - Department of Statistics identification of registered statistical units. Research and development of several categories of enterprises and organizations 114 Development of technical task and 1994-96 10 thou. Lei Department of Statistics working designs based on international and local classification systems, and establishment of an information base structure 115 Introduction of technology for the 1994 - Department of Statistics, Ministry of maintenance of a statistical units register Economy 116 Development of applied mathematical 1995 2 thou. Lei Department of Statistics support and instructive documentation for several sections of the register for phase two ____ 1 1 7 P ilo t o p e r a tio n 1 9 9 6 -D e p a r tm e n t o f S ta tis t ic s 118 Implementation in practice 1996 - Department of Statistics 119 Introduction of phase two National 1997 14 thou. Lei Department of Statistics Register of Statistical Units and its use in the national economy V. Establishment of the National Product Cataloging System 52 Annex 1.1: Decree 710 Attachment: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics 120 Foreign experience study on the 1994-95 - IDepartment of Standards, Methodology and establishment and application of a Technical Inspection r -f cataloging system 121 Development of proposal for 1995 - Department of Standards, Metrology and establishment of national product Technical Inspection, Ministry of Industry, .cataloging system Ministry of Economy, Ministry of Finance, Ministry of Labor, Social Protection and Family, Ministry of Transport and Roads, Ministry of Agriculture and Food, Department of Statistics, Department of Architecture and Construction, Department of Trade, Ministry of Information and Communications, National Bank of Moldova VI. Implementation of Bar Coding System Use of Bar Coding at the Government level 122 Membership of Moldova in International 1994-95 20 thou. Lei Production Association Vibro-Apparat, Association of Goods Numeration Research, Design and Technology Institute (NIKTI) of Food Industry under Ministry of Agriculture and Food, Ministry of Finance, Ministry of Agriculture and Food 123 Establishment of goods numeration 1994-95 2 thou. Lei NIKTI of Food Industry under Ministry of association in the Republic of Moldova Agriculture and Food, Ministry of Finance, Ministry of Agriculture and Food 124 Methodological and informational J 1994-95 14 thou. Lei NIKT1 of Food Industry under Ministry, of support for application of bar-coding Agriculture and Food, Ministry of (BC, including development of Economy computerized database) 125 Development of technology and 1995-96 5 thou. Lei Ministry of Industry, NIKTI of Food normative documentation for bar-coding Industry under Ministry of Agriculture and system in accordance with international Food requirements 126 Education of specialists in bar-coding 1995-97 8 thou. Lei NIKTI of Food Industry under Ministry of system Agriculture and Food 53 Annex 1.1: Decree 710 Attachment: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics 127 Acquisition of equipment and 1995-97 20 thou. Lei Ministry of Finance, Department of Trade, technology for marking and reading of Ministry of Agriculture and Food, Ministry bar-coding of Health, NIKTI of Food Industry under Ministry of Agriculture and Food, Ministry of Economy [ Applicatio of Bar Coding System in the National Economy Branches 128 Application of bar-coding in retail and 1996-97 30 thou. Lei Department of trade procurement I I I 129 J_Application of bar coding in banking 1996-97 30 thou. Lei National Bank of Moldova 130 Application of bar coding in 1995-97 20 thou. Lei NIKTI of Food Industry under Ministry of manufacturing and technological Agriculture and Food processes 131 Application of bar-coding for 1996-97 30 thou. Lei Ministry 6f Health, Association manufacturing of medical preparations _Moldovafary" 132 Application of bar-coding in food 1996-97 40 thou. Lei Ministry of Agriculture and Food industry and agriculture 133 Development and implementation of 1996-97 50 thou. Lei NIKTI of Food Industry under Ministry of computerized identification systems in Agriculture and Food enterprises and organizations VII. Education and Re-Education of Staff 134 Identification of national economy 1994-95 1 thou. Lei Ministry of Economy, Ministry of requirements for re-education of Education, Ministry of Finance, accountants and statisticians in Department of Statistics, Academy of accordance with international standards Economic Studies 135 Development of program for internship 1994 - ademy of Economic Studies, Ministry of of students from schools of economics Education and engineering economics specializing on accounting and statistics 136 Preparation of schedule for publication 1994-95 - Ministry of Education, Ministry of of text books, work books and reference Finance, National Bank of Moldova, books for accounting and statistics Academy of Economic Studies 54 Annex 1.1: Decree 710 Attachment: State Program for Transition of the Republic of Moldova to the International System of Accounting and Statistics 137 Introduction of topics of development of 1994-95 - Ministry of Education, Ministry of methodological problems on statistics, Finance, National Bank of Moldova accounting, financial and banking accounting for graduation and annual thesis for higher economic engineering economics course 138 To re-educate staff abroad for the 1994-97 130 thou. Ministry of Economy, Ministry of purpose of increasing their professional Lei Education, Ministry of Finance, qualifications and study of methods used Department of Statistics abroad 139 Consultations with foreign specialists on 1994-97 100 thou. Ministry of Economy, Department of education of staff in statistics and Lei Statistics, Ministry of Finance accounting based on international methodology VIII. Improvement of the Technology for Collection and Processing of Statistical Data, Establishment of Procurement Basis for Statistics Agencies 140 Procurement of computer technology 1994-97 225 thou. Department of Statistics, Ministry of for statistical agencies Lei Finance, Ministry of Economy 141 Development of a new software for 1994-97 100 thou. Department of Statistics computerized data processing, updating Lei of old software due to transition to new system 142 Education of statisticians in 1994-97 20 thou. Lei Department of Statistics . _informational science 143 Preparation and submission of statistical Regularly - Department of Statistics data to international agencies by using new technologies 144 Establishment of modern printing 1994-96 120 thou. Department of Statistics, Ministry of services for development of publication Lei Finance activities 55 Annex 1.2: Law on Accounting PARLIAMENT OF THE REPUBLIC OF MOLDOVA LAW ON ACCOUNTING The Parliament adopts the present Law. CHAPTER I GENERAL PROVISIONS Article 1. The present Law determines the single methodology, principles of accounting and financial reporting and establishes procedures for the organization and implementation of filing accounting and financial reports. Article 2. The definitions used in the present Law stand for: 'business operations' - the facts of business and other activity influencing the financial state of the enterprise/budgetary institution regarding the state of their assets, capital, liabilities and financial results; 'primary documents' - the written evidence certifying or confirming the business operations, including the instructions and permission of the management (owner) of the enterprise/budgetary institution as to their implementation; 'inventory' - the examination and documentary confirmation of availability and state of material assets, other assets, payments and liabilities (debts) of the enterprise/budgetary institution, and also the estimation of the worth of their property; 'account of accounting' - the primary unit of grouping and maintenance of the information on the business operations and of other information of accounting; 'synthetic accounts' - the consolidated reflection of the business activity in monetary expression; 'analytical accounts' - the detailed reflection of funds and sources in monetary and in-kind expression; 'synthetic and analytical accounting' - the accounting that is correspondingly kept on the analytical and synthetic accounts; 'chart of accounts accounting' - the cumulation of synthetic accounts of accounting established under effective procedure in conformity with certain characteristics; 'double recording' - the recording of each business operation in monetary form, at the same time one account is credited, a debit is made to other accounts in equal amounts; 'simple form of accounting' - the unilateral reflection of a business operation by the method 'income- expenses'; 'registers of accounting' - the purposefully designed tables (register order, form, development table), 56 Annex 1.2: Law on Accounting which are used for recording accounts for business operations; 'standard of accounting' - the document of standards establishing the obligatory rules or instructions on the implementation of accounting under the execution of provisions of the present Law; 'the financial and credit liabilities' - the liabilities (loans received, borrowed securities, bills issued, etc.) which are due for payment within a normal (usual) operation cycle of one year. The liabilities with the term of payment exceeding one year are referred to as long-term liabilities; 'property' - the accumulation of revolving and static assets of an enterprise; 'financial reporting' - the accumulation of actual accounting data filed under established procedures for users (e.g. stockholders, creditors, staff, state institutions, etc.) which reflect the status of assets and the financial status of the enterprise/budgetary institution and the results of their business activity; 'the balance sheet' - the form of financial reporting characterizing the state of assets and the financial state of the enterprise, budgetary institution, as of the end of the last day of the reported period. Article 3. Accounting represents the system of accounting, information and reporting from which necessary indices for compiling declarations are determined, in addition to other documents which are used for the determination of taxes and for implementing their payments. As a main document which accounts for property and the processing, accumulating and analysis of results, accounting shall provide: a.) a chronological and systematic registration, processing and maintenance of information on property, business and turnover expenses, settlements of accounts, liabilities, titles and results obtained, which may be used both internally and for relations with stockholders, clients, suppliers, banks, tax institutions and other legal and physical entities; b.) control of operations with the property, methods used for processing and for the precision of accounting data; c.) for the submission of information necessary to evaluate state property, execution of the budget and for the compilation of general state financial reports. Article 4. Accounting represents transactions comprised of movable and immovable assets, in in- kind and monetary expression, assets with economic potential, monetary funds, securities, titles and liabilities on property, expenses, income and results obtained and also the circulation and transactions which took place as a result of operations. Article S. The legal entities and the individuals dealing with business activity and budgetary institutions are obliged to maintain accounting procedures in conformity with the present Law and with corresponding acts of standards. Article 6. Accounting is maintained in the state language; other cases are regulated in conformity with the effective legislation. 57 Annex 1.2: Law on Accounting Article 7. Accounting is maintained in the national currency. The accounting of inventory, commodities and other material values at premises of their maintenance is kept in the expression of amounts. In conformity with certain structural indices, the enterprises of retail trade and public catering are allowed to keep accounting in monetary form. Article 8. The possession in any form of material assets, monetary funds, property titles and liabilities, or conducting property transactions without reflecting the accounting activity is prohibited. Article 9. The Ministry of Finance shall develop the methodology of accounting, the single charts of accounts, the samples of accounting registers, forms of reporting on financial activity, procedures for their completion, and the accounting standards compulsory for their execution by the persons mentioned in Article 5. Article 10. For the banking system, the chart of accounts and the documents of standards on accounting are developed and approved by the National Bank of Moldova, in coordination with the Ministry of Finance. Article 11. The Department of Statistics, in coordination with the Ministry of Finance, shall develop and approve the typical forms of the primary documents and the procedures for their completion. Article 12. The acts of standards regulating accounting procedures and financial reporting, as developed by state power institutions and public organizations, are to be coordinated with the division of the Ministry of Finance responsible for the coordination of the methodology of accounting and financial reporting and are to be published in conformity with the effective procedures. Article 13. The Methodological Consultative Council is operating under the Ministry of Finance for the purposes of the consideration and development of proposals on disputable issues. The Methodological Consultative Council operates under the authorities and competence of which is determined by the Government. CHAPTER II. MAJOR RULES FOR KEEPING ACCOUNTANCY AND COMPILATION OF FINANCIAL REPORTS Article 14. The legal entities, except for the peasant's (farmer's) entities, are keeping the accounting of assets and business transactions by the method of double recording in conformity with the Chart of Accounts and with the regulations on its application. The individuals and the peasant's (farmer's) entities are keeping accounting in conformity with the simple system developed by the Ministry of Finance. Article 15. (1) When maintaining accounting records it is necessary to provide the following: a.) documentary confirmation, legal grounds and the complete and uninterrupted reflection in accounting of all business transactions conducted within the reported period; b.) the accuracy of income and expenses in the reporting period to which they apply, 58 Annex 1.2: Law on Accounting with no differences noted from the time of their payment; C.) the identity of analytical accounting data, the turnover and balance of synthetic accounts, and the identity of the debtor's and creditor's turnover for the first day of each month; d.) the stability of accounting policy (of the methodology of reflection of business operations) during the entire period of the reporting year. (2) Changes to accounting policy are possible in the following cases: a.) changes in the operational status, including the consequences of adopting new laws or revisions to existing laws (the introduction of prohibitions or restrictions on the implementation of specific activities, changes in contractual provisions with consumers, restructuring of the sources of formation of financial resources, or the hardening or liberalization of the fiscal regime, etc.); b.) changes in the system of regulating accounting standards; c.) development of new methods and forms of accounting; (3) Both accounting policy and revisions to accounting policy are to be authorized by an instructive document (order) indicating the date of effectiveness. (4) Changes in accounting policy of the business entity/budgetary institution, which have taken place during the reported year and cause the basis of the reported year to vary in comparison to the previous reported year, must be explained in the financial reports. CHAPTER E. THE PRIMARY DOCUMENTS Article 16. The supporting documentation for recording in accounting registers are primary documents which are compiled during the implementation of business operations, or if this is impossible, immediately after they are finished. The business entities/budgetary institutions are using typical forms for primary documents, as approved by the Department of Statistics. In certain cases, they are utilizing individually developed forms. Article 17. The manager of the business entity/budgetary institution has the responsibility for controlling the implementation of business operations and the recordkeeping which is based on the primary documents. Article 18. The cashier's banking and payment documents and financial and credit liabilities must be signed by two persons. These two signatures are required to be in compliance with the list of sample signatures approved by the manager and the accounting-in-chief of the business entity/budgetary institution. The first signature should belong to the manager of the business entity/budgetary institution, or to his deputies. The second signature should belong to the manager of the accounting service, or his 59 Annex 1.2: Law on Accounting deputies, or to the authorized person of the audit company which by the provision of a contract are providing the accounting services to the business entity/budgetary institution. For investments funds and trust companies, where the function of accounting is at the depository, the second signatures is the authorized person of the depository. For peasant's (farmer's) entities and enterprises with the status of physical persons, in the case of no accountant, both signatures of the documents belong to the owner or they are made by the person appointed by the founder of the enterprise and are, as a rule, authenticated by the official stamp of the enterprise. Article 19. The documents which represent the basis for receiving and issuing material assets, monetary funds, implementing payment operations, executing credit, financial liabilities and economic agreements, payments carried out from a specially designated fund and other financial sources, are considered invalid for the executors if they lack the signature of the manager of the accounting service. Article 20. Operations dealing with the receiving and issuing of material assets and of other objects of property or monetary funds, are registered by the primary documents. The participating individuals and representatives of the legal entities are issued copies of the primary document in conformity with effective legislation. The responsibility for issuing copies to the participants of the business operation is that of the business entity/budgetary institution. Article 21. (1) The primary documents, including the paper or machine stores of information, must contain the following obligatory particulars: the date of compilation; content of the business transaction; unit of measurement of the business operation (in-kind and monetary expression); name of the enterprise, position and name of persons responsible for the implementation and proper management of the business operation; and signatures of these persons. (2) Depending on the nature of the business operation and the technology of data processing, the primary documents may also be in conformity with the effective procedures containing additional particulars. Article 22. (1) It is not permitted to introduce unagreed changes into the primary documents and registers of accounting. The correction of mistakes must be confirmed by documents and signatures of the persons having signed the document, including the date of the correction. (2) In payment documents (cashier's and banking), corrections are not permitted. Article 23. The persons compiling and signing the primary documents are responsible for the timeliness and correctness of their compilation, the authenticity of the data contained and also for their transference within stipulated terms to the accounts department for reflection in accounting. Article 24. The procedures and terms of transference. to the accounts department of the primary documents are determined by the manager of the accounting service. Article 25. The primary documents, registers of accounting and reports are to be made in ink and should be in conformity with the compulsory effective procedures. The responsibility for archival is that of the manager of the business entity/budget institution. 60 Annex 1.2: Law on Accounting Article 26. In the case of loss, theft or annihilation of accounting documents, it is necessary to restore them within a two month period from the moment of identification of the corresponding fact. CHAPTER IV. REGISTERS OF ACCOUNTANCY Article 27. The information contained in the primary documents and liable to reflection in accounting are stored in cumulative documents and systematized in the registers of accounting on the grounds of accounting operations. Information on business operations, implemented during a certain period of time, is introduced into reporting. Article 28. The registers of accounting are used in strict correspondence with their designation, presented in conformity with certain procedures, and are kept in such a form as to allow a ready availability for examination. Article 29. Individuals and legal entities using automated data processing are obliged to observe the standards of accounting and accumulate, preserve and control the information on the machines which are registered in accounting. The final information from the machine stores of information is compiled in the form of outgoing documents. Article 30. Computing centers are responsible for the precision of data processing as contained in documents and the clients are responsible for the precision and authenticity of the information given for processing. CIIAPTER V. MANAGEMENT OF ACCOUNTANCY Article 31. The responsibility for the management and implementation of accounting belongs to the manger of the business entity/budgetary institution. Article 32. The manager of the business entity/budgetary institution is obliged to provide the necessary conditions for the correct implementation of accounting, timely compilation and submission of reports. In addition, the manager of the business entity/budgetary institution should also ensure strict compliance from all departments and services for accounting and the related compilation of documents and the submission of information. Article 33. (1) The individuals and legal entities dealing with business activity and the budgetary institutions are to manage and maintain accounting records and compile financial reports with the assistance of the manager of the accounting service, the accountant-in-chief and the financial director, who as a rule must have higher education in the domain or special secondary education. (2) An audit company may implement the job of accounting and financial reporting on the grounds of an agreement with the business entity. In this case, the audit company may not approve the annual report of the business entity. Article 34. The manager of the accounting service is providing the control on the recordings on 61 Annex 1.2: Law on Accounting accounts of all of the implemented business operations and of the observation of methodology of accounting. Article 35. The order of hiring, transfer and dismissal of a materially responsible official and/or employee of the accounting service must be coordinated with the manager of the accounting service. Article 36. The manager of the accounting service is prohibited to present documents on business operations which contradicting the acts of standards. If the acts of standards are contradicted, he shall inform the business entity/budgetary institution and the district (city) financial institution. Article 37. The manager of the accounting service is subject to the direct supervision of the manager of the business entity/budgetary institution, and on the issues of the methodology of accounting, to the district (city) financial institution. Article 38. If the manager of the accounting service is dismissed, all files are to be transferred to the newly appointed manager of the accounting service, or to the provisional manager, in conformity with the order of the manager of the business entity/budgetary institution. At the same time, it is necessary to examine the state of accounting, the authenticity of reports and a corresponding act is compiled which is approved by the manager of the business entity/budgetary institution. CHAPTER VI. INVENTORY Article 39. (1) The business entities/budgetary institutions are obliged to periodically verify the state of the property, payments and liabilities in view of the confirmation of correctness and authenticity of accounting and reporting. (2) The objects and terms of taking inventory are determined by the management of the business entity/budgetary institution. Article 40. Taking inventory is compulsory and should be taken no less than once a year during the entire period of operation of the business entity/budgetary institution or in the case of transition from one form of ownership to another, terminating activity of the business entity/budgetary institution, theft, deterioration of material assets or abuse, fire or natural calamities or by court order. Article 41. Procedures for taking inventory and exceptions of the general rules are to be confirmed by the Ministry of Finance. Article 42. Discrepancies identified during the process of taking inventory or in other examinations of the state of material assets and cash funds which result in variances with accounting information, are to be treated as follows: a.) the excess of material assets and monetary funds is registered and transferred to financial results or to increases in financing; b.) the shortage of material assets, within limits established for the natural perishing norms, 62 Annex 1.2: Law on Accounting are transferred to production costs or to decreases in financing; c.) the shortage of material assets, beyond limits of natural perishing norms or for losses from the deterioration of material assets, are the responsibility of the guilty person(s) and they are liable for recovery based on the market price at the time of identifying the shortage; d.) in the cases where the guilty persons are not identified, or are recognized as innocent by the court, the losses dealing with the deterioration of material assets, or of the shortage exceeding the limits of natural perishing norms, are referred to as losses or to decreases in financing. CHAPTER VII. FINANCIAL REPORTING Article 43. The financial reports include the balance sheet, the account of results, the accounts of income and loss, the enclosures and explanatory notes regarding the major factors which have influenced the final activity of the enterprise, its financial state or tendencies of development or any changes which took place after the reporting period and would have an influence on the next year's results. Article 44. (1) Legal entities, except for the peasant's (farmer's) entities are obliged to file quarterly and annual reporting. (2) Physical persons and the peasant's (farmer's) entities must file the declarations of actual incomes and expenses during the elapsed year. Article 45. The financial year starts on the 1st of January and ends on the 31st of December, except for the first reported year, which begins from the date of registration of the business entity/ budgetary institution. Article 46. The amendments in accounting referring both to the reported year and to the previous one (after the approval of the report), are introduced into the report and compiled on the reported period during which the distortions of data were identified. Article 47. In the case of termining activity, legal and physical entities dealing with the business entity/budgetary institution are obliged to file a liquidation report within a two month period after termination of activities. The liquidation report is to be certified by an audit company and should be in conformity with the legislation. The accounting reports, registers and other documents relevant to the business operations must be transferred to the state archives. CHAPTER VIII. PROCEDURE OF FILING FINANCIAL REPORTS Article 48. (1) Legal entities, except for peasant's (farmer's) entities are required to file financial reporting to: 63 Annex 1.2: Law on Accounting a.) the district (city) financial institutions at the location of their registration; b.) the owner's in conformity with the documents of establishment (the state enterprises are filing the financial reporting to the institutions authorized to the management of the state property, following their demand); (2) The financial reporting may be filed to other institutions of state power, to crediting banks and to other interested organizations on the grounds of agreement with the business entity. Article 49. (1) Legal entities, except for peasant's (farmer's) entities, are obliged to provide: a.) quarterly financial reports within the period between the 15th and 25th day of the month following the reported quarter. b.) an annual financial report between the dates of January 25 and March 15 of the year following the reported one. (2) The specific terms for filing financial reports are fixed by the district (city) financial institutions depending on the size of the enterprise. Article 50. The district (city) financial institutions accept, examine and summarize financial reports of all legal entities located in the territory of the district (city), except for budgetary institutions, and provide consolidated financial reports to the Ministry of Finance, in conformity with procedures and terms stipulated by the Ministry of Finance. Article 51. The Ministry of Finance provides the general financial reports on the national economy and files them with the Government under the established order. Article 52. The major object reflected in the balance sheet on the national economy is the national property of public and private ownership. Article 53. The annual accounting report of the business entity is considered in conformity with the procedure stipulated by the documents of establishment and is confirmed by an audit company in conformity with the effective legislation. Article 54. Business entities and the budgetary institutions, the managers of which are acting as managers of budget credits, are to file one copy of the quarterly and one copy of the annual financial reports to the senior institutions, within the terms stipulated by the senior institutions. Article 55. The ministries, departments and local institutions of state power are filing the consolidated quarterly and annual reports in conformity with the procedure and terms stipulated by the Ministry of Finance. CHAPTER IX. RESPONSIBILITY FOR THE VIOLATION OF THE PRESENT LAW Article 56. The persons guilty of violations of the present Law, evading and keeping of accounting, using accounting standards and other norms of accounting incorrectly or purposefully distorting the 64 Annex 1.2: Law on Accounting financial reporting are liable to disciplinary, material, property, administrative and criminal responsibility in conformity with the effective legislation. Article 57. Correspondence of accounting to approved standards and other norms may be defined only by the institutions which are authorized to implement the management of accounting and the coordination of its methodology. CHAIRMAN OF PARLIAMENT PETRU LUCINSKI 65 Annex 1.3: Draft Law on Auditing REPUBLIC OF MOLDOVA Draft Law On Auditing This law was developed in accordance with the Constitution of the Republic of Moldova, the Law on Property and the Law on Entrepreneurial Activities and Enterprises. Its purpose is to establish the legal, economic and organizational framework for audits in the Republic of Moldova. Chapter 1. General Provisions Article 1. Concept of an Audit An audit is an entrepreneurial activity which includes the independent inspection and analysis of accounting and financial reporting and tax declarations relating to the business activities of an economic entity. Audits are performed in addition to state and internal financial control of economic entities. Article 2. Auditing Entities Any Audit Firm headed by a manager holding an auditing license may perform audits. Article 3. Entities Subject to Audit All economic entities shall be subject to audit, regardless of the type of property and their associations or unions, banks, other lending institutions and their associations and unions, insurance and trust companies, exchanges, foundations and auditor firms. Article 4. Scope of Audit and Types of Services The scope of an audit shall include the inspection and analysis of accounting and financial reporting, tax declarations, payment documentation and other financial liabilities of economic entities for the purpose of establishing reliability, completeness and compliance of such documentation with the current legislation and requirements for accounting and reporting. Audit firms shall provide economic entities with services related to the establishment, restoration and maintenance of accounting procedures, preparation of financial reporting, income tax returns, evaluation of assets and liabilities, economic prognosis, assistance in financial and business matters, establishment and management of computerized bookkeeping systems, consulting on issues related to financial, business and foreign economic activities, taxation, accounting management, preparation of financial reporting (balance sheets, declarations) and general management. Article 5. Limitations for Performing an Audit An audit firm may not perform any type of activity other than auditing. A person whose right to audit was suspended by the legal judgement of a court or has had the license revoked or confiscated for legal reasons may not be an auditor. 66 Annex 1.3: Draft Law on Auditing Audits may not be performed in the event that: a) the auditor is an owner, founder, participant, shareholder, manager or officer of the audited economic entity, or otherwise participates in the management of its affairs, or is related to the above mentioned persons; b) the auditor is providing services to the audited economic entity related to the establishment and maintenance of accounting, restoration and preparation of the financial reporting system or consulting on finance and business legislation; c) the audit firm is the owner, founder, shareholder, creditor, guarantor, trustee or agent of the economic entity to be audited. Article 6. Types of Audits Audits may be compulsory or performed on an as requested basis. Requested audits are performed at the request of an economic entity, within the time and under the terms and conditions of a contract concluded with the audit firm. Compulsory audits shall be performed under following circumstances: - to confirm reliability of annual accounting and financial reporting data of an economic entity, if their sales of products (work, services) plus gross income amount to greater than 150,000 Lei, as well as banks and lending institutions, insurance and trust companies, joint ventures with foreign investment, exchanges, foundations and open joint-stock companies; - upon liquidation of an economic entity and/or its bankruptcy. An economic entity shall agree to undergo an audit of its financial and business activities in the event that it is required by a resolution of an investigation and inquiry department and approved by the procuiator, or by a resolution of the procurator, or a judgement of the arbitration and the court. Chapter 2. Procedures and Responsibilities for an Audit Article 7. Requested Audit A requested audit under a contact between an economic entity and an audit firm shall be performed within the scope described by the economic entity and based on the issues raised by it. In order to provide for high quality in the auditor's performance, the economic entity shall: - cooperate in order to provide for a timely and complete audit; submit all documentation necessary for the audit; and provide clarifications (explanations) both orally and in writing upon 67 Annex 1.3: Draft Law on Auditing the request of the auditor; - efficiently correct all violations revealed by the auditor, related to bookkeeping and reporting procedures; - eliminate obstacles preventing an audit. Article 8. Compulsory Audit At the end of each fiscal year a compulsory audit of economic entities shall be performed, which shall be based on a contract with the auditor. The scope of issues for such audit shall be determined by the current system of bookkeeping and reporting and financial legislation. An economic entity shall: - cooperate in order to provide for a timely and complete audit; submit all documentation necessary for an audit; and provide clarifications (explanations) both orally and in writing upon the request of the auditor; - efficienily correct all violations revealed by the auditor in bookkeeping and reporting procedures and submit. corrected documentation to the auditor. The economic entity may not: - change the scope of issues subject to auditing; - interfere with auditing performed by the auditor. A compulsory audit, if required by a resolution of the procurator, or inquiry or investigation department, or by a judgement of court or arbitration, shall be performed by the auditor within the scope of issues raised by the person requesting such an audit. The person requesting an audit shall: - cooperate in order to provide for a quality audit by the auditor, in accordance with the issues raised; - submit to the auditor all bookkeeping and accounting documents necessary for the audit; - on the request of the auditor, familiarize the auditor with the materials of the case to be audited; - provide for the personal safety of the auditor and, if necessary, members of his (her) family; 68 Annex 1.3: Draft .Law on Auditing - provide for payment of audit services at rates established by the Government for such services; - eliminate any obstacles for auditing. Article 9. Rights of Auditors Auditors shall have the following rights: - in the case of a requested audit, to schedule audit sessions independently within the time frame established under contract with the economic entity; and in case of a compulsory audit, within the term established by the legislation, based on the resolution of the procurator, investigation or inquiry department; - to review all bookkeeping and reporting documentation of the economic entity; - to receive explanations (clarifications), both in writing and orally, from the officers and specialists of the audited entity; - to refuse from performing an audit under the following circumstances: a) in the event that the person requesting an audit did not supply the appropriate documentation or failed to complete or inappropriately completed the submitted documents; b) in the event that the person requesting an audit did not eliminate obstacles for the audit; c) in the event that the person requesting the audit interferes with the actions of the auditor; - to refuse from providing an evaluation based on the materials of the audit in the event that the economic entity did not correct any violations. Article 10. Obligations of Auditors Auditors shall have the following obligations: - to perform quality audits and evaluations at an appropriate professional level, on time, and in accordance with the requirements of generally accepted accounting guidelines and current legislation; - to inform the person requesting an audit that an audit may not continue in the event of failure to correct all revealed violations, or in the event of obstacles to the audit and/or failure to eliminate them, or in the event that the auditor finds that they are related to the person requesting the audit or his manager; 69 Annex 1.3: Draft-Law on Auditing - to refuse from performing an audit, in the event that the auditor has an interest in the audited economic entity; - to provide for the confidentiality of information about the person requesting the audit. In the event that an auditor identifies any violations not provided for in accounting and reporting guidelines or current legislation, the auditor shall suggest the correction of such violations to the economic entity. Article 11. Auditing Procedures and Reports Auditors shall perform audits in accordance with the procedures provided for in auditing guidelines and comply with principles of confidentiality of information, independence, advance planning, self-control, objectivity and good faith. During audits, auditors shall maintain records which shall then be used in the analysis of the reliability of reporting data of the audited entity, and in the preparation of the report and evaluation. The audit report shall be prepared in writing. The head of the audited entity and the Chief Accountant shall review and sign the report. The report shall be submitted to the person requesting the audit and a copy filed at the auditor firm within a year. The first part of the report shall include the first, middle and last name of the auditor, number of license, date of issuance, term of effectiveness, auditor's position in the audit firm, reason for conducting the audit, full name of the audited economic entity, its legal status and structure, number, date and agency of registration, mailing address and list of issues subject to audit. The second analytical part shall include: the time period subject to audit; the status of the accounting and reporting procedures; the status of external controls; violations of accounting and reporting procedures revealed during the audit which may effect data reliability; violations of current legislation; the effect of the violations discovered on the financial and business condition of the audited entity, as well as the prognosis and recommendations of the auditor. The evaluation of the auditor shall be based on the audit report, which is an independent document with full legal force that confirms (or does not confirm as the case may be) the reliability of the accounting and reporting data for the users of the information (e.g. shareholders, investors, creditors) and the audit report shall serve as the basis for the submission and acceptance of the balances by the appropriate agencies. Article 12. Liability of Audit Firms Audit firms shall be fully liable with their property for the economic entity and users of the information: - for any damage incurred as a result of a poor quality audit; - for disclosure of confidential information which resulted in property damage or moral 70 Annex 1.3: Draft Law on Auditing loss; for the quality of services in the event of property damage or moral loss. Chapter 3. Audit Management Article 13. The Right to Perform Audits Capable individuals with higher financial and economic education and experience of no less than three years in the capacity of an accountant, accounting inspector, economist, economic inspector, comptroller, professor of financial and economic subjects at educational establishments, individuals with associate financial and economic education and experience of no less than five years in the capacity of an accountant, economist or comptroller, and were approved as auditors by the Attestation Commission and issued a qualification certificate, shall have the right to establish an auditing practice. Any candidate who does not pass attestation may appeal the resolution of the Attestation Commission to the Auditor Board Management within one month. Article 14. Establishment of an Audit Firm A person who received an auditor qualification certificate may establish an audit firm of any legal structure, except for an open joint-stock company, cooperative, leased, or state or municipal enterprise, and may register it at the Registration Board under the Ministry of Justice and at the Auditor Board within a month and receive the auditor license during the same time. License may be issued for the following types of auditor activities: - audits of enterprises and organizations; - audits of banks and lending institutions; - audits of insurance companies; - audits of exchanges, non-government funds and investment institutions. Article 15. Authority and Rights of the Auditor Board The Auditor Board is an independent association of auditor firms and is a legal entity. The Auditor Board may have any legal structure, except an open joint-stock company, cooperative, lease, state or municipal enterprise for the coordination and protection of the professional interests of the auditors. The Auditor Board shall be registered at the Registration Board under the Ministry of Justice and its authority shall be governed by this Law, the Charter of the Board and general license of the National Bank of Moldova and the Ministry of Finance. The Auditor Board may not perform auditing. 71 Annex 1.3: Draft Law on Auditing The Auditor Board shall establish an Attestation Commission comprised of qualified experts. It will issue qualification certificates to persons who passed attestation, as well as auditor licenses, and develop, approve and communicate to all audit firms the following guidelines: ethics for audits and related activities; inspection and attestation of financial reporting; prognosis related to financial and economic activities; control of audits by the Auditor Board. Guidelines approved by the Auditor Board shall be enforceable for all auditors. The Auditor Board shall maintain registration of audit firms, licenses and auditors in its registers. The Auditor Board shall control the quality of auditing services and compliance with guidelines. The Auditor Board shall, in the event of the identification of non-compliance (violation) of guidelines for poor quality of auditing or services, performance of any activities other than auditing, or failure to uphold the confidentiality of information of economic entities, adopt a resolution for the suspension of the auditor license for up to two years. The Auditor Board shall provide for the legalization of licenses to foreign auditors in the Republic. Article 16. Resources of the Auditor Board Resources of the Auditor Board shall be replenished by the collection of fees for attestation services, issuance of qualification certificates and licenses and payments from audit firms of a percentage of their total income from services provided, without a VAT, and recorded as a net cost. The amount of deductions shall be approved annually by the management of the Auditor Board. All resources of the Auditor Board shall be directed to the fund for insurance from auditing risk and for the maintenance of the Board. Article 17. Attestation Commission The Attestation Commission shall include experts in finance, accounting and law with appropriate educational background and professional experience of no less than ten years. The Auditor Board shall approve members of the Attestation Commission. Members of the Attestation Commission shall serve for two years with a right to be re-approved as a member of the Commission. Members of the Attestation Commission may decide to terminate their appointment as such by sending a notification and upon resolution of the Auditor Board. Members of the Attestation Commission may be terminated early under the following circumstances: - Intentional mis-evaluation of professional capabilities of candidates to become auditors; - Violation of standards of the Auditor Board or other behavior, which negatively affects 72 Annex 1.3: Draft Law on Auditing auditing activities. Activities of the Attestation Commission shall be governed by the Statute on the Attestation Commission adopted by the Auditor Board. Chapter 4. Procedures for the Resolution of Disputes Any disputes arising between an economic entity and an audit firm shall be resolved by the Auditor Board based on the request of the interested party. Upon receiving notification of a dispute, the Auditor Board shall appoint a commission of three experts who shall review the notification and adopt a resolution regarding the matter of dispute within one month. Interested parties shall be notified of the resolution. In the event that a party disagrees with the resolution, such party may appeal the decision at the arbitration or court within one month from the date of receipt of the resolution. This draft was developed by the Ministry of Finance of the Republic of Moldova, Auditor Board and SNC Pragmaticus Company. 73 Annex 1.4: Temporary Statute on Auditing of the Banking System in the Republic of Moldova Approved President of the National Bank of Moldova L. Talmaci January 11, 1995 Minutes #1 of January 11, 1995 Temporary Statute on Auditing of the Banking System in the Republic of Moldova 74 Annex 1.4: Temporary Statute on Auditing of the Banking System in the Republic of Moldova This temporary statute determines the foundations for the auditing of banks and lending institutions in the Republic of Moldova and establishes an audit as an independent and extra-departmental evaluation procedure and shall remain in effect until the adoption of legislative instruments regulating such auditing activities. 1. Audits of banks and lending institutions shall include: * audits of banks; * audits of lending institutions; * audits of the founders and shareholders of banks and lending institutions. 2. Audits of banks and lending institutions shall be carried out, in addition to control procedures established for banks and credit institutions, by specially authorized state agencies in accordance with the legislation of the Republic of Moldova. 3. The main purpose of audits for banks and lending institutions shall be the verification of accounting (financial) reporting data and the compliance of banking, financial and business transactions with the requirements of legislation and regulations currently in effect in the Republic of Moldova. Instructions of the National Bank of Moldova (NBM) shall determine the use of main indicators (contents, scope and form) of accounting (financial) reporting for banks and lending institutions accepted in the Republic of Moldova. 4. Audits may be compulsory or initiated by the entity to be audited. Compulsory audits shall be carried out at all banks and lending institutions for the purpose of verification of annual accounting (financial) reporting when required. Audits initiated at the bank or lending institution's request, shall be carried out upon decision or resolution of the Council of Shareholders for the purpose of obtaining independent evaluation of the results of activities of a bank or lending institution. 5. An audit firm may, regardless of the form of legal ownership (e.g. sole proprietorship, joint venture, partnership, etc.) for legal entities and individuals, both domestic and foreign, or those established jointly with foreign legal entities and individuals, engage in auditing activities. Audit firms shall be registered with the same procedures as entities engaged in other types of activities and may be of any type of legal and organizational form provided for by the legislation of the Republic of Moldova, except for open joint stock companies. An audit firm may commence activities upon registration with the State as an entrepreneurial entity and an audit license and registration have been received from the NBM to audit banks and lending institutions. 75 Annex 1.4: Temporary Statute on Auditing of the Banking System in the Republic of Moldova 6. Audit firms may provide services other than audits, such as services for defining and coordinating the implementation of new accounting systems, preparation of income tax declarations and accounting (financial) reporting, economic evaluation of property, drafting of client agreements and programs of joint operation, analysis of financial and business activities, evaluation of assets and liabilities of business entities, development of feasibility studies, consulting on banking, taxation and business legislation of the Republic of Moldova, as well as training and other related services. Audit firms may not be engaged in any entrepreneurial activities other than auditing and related activities. Audit firms may not disclose any information obtained in the audit procedures to third parties for their use in business activities. 7. Audits may not be performed by: a. auditors who are founders, shareholders, managers or other officers of the audited entity responsible for accounting and financial reporting, or have a personal relationship to any of individuals of this responsibility within the audited entity (parents, spouses, brothers, sisters, sons, daughters, and spouse's brothers, sisters, parents and children) and persons who designed and implemented the accounting system; b. audit firms: * in the event that an audited entity is a founder, shareholder, creditor, guarantor of the audit firm, or in the event that such audit firm is a founder, owner or shareholder of the entity; * in the event that an audited entity is a subsidiary, affiliate, branch or agency of the audit firm, or in the event that the audit firm owns a capital share in the entity. In the event that any of the circumstances specified above become known, the agreement shall be terminated. In the event that an audit firm purposefully conceals from the client any of the circumstances preventing the audit, the client shall be reimbursed, at the expense of the audit firm, for any expenses incurred as a result of entering into the agreement. Concealment of such circumstances shall also be the basis for revocation of the license of the audit firm. 8. In audits and evaluations, auditors shall be independent of the audited entity and audit firm where they are employed and from any third party, including state agencies. 9. In conducting audits, the results of which are submitted to the NBM or other state agencies, audit firms have to use forms and methods established by the NBM. For audits conducted on behalf of other types of agencies, the audit firms may independently determine the forms and methods based on the requirements of the Republic of Moldova and conditions of the agreement with the audited entity. 10. Audit firms shall have the following rights: 76 Annex 1.4: Temporary Statute on Auditing of the Banking System in the Republic of Moldova a. to verify any and all documentation related to the banking, financial and business activities of the audited entity, existing funds, securities, material valuables and to receive explanations or clarifications for issues that arise and any other additional information necessary; b. to receive upon written request, any necessary audit information from third parties; c. to hire, on a contractual basis, for the audit, to hire auditors employed by other audit firms, or other specialists, except for persons specified in Paragraph 7 a. of this Temporary Statute; d. to refuse from performing an audit in the event that necessary documentation was not submitted by the audited entity. 11. Audit firms shall have the following obligations: a. to strictly comply with the requirements of the legislation of the Republic of Moldova related to auditing activities; b. immediately inform the client, who requested an audit, of the following: * circumstances specified in 10 b. of this Temporary Statute, preventing its participation in the audit of the entity; * the need to attract additional auditors (specialists) for the audit due to the volume of the workload or other circumstances which arose after the agreement has been signed; c. to perform the services, subject to the agreement with the client, at a high professional level; d. to provide for the safety of the documents received and prepared during the audit and to not disclose their contents without the consent of the Chief of the audited entity; and to submit complete information regarding requirements of legislation related to auditing, rights and obligations of the parties, to the audited entity ; e. to submit all materials to the client related to the execution of the agreement, after the completion of the work, subject to the agreement with the client . 12. The NBM may initiate an audit of the audit evaluation. In the event that the audit report has been found to be in non-compliance with audit legislation and regulatory requirements: * in the event that such an audit did not detect something and as a result an insufficient payment to the budget by the audited entity occurred, the resulting shortfall shall be paid 77 Annex 1.4: Temporary Statute on Auditing of the Banking System in the Republic of Moldova to the budget by the audited entity, and the audited entity may claim reimbursement from the audit firm for the expenses related to the audit; * in the event that such an audit did not detect something and as a result an overpayment to the budget occurred, the audited entity may claim that the auditor firm pays monetary compensation for any losses incurred as a result. 13. Managers and other officers of an audited entity shall have the following obligations: a. to cooperate in order to assure a timely and complete audit, to submit all necessary documentation and to provide all required clarifications; b. to immediately initiate the corrections of any violations found in the accounting and reporting procedures; and to submit corrected reports and explanations to the NBM, statistical agencies and other recipients within no more than 10 working days after the completion of the audit. Any actions that may lead to a limitation on the scope of issues under the audit shall be prohibited. 14. An audit shall result in an audit report prepared by the audit firm, which shall be a legally enforceable document for any legal entity or individual, local, state or judicial agencies. The audit report on the results of the audit shall be a document of independent evaluation. 15. The audit firm report shall be typed on the firm's letterhead, showing the firm's address, telephone number, bank information and shall consist of three parts. The first introductory part shall include the date of audit licensing from the NBM for auditing of banks and lending institutions, the name of the audited entity, date and number of the agreement which served as a basis for the audit firm to commit to providing audit services subject to the audit agreement and purpose. This part shall also include an evaluation of accounting and reporting procedures and internal controls. The second (analytical) part shall include all identified violations of accounting and reporting procedures that may affect the reliability of information, as well as legislative violations of the Republic of Moldova for transactions that may have adversely affected the interests of the audited entity, state or third parties. The third (summary) part shall confirm reliability of the accounting reporting data of the audited entity based on their examination. In the event that the audited entity has not corrected the violations in accounting and reporting procedures, as instructed by the legislation of the Republic of Moldova, the third part of the audit report 78 Annex 1.4: Temporary Statute on Auditing of the Banking System in the Republic of Moldova shall include a statement regarding the lack of reliability in the reporting data and provide details of a definitive proposal to eliminate the inconsistencies and defects. After introducing corrections suggested by the audit firm, the audited entity may request to receive a confirmation of reliability of the data. The audit report shall be signed by the auditor (specialist) who performed the audit, as well as by the Chief of the audit firm and bear a seal of the audit firm. The audited entity shall submit the audit report to the NBM within 10 days from the completion of the audit. Other interested individuals may receive only the summary part of the audit report. 16. The NBM shall regulate bank auditing. Regulation of bank auditing shall include the issuance and revocation of bank audit licenses, inspection of audit quality and certification of the right to conduct bank auditing activities. 17. The NBM shall establish the procedures for: certification examinations of the right to qualify for conducting bank auditing, establishing certification commissions, fees for certifications and the procedures for obtaining a license to audit bank activities. * Certification shall be conducted by a commission approved by the Administrative Council of the NBM. * Categories of persons that may be qualified to apply for certification are specified in Paragraph 18 of the Regulation "On Audits of the Banking System of the Republic of Moldova". * The scope of questions to be offered to the candidates for the certification examination shall be developed. * Each member of the Commission shall evaluate the candidate in accordance with a scale from one (1) to ten (10). * Only those candidates who received an average grade of seven (7) may qualify for the right to perform audits. * Certification examinations shall be conducted quarterly. 18. The individuals admitted to apply for bank audit licenses are required to have the following qualifications: * a higher economic education and experience of no less than three years, and the experience must have been obtained in the last five years as an auditor, controller, accountant, instructor or teacher of economics, banking employee; 79 Annex 1.4: Temporary Statute on Auditing of the Banking System in the Republic of Moldova * individuals with a trade school education specialized in economics and experience of no less than five years, and the experience must have been obtained in the last ten years as an auditor, controller, accountant, economist and banking employee. Individuals who have been convicted in a court procedure and have received a sentence which prohibits future employment for certain positions or the engagement in certain activities related to business or finance may not be allowed to apply for certification until the sentencing period in effect has expired. Individuals who pass the certification examination shall receive a certificate. The certificate shall be issued within one month of the date of the certification examination. In the event that the individual who passed the certification examination did not gain employment as an auditor within two years from the date of issuance of the certificate, the certificate shall no longer be effective. Any individual who failed the certification examination may appeal the decision to the court within one month after the certification examination results have been declared. Individuals who received a certificate may engage in auditing activities exclusively on behalf of audit firms who were issued state licenses for bank auditing by the NBM. State licenses shall be issued to audit firms based on a review of the following documents to be submitted by the audit firm: * application for a license; * copies of the founding documents of the company; * copies of the registration certificate; * excerpts of the founders' meeting minutes regarding the election of a director who must have a bank auditing certificate; * a feasibility report including specifics on possible pending bank audits, including descriptions of the purpose of the audit, the objective, the development prognosis and estimates of revenue and expenditures. A bank audit license application shall be reviewed within 45 days from the date of submission of all documents specified above in this Paragraph. 19. Licenses and certificates for bank auditing activities may be cancelled by the issuing agency under the following circumstances: a. in the event that false information was submitted in order to receive the state license for the audit firm, or the certificate for the individual; b. in the event of violation by the audit firm, or an auditor, of the non-disclosure obligation 80 Annex 1.4: Temporary Statute on Auditing of the Banldng System in the Republic of Moldova regarding information obtained during the audit; c. in the event that a court sentence has become legally effective which provides for the sentence or punishment of the individual engaged in the bank audit, if such decision prohibits the individual from operating as a bank auditor or from being engaged in certain types of activities relating to finance or business; d. in the event of violating or concealing information that would have precluded the auditor or audit firm from conducting the audit in compliance with audit qualification regulations; e. in the event that an excess of three bank audits or audit related services have been deemed as conducted below a professional level of quality, as determined by the NBM. Cancellation of licenses or certificates for bank auditing activities for reasons other than those identified above shall be prohibited. An audit firm which has had a license revoked for insufficient professional level of quality (i.e. has exceeded the limit of three bank audits or audit related services being conducted below a professional level of quality) may re-apply for a bank auditing license after two years from the date of license revocation. An auditor who has had a certification revoked for an insufficient professional level of quality (i.e. has exceeded the limit of three bank audits or audit related services being conducted below a professional level of quality) may re-take the certification examination after one year from the date the certification was revoked. 20. Audit firms shall be liable for any violation of the legislation of the Republic of Moldova in the established procedure. Any disputes arising between business entities and audit firms shall be resolved by arbitration or court. Signature Acting Chief Board of Banking Regulation and Control R. Mustyatsa 81 Annex 2: Existing and Pending Technical Assistance Efforts in Moldova Annex 2.1: Targeting the Public Sector Under USAID contract, Price Waterhouse - Chisinau (PW) is currently conducting a capital markets program to develop market infrastructure regulations on the shareholder registry and design trading systems for the trading of shares on the Moldovan stock exchange. A capital markets monitoring unit has been developed for the purpose of providing training and technical support to investment funds and trust companies. Further assistance is being provided regarding the promotion of corporate governance and the training of enterprise management. PW is also reporting to the MoF for the purpose of developing laws and regulations for investment funds and trust companies (i.e. intermediary financing organizations). As a part of this contract they will be setting up a Securities and Exchange Commission to regulate the Moldovan Stock Exchange. The scope of the project includes the development of a share registry. PW is currently funding two to three organizations as pilot registrars through the middle/end of February 1995. A Chief Executive Officer of the Stock Exchange was elected in December 1994 and PW is meeting regularly with the CEO for purposes of assisting with the following needs: training, working with computer hardware, procurement, job descriptions, shareholder meetings and defining the rights of management. The Capital Markets Management Unit, currently comprised of 35 to 40 people (6 expatriates, the remainder are local), is managed and staffed by PW. Their primary client for the development of the stock exchange is the Ministry of Privatization. Annex 2.2: Targeting the Private Sector A Bank financed Institutional Development Fund (IDF) grant was authorized by the IDF committee on September 26, 1995. This IDF grant, to be executed by the MoF, will support the Action Plan for Private and State Owned Enterprises. Under USAID and private funding, the Moldova Institute of Public Accountants (MIPA) was formally registered as an educational insitution with the Ministry of Education in April 1994. MIPA was established to train accountants and managers in advanced accounting techniques, assist in the design and installation of accounting systems, provide analysis of financial accounting data, and introduce managers and non-accounting executives to the use of management reports. MIPA, which is a part profit and part non-profit organization, was initially funded with a $200K grant from USAID under a program to be administered by USIA. Other small contributions have been made by private individuals. The initial funding was spent on a six month training program which included sending 12 students to Central Connecticut State University in the U.S. for a five week concentrated accounting program. Additional funding is needed as they predicted they can only exist another six months with the current financial situation. MIPA's goal is to become self sufficient through revenue generated from training and consulting services; their current billing rate is $5/hour. Originally started with twelve members, MIPA is currently comprised of six students in their last year at AES with strong English capability; and six experienced accountants with no English capability; however the organization has been estimated to be currently comprised of three members. MIPA is open to new shareholders. Current participants are not licensed auditors; however members are preparing for an upcoming examination given by the Auditing Chamber. 82 Annex 2: Existing and Pending Technical Assistance Efforts in Moldova MIPA representatives indicated that the financial statements produced by enterprises only include those requested and submitted to the government; most enterprises do not prepare other financial reports for internal use. Very limited analysis is done on financial data and the reports produced are oriented towards identifying units of production, not pricing and cost components. Further comments by MIPA included mentioning that bribes are common in government and a strong mafia element exists. The organization has been offered work regarding the development of accounting standards by Mr. Damien of the Methodological Council however they do have limited capacity to help due to the existing number of staff and their capacity. MIPA is said to only have three professionals left from the original twelve members (one person with a doctorate, and two individuals with three year college backgrounds). Peace Corps. Ten Peace Corps volunteers arrived in June to provide support for programs to be conducted under their Center for Small Businesses. The volunteers will focus on training and teaching accounting concepts and will organize seminars on these topics in conjunction with the AES. The Center is however in need of long term financing, permanent office space and equipment (e.g. computer hardware and software, copy machines and communications equipment). Annex 2.3: Targeting the Commercial Banking Sector Under USAID. contract, Barents Group, the KPMG Peat Marwick consulting company, has established the Moldovan Banker's Association (MBA). The MBA has been developed to provide local institutional capacity for financial sector training for both the central bank and commercial banks in Moldova. Starting in September 1994, weekly training programs have been conducted and have included an average of 27 students per class with participation primarily from the commercial banking sector (with 19 of the 24 banks in operation), the NBM and limited participation from the MoF. The principal areas of training have included, inter alia: Bank Management, Credit Analysis, International Banking, Foreign Exchange Operations, Payment Systems, Asset/Liability Management, Human Resource Management and Banking Supervision. The topics of accounting and auditing have not been addressed in the classes. In order to perpetuate the organization, the MBA charges membership fees and training fees. Each course costs 135 lei per person/per class/per week for members and 200 lei for non-members. The director of the MBA gets a percentage of the revenue over breakeven as an incentive to expand the membership. In addition, the NBM has requested assistance from USAID in order to expand its technical support of the development of the commercial banking sector. NBM's, requests covered the following topics: (1) Training courses for the NBM and commercial bank staff in the implementing [AS charts of accounts (requested August 1994); (2) Assistance with the task of transforming the accounts of the commercial banks (requested March 1995); (3) Support for a Bank Resolution Unit to deal with inadequately capitalized banks (requested March 1995); (4) Auditing and upgrading the small private banks that may have a disproportionate impact on economic growth (requested March 1995). 83 Annex 2: Existing and Pending Technical Assistance Efforts in Moldova In the diagnostic report on Moldova, USAID NIS Monetary Restructuring Project. Contract No. CCN-0009-C-00-3147/19' recommendations were made for USAID support, and USAID has committed to this support, for the requests noted above that include assigning two resident experts in bank accounting and operations to assist the NBM in implementing its new chart of accounts and assist a Moldovan bank accounting task force to design and implement modem bank accounting practices in the commercial banks. The two resident experts in bank accounting arrived in Chisinau in August 1995 and will be on-site for a 12 to 18 month term. The USAID sponsored effort is to be conducted in conjunction with a Moldovan counterpart team comprised of cross sector representation from the NBM, MoF, commercial banks, accounting profession, training institutions and universities. The USAID work program will be conducted in alignment with the Action Plan for Commercial Banks outlined in this report. 1/ This report was prepared by Chris Baritrop and Ed Drake of the Barents Group LLC of KPMG based on their mission conducted in Moldova from April 3-14, 1995. 84 Republic of Moldova Government Organization Chart as of February 1995 President Pariament Mircesa Snegur Prime Minister Andrel Sanghell 00 Deputy Prime Minister Deputy Prinme Minister Deputy Prime Minister Deputy Pime Minister1 Economnic Reform and Industry Local Administration. Energy Sector. Telecorrm, social Secudity, LaOr, Central Bank Accounting Construction and Agriculture Transport. Public Housing and Health, Education and National Sank of Moldova Chamber UtIlRtes Cu Ion Gutsu Valedu Bulgarl Valentin Cunev (Vacant) Leonid Talmatd lon Clubuc (8) (b) Minstry of Foreign Affairs Miiatry of Defense i Istry of lnternal AffairesMinistr of Natond Secuduiy Miisty of Justle Mnitry of Paliament Relations MIhEa Popov Pavel Creange Constantin Antod Vasile Caliol Veae SturEa Victor Puscas Notes: Ia) Refer to Annex 3, Page 66 for further organizational detail below this entity. (bi Refer to Annex 3, Page 8 for further organizational detal below this entity. rt 0 4t on:\snevsecg\rnlorpxII Republic of Moldova Organization Chart: Deputy Prime Minister of Economic Reform and Industry as of February 1995 - Deputy Prime Mister of Economic Reform and Industr outsu MIMStr of Ministry of Ministry Of Ministry of Economy Finance Privatization and Admin Industry of State Property. Bobutbac Chitsn Clobanu Tribal (a) Department of Department of Department of Trade State Statistics Customs Control Opres Tobultoc HIoara Note: a (a) Refer to Annex 3, Page 87 for further organizational detail below this entity. M O mt 0 r-i rt rt --AQafndv1acctaAmolorq2.x1s Annex 3: Public Sector Infrastructure Republic of Moldova Organization Chart: Ministry of Finance as of February 1995 Ministry of Finance Valeru Chitsan Dept of Methodological Dept of Tax Treasury Auditing Financial Council on Methodology Inspector Chamber Control Acctg & Reporting on Acctg & Reporting Sobchenko Chimurtan Damien Control and Financial Dept. of Revision of Guard Price Control State Owned Enterprises Bivol .Catorcha 87 Annex 3: Public Sector Infrastructure Republic of Moldova Proposed Organizational Framework Accounting Chamber (a) Per: Mr. Ion Ciubuc Parliament Accounting Chamber Chairman Mr. lon Clubuc Accounting Chamber Vice Chairman Department of Department of Department of Department of Department of Organization, Budgeting Control of Privatization Legislation Information and Ministries and Issues and Analysis Monopoly Commercial Enterprises Banks Proposed Staffing Requirements: 28 individuals 23 individuals 24 individuals 12 individuals 7 individuals (94 individuals + 56 additional staff = 140 Total Staff Requirements) 88 Annex 4.1: Financial Reporting for Private and State Owned Enterprises Approved by the Ministry of Finance for annual and quarterly reporting REPORT ON FIANCIAL RESULTS AND THEIR USE From January I up to 199 Codes 0710002 Enterprise (company)_ Branch (type of activity) Economic management entity Form of ownership Unitofmeasuring:(lei) District (city)_ a:\report2 April 5,1994 89 Annex 4.1: Financial Reporting for Private and State Owned Enterprises L FINANCIAL RESULTS 001 Number of companies INDICATORS CODE PROFIT LOSSES LINE (EXPENSES) Return (income) from marketing of goods (works, 010 x services) 011 x 015 Gross income from marketing of goods 020 Excises 025 x VAT 026 x Production costs and marketing costs including commercial expense and expenditures for circulation of marketed goods (works, services) outside the republic 040 x Production costs and marketing costs (including commercial expenses) of marketed goods (works, serices) .outside the republic 041 x from line OM including VAT 042 x The result from marketing of goods (works, services) 050 The result from marketing of goods (works, services)outside the republic 051 The result from marketing of commodities 053 The result from marketing of fixed assets 060 The result from marketing of other assets 062 Income and expenses on off-marketing operations 070 * Under the code of Line 020 in Column 4 commercial and other companies which deal with trade and public catering alongside with their principal activities and which get return from marketing of commodities, show their commodities turnover. a:\report2 April 5,1994 90 Annex 4.1: Financial Reporting for Private and State Owned Enterprises -including from securities and share participation in joint- ventures 071 -production cooperation, inter-economic and joint operations which are taxed 072 Earnings received outside the republic 075 TOTAL: profits and losses 80 Balance profit or loss 90 Taxable amount of profit (income) 091 INLBalance profit or loss for the respective period of last ...Year 095 The amount exceeding normative amount of remuneration expenses of the company's employees .100 The amount exceeding normative amounts of expenses on training of people, advertisement, representative expenses and services transport 105 Number of companies which received balance profit or losses according to line 090 Control amount 199 a:\report2 April 5,1994 91 Annex 4.1: Financial Reporting for Private and State Owned Enterprises IL Distribution of Profit and Financing of Code line As of the end of the fiscal period Investments Payments to the budget 200 including dividends to the state 201 Deductions to the reserve fund 210 Expenses and deductions on: production development 220 social development 230 stimulation 240 including dividends for the employees of a company 241 Dividends for payment to other founders 250 including foreign investors 251 charitable purposes 260 other purposes 270 271 Note: Code line As of the and of the fiscal period Expenses on payment of economic sanctions and penalties to the budget 272 number of all the employees (people)due to the average lists 280 remuneration and premiums from all the sources of payment of all the employees 281 remuneration expenses of all the employees of the principal activities included into production cost 282 a:\report2 April 5,1994 92 Annex 4.1: Financial Reporting for Private and State Owned Enterprises number of employees of principal activities due to average lists 285 including the number of employees due to average lists that are on leave without being paid because of lack in financial and energy resources 286 average list number of employees occupied in the principal activity 287 Production costs including commercial expenses and turnover expenditures 290 including financial costs without fuel and energy from outside 291 Fuel and energy from outside 292 Deductions to specific off-budget funds 301 Taxes, duties, fees and other compulsory deductions included into expenses 302 Depreciation (amortization) of fixed production assets 310 Depreciation (amortization) of fixed assets 311 Depreciation aimed at feancing (purchasing)offixed assets in eatinoperation 315 Long-term credits are allotted for capital investments 320 including those assimilated 321 Fixed assets introduced into operation 330 including those assimilated 331 Fixed assets introduced into operation 340 a:\report2 April 5,1994 93 Annex 4.1: Financial Reporting for Private and State Owned Enterprises Average cost of fixed production and turnover resources for calculation of profitability 350 Debt of companies into specific off-budget funds for NIR and OKR 360 conversion and military production 361 Payment for redemption of state-owned assets 370 Return (income) from marketing of 390 Control amount 199 IlL Expenditures and Expenses Accounted for with the Code loe De Facto Calculation of Benefits out of Taxable Income Real expenditures for capital investments, includingtecnical renilitarization and reconstruction of production 510 for nature protection 511 For maintenance of hospitals, kindergartens, cultural objects, sports and dwelling (housing) fund 530 including: within the norms of expenditures approved by local entities 531 Control Amount 599 a:\report2 April 5, 1994 94 Annex 4.1: Financial Reporting for Private and State Owned Enterprises IV. Payments to the budget Code Amount Paid de facto Reinvestme line due to . into the settlement budget as of the end of the fiscal year Total inc. republican budget I 2 3 4 5 6 VAT 600 Profit tax (of companies) 610 including: within the limits of the set-up level of profitability 611 Excises 620 Tax on securities transactions 630 Private tax 640 Tax on use of natural resources and payment for release of hazardous substances polluting the environment 650 including: for water 651 Land tax 660 State duty and stamp duty 670 Customs duty 680 Tax on premise of companies 710 Tax on construction of industrial objects 720 a:report3 April 5, 1994 95 Annex 4.1: Financial Reporting for Private and State Owned Enterprises Income tax from individuals 740 Road tax 750 Other taxes 760 including: Economic sanctions 770 h[b15 Received from the budget 780 Control amount 799 Manager Chief accountant a:\report3 April 5, 1994 96 Annex 4.1: Financial Reporting for Private and State Owned Enterprises Annex 1 Ministry of Finance of the Republic of Moldova December 23, 1993, #11-3-16-93 Approved by the Ministry of Finance of the Republic of Moldova for annual and quarterly reports BALANCE OF THE COMPANY Form #1, RKD For 1, 199 Date (year) Codes 0775101 Company acc. to RMPO Type of activity acc. to RKONH Economic administrative entity_ acc. to RKPO Form of ownership Unit: Lei District, city.. Control amount Date of sending Address Date of receiving .Date of presenting 97 Annex 4.1: Financial Reportitg for Private and NOTES State Owned Enterprises Indicators Code Beginning End of the line of the reporting _year period 1 2 3 4 Guarantees: received 800 handed out 801 Participants' debt on contributions to statutory fund - total 810 Joint-stock companies from the code line 400 state share (in lei) 815 Leased companies allot fixed assets (leased) belonging to the state from the code line 021 Depreciation 821 From the code line 022 Initial value 822 _ Control amount 829 98 Annex 4.1: Financial Reporting for Private and State Owned Enterprises Assets Code Beginning End of the line of the fiscal year period 1 2 3 4 I. Fixed assets and other current and non-current assets Intangibles (04) balance value 010 depreciation (OS) 011 initial value (04) 012 Fixed assets: balance value 020. depreciation (02) 021 initial value (01, 03) 022 Equipment to be installed (07) 030 Capital investments in process (08) 040 Long- term financial investments (06) 050 Settlements with founders (75) 060 Other non-current assets 070 TOTAL 080 II. Reserves and Expenditures Production reserves (10, 15, 16) 100 Livestock for breeding and fattening (11) 110 Highly depreciating and low valued items: balance value 120 depreciation (13) 121 initial value (12) 122 Production in process (20, 21, 23, 29, 30) 130 _U 99 Annex 4.1: Financial Reporting for Private and State Owned Enterprises Future expenses (31) 135 Final produce (37, 40) 140 Commodities: purchase price 150 commercial extra charge (42) 151 sale price (41) 152 Circulation costs for remaining commodities (44) 160 TOTAL 180 including reserves and commodities being transported 181 Norm of current assets 182 III. Cash, settlements and other assets Cash: cashier's office (50) 200 settlement account (51) 210 hard currency account (52) 220 including those in banks outside the Republic 221 other cash (55, 56, 57) 230 including those in banks outside the Republic 231 Settlements with debtors: for commodities, works and services (45, 62, 76) 240 including freign clients 241 on bills of exchange received (62) 250 with the budget (68) 260 with employees on other transactions (73) 270 with affiliated companies (78) 280 with other debtors 290 Downpayments to suppliers and entrepreneurs (61) 300 100 Annex 4.1: Financial Reporting for Private and State Owned Enterprises including foreign suppliers 301 Short-term financial investments (58) 310 Other current assets 320 TOTAL 340 Losses: for previous years (87) 360 for the fiscal year (80) 370 Balance (the sum of lines 80, 180, 340, 360, 370) 390 Control amount 399 101 Annex 4.1: Financial Reporting for Private and State Owned Enterprises Liabilities Code Beginning of End of the line the year fiscal period I. Sources of companies' own means Statutory fund (capital) (85) 400 Reserve fund (86) 410 Funds of specific purposes (99) 420 Aimed financing and earnings (96) 430 Lease obligations 440 Settlements with founders (75) 450 Retained profits of previous years (87) 460 Fund of assets indexation 465 Fund of depreciation (amortization) indexation 470 Profit: for the fiscal year (80) 480 utilized (81) 481 retained profit for the fiscal year 482 TOTAL .490 II. Long-term liabilities Long-term bank credits (921 500 Past due long-term bank credits 505 Short-term hard currency bank credits (92) 510 Past due long-term hard currency bank credits 515 Long-term loans (95) 520 Past due long-term loans 525 Aimed state credit for indexation of current assets 530 TOTAL 540 III. Settlements and other liabilities Short-term bank credits (90) 550 102 Annex 4.1: Financial Reporting for Private and State Owned Enterprises Past due short-term bank credits Bank credits for employees S555 Short-term hard currency bank credits (90) 560 Short-term loans (94) 570 Past due short-term loans 571 Settlements with creditors: for commodities, works, and services (60) 580 including foreign creditors 581 on issued bills of exchange (62) 590 on the off-budget payments (67) 600 with the budget (69) 610 . . on social insurance and security (65) 620 on property and private insurance (65) 630 on remuneration (70) 640 with affiliated companies (78) 650 with other creditors 660 Downpayments received from buyers 670 and customers (64) including those from foreign clients 671 Reserves on doubtful debts (82) 680 Future income (83) 690 Reserves of future expenses and payments (99) 700 Other short-term liabilities 710 TOTAL 720 Balance ( the sum of lines 490, 540 and 720 ) 730 Control amount 799 103 NOTES: Downpayments and Settlements with Foreign CuptQmere tu Total Sun to Be Paid & Name of the i From From Other country other other Direct investments Downpayments assets liabil investments and securities Dividends Downpayments_ I__ ities invesment I______ issued re- 060.241 450,560 into rein- ac- issued re- paid ceived 250,200 571.561 statu- vested quired ceived . 290.310 590.650 tory prof it 32D 660,710 fund _ 1 2 3 4 S 6 7 8 9 10 11 12 13 1 Russian Federation 660 2 Romania a65 3 Ukraine 70 0 5 9 *0 10 o 11? 12 Control - amount 0 ' Manager Chief accountant balance2.ent a April 5, 1994 on O Annex 4.2: Financial Reporting forCommercial Banks Income Statement for Commercial Banks Form #2 (Filed Quarterly with the National Bank of Moldova) Income statement of the bank as of .... ItemNo Amount OPERATIONAL & OTHER INCOME Interest accrued & received: - on short term loans 01 - on long term loans 02 - on deferred short term loans 03 - on deferred long term loans 04 - on overdue short & long term loans equal to the amount of interest on current loans 05 - on medium term loans 06 - on a/c of foreign correspondents, guarantees & acceptance transactions 07 Interest paid by the government on loan to cover temporary shortfall of budget -resources for subsidizing agricultural production 08 Pre-payment of loans (credit resources) 09 Dividends on shares 10 Commission fees received for services & correspondence relations 11 Exchange rate difference in foreign transactions 12 Reimbursement of telegraph, etc. expenses to clients 13 Income received for taking part in activity of enterprises, organizations, banks 14 Overdue interest & commission fees collected, refunds by customers of overpaid commission fees & interest 15 Revenue generated by enterprises of the bank. Levies on income of self-supporting enterprises of the bank 16 Payments from enterprises for services rendered by the bank 17 Payments from individuals for services rendered by the bank 18 Fees for collection 19 Other revenue 20 A/c No 969 Fines, penalties, 21 Repayment of rouble equivalent for obligatory sale of 35% of hard currency earnings 30 Total income (a/c No 960) 22 Balance on a/c 962 23 Grand total (This total matches balance for account #96X) 24 OPERATIONAL & OTHER EXPENSES: Interest calculated & paid: - on settlement, deposits & other a/cs of clients 01 - on deposits of enterprises, organizations & cooperative societies 02 - on deposits of individuals & the military 03 - on Gosstrah (State Insurance Company) a/c 04 - deposit a/c in hard currency of foreign correspondents, organizations & individuals 05 Interest paid to other banks for credit resources 06 Commission fees paid to banks for correspondence relations & services 07 Exchange rate difference in foreign transactions 08 Rent for vehicles for transportation of valuables 09 Purchase & maintenance of packaging for valuables 10 Postage fees, office supplies & stationery expenses 11 Expenses for printing money, securities, checkbooks 12 Expenses for transportation of valuables 13 Payment for services of computer bureaus 14 Postage & telegraph fees 15 Depreciation of fixed assets & housing facilities 16 105 Annex 4.2: Financial Reporting for Commercial Banks Income Statement for Commercial Banks Form #2 (Filed Quarterly with the National Bank of Moldova) Income statement of the bank as of .... Item.No Amount Overdue interest & commission fees paid, refunds of interest & commission fees to clients 17 Repairs of fixed assets 18 Allocations to risk fund 19 Other expenses 20 Fines, penalties, legal damages paid 21 Total expenses (a/c 97 with exception of 971) 22 Administrative expenses (a/c No 971) 23 Total expenses (22+23) 24 Balance on a/c 972 24 - A Total expenses (23 + 24A) (This total matches balance for account #97X) 24 - B Amounts written off as loss (in local currency) 25 Amounts written off as loss (in hard currency) 25 - A Profit (in local currency) (22 revenues - 24 - 25) 26 Profit (hard currency) (23 revenues - 24A - 25A) 26 - A Amount of obligatory sales of 35% of hard currency earnings 26 - Profit in hard currency net of obligatory sales (26A - 26B) 26 - B Profit (hard currency + local currency) (26 + 26B) 26 - C Loss (in local currency) 27 Loss (in hard currency) 27 - A 106 Annex 4.3: Notes on Soviet Style Financial Statements A Note on Soviet-style Financial Statements: Reconciling the Income Statement to the Balance Sheets? David Ellerman EDIRP, World Bank February 1995 At the end of each year, Moldovan and other FSU enterprises fill out two basic financial statements: the Balance Sheet (with beginning and ending balances) and the Statement of Financial Results and Uses. The point of this note is to investigate whether or not the information is available in the Moldovan or other post-1992 Soviet-style statements to reconcile the retained profits on the income statement to the change in retained earnings between the beginning and ending balance sheets. Unfortunately the Statement of Financial Results and Uses in Moldovan and Soviet-style accounting does not seem to present the summary information in a form to allow that reconciliation-so there seem to be inherent limitations in construing the FSU summary statements as approaching international standards. We may approach this problem by considering the Statement of Financial Results and Uses. It is essentially a sources and uses of profits statement. In the West, such a statement might have the following simplified form. Profit Sources and Uses: A Western Format Sources of Profits Uses of Profits Revenues Dividends Expenses + Non-deductible Contributions = Pretax Profits + Non-expense Expenditures - Corporate Tax + Retained Profits = Net Profit = Net Profit Non-deductible Contributions might be political donations to the Fifty Years is Not Enough Campaign that could not be expensed, and Non-expense Expenditures might include that third martini at a business lunch that could not be expensed. For the balance sheet, the important information in this sources and uses of profits statement is the Retained Profits account since it allows the reconciliation of the Retained Earnings accounts in the beginning and ending balance sheets: 107 Annex 4.3: Notes on Soviet Style Financial Statements Beginning Retained Earnings + Retained Profits = Ending Retained Earnings. The Moldovan Statement of Financial Results has essentially the following form. Profit Sources and Uses: An Eastern Format Sources of Profits Uses of Profits Revenue from Works and Services Payments to Budget + Revenue from Sale of Products + Allocations to Reserve Fund - Excise Taxes Expenditures & Allocations on: - VAT + Development of Production - VAT & Excise Taxes Forthcoming + Social Development - Costs of Goods Sold + Stimulation (Bonuses) = Profits from Sale of Works & Services + Dividends to Other Owners + Profits from Sale of Retail Goods + Charity + Profits from Basic Funds + Other Purposes + Profits from Sale of Other Assets + Other Income (expenses) not from Sales = Net Profit = Net Profit To fully understand the .Moldovan and other ex-Soviet accounting statements, one needs to understand how the nominal or temporary accounts are, in effect, closed into the balance sheet at the end of the fiscal year. The Soviet system seems to use a special method that is technically equivalent to closing the income statement accounts into the balance sheet but is presented in different terms. Perhaps the best way to understand this system is to present both methods with the western accounts. We begin with the western method of closing the income statement accounts into the balance sheet. During the accounting year, the Revenue, Expense, and Tax accounts are built up as goods are sold, cost expire, and taxes are paid. As dividends, non-deductible contributions, and non-expense expenditures are paid out, Cash is credited and those three debit-balance accounts are debited. Then at the end of the year, the Revenue, Expense, Tax, Dividend, Non-deductible Contribution, and Non-expense Expenditure accounts are closed into Retained Profits reflecting the equation: 108 Annex 4.3: Notes on Soviet Style Financial Statements Revenue - Expense - Corporate Taxes - Dividends - Non-deductible Contributions - Non-expense Expenditures = Retained Profits. Then Retained Profits is zeroed out with a debit and a corresponding credit to Retained Earnings on the balance sheet. No previous income statement transactions were made to the Retained Earnings account during the accounting year. Now consider an alternative "eastern" approach where we are required to end the accounting year with a Profit Sources - Profit Uses = 0 equation in the form: Revenue - Expense - Corp. Taxes - Dividends - Non-ded. Contrib. - Non-exp. Expenditures - Ret. Profits = 0. All the temporary accounts including Retained Profits as well as the Retained Earnings account on the balance sheet are updated by transactions during the accounting year. The transactions must be made so that, at the end of the accounting year, the above Profit Sources - Uses = 0 equation must hold. That is the end of the procedure. Since the profit sources minus uses is zero (by construction), there is no need for any "closing into the balance sheet" transactions. The temporary accounts are simply started again at zero for the next accounting period. That "eastern" method of establishing the Profit Sources = Profit Uses equation at the end of the accounting period is equivalent to the "western" method of closing the temporary accounts into the balance sheet in the sense that it gives the same ending balance to Retained Earnings on the balance sheet. This can be proven by considering a more abstract version of the process. There are stock accounts (with a value at a point in time) and flow accounts (with values over a time period). The basic equation relating stocks and flows is the: Stock-Flow Equation: Beginning Stock + Inflow - Outflow = Ending Stock. In the case in point, the Beginning Stock is the beginning value of the Retained Earnings account. The Inflow is the Revenue. The outflows occur in the subaccounts of Expenses, Corporate Taxes, Dividends, Non-deductible Contributions, and Non-expense Expenditures. The stock-flow equation can also be written briefly as: Beginning Stock + Netflow = Ending Stock where the Netflow in the case in point is Retained Profit. Over the accounting period the Inflow and Outflow accounts would build up their values. At the end of the accounting period, those flow accounts would be zeroed into the Netflow account which could then be zeroed into the Stock account with the following transactions. 109 Annex 4.3: Notes on Soviet Style Financial Statements Closing Inflow into Netflow Account, Debit Credit Inflow Account Inflow Netflow Account Inflow Closing Outflow into Netflow Account Debit Credit Netflow Account Outflow Outflow Account Outflow Closing Netflow into the Stock Account Account Debit Credit Netflow.Account Netflow Stock Account Netflow Then all the flow accounts have been zeroed out, and the Stock account has been updated to its ending value. To illustrate the "eastern" approach, we again start at the stage where the Inflow and Outflow accounts have acquired values during the accounting period. Instead of zeroing out the flow or temporary accounts, we need to establish the equation: Inflow - Outflow - Netflow = 0. In this simplified framework, this can be accomplished with one transaction. Account Debit Credit Netflow Account Infow - Outflow Stock Account Inflow - Outflow That is the end of the procedure; the stock account has its correct ending values. It might be noted that on the western approach, the Netflow account is a credit-balance account when it is considered as an intermediary to close the inflows and outflows into before it is, in turn, closed into the Stock account. On the eastern approach, the Netflow account is another "uses of inflows" account and it is a debit-balance account. The western and eastern methods can also be illustrated by considering the whole accounting equation (typically the balance sheet equation). Consider an equation in the form: 110 Annex 4.3: Notes on Soviet Style Financial Statements LHS Accounts = Other RHS Accounts + Stock Account where Other RHS Accounts refers to the sum of all the right-hand side accounts other than the Stock Account that has the flow accounts associated with it. In the western approach we could write the beginning equation as follows: Beginning LHS = Beg. Other RHS + Beg. Stock + Beg. Inflow - Beg. Outflow - Beg. Netflow where the beginning flow accounts have zero value. Then during the accounting period, the LHS, Other RHS, Inflow, and Outflow accounts are all updated while the Beginning Stock and Beginning Netflow accounts are frozen. Then at the end of the accounting period, we have the preclosing equation: Ending LHS = Ending Other RHS + Beginning Stock + Ending Inflow - Ending Outflow - Beg. Netflow. Then the ending Inflow and Outflow accounts are "closed" into the Netflow account to obtain the equation: Ending LHS = Ending Other RHS + Beginning Stock + Ending Netflow and then the Ending Netflow account is closed out to the Stock account to obtain: Ending LHS = Ending Other RHS + Ending Stock. In the eastern approach, the beginning equation could also be written as: Beginning LHS = Beg. Other RHS + Beg. Stock + Beg. Inflow - Beg. Outflow - Beg. Netflow where all the flow accounts start with zero values. Then during the accounting period all the accounts, including the Stock and Netflow account, can have their values updated. The only requirement is that at the end of the accounting period, the (Sources - Uses = 0) equation Ending Inflow - Ending Outflow - Ending Netflow = 0 must hold. Hence the ending equation Ending LHS = Ending. Other RHS + Ending Stock + Ending Inflow - Ending Outflow - Ending Netflow 111 Annex 4.3: Notes on Soviet Style Financial Statements implies the same ending equation as obtained by the western method: Ending LHS = Ending Other RHS + Ending Stock. The two methods yield the same Ending Stock value. We are now at last in a position to decipher the Soviet use of the Statement of Financial Results and Uses, and see why it does typically not allow us to reconcile the income statement with the change in the Retained Earnings (RE) account on the balance sheet. In the eastern approach, the beginning balance sheet could be written abstractly as Beg. LHS = Beg. Other RHS + Beg. RE + Beg. Profit Sources - Beg. Profit Uses where the beginning profit source and use accounts have zero values. During the accounting period, all the accounts can -have their values updated. However at the end of the accounting period, the requirement is that the ending values of the profit sources and uses have to be equal so that the equation: Ending LHS = Ending Other RHS + Ending RE + Ending Profit Sources - Ending Profit Uses implies the same equation as would be obtained on the western approach: Ending LHS = Ending Other RHS + Ending RE. But here is the point. The subaccounts of Profit Uses do not differentiate between outflows and netflows so we are unable to compute the change in the Retained Earnings account from the profit sources and uses statement. The problem is not in the eastern method of arriving at the ending balance sheet. The problem is simply in the construction of the profit-use accounts which combine under single headings both dividend-like outflows and retained-profit-like netflows. Some of the profit-use accounts can be reasonably categorized as outflow accounts or netflow accounts, but unfortunately some profit-use accounts are mixed. For instance, Payments to Budget, Expenditures on Stimulation (bonuses), Dividends to Other Owners, and Charity are clearly outflow accounts, while Allocations to Reserve Fund and Expenditures on Development of Production seem to be netflow accounts. However, the Expenditures on Social Development account (not to mention the Other Purposes account) seems to be a mixed outflow and netflow account. Thus, from the information on the Statement of Financial Results and Uses (in its usual format), one cannot construct the total netflow to reconcile with the change between the beginning and ending Retained Earnings accounts. If the profit-use accounts were defined with each one being clearly constructed as a pure outflow or a pure netflow account, then the reconciliation would be quite feasible. 112 Annex 4.3: Notes on Soviet Style Financial Statements The transactions associated with a mixed account such as Social Development could be illustrated. Suppose the enterprise buys 100 bars of soap at 1.5 Lei each for a total of 150 Lei for the enterprise recreation camp (reserved for the workers and their families). For simplicity we assume that the soap expires quickly rather than being routed through the inventory for short- lived assets. But the enterprise is not allowed to treat such an expenditure as an expense so it is an outflow akin to the executives' third martini. Account Debit Credit Social Development 150 Cash 150 But now suppose that 150 Lei are spend to buy a new radio for the workers' smoking lounge in the factory. This would be recorded in the normal way as follows. count Debit Credit Fixed Assets 150 Cash 150 But the eastern accountant would also see this expenditure as a use of profit for social development where the credit is applied to some equity account such as Special Purpose Funds which could be considered a subaccount of Retained Earnings. Account Debit Credit Social Development 150 Special Purpose Funds 150 Since this debit to Social Development was balanced by a credit to equity, it was a retained- profit-like netflow transaction as opposed to the previous soap debit to Social Development which was a dividend-like outflow transaction. Thus knowing only the mixed Ending Social Development balance prevents us from differentiating outflow and netflow transactions, and thus we are unable to develop a Retained Profits (netflow to Retained Earnings) figure from the Statement of Financial Results and Uses in order to reconcile the beginning and ending balances of the Retained Earnings account. There is another interesting aspect to this procedure. One can clearly identify expenditures for dividends, non-deductible contributions, or third martinis. But it is difficult and indeed unnecessary to pair expenditures on assets with the use of profits for netflows such as the "development of production." When cash is expended on a productive machine, it is rather artificial to say that the cash came from profits as opposed to (say) from the beginning cash balance or from the proceeds of a loan during the year. There seems to be little or no 113 Annex 4.3: Notes on Soviet Style Financial Statements economically significant information content in the differentiation of netflow transactions between the development of production, allocation to reserve funds, social development, and other purposes. Little meaningful information would be lost and much clarity would be gained if the netflow-type transactions were grouped together in a Retained Profits account-which would then allow an easy reconciliation between the income statement and the balance sheets. Since the FSU summary financial statements (Balances Sheets and Statement of Financial Results and Uses) do not allow reconciliation of the income statement into the balance sheets, there are inherent limitations in construing the (1992) FSU statements as approaching international standards. The original journal entries need to be summarized in a different manner to separate the dividend-like outflows from the retained-profit-like netflows. 114 CATALOGUERS/FILE CONFIDENTIAL Report No: 14994 MD Type: SR