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West University of
Timisoara, Romania
Faculty of Economics and
Business Administration
Department of Accounting and Audit
PROCEEDINGS of the 3
rd International Conference
ACCOUNTING AND AUDITING PERSPECTIVES
AAP 2016
October 20-22, 2016
Timisoara, Romania
ISSN 2559-0480
ISSN–L 2344-2980
Editura Universității de Vest
2
Organizing Committee
Ovidiu BUNGET West University of Timișoara, Romania
Ovidiu MEGAN West University of Timișoara, Romania
Alina ALMĂȘAN West University of Timișoara, Romania
Rodica BLIDIȘEL West University of Timișoara, Romania
Cristina CIRCA West University of Timișoara, Romania
Alin DUMITRESCU West University of Timișoara, Romania
Nicoleta FARCANE West University of Timișoara, Romania
Camelia HAȚEGAN West University of Timișoara, Romania
Anda IOSIF West University of Timișoara, Romania
Scientific Committee
Catalin Nicolae ALBU The Bucharest University of Economic Studies, Romania
David ALEXANDER University of Birmingham, United Kingdom
Patrick BOISSELIER CNAM, France
Liliana FELEAGA The Bucharest University of Economic Studies, Romania
Belen FERNANDEZ-FEIJOO University of Vigo, Spain
Andrei FILIP ESSEC Business School, Paris, France
Lilia GRIGOROI Academy of Economic Studies of Moldova, Chisinau, Moldavia
Sylvie HEROUX University of Quebec, Montreal, Canada
Costel ISTRATE “Alexandru Ioan Cuza” University of Iasi, Romania
Laszlo Peter LAKATOS Corvinus University of Budapest, Hungary
Eurico LIMA-BASTO Institute of Accounting and Administration of Porto, Portugal
Athanasios MANDILAS Kavala Institute of Technology, Greece
Aileen PIERCE UCD Lochlann Quinn School of Business, Dublin, Ireland
Adriana TIRON TUDOR "Babes-Bolyai" University, Cluj-Napoca, Romania
Juhani VAIVIO Aalto University School of Business, Helsinki, Finland
3
CONTENT
INTEGRATED REPORTING AND BOARD FEATURES
Rareș HURGHIȘ
5
EVOLUTIONS AND TENDENCIES REGARDING THE ROMANIAN
TRANSFER PRICING LEGISLATION: IS THERE A NEED FOR CHANGE?
Ioana NEACŞU
Liliana FELEAGĂ
16
IMPACT OF IFRS ON MANAGERIAL ACCOUNTING: STUDY FROM
TRANSITIONAL ECONOMY
Irena JINDRICHOVSKA
Dana KUBICKOVA
36
SPECIFIC ASPECTS REGARDING THE NEW PROCEDURE FOR
SOLVING COMPLAINTS FOR THE AWARD OF PUBLIC PROCUREMENT
CONTRACTS, SECTOR CONTRACTS, PUBLIC WORKS CONCESSION
CONTRACTS AND PUBLIC SERVICES CONCESSION CONTRACTS
Anda Mihaiela IOSIF
Csaba Bela NÁSZ
53
COST CENTERS FROM HOSPITAL UNITS. STUDY CASE
Alina PUȚAN
Oana Raluca IVAN
Attila TAMAS
61
THE CURRENT REPORTING CONVERGENCE STATUS AND THE
FAIRNESS OF THE TERMS ANGLO-SAXON OR CONTINENTAL
ACCOUNTING
Adrian GENCIA
74
ANALYSIS OF THE LEGAL BASIS OF RESEARCH PROGRAMMES
FUNDED BY THE EUROPEAN UNION BETWEEN 2007-2020 FROM AN
AUDIT PERSPECTIVE
Alexandru BOCEAN
82
UN(MODIFIED) AUDIT REPORTS AND THE APPLICATION OF THE
ACCOUNTING STANDARDS – EVIDENCE FROM THE AERO SEGMENT
OF THE BUCHAREST STOCK EXCHANGE
Costel ISTRATE
Ioan Bogdan ROBU
100
BANKRUPTCY RISK PREDICTION MODELS BASED ON ARTIFICIAL
NEURAL NETWORKS
Doina PRODAN-PALADE
110
4
COST STRUCTURE USING ABC METHOD
Sorin BRICIU
Adrian Ioan ŢÎRĂU
122
HIDDEN COSTS OF SELF-MANAGEMENT SERVICES OF ACCOUNTING
ACTIVITY IN A COMPANY
Gary COKINS
Sorinel CĂPUŞNEANU
Dan Ioan TOPOR
Oana Raluca IVAN
128
5
INTEGRATED REPORTING AND BOARD FEATURES
Rareș HURGHIȘ
Babeș-Bolyai University, Cluj-Napoca, Romania
Abstract
In the last two decades the concept of sustainability reporting gained more importance in the companies’
annual reports, a trend which is embedded also in integrated reporting. Issuing an integrated report
became a necessity, because it explains to the investors how the organization creates value over time. The
governance structure, more exactly the board of directors, decides whether or not the company will issue
an integrated report. Thus, are there certain features of the board that might influence the issue of an
integrated report? The companies which issue an integrated report have certain features of the
governance structure? Looking for an answer at these questions, we seek for any possible correlation
between a Disclosure Index and the corporate governance structure characteristics, on a sample from the
companies participating at IIRC Examples Database. The results highlight that only the size of the board
influences the extent to which the issued integrated report is in accordance with the IIRC Framework.
Keywords: integrated reporting, sustainability reporting, corporate reporting, corporate governance
JEL Classification: M10, M40, G30, F60
1. INTRODUCTION, MOTIVATION AND IMPORTANCE
The reporting package, evolved from financial statements to financial statements, management
commentary, environmental reporting, governance and remuneration. But, nevertheless, the
information in these reports was not interconnected, and it did not show how environmental and
corporate social responsibility issues may affect the company’s performance.
Thus a new trend was born in the reporting field: integrated reporting. In 2011 the International
Integrated Reporting Council (IIRC) - a global coalition of regulators, investors, companies,
standard setters, plus the accounting profession and NGOs, launched a pilot programme
regarding the issue of an integrated report. The purpose of the Council was to issue a framework
for integrated reporting, based on the feedback from the affected actors. Integrated Reporting is a
process founded on integrated thinking with the purpose to issue a periodic integrated report by
an organization, about value creation over time.
Integrated reporting tries to put together both financial and non-financial information,
developing the integrated thinking, underling the interdependencies between them, improving
the quality of information, identifying the material issues that affect the business, which will lead
to a better allocation of the resources. All these elements support integrated thinking, decision-
making and actions that are focused on the values creation over the short, medium and long term.
According to IIRC, integrated thinking takes into account the connectivity and interdependencies
between the range of factors that affect an organization’s ability to create value over time,
including:
- The capitals that the organization uses or affects, and the critical interdependencies,
including tradeoffs, between them;
- The capacity of the organization to respond to key stakeholders’ legitimate needs and
interests;
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- How the organization tailors its business model and strategy to respond to its external
environment and the risks and opportunities it faces;
- The organization’s activities, performance (financial and other) and outcomes in terms of
the capitals – past, present and future.
Through an integrated report, a series of advantages will be gain, (IIRC, 2013):
- Improve the quality of information available to providers of financial capital to enable a
more efficient and productive allocation of capital
- Promote a more cohesive and efficient approach to corporate reporting that draws on
different reporting strands and communicates the full range of factors that materially
affect the ability of an organization to create value over time
- Enhance accountability and stewardship for the broad base of capitals (financial,
manufactured, intellectual, human, social and relationship, and natural) and promote
understanding of their interdependencies
- Support integrated thinking, decision-making and actions that focus on the creation of
value over the short, medium and long term.
The IIRC framework contains the following: guiding principles (strategic focus and future
orientation, connectivity of information, stakeholder relationship, materiality, conciseness,
reliability and completeness, consistency and comparability) and content elements
(organizational overview and external environment; governance; business model; risks and
opportunities; strategy and resource allocation; performance; outlook; basis of preparation and
presentation).
There are also other reporting initiatives like Global Reporting Initiative (GRI) who also issued
guidelines regarding how to prepare a GRI report. The aim of the GRI is to make corporate
responsibility reporting as common and comparable as financial reporting. But, this has common
points with the IIRC framework, as sustainability reporting is an intrinsic element of integrated
reporting (GRI 4, 2013). Moreover, in order to reach a global adoption of the integrated report,
IIRC established collaborations with different partners such as: CDP, GRI (Global Reporting
Initiative), IFRS Foundation, IFAC (International Federation of Accountants), SASB
(Sustainability Accounting Standards Board), WBCSD (World Business Council for Sustainable
Development). The support for a global adoption is through endorsement, advocacy and profile-
raising (IIRC website).
This research was made on integrated reports due to the fact that is a growing phenomenon, more
companies choosing to voluntarily issue this type of report, and it might be the corporate
reporting norm in the near future. Thus, we want to analyze whether issuing this type of report
might be influenced by the characteristics of the company’s board, mainly because this type of
reporting is not mandatory (excepting South Africa Stock Exchange), giving us a slight sense
under which circumstances IR might occur.
As will be explained in the following paragraph, a series of other studies, analyze the correlation
between board features and voluntary, environmental reporting. The contribution to accounting
literature of this study is that it analyzes a possible correlation between the integrated reports and
the company’s board characteristics.
2. LITERATURE REVIEW
Companies play the main role into capitalist economies, creating economic grow which leads to
a better social environment. In order to create added value, companies interact with different
actors like: investors, employees, regulators, suppliers, customer, to whom delivers: products,
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services and information. But in order to establish new relationships, the actors need information
to enter into an exchange with the company. In this sense the companies disclose information to
reduce the asymmetry between them and investors. This assumption refers to shareholders theory
which is concerned to resolve two problems: “first is the agency problem…the second is the
problem of risk sharing” (Eisenhardt, 1989) which may occur in the relation between the
principal, which delegates the work to another party, the agent.
Back in the 60’s, the disclosed information was only financial, lately, due to globalization and
the enlargement of companies, other issues occurred come into the public attention:
environmental and social issues. This company’s function is met by corporate reporting which
disclose the overall picture of the activities of a corporate enterprise. It includes the following
dimensions: financial reporting, executive remuneration, corporate governance and
responsibility, narrative reporting, environmental and social reporting, human resource reporting,
segment reporting, integrated reporting.
The need to report on a broader information area, is argued by the explanatory factors of market
value, which consisted, in 1975, 83% from physical and financial assets, 17% other factors,
while in 2009 the ratio reversed: 81% other factors, 19% physical and financial assets. Thus, a
new type of reporting appeared as an option to encompass both financial and non-financial
information, which is integrated reporting. An integrated report is a concise communication
about how an organization’s strategy, governance, performance and prospects, in the context of
its external environment, lead to the creation of value over the short, medium and long term
(IIRC, 2013).
The purpose of an integrated report, as IIRC highlights, is to explain to providers of financial
capital how an organization creates value over time. It therefore contains relevant information,
both financial and other. Therefore, the integrated report is used by investors and shareholders to
make decisions. But not any type of information is taken into account by investors, but the one
which influences the investment decision. Furthermore, the investor’s behavior is not influenced
only by mandatory disclosed financial information, but also by non-financial information and
voluntary disclosed information. Thus, deciding whether or not to adopt and disclose on a
broader range of information might influence the capital suppliers (investors).
This is mainly driven by corporate governance, because the management of the company decides
what should be disclosed or not. Thus, corporate governance should be considered an influence
on disclosure, because the board of directors manages information disclosure in annual reports
and therefore disclosure may be a function of the structure, characteristics and constituents of
boards, resulting the agency relationship, where the shareholders and investors require more
information to be disclosed by the management (Haniffa & Cooke, 2002). It is considered that
non-executive directors tend to have interests aligned with external stakeholders.
As the framework proposed by IIRC is mainly voluntary adoptable, it is important that this
voluntary disclosed information could change the shareholders and investor’s behavior or at least
to reduce the asymmetry between them and management, based on the shareholders theory.
Voluntary disclosures lead to an improvement of creditability of reported earnings and lower the
information asymmetry between investors and managers, thus voluntary disclosure is relevant
for investors (Cormier & Magnan, 2007).
But when voluntary discloses, companies, have to be cautious, due to the fact that disclosing
certain type of information might negatively affect the company’s reputation or reveal
competition-sensitive information.
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The voluntary disclose of information was priory analyzed in other studies. Mainly, voluntarily
disclosed information was non-financial.
Regarding the board characteristics, Brammer & Pavelin (2008), analyzes whether or not the
quality of voluntary environmental disclosure tends to be higher the more non-executive
directors the firm has. They find a significant correlation but these two are negatively linked,
thus, the higher the number of non-executive directors higher the probability of not voluntarily
disclosing environmental issues. The sample is formed from 447 companies, representing 64%
of FTSE All-Share Index, for years 1999 and 2000.
Lim et al. (2007) examines the association between board composition and different types of
voluntary disclosure, such as strategic information, historical financial information. The overall
finding suggests that there is a positive and significant relation between board composition and
total voluntary disclosure in company annual reports. The results indicated that boards composed
of largely independent directors voluntarily disclose more forward looking quantitative and
strategic information and board structure does not influence the non-financial and financial
voluntary information disclosure. The sample is formed from 181 Australian Top 500
companies, for year 2001.
Villiers et al. (2011) investigates the relationship between corporate environmental performance
and board characteristics, such as the role of directors. They find that companies having a higher
concentration of independent directors and larger boards have a higher environmental
performance. The sample is formed from 1.216 companies from KLD database from U.S., with
2.151 observations for years 2003 (981 observations) and 2004 (1.170 observations).
Cheng and Courtenay (2006) analyses the association between board monitoring and the level of
voluntary disclosure. They focus on the proportion of independent nonexecutive directors, board
size, whether or not the same person is both CEO and chairman. The results highlight that there
is a significant and positive association between the proportion of independent non-executive
directors and voluntary disclosure, in the sense that they tend to disclose more than the
companies with a lower proportion of independent non-executive directors. Board size and CEO
duality are not correlated with the level of voluntary disclosure. The sample is formed from 104
listed companies on Singapore Stock Exchange, for year 2000.
3. DATA AND VARIABLES
The primary purpose of an integrated report is to explain to providers of financial capital how an
organization creates value over time (short, medium and long term), based on it’s resources
(financial, manufactured, intellectual, human, social and relationship, and natural capital) and
relationships (IIRC, 2013). Thus, we can state that issuing an integrated report aspects like:
environmental reporting, corporate social responsibility, are embedded in this report (integrated
report).
Therefore we want to seek for any possible correlation between the disclosure (issuing) of an
integrated report and the company’s board characteristics. Issuing an integrated report is mainly
optional, excepting South Africa, and by doing it, investors might understand better the
company, convincing them to invest. Certain board characteristics might influence the
voluntarily adoption, in accordance with IIRC Framework, of integrated reporting. Due to the
fact that all the companies from the sample, issued an integrated report, we will check the extent
to which these are in accordance with the IIRC Examples Database, by an Disclosure Index.
9
The board characteristics refer to the following: independence, duality, diversity (Prado-Lorenzo
& Garcia-Sanchez, 2010). In this study these characteristics of the board will be determined
using: board size, the percentage of independent non-executive directors reported to the total
number of board members, CEO gender, whether or not the CEO is also the president/ chairman
of board of directors, if there has been a CEO change during that year and the percentage of
women in board.
Thus, in order to test the possible correlation between issuing an integrated report, more
specifically the extent to which an integrated report, issued by a company complies with the
recommendations from the IIRC framework, and company’s board characteristics, we will use
the following variables:
- The extent to which the integrated report is issued in accordance with the IIRC
framework, using a Disclosure Index (DI) – dependent variable; and
- The board characteristics, based on previous studies: board size, the percentage of
independent non-executive directors reported to the total number of board
members, CEO gender, whether or not the CEO is also the president/ chairman of
board of directors, if there has been a CEO change during that year and the
percentage of women in board.
The Disclosure Index is build up based on the IIRC framework. Thus, in order to build up the
Disclosure Index the following issues, from the framework, were taken into account: the
presentation of “Six Capitals”, the “Content Elements” – which are presented based on the
“Guiding Principles”, to which we add whether the report is audited from the integrated report
perspective. To make integrated reports as reliable and comparable as financial reports, an
integrated assurance opinion will have to be provided (Eccles et al, 2011). Ideally, it will be in
the form of “positive assurance” rather than the “negative assurance”. Furthermore, is most
probably to give assurance on the methods, methodology and procedures on which the integrated
report was built on rather than on the accuracy of information.
Therefore for the DI we checked whether or not the issued report contains or not the following
content elements: organizational overview and external environment; governance; business
model; risks and opportunities; strategy and resource allocation; performance; outlook; basis
of preparation and presentation.
Thus, each of the above mentioned items, became a binary variable: if the report presented the
element the variable took “1” as value and if not “0”. The same principle was applied whether
the report was audited, as an integrated report, when the value was “1” or not, when the variable
was “0”. Also if the company presented information regarding the six capitals (financial,
manufactured, intellectual, human, social and relationship, natural), which could be
applicable to their business model and activity, the value was “1” and if not “0”. The same
principle was applied for CEO gender, where “1”=male and “0”=female, whether or not the
CEO is also the president/ chairman of board of directors, where “0”=CEO is also the
president/ chairman of board of directors and “1”=if is not and if there has been a CEO change
during that year, where “0”=there was no CEO change and “1”=there was a CEO change. Thus,
if the company presented the content elements, information regarding the six capitals and the
issued report was audited as an integrated report, it could score a “10”.
One of the advantages of using the Disclosure Index is that it measures and compares the actual
presented information, in the issued reports, with the maximum possible presented information
that it could be disseminated by the company. In this case it measures to which extent the
analyzed reports are issued and presented based on the IIRC framework.
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In this case DI is the dependent variable and is computed as follows: DI= where
di
di
n
i
m
i ;
1
1
DI = Disclosure Index, DI=[0;1]
di = 1 if the item is disclosed and 0 if not;
m = the number of the disclosed items;
n = maxim number of analyzed items.
So, if the company have been presented all the items and audited, it took 1 as value. Disclosure
Index takes values between 0 and 1, due to the fact that is a arithmetic average, a value closer to
1 indicating a greater compliance with the IIRC framework of the analyzed report.
The independent variables express the board characteristics through board size, the percentage
of independent non-executive directors reported to the total number of board members,
CEO gender, whether or not the CEO is also the president/ chairman of board of directors,
if there has been a CEO change during that year and the percentage of women in board.
The data was collected manually for each company, from the uploaded reports in the IIRC
Examples Database, on the IIRC website. The sample initially included 122 observations and 89
companies for years: 2012 (22; 19), 2013 (39; 30), 2014 (45; 32) and 2015 (13; 8). We decided
to exclude the reports for year 2011 due to the fact that was the first year, and the reports were
not familiar with the framework and our result might be distorted.
In Figure 1 – Appendix is displayed the DI composing items for all 122 observations. Most of
the companies, out of 89, 74 are publicly listed companies, 15 are private companies. They are
from: 7 from North America, 5 from South America, 49 from Europe, 11 from Africa, 13 from
Asia, 4 from Australasia. The average length for a report was 167 pages.
4. ANALYSIS AND RESULTS
In order to test the possible correlation between Disclosure Index, which is the dependent
variable, respectively board size, the percentage of independent non-executive directors reported
to the total number of board members, CEO gender, whether or not the CEO is also the
president/ chairman of board of directors, if there has been a CEO change during that year and
the percentage of women in board, independent variables, we used the Pearson Correlation and
ANOVA tests, using SPSS. Due to the fact that for some companies the variables could not be
determined, we eliminated them from the sample, remaining 119 observations. Nevertheless the
sample kept its’ structure and the parameters of central tendency their values. In order to verify
whether the distribution of the sample (population) follows normal law, we used the
Kolmogorov-Smirnov Test. The results are highlight in the table no.1:
Table no.1 - One-Sample Kolmogorov-Smirnov Test
DI
Population 119
Normal Parameters Mean 0,6
Std. Deviation 0,15
Asymp. Sig. (2-tailed) 0,21
Source: SPSS computations
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Based on the above results, we can state that the distribution is normal, as the significance level
of the test (0,21) is greater than the significance level (0,05). The same conclusion results from
computing the parameters: mean (0,6), median (0,6) and mode (0,6), because all three al equal.
Computing the variance coefficient results 25%, which is lower than 35% resulting that the mean
is significant for the studied reports.
For the analyzed variables the descriptive statistics is presented in Table no.2:
Table no. 2 - Descriptive Statistics of variables
Parameter: DI Board
size
Indep.
Non-exec
CEO
president
CEO
gender
CEO
change
Women
board
Population 119
Mean 0,62 11,35 0,50 N/A N/A N/A 0,20
Median 0,60 11,00 0,54 N/A N/A N/A 0,20
Mode 0,60 9 0 1 1 0 0
Std. Deviation 0,15 3,36 0,30 N/A N/A N/A 0,12
Variance 0,02 11,32 0,09 N/A N/A N/A 0,01
Minimum 0,30 5 0 0 0 0 0
Maximum 0,90 21 1 1 1 1 0,56
Source: SPSS computations
We also tested whether or not the average score for DI is different depending on: organization
type, industry and region. For the organization type we had two segmentation variables: public
listed company and private company. In this case the mean was the same (0,61) this meaning
that disclosing process is not influenced by the company ownership structure. In case of the
industry where companies operate, we obtained the following results: Consumer goods and
services – 31 observations (mean= 0,61); Financial and professional services – 28 observations
(mean= 0,67); Healthcare – 7 observations (mean= 0,51); Industrials and Basic materials – 27
observations (mean= 0,61); Telecommunications – 5 observations (mean= 0,58) and Utilities –
21 observations (mean= 0,6). Based on industry segmentation we can state that companies
operating in financial sector tend to disclose more than those in healthcare.
Regarding the region where the company has it’s headquarter we had the following regions:
Africa – 16 observations (mean= 0,65); Asia - 17 observations (mean= 0,62); Australasia - 5
observations (mean= 0,68); Europe – 67 observations (mean= 0,6); North America – 8
observations (mean= 0,66) and South America – 6 observations (mean= 0,68). Based on the
results highlighted previously, we can state that, in average, companies does not disclose, in
accordance with IIRC framework, significantly different.
In order to analyze the possible correlation between DI and the independent variables, we used
Pearson Correlation and ANOVA tests for which we stated the following two hypothesis, for
each of the independent variables:
- H0: according to which board size, the percentage of independent non-
executive directors reported to the total number of board members, CEO gender, whether
or not the CEO is also the president/ chairman of board of directors, if there has been a
CEO change during that year and the percentage of women in board, does not influence
the extent to which the issued integrated report, by the companies from the IIRC
Examples Database, is in accordance with the IIRC Framework, highlight by Disclosure
Index; with the alternative
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- H1: according to the Disclosure Index, the extent to which the issued
integrated report is in accordance with the IIRC Framework, is influenced by these
variables.
Applying the Pearson Correlation Test, to test the correlation between the dependent variable
(DI) and the independent quantitative variables, we obtained the following results:
Table no. 3 - Pearson Correlation Test
DI Board size Indep. Non-exec. Women board
DI Pearson Correlation 1 0,191* -0,112 0,088
Sig. (2-tailed) 0,038 0,227 0,339
N 119
Source: SPSS computations
In order to explain the obtained results, the following remarks need to be made: if the Pearson
Correlation coefficient is positive it means that we have a direct link and if it is negative we have
an indirect link, between the variables. If the value of the coefficient is between [0;0,3] the link
is weak, between (0,3;0,7] the link has an medium intensity and between (0,7;1] the link is
strong.
In this case, only for Board size we flag a significant correlation. The Pearson Coefficient is
0,191 which means that is a weak and direct link between DI and Board size, being also
significant as the significance level is 0,038 which is smaller than 0,05. In this case we accept H1
hypothesis. The same methodology is applied for the other variables resulting that for:
Independent non-executive and Women board variables, H0 hypothesis is accepted, thus there is
no correlation.
To analyze the qualitative variables (CEO gender, whether or not the CEO is also the president/
chairman of board of directors, if there has been a CEO change during that year) in correlation
with DI we used ANOVA. The results are presented in Table no.4:
Table no.4 - ANOVA Test
DI: CEO president CEO gender CEO change
Sig. 0,231 0,211 0,764
Source: SPSS computations
Due to the fact that the significance level for each of the analyzed variables which is greater than
0,05 H0 hypothesis is accepted. So, nor the CEO gender, whether or not the CEO is also the
president/ chairman of board of directors, if there has been a CEO change during that year
influences the extent to which the issued integrated report, is in accordance with the IIRC
Framework (expressed by DI).
The only correlation found, is between the board size and the extent to which the issued
integrated report, is in accordance with the IIRC Framework (expressed by DI), with a direct and
weak link. So, according to this finding the more directors the board has the more the issued
integrated report, is in accordance with the IIRC Framework. Our result is in accordance with
Villiers et al. (2011) findings.
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5. CONCLUSIONS AND LIMITATIONS
Previous studies analyze the possible correlation between board features and voluntary
disclosure. The results highlight that there is a link between the percentage of independent and
non-executive directors in the board structure and board size and different types of voluntary
disclosure.
Starting from previous mentioned studies we tested to whether or not board characteristics of the
companies from the IIRC Examples Database influence the extent to which company’s issued
integrated report is in accordance with the IIRC framework. Here we can find some similarities
with the previous studies, due to the fact that: issuing an integrated report in accordance with the
IIRC proposed framework is voluntary.
Using the Pearson Correlation and ANOVA Tests we verified whether or not there is any
correlation between DI and independent variables. For the board characteristics, only for board
size we found that there is a direct and weak link between board size and the extent to which the
issued integrated report, is in accordance with the IIRC Framework. So, according to this finding
the bigger the board is the more the issued integrated report, is in accordance with the IIRC
Framework. For the other variables no correlation could be found. Thus issuing an integrated
report does not depend on the percentage of independent non-executive directors reported to the
total number of board members, CEO gender, whether or not the CEO is also the president/
chairman of board of directors, if there has been a CEO change during that year and the
percentage of women in board.
Some of the reasons of this result is that the framework is not mandatory, the principles and the
guidelines being very flexible, being also something new for the participating companies and
also an exercise to issue this type of report.
Nevertheless, issuing an integrated report should not depend on some features of the company
board, because this type of reporting develops the integrated thinking, improving the quality of
information available to providers of financial capital leading to a more efficient and productive
allocation of capital. Moreover, integrated reporting intends to become the norm.
Limitation of this study is the size of sample and also the independent variables. Possible future
research questions could take into consideration other variables which highlight the economical,
regulatory, legal, labor and cultural backgrounds for the countries from which the analyzed
companies are (based on the institutional theory).
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15
Appendices
Figure 1. Disclosure index – drilled by items
Source: author’s projection
Table no. 5 - Disclosure index – drilled by score
DI score 1 0,9 0,8 0,7 0,6 0,5 0,4 0,3 Total
Number of
companies 5 11 25 29 22 20 7 3 122
Source: author’s projection
16
EVOLUTIONS AND TENDENCIES REGARDING THE
ROMANIAN TRANSFER PRICING LEGISLATION: IS THERE
A NEED FOR CHANGE?
Ioana NEACŞU
Bucharest University of Economic Studies, Romania
Liliana FELEAGĂ
Bucharest University of Economic Studies, Romania
Abstract
In the context of internationalization and globalization of businesses an important attention has been paid
to the transfer pricing legislation. Moreover, starting with 2016 Romania has adopted new transfer
pricing regulations which have a significant impact on the groups of companies. Therefore, one of the
objectives of our research was to analyse the Romanian transfer pricing legislation in order to capture an
evolution of it. To achieve this objective we performed a comparison between Order 222/2008 and Order
442/2016. Other objectives of the research were to capture the perception of the tax specialists about the
transfer pricing subject and the Romanian related legislation, especially about the new regulations and to
identify if there is necessary a change in the Romanian transfer pricing legislation. To achieve these two
objectives, the main investigative tool used was a questionnaire distributed to members of the Romanian
Chamber of Tax Consultants. The collection of the information based on questionnaire was conducted in
the period 11 June – 27 June 2016. The study`s results show that the Romanian transfer pricing
legislation contains some efficient regulations, but however it needs some changes which would
contribute to a better prevention of the base erosion and profit shifting between multinationals and which
would avoid any misunderstandings and possible disputes between taxpayers and tax authorities.
Keywords: transfer pricing, legislation, change, Romania, Order 442/2016
JEL Classification: M48, K34, F23
1. INTRODUCTION
Once with the increasing of the number of multinational enterprises, the number of related party
transactions rose as well offering to the groups of companies the opportunity to shift income
from a high-tax jurisdiction into a low-tax one. This situation represents a high risk for the
governments of all countries of the world, as its tax revenues could be reduced. Given this, more
and more countries are introducing and extending the transfer pricing legislation in order to
prevent and combat the base erosion and profit shifting between multinationals (Lohse et al.,
2012).
Romania is one of the countries which during 2016 adopted new transfer pricing regulations, this
event having a significant importance in the evolution of the Romanian transfer pricing
legislation and also a significant impact on the business environment. In this respect, the most
important transfer pricing regulations were adopted through Order 442/2016 regarding the value
of transactions, the preparation terms, the content and the conditions under which the transfer
pricing documentation file is to be requested and presented and the procedure for
adjusting/estimating the transfer prices.
17
In this paper we analysed the new transfer pricing regulations stipulated by Order 442/2016
(applicable from 2016) by comparison with the old ones provided by Order 222/2008 (applicable
until the end of 2015). Through this comparison we tried to capture the evolution of the
Romanian transfer pricing regulations and to identify the advantages and disadvantages of this
evolution for the groups of companies.
In addition, the paper presents the perception of the tax specialists about the transfer pricing
subject and the related legislation, especially about the new regulations brought by Order
442/2016 and analysis if there is a need for additional changes in the Romanian transfer pricing
legislation.
Summarizing, the main objectives of the paper were: to analyse the Romanian transfer pricing
legislation in order to capture an evolution of it; to capture the perception of the tax specialists
about the transfer pricing subject and the related legislation, especially about the new regulations
brought by Order 442/2016 and to identify if there is necessary a change in the Romanian
transfer pricing legislation.
The motivation of our research is represented by the fact that the new transfer pricing order
adopted by Romania in 2016 brought important changes to the Romanian transfer pricing
legislation, being a controversy subject for the business environment. We were also motivated by
the fact that until now no study was performed in relation to the new Romanian transfer pricing
regulations. Therefore, we consider that our study have an important contribution to the transfer
pricing literature and in the same time could represent a starting point for future research.
The rest of the paper is organized as follows. Section 2 discusses the background literature on
transfer pricing legislation. Section 3 describes the research methodology. Section 4 analyses the
new transfer pricing regulations in Romania. Section 5 presents the perception of the tax
specialists about the transfer pricing subject and the related legislation. In the final section, the
conclusions are accompanied by a description of tentative avenues of research.
2. LITERATURE REVIEW
Transfer prices represent the prices charged between affiliated companies for the
provision/acquisition of services (including administrative services and financial services) or for
the sale/acquisition of goods (Matei & Pîrvu, 2011).
According to the literature review, prices at which goods or services are transferred between
affiliated companies influence the profit obtained by each of these companies and the corporate
income tax which should be paid. Due to this fact, the transfer pricing subject becomes
increasingly important for groups of companies (Sansing, 2014).
Therefore, considering the fact that multinationals own entities in different countries of the
world, they could profit from differences in tax rates (Peralta, 2006) and they could try to use
transfer pricing in order to shift the profit from high-tax countries into low-tax countries.
Moreover, Neighbour (2002) pointed out that transfer pricing can deprive governments of their
fair share of taxes from multinationals. Yao (2013) stated that as a consequence to this situation,
most countries have adopted regulations to “assess the appropriateness of the transfer prices
quoted by MNEs”.
18
In addition, according to Ito and Komoriya (2015) in order to combat the profit shifting between
multinationals, governments have implemented, among other rules, transfer pricing regulations.
These two authors analysed for the period between 2009 and 2012 the transfer pricing
regulations of OECD member countries and conducted a research in order to observe the impact
of these regulations on the location decisions of multinationals. The conclusion of the survey was
that in the location decisions, an important role is played by the transfer pricing regulations. In
this respect, the authors noted that rules with regards to the transfer pricing documentation
decrease the foreign direct investments.
Lohse and Riedel (2013) performed a study at the level of pan-European countries and noticed
that the transfer pricing regulations significantly reduce the profit shifting activities of
multinationals. Moreover, the authors stated that the transfer pricing rules “may be socially
desirable despite the high administrative burden they impose on firms and tax authorities”.
On the other hand, Silberztein (2008) considered that a transfer pricing system involves more
than enacting of legislation. She stated that an effective transfer pricing system should be based,
among others, on the development of the transfer pricing expertise within tax authorities,
development of dispute resolution mechanism which could eliminate double taxation,
development of guidance for complex transactions etc.
2.1. Global evolutions regarding the transfer pricing legislation
Keuschnigg and Devereux (2013) considered that once with the increasing of the multinational
enterprises, the collection of corporate taxes has become a challenging task. Therefore, in order
to protect the tax base countries implemented the arm's length principle. According to this
principle, the prices charged between related parties should be the same to the prices charged
between unrelated parties if they had trade the same products or services, under the same
circumstances as the related parties (Smith & Eden, 2001).
The first country which implemented the arm`s length principle and adopted a transfer pricing
legislation was US (Mirjam, 2015). Having as a starting point the US legislation, and in order to
develop global transfer pricing regulations, the Organisation for Economic Cooperation and
Development (OECD) published a report about the allocation of profit and costs between
affiliated companies.
In 1995 OECD published the document Transfer Pricing Guidelines for Multinational
Enterprises and Tax Administrations (“OECD Transfer Pricing Guidelines”), which has been
revised in 2010. This document contains, inter alia, details about the transfer pricing
documentation and the analysis which should be perform in order to assess if transfer pricing
comply with the arm`s length principle (OCDE, 2010). In order to prevent the profit shifting
between multinationals, in 2013 OECD originated the Action Plan on tax base erosion and profit
shifting – BEPS Action Plan (Lamers et al., 2014).
Furthermore, on 15th
of June 2016, OECD announced the amendments of the Transfer Pricing
Guidelines, according to the provisions of BEPS Action Plan, more exactly according to the
provisions of Actions 8-10 "Aligning Transfer Pricing Outcomes with Value Creation" and
Action 13 "Transfer Pricing Documentation and Country-by-Country Reporting"
(http://www.oecd.org).
2.2. OECD Transfer Pricing Guidelines
The OECD Transfer Pricing Guidelines contain recommendations on the application of the arm’s
length principle as the appropriate means of determining applicable transfer prices for
19
transactions carried out by related parties. Multinational enterprises are encouraged to follow the
OECD Guidelines regarding transfer pricing, as subsequently amended and supplemented, in
order to ensure compliance with the arm's length principle when determining transfer prices. The
OECD Guidelines view the arm's length principle as a method which "provides the closest
approximation of the workings of the open market in cases where property (such as goods, other
types of tangible assets, or intangible assets) is transferred or services are rendered between
associated enterprises" (OECD, 2010: 36).
The OECD Guidelines present the main steps to be analysed when applying the arm’s length
principle to transactions performed between affiliated companies. The Guidelines are intended to
help tax administrations (both of OECD member and non OECD member countries) and
multinational enterprises by indicating ways to find mutually satisfactory solutions to transfer
pricing cases, thereby minimising conflict among tax administrations and multinational
enterprises and avoiding costly litigation. Taxpayers are encouraged to follow the Guidelines in
evaluating for tax purposes whether their transfer pricing complies with the arm’s length
principle.
In order to analyse whether a transaction has been carried out at arm’s length, one of the general
accepted methods, as provided by the OECD Guidelines, and also by the Romanian Tax Code
must be applied by the taxpayers: the comparable uncontrolled price method, the cost plus
method, the resale price method, the transactional net margin method and the profit split method.
When choosing the most appropriate transfer pricing method in order to determine the
comparability range of a transaction between affiliated parties, the facts and circumstances of
that transaction should be considered for (i.e. there should be performed a functional analysis of
the related parties transactions, presenting the functions carried out, the risks incurred and the
assets used by each party involved in transactions). The selection of the method should offer the
most appropriate measurement or the best estimate of the market value.
Transfer pricing methods
The comparable uncontrolled price method involves the comparison of the prices charged by
related parties with the prices charged by independent companies. This method should be applied
only if the conditions and circumstances of the transactions performed between related parties
are similar with those carried out between unrelated parties (e.g. there are similar products sold/
services provided, comparable quantities etc.). In practice, it is used to the test the arm`s length
principle of transactions which suppose the payment of commissions, royalties or interest.
The cost plus method is used in order to test the compliance with the arm`s length principle of
the prices charged by a service provider or a manufacturer to its related parties. The application
of this method involves the comparison of the mark-up added by the service
provider/manufacturer to the costs incurred in order to provide the services/ manufacture the
goods and sell them to an affiliated company with the mark-up applied by independent
companies to the costs incurred in order to provide similar services/ manufacture similar
products.
The resale price method is used when a company purchases a product from an affiliated
company and resells it to a third party. The application of this method begins with the
determination of the price at which that product was resold to third parties (i.e. the resale price).
After that, the price at which the product was purchased from the affiliated company is
determined as a difference between the resale price and the margin added in order to resale it to
third parties. In the next step, the margin applied by a company in order to resell to a third party
the products purchased from an affiliated company is compared with the margin applied by
20
independent companies which resell in similar circumstances, similar products. If this margin is
situated in the interval of margins used by independent companies, then the price at which the
goods resold was purchased from the affiliated company complies with the arm`s length
principle.
The transactional net margin method operates in the same way as the cost plus method and the
resale price method, the only difference being represented by the fact that these methods suppose
the comparison of gross mark-up/margins, while this method compares net mark-ups/margins.
The profit split method is used when the transactions between affiliated companies are
interrelated, and so it would be impossible to identify comparable transactions.
2.3. Evolution of the Romanian transfer pricing legislation
The arm`s length principle was introduced in the Romanian tax legislation in 1994, but only in
2000 was developed the legal framework for the application of this principle.
In September 2006 Romania introduced the transfer pricing documentation requirement, but the
first detailed regulations regarding the content of the transfer pricing documentation file and the
deadline for its submission were published in the Romanian Official Gazette in February 2008
(i.e. Order 222/2008 regarding the content of the transfer pricing file).
Starting with 2007, the Romanian taxpayers which perform transactions with affiliated
companies have the possibility to ask the tax authorities for the issue of an advance pricing
agreement (APA). The Romanian transfer pricing legislation follows the principles stipulated
within the OECD Transfer Pricing Guidelines.
The year 2016 has brought substantial changes to the Romanian transfer pricing legislation. In
this year there was published the Order 442/2016 regarding the value of transactions, the
preparation terms, the content and the conditions under which the transfer pricing
documentation file is to be requested and presented and the procedure for adjusting/estimating
the transfer prices. Compared with Order 222/2008 (applicable until the end of 2015), this new
order contains more detailed regulations with regards to the structure of the transfer pricing file
and brings new substantial changes regarding the preparation and presentation of the transfer
pricing file.
Moreover, considering the fact that the Romanian transfer pricing legislation is based on the
provisions of the OECD Transfer Pricing Guidelines which will be amended according to BEPS
Action Plan, it is expected that the transfer pricing legislation of our country to be also amended.
In this respect, on 2 June 2016 the Romanian Government approved the ascension of the
Romania as associate to the BEPS Implementation Forum in order for our country to implement
the BEPS measures at national level.
2.4. Previous studies performed in relation to transfer pricing legislation
Lohse et al. (2012) considered that in order to exist a transfer pricing legislations, countries
should include in its national tax law, in addition to the arm`s length principle, key concepts such
as related parties, controlled transactions, methods for the determination of the transfer pricing
and documentation requirements. Moreover, these authors performed a comparison of the
transfer pricing regulations across 44 countries over a period of nine years (2001-2009). In order
to show the differences between the regulations of countries analysed, they categorized the
transfer pricing regulations as follows:
category 0 - no transfer pricing regulation exists;
21
category 1 - the arm`s length principle exists in the national tax law, but there is no
documentation requirement;
category 2 - the arm`s length principle exists in the national tax law, documentation
requirement is not implemented in the national tax law, but the documentation is required
in practice (during an audit);
category 3 - the arm`s length principle exists in the national tax law, documentation
requirement is implemented in the national tax law, but the full documentation is
available only upon request;
category 4 - the arm`s length principle exists in the national tax law, documentation
requirement is implemented in the national tax law and a short disclosure of
documentation is required;
category 5 - the arm`s length principle exists in the national tax law, documentation
requirement is implemented in the national tax law and a long disclosure of
documentation is required.
According to Lohse et al. (2012), during 2003 – 2006 Romania was situated within the category
2, and between 2007 and 2009 within the category 3.
Oosterhoff (2011) analysed the results of the 2010 Global Transfer Pricing Survey conducted by
Ernst & Young based on interviews with 877 multinational enterprises across 25 different
countries and noticed that the importance granted by respondents to transfer pricing differs per
industry. The industry which recorded the highest percentage (more than 70%) of respondents
which considered transfer pricing as the most important issue is represented by the
pharmaceuticals industry. The lowest percentage (close to or below 20%) was recorded, among
others, by the banking and capital industries. Moreover, the author pointed out that more than
half of the respondents interviewed in the parent companies prepared documentation
contemporaneously with the filling of their corporate income tax return.
Corlaciu and Tiron (2014) performed a survey regarding the perception of professionals with
regards to the specific aspects related to the Romanian transfer pricing. In this respect, they used
a questionnaire which was distributed to members of CECCAR (The Body of Licensed
Accountants and Expert Accountants in Romania), CCF (Romanian Chamber of Tax
Consultants) and CAFR (Chamber of Financial Auditors of Romania). The objective of this
questionnaire was to identify the following elements:
the level of the transfer pricing knowledge of the target group;
the conditions in which the target group would attend professional courses in the field of
transfer pricing;
the general perception of the target group in relation to the technical aspects regarding
transfer pricing (e.g. the importance of transfer pricing subject, the persons which should
be involved in the preparation of a transfer pricing file, the capacity of companies to
deliver accuracy information about related party transactions etc.);
the perception of the target group regarding the Romanian transfer pricing legislation. In
this respect the results of the research showed that one of the most important factors
which determine the Romanian companies to pay attention to the transfer pricing aspects
is represented by the legislative regulations.
Stana (2016) analysed the business perspective on transfer pricing and related legislation using
also a questionnaire as a research tool. Compared with the questionnaire designed by Corlaciu
and Tiron, this one outlined the perception of the specialists in relation to the preparation of the
transfer pricing file and to the application of the transfer pricing legislation by the Romanian tax
authorities. The target group was represented by companies from different industries and was
selected using various contacts from LinkedIn.
22
Until now, no research was performed in relation to the perception of the specialists on the new
transfer pricing regulations implemented by Romania through Order 442/2016.
3. RESEARCH METHODOLOGY
Below we presented the three main objectives of our survey. For each objective, we described
the research methodology used in order to achieve it.
The first objective was to analyse the Romanian transfer pricing legislation in order to capture
an evolution of it. Given the fact that the most important legislative amendments are related to
the presentation, preparation and structure of the transfer pricing file, our analysis was
concentrated on the regulations provided by Order 222/2008 (applicable until the end of 2015)
and Order 442/2016 (applicable starting with 2016).
The research methodology used in this step of the research was represented by the analysis of the
provisions of the two orders. After that, in order to capture the evolution of the transfer pricing
regulations, we performed a comparison between Order 222/2008 and Order 442/2016 and we
identified the advantages and disadvantages of this evolution for the groups of companies.
The second objective was to capture the perception of the tax specialists about the transfer
pricing subject and the related legislation, especially about the new regulations brought by
Order 442/2016.
The research methodology used in order to achieve this objective was represented by the design
of a questionnaire.
The questionnaire used contains 18 questions grouped in 4 categories of information as follows:
category 1: information about respondents (questions 1-5).
In order to gather information about respondents we used 4 closed questions with
multiple choice answers and 1 dichotomous question (i.e. question that ask respondents to
answer with yes or no);
category 2: general information regarding the transfer pricing subject and the related
legislation (questions 6-10).
In this section we included 1 mixed question (where the respondents were given the
possibility to fill in the answer where none of the answers provided were considered
adequate), 1 dichotomous question and 3 questions using the Likert scale of answer
options (where 1 represents the lowest value and 5 the highest one);
category 3: technical information regarding the new transfer pricing regulations adopted
by Romania through Order 442/2016 (questions 11-16).
In order to gather this type of information we used 3 closed questions with multiple
choice answers, 2 mixed questions and 1 dichotomous question.
category 4: information related to the need of amendment the Romanian transfer pricing
legislation (question 17-18). In this section we used 1 mixed question and 1 open
question.
The questionnaire was designed using the funnel technique (Chelcea, 2001, pp.101). According
to this technique, the structure of the questionnaire should be based on the shift from general
aspects to particular ones.
23
Taking into consideration the fact that transfer pricing subject is a new one for the professionals,
we chose as target group only the members of CCF (Romanian Chamber of Tax Consultants).
We considered that these members have more experience and knowledge in transfer pricing area,
compared with members of other professional bodies. Given this, we considered that the answers
offered by members of CCF could be more relevant in order to perform our research than the
answers of members of other professional bodies.
The questionnaire was distributed via e-mail. The e-mail addresses of CCF members were
collected from the website of the Romanian Chamber of Tax Consultants
(http://www.ccfiscali.ro/). We tried to perform an exhaustive research and in this respect we
collected the e-mail address of all CCF active members (i.e. 4,486 members).
The computer software used in order to design the questionnaire and to store the answers
received is represented by the online platform GoogleDocs. In order to send the questionnaire to
the target group we used the Gmail platform and in order to interpret the results obtained we
used the Microsoft Excel application.
The period during which we sent the questionnaire and collected the answers is between 11th
of
June and 27th
of June.
The third objective of the research was to identify if there is necessary a change in the
Romanian transfer pricing legislation. This last research step was based on the results of the
questionnaire. More exactly, based on the answers received we performed an analysis in order to
identify if Romania needs additional transfer pricing regulations or if the existing regulations
should be amendment or presented more detailed.
4. THE NEW ROMANIAN TRANSFER PRICING LEGISLATION AND ITS IMPACT
ON BUSINESS ENVIRONMENT
The table no.1 presents a comparison between the new Romanian transfer pricing legislation (i.e.
the provisions of the Order 442/2016) and the old one (i.e. the provisions of the Order 222/2008).
Through this comparison we tried to identify the impact of the new regulations on the business
environment, more exactly we tried to identify the advantages and disadvantages of the new
regulations from the taxpayers’ point of view.
Table no.1. - New vs. old Romanian transfer pricing regulations
I. Preparation and presentation of the transfer pricing file
Items Order 222/2008 Order 442/2016 Impact
Mandatory
annual
preparation of
the transfer
pricing file
n.a. (i.e.
Order 222/2008
did not request
companies to
prepare an annual
transfer pricing
file)
By whom?
Large taxpayers which record
an annual value of the
transactions performed with
affiliated companies higher
than or equal to any of the
following thresholds:
o EUR 200,000 for
interest paid/ received;
o EUR 250,000 for
services provided/
received;
o EUR 350,000 for sale/
acquisition of tangible
and intangible goods.
This new regulation represents
a disadvantage for the large
taxpayers, compared with the
other categories of taxpayers.
The obligation to prepare an
annual transfer pricing file
could represent a tax burden
and large taxpayers should
allocate considerable resources
in this respect.
However, the advantage is
represented by the fact that only
transactions which exceed the
thresholds should be analysed
24
When?
The deadline for the
preparation of the transfer
pricing file is represented by
the deadline for the
submission of the annual
corporate income tax return.
How?
The transfer pricing file should
be presented upon the request
of the tax authorities either
during a tax audit or outside
such process. The file should
be presented in maximum 10
days from the request date, but
not earlier than 10 days from
the annual deadline mentioned
above.
within the transfer pricing file,
and not all the transactions.
In addition, due to this new
regulation, starting with 2017 it
is expected that the number of
tax audits increases for the large
taxpayers. Given this, we
consider that this new
regulation is an efficient one in order to prevent the base
erosion and profit shifting
between multinational
companies.
Preparation of
transfer
pricing file
upon request
By whom?
All taxpayers which perform
transactions with
affiliated
companies,
irrespective of the
annual value of
the transactions.
How & When?
The transfer
pricing file should
be presented upon
the request of the
tax authorities
during a tax audit.
The deadline for
the presentation of
the file upon
request is of
maximum 3
months and can be
extended only
once with a period
equal with that
initially
established.
By whom?
Large taxpayers which do not
exceed the thresholds
mentioned above (for the
mandatory annual preparation
of the transfer pricing file),
small and medium taxpayers which record an annual value
of the transactions performed
with affiliated companies
higher than or equal to any of
the following thresholds:
o EUR 50,000 for
interest paid/ received;
o EUR 50,000 for
services provided/
received;
o EUR 100,000 for sale/
acquisition of tangible
and intangible goods.
How & When?
The transfer pricing file should
be presented upon the request
of the tax authorities during a
tax audit.
The deadline for the
presentation of the file upon
request is of 30 to 60 days and
can be extended only once
with maximum 30 days.
This new regulation presents
some advantages, as follows:
o for the taxpayers targeted
by this regulation there is
no obligation regarding the
annual transfer pricing file
preparation;
o only transactions which
exceed the thresholds
should be analysed within
the transfer pricing file,
and not all the
transactions.
The disadvantage is
represented by the diminishing
of the presentation deadline.
However, we consider that the
diminishing of the
presentation deadline
represents an efficient
regulation, as this encourage
the taxpayers to prepare a
transfer pricing file, irrespective
they are or not subject to a tax
audit.
Other
documentation
rules n.a.
Taxpayers who perform intra
– group transactions below
the thresholds mentioned
above (for the preparation of
the transfer pricing file upon
request) should not prepare a
We consider that this regulation
is an efficient one and
represents an advantage for the
taxpayers, as it eliminates the
situation in which the costs
incurred by a taxpayer in order
25
transfer pricing file. They have
only the obligation to
document, during a tax audit,
the compliance of the transfer
pricing with the arm`s length
principle. This should be
performed according to the
general rules provided by the
financial-accounting and tax
legislation in force.
Order 442/2016 does not
define the practical approach
of documenting the arm’s
length nature of transfer
pricing according to the
general rules provided by the
financial-accounting and tax
legislation in force.
to prepare the transfer pricing
file would be higher than the
value of the intra-group
transactions performed.
On the other hand, the fact that
there is no definition with
regards to the documentation
which should be performed
represents a disadvantage for
taxpayers, as this situation
might lead to
misunderstandings and possible
disputes to the tax authorities.
II. The content of the transfer pricing file
Order 222/2008 vs. Order 442/2016 Impact
The structure of the transfer pricing documentation file
provided by Order 442/2016 is more complex compared
with the structure provided by Order 222/2008. The new
structure requires, inter alia, the presentation of more
detailed information about the group of companies (e.g. a
description of any business restructuring that occurred
within the group; a general description of the group
research and development activity; a general description
of the transfer pricing policy regarding financial
arrangements concluded between affiliated companies
within the group etc.).
The modification of the content of the
transfer pricing file involves the allocation
of more resources in order to prepare it.
This thing could represent a disadvantage
for taxpayers.
However, we consider that the advantage is
represented by the fact that the presentation
of the new information requested by Order
442/2016 could be relevant in order to
perform an accuracy transfer pricing
analysis.
III. Transfer pricing adjustment and estimation procedures
Order 222/2008 vs. Order 442/2016 Impact
In the case that taxpayers fails to submit the transfer
pricing file or submit an incomplete one, the tax
authorities could perform the estimation of transfer
prices.
The estimation process is followed by the adjustment of
the transfer prices.
The adjustment of transfer prices is also performed when
taxpayers carry out related party transactions which do
not comply with the arm`s length principle.
According to Order 222/2008 the estimation of transfer
prices was performed based on the arithmetic average of
the amount of three similar transactions carried out
between independent companies and selected by the tax
authorities.
According to Order 442/2016 transfer prices are adjusted/
estimated based on the level of the central tendency of
the market (i.e. the median value of the comparison range
of the prices or margin used by independent companies
which perform comparable transactions).
The modification of the estimation
procedures based on the level of the central
tendency of the market represents an
advantage for the taxpayers, as it avoids
the abusive approach of the tax authorities
of selecting those three transactions which
are the most unfavourable for the taxpayers.
Source: own processing
26
5. THE PERCEPTION OF THE TAX SPECIALISTS ABOUT THE TRANSFER
PRICING SUBJECT AND THE RELATED LEGISLATION: RESULTS AND
INTERPRETATIONS
Given the fact that almost for each new transfer pricing regulation we have identified both
advantages and disadvantages, and considering that these regulations represent a controversy
subject for the business environment, we found interesting to identify the general perception of
the tax specialists about the transfer pricing subject and the related legislation and to identify if
there is need for a change in the Romanian transfer pricing legislation.
In the table no.2 below we presented the number of persons involved in the research, as well as
the questionnaire response rate.
Information presented within table 2 was provided by the online platform GoogleDocs and the
Gmail platform.
The percentage values were computed as follows:
E-mails: error sending = E-mails: error sending/ E-mails: total available
E-mails: actually sent = E-mails: actually sent/ E-mails: total available
Effective responses = Effective responses/ E-mails: actually sent
Table no.2 - Questionnaire response rate
Element Number %
E-mails: total available 4,486 100%
E-mails: error sending 315 7%
E-mails: actually sent 4,171 93%
Effective responses 167 4%
Source: own processing
In the following sections we presented the interpretation of results obtained based on the answers
received from 167 tax consultants which completed the questionnaire.
5.1. General information about the respondents
According with the statistics generated by the online platform GoogleDocs, the responses were
received as follows:
25% from the responses were received from people who are only members of CCF;
50% from people who are members of both CECCAR and CCF;
19% from members of the following three professional bodies: CECCAR, CCF and CFR;
the difference of 6% represents answers received from members of CCF and ACCA;
CCF and CFR; CECCAR, CCF and ACCA; CECCAR, CCF, CFR and ACCA.
The figure 1 below presents the field in which the respondents are working. As could be
observed, a big part of the respondents is working in the field of tax advice (34%) and in the
field of accounting services (also 34%).
27
Figure 1. Areas in which respondents are working
Source: own processing
Moreover, 83% of the respondents have an experience of over 10 years. The hierarchy is
completed by persons with prior professional activity between 6 and 10 years (14% of
respondents) and finally by those with less than five years of experience.
In addition, 52% of the respondents worked in transfer pricing projects and have experience in
this domain.
Regarding the participation to transfer pricing courses, 73% of the respondents would attend
such courses on their own initiative, while 20% of the respondents would participate to this kind
of courses only at the request of professional bodies. The difference of 7% would participate to
transfer pricing courses only upon the request of the employer.
Overall, we consider that the fact that most of the respondents are members of other professional
bodies in addition to CCF, have an experience of over 10 years, worked in transfer pricing
projects and have experience in this domain and would participate to transfer pricing courses on
their own initiative, represents a positive aspect in our research and ensures us that the responses
to the questionnaire have a high quality level.
5.2. General perception of the respondents about the transfer pricing subject and about the
related legislation
General perception about the transfer pricing subject
Our research aimed to gather the opinion of the respondents about the following three aspects
related to the transfer pricing subject:
the importance that group of companies should pay to transfer pricing aspects;
the transfer pricing documentation;
the involvement of the professional organizations in the training of the transfer pricing
specialists.
Regarding the importance that groups of companies should pay to transfer pricing aspects, 58%
of the respondents consider that the transfer pricing subject should be highly important for the
groups of companies and 31% of the respondents consider this subject important.
Respondents who stated that transfer pricing subject should be highly important for groups of
companies are those who are working in the tax advisory field and in accounting services field
and have more than 10 years of experience.
28
Furthermore 8% of the respondents believe that the group of companies should pay a medium
importance to transfer pricing aspects, while 3% consider that transfer prices should have a low
importance for groups of companies.
Following, we tried to capture the perception of the respondents about the factors which make
the transfer pricing documentation process a difficult one. These factors have been classified
using the Likert scale. Therefore, the answers could take values from 1 (the lowest value) to 5
(the highest value). The hierarchy of the factors which cause the difficulty of the transfer pricing
documentation, set based on the answers obtained, is shown in table no.3 below.
Table no.3. - Hierarchy of factors which cause the difficulty of the transfer pricing documentation
process
Factor Rank based
on average Average Minimum Maximum
Standard
Deviation
Access to the database in order to
identify comparable companies 1 4.28 1 5 1.12
The lack of detailed guidelines with
regards to the technical aspects used
in the transfer pricing documentation
process
2 4 1 5 1.23
Lack of technical knowledge required
for the individuals within a company
who are involved in the transfer
pricing documentation process
3 3.77 1 5 1.12
Characteristics of business
environment 4 3.43 1 5 1.26
Source: own processing
It is observed that the most important factor that causes the difficulty of the transfer pricing
documentation process is represented by the access to the database in order to identify
comparable companies. It was an expected result as a company should incur considerable costs
in order to access a database with comparable companies and as a consequence many companies
externalize the transfer pricing documentation to specialized firms.
The second important factor which makes the transfer pricing documentation process a difficult
one is represented by the lack of detailed guidelines with regards to the technical aspects. Also,
as a solution to this situation, companies externalize the transfer pricing documentation process
to specialized firms. Furthermore, we consider that we identify a need for the introduction in the
Romanian transfer pricing regulatory framework of detailed guidelines with regards to the
technical aspects used in the transfer pricing documentation process (e.g. steps which should be
followed in order to perform a benchmark analysis, guidelines regarding the presentation of the
functional analysis etc.)
According to the answers received the characteristics of business environment have the lowest
influence on the transfer pricing documentation process.
Another factor which makes the transfer pricing documentation process a difficult one is
represented by the lack of technical knowledge required for the individuals within a company
who are involved in the transfer pricing documentation process. In this respect, 94% of the
respondents believe that the professional organizations should be involved in the training of the
transfer pricing specialists. They also believe that such involvement would be useful for the
professionals in the field of finance and accounting.
29
General perception about the transfer pricing legislation
According to figure 2, most of the respondents (37%) consider that the Romanian transfer
pricing legislation could contribute in a large measure to the prevention of the opportunistic
practices of multinationals regarding the manipulation of the tax result through transfer pricing
mechanism. The hierarchy is completed by the respondents who consider that the Romanian
transfer pricing legislation could prevent the manipulation of tax result in a very large measure
(32%), in a medium measure (23%), in a small measure (6%) and in a very small measure (2%).
Figure 2. Romanian transfer pricing legislation
Source: own processing
Moreover, 64% of the respondents consider that the Romanian transfer pricing legislation is
ambiguous and too summary, while 20% of the respondents believe that it is properly structured
and easy to understand. This result is converging with that of previous works (Coralciu & Tiron,
2014).
The rest of the respondents (16%) filled their own response in relation to the Romanian transfer
pricing legislation. The most important remarks made by these respondents are the followings:
the legislation is difficult, ambiguous and consuming of financial and human resources;
the legislation is not properly structured, but it is clear;
the principles of the legislation are solid (as they are in line with the OECD Guidelines),
but many practical issues need to be better regulated/clarified;
the legislation is easy to understand, but its implementation in practice is deficient;
the Romanian transfer pricing legislation is insufficient and not properly structured;
the legislation leads to misunderstandings and possible disputes between tax authorities
and taxpayers.
Based on the responses received we identified the need for a properly structuring of the
Romanian transfer pricing legislation, in order to be easy to understand and to avoid any
misunderstandings which could conduct to disputes between taxpayers and tax authorities.
5.3. Perception of the respondents about the new transfer pricing regulations
With regards to the new transfer pricing regulations adopted by Romania in 2016, 73% of the
respondents consider that these regulations, compared with the old ones, will determine
companies to pay more attention to the transfer pricing subject.
Furthermore, in this section of the questionnaire we tried to gather the opinion of the respondents
about the following aspects related to the new transfer regulations:
30
the thresholds used in order to assess if a taxpayer has the obligation to prepare a transfer
pricing file for the transactions performed with its affiliated companies;
the preparation and presentation of the transfer pricing file (i.e. the modification of the
deadline established for the presentation of the transfer pricing file upon the request of
the tax authorities and the introduction of the mandatory annual preparation of the
transfer pricing file for large taxpayers);
the new content of the transfer pricing file.
We chose to capture the perception of the specialists on these aspects, because as we have
already presented above within section 4, these new regulations have a significant impact on the
activity of the groups of companies.
Thresholds
79% of the respondents agree with the introduction of thresholds in order to assess if a taxpayer
has the obligation to prepare a transfer pricing file and believe that this represents an efficient
legislative amendment, but only 62% of the respondents consider that the values of the
thresholds are reasonable. 7 % of the respondents consider that the values of the thresholds are
too high, while 23% consider them too small.
On the other hand, 10% of the respondents do not agree with the introduction of thresholds in
order to assess if a taxpayer has the obligation to prepare a transfer pricing file and believe that
all taxpayers should have the obligation to prepare a transfer pricing file, irrespective of the
value of the transactions performed with affiliated companies. In addition, 3% of the respondents
have other opinions about the introduction of thresholds. We mentioned herein the most
important two opinions in this respect: “the threshold criterion is not exhaustive and sufficient in
order to remove the obligation regarding the transfer pricing documentation”, “only time can
prove the effectiveness of these thresholds”.
A percentage of 8% of the respondents could not express any opinion about the introduction of
thresholds and its values because they do not have any knowledge about this topic.
Figure 3 and figure 4 summarize the results obtained and interpreted above in relation to the
thresholds used in order to assess if a taxpayer has the obligation to prepare a transfer pricing
file.
Figure 3. Introduction of thresholds
Figure 4. Value of the thresholds
Source: own processing Source: own processing
31
Presentation and preparation of the transfer pricing file
71% of the respondents agree with the new regulation brought by the Order 442/2016 which
provides that the large taxpayers (which perform intra-group transactions exceeding certain
thresholds) should prepare an annual transfer pricing documentation file until the deadline for the
submission of the annual corporate income tax return.
On the other hand, 25% of the respondents believe that the mandatory annual preparation of the
transfer pricing file should exist for all taxpayers, irrespective of its categories (i.e. large,
medium, small). The difference of 4% is represented by those respondents which cannot express
any opinion because they do not have any knowledge about this topic.
Regarding the diminishing of the deadline (from maximum 6 months in 2015 to 90 days in 2016)
established for the preparation and presentation of the transfer pricing file upon the request of the
tax authorities, within a tax audit, more than half of the respondents (52%) agree with this new
regulation. In this respect, they consider that the diminishing of the deadline will determine the
companies to pay more attention to the transfer pricing documentation file, preparing it in time,
irrespective they are or not subject to a tax audit.
35% of the respondents do not agree with this new regulation and consider it as an abusive
measure of the tax authorities.
A percentage of 8% of the respondents could not express any opinion about the diminishing of
the deadline because they do not have any knowledge about this topic, while a percentage of 5%
of the respondents have other opinions, from which the most important are: “the new deadline is
very short, but the taxpayer should learn from this to prepare the transfer pricing file regularly,
without waiting a tax audit”, “I agree with the new deadline, but I think it should be established
exceptions to this rule, depending on the profile of the company (turnover, number of clients,
etc.)”.
Figure 5 summarizes the results obtained and interpreted above in relation to the diminishing of
the deadline established for the preparation and presentation of the transfer pricing file upon the
request of the tax authorities, within a tax audit.
Figure 5. Deadline established for the preparation and presentation of the transfer pricing file
Source: own processing
Content of the transfer pricing file
With regards to the new content of the transfer pricing file, according to figure 6, there are
controversy opinions. As could be observed, 40% of the respondents do not agree with the new
structure of the transfer pricing documentation file considering that it is too detailed and requests
information which is not relevant.
32
On the other hand, 39% of the respondents agree with the new structure of the transfer pricing
documentation file and consider that the new information requested is relevant and useful for the
analysing of the transfer prices.
21% of respondents could not express any opinion because they do not have any knowledge
about the new content of the transfer pricing documentation file.
Figure 6. Content of the transfer pricing documentation file
Source: own processing
We would like to emphasise the fact that the respondents to our questionnaire pay a special
attention to the transfer pricing subject, as only a little percentage (i.e. 8%) is not informed about
the recently regulations in terms of transfer pricing. Moreover, we consider that the fact that only
a percentage of 21% of the respondents does not have knowledge about the content of the
transfer pricing file represents a positive aspect as this information is a technical one and
presents a big importance only for the transfer pricing specialists.
5.4. Is there a need for change in the Romanian transfer pricing legislation?
As we already mentioned above, most of the respondents believe that the transfer pricing
legislation could contribute in a large measure to the prevention of the opportunistic practices of
multinationals regarding the manipulation of the tax result through transfer pricing mechanism.
However, the respondents consider that in order for the Romanian transfer pricing legislation to
represent an effective and efficient measure in terms of prevention of tax results` manipulation,
there should be included new regulations. In the table no.4 we presented the most important
changes that the Romanian transfer pricing legislation needs in this respect.
Table no.4 - Changes needed by the Romanian transfer pricing legislation
Change No. of
respondents Rank
Implementation of BEPS Action 13 "Transfer Pricing Documentation and
Country-by-Country Reporting" 89 1
Publication of the transfer pricing documentation file by the listed companies 49 2
Introduction of higher fines and penalties for the failure to prepare the
transfer pricing documentation file 20 3
The preparation and submission of the transfer pricing documentation file to
be annually and mandatory for all taxpayers 17 4
Other changes (e.g. encouraging of the taxpayers to use APAs, detailed
guidelines with regards to the technical aspects used in the transfer pricing
documentation process, encouraging of the taxpayers to document the intra-
group transactions by granting tax deductions/ facilities)
16 5
Source: own processing
33
As could be observed, the most important amendment that needs the Romanian transfer pricing
legislation is represented by the implementation of the BEPS Action Plan, more exactly of
Action 13 "Transfer Pricing Documentation and Country-by-Country Reporting". The following
important change could be represented by the publication of the transfer pricing documentation
file by the listed companies. Changes such as the introduction of higher fines and penalties for
the failure to prepare the transfer pricing documentation file and the introduction of the annual
mandatory preparation of the transfer pricing file for all taxpayers are not so important in order
to prevent the manipulation of the tax results through transfer pricing mechanism. This result
converges with that presented above, according to only a small part of the respondents believe
that the mandatory annual preparation of the transfer pricing file should exist for all taxpayers,
irrespective of its categories (i.e. large, medium, small).
According to the responses received to the open question, the most important changes that the
Romanian transfer pricing legislation needs are represented by:
definition of the practical approach of documenting the arm’s length nature of transfer
pricing according to the general rules provided by the financial-accounting and tax
legislation in force. Such a definition would avoid misunderstandings and possible
disputes between taxpayers and tax authorities;
definition of the concept of incomplete transfer pricing file. This definition would also
avoid misunderstandings and possible disputes between taxpayers and tax authorities, as
in the case of an incomplete file the tax authorities could perform the estimation of
transfer prices;
the deadline for the mandatory annual preparation of the transfer pricing file should be
established after the submission of the annual financial statements and not until the
submission of the annual corporate income tax return;
Order 442/2016 should be accompanied by norms;
implementation of a common practical guide for taxpayers and tax authorities in order to
ensure a uniform application of the legislative provisions;
publication of a template for the transfer pricing file that should be used by all taxpayers.
In addition, almost all respondents consider that Romania does not need only a change in the
transfer pricing legislation. Romania also needs well trained transfer pricing specialists and tax
inspectors. In this respect, a solutions proposed is represented by the organization of transfer
pricing courses and seminars financed by European founds. Another solution could be
represented by the implication of the professional organizations in the training of transfer pricing
specialists.
6. CONCLUSIONS
During 2016 the Romanian transfer pricing legislation was subject to significant amendments
which impact the business environment. The major amendment and one of the most important
event in the evolution of the Romanian transfer pricing legislation is represented by the
publication in the Romanian Official Gazette of Order 442/2016 regarding the value of
transactions, the preparation terms, the content and the conditions under which the transfer
pricing documentation file is to be requested and presented and the procedure for
adjusting/estimating the transfer prices.
The research performed by us through the comparison of the provisions of the Order 222/2008
(applicable until the end of 2015) with the ones of Order 442/20016 (applicable starting with
2016), and also the opinions expressed by the specialists questioned led us to conclude that the
34
new transfer pricing regulations adopted by Romania present advantages and disadvantages for
groups of companies, but overall they are efficient and represent a big step for the prevention of
the base erosion and profit shifting between multinationals.
In this respect, the respondents considered that the introduction of thresholds in order to assess if
a taxpayer has the obligation to prepare a transfer pricing file represents an efficient legislative
amendment. In addition, according with the answers of the respondents, the diminishing of the
deadline established for the preparation and presentation of the transfer pricing file upon the
request of the tax authorities, the introduction of the mandatory annual preparation of the transfer
pricing file and the new information requested to be included in a transfer pricing file
documentation represent important steps in order to prevent the base erosion and profit shifting,
but all these new regulations are not still sufficient in this respect.
Therefore the Romanian transfer pricing legislation needs some changes which would contribute
to a better prevention of the base erosion and profit shifting (e.g. implementation of BEPS
Action 13 “Transfer Pricing Documentation and Country-by-Country Reporting”; publication of
the transfer pricing documentation file by the listed companies etc.).
Furthermore, the respondents noted that the Romanian transfer pricing legislation is ambiguous
and not very well structured and due to this it might led to misunderstandings and possible
disputes between taxpayers and tax authorities. In order to avoid these misunderstandings, the
results of our research show that the Order 442/2016 should be accompanied by application
norms which should define and clarify some concepts like that of incomplete transfer pricing file
or that of documentation of the arm`s length nature of the transfer pricing according to the
general rules provided by the financial-accounting and tax legislation in force. Other changes
that the Romanian transfer pricing regulatory framework needs are represented by the
implementation of detailed guidelines with regards to the technical aspects involved by a transfer
pricing analysis (e.g. the benchmark analysis, the functional analysis of the intra-group
transactions etc.).
With regards to the limit of the research, it is represented by the relatively limited number of
answers received. However, considering that there is no study performed in relation to the
perception of the tax specialists on the new transfer pricing legislation adopted by Romania
starting with 2016 and there was not investigated if the Romanian transfer pricing legislation
needs other amendments, we consider that our research improves the transfer pricing literature
and could provide new insights for future researches related to the transfer pricing legislation.
In this respect, future research directions could be represented by the comparison of the
Romanian transfer legislation with the transfer pricing legislation of other European countries
and also by the comparison of the perception of the tax specialists on Romanian transfer
legislation with the perception of these specialists on the transfer pricing legislation of other
European countries. In addition, there could also be performed a comparison between the
perception of the Romanian tax specialists on the Romanian transfer pricing legislation and the
perception of foreign tax specialists on this legislation. The paper could represent a starting point
for all future research directions mentioned above.
Moreover, taking into account that the Romanian Government approved the ascension of the
Romania as associate to the BEPS Implementation Forum in order for our country to implement
the BEPS measures at national level, a future research direction might imply the analysis of the
BEPS Action Plan and the capture of the specialists` perception about the implementation of the
BEPS measure at the level of Romania.
35
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Economics and Business, vol. 65, issue January–February, pp. 1-13.
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organization”, Journal of International Economics, vol. 89, issue 2, pp. 432-440.
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international economic law”, Genève: The Graduate Institute, Centre for Trade and Economic
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from European multinationals”, CESinfo working paper, No. 4404
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administrations.htm
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36
IMPACT OF IFRS ON MANAGERIAL ACCOUNTING: STUDY
FROM TRANSITIONAL ECONOMY
Irena JINDRICHOVSKA
Anglo-American University, Prague, Czech Republic
Dana KUBICKOVA
University of Finance and Administration, Prague, Czech Republic
Abstract
In recent years IFRS adoption has significantly changed reporting styles and habits and has become part
of the accounting environment. In the Czech Republic, this change was quite slow due to existing well-
developed local accounting standards with long-standing European traditions. This study concentrates on
changes in MA practices in the Czech Republic stimulated by IFRS. The study uses a survey questionnaire
method. We posit that an improved and more elaborate informational base required by IFRS reporting
can be employed in internal managerial accounting systems of companies. IFRS could serve as a
platform for better managerial decision-making. In this paper, we develop this point using the
questionnaire survey method to show where and how new information from IFRS improves internal
management accounting by using 105 valid responses from financial and economic directors of Czech
SMES and large companies. The study finds that higher quality management accounting systems are
perceived in companies that have adopted IFRS. However, this cannot be treated as a universal truth,
because of a small number of IFRS users and because it has been observed that management accounting
practices serve their purpose also in companies that do not use IFRS Cultural differences and Czech
accounting history to date may provide some explanation.
Keywords: CEE, Financial reporting, IFRS, Managerial accounting.
JEL Classification: M21, M41
1. INTRODUCTION
In the Czech Republic, transition from public to private ownership took place after privatization
in the 1990s. The industrial structure of the country maintained a strong orientation toward
manufacturing, which remained the major sector in Czech exports.
The financial reporting was changed in 1991 to be oriented more to the needs of external users -
banks as providers of the free capital and state authorities for tax purposes. Internal - managerial
accounting was not regulated by state and remained under the control of companies, which
decided about the type and the form of the internal system of information. This was influenced
by the evolution of information technologies supported by fast development of the technical
devices. The decisive factor influencing the level of internal information system was the way of
privatization of originally state owned company.
The purpose of this article is to investigate possible implications of IFRS on internal reporting of
Czech firms. The study uses a survey questionnaire methodology embedded in the contingency
platform. Unlike financial reporting, managerial reporting does not have any exact reporting
rules or standards even though certain standard practices have been developed in internal
reporting. Managerial accounting is nowadays greatly helped by the use of information
technology, which is using routines and specialized programmes.
37
The transformation of Czech companies was performed mainly by acquisition by foreign owners.
Now the Czech economy is under the strong and forceful influence of multinational firms in
almost all industries - (machinery, steel and glass production, heavy machinery, and banking).
Currently, about 58 percent of Czech companies are in foreign hands (Ernest, 2014).
Transformation of ownership has altered the management philosophy, increased the role of
managers (mostly from the foreign economic surroundings) and supporting information systems.
Company management is now using market based decision criteria both in the external as well as
in the internal environment. This has changed data collection methods with further elaboration
for use in management activities at all levels of management system.
From an accounting perspective, transition to use of IFRS was not widely welcomed by Czech
companies, who did not see any clear benefits from transforming their Czech-based accounting
systems to IFRS. Some authors have suggested that there was only a limited positive impact, e.g.
Strouhal & Zdarska (2008), Nerudova & Bohusova (2008), Strouhal et al., (2009), Mullerova et
al. (2010), Prochazka (2010, 2011), Jindrichovska et al. (2014). At the same time, Czech
regulators did not rush this transformation, as the Ministry of Finance wanted to maintain
exclusive control over tax reporting. This was perceived as one important encumbrance, which
dissuaded Czech companies from using IFRS fully. Change and more frequent usage of IFRS
came only gradually with greater internationalization of the Czech economy and especially with
changes of ownership in the new millennium initiated in 1990s. Directive 1606/2002 has
required companies listed on EU capital markets to prepare consolidated financial statement in
compliance with IFRS since 2005. However within the Czech context, this directive had only
limited influence due to unimportant position of the Prague Stock Exchange in the financial
system of the country and a small number of listed companies in general. More visible changes
in accounting and reporting were then apparent in companies with foreign ownership.
Accounting regulation was decided centrally by the Ministry of Finance. Presently, accounting
serves mostly private owners which are frequently international firms. That is why international
managements introduce their own practices with regards to financial reporting, and also internal
information systems and internal managerial accounting. In general more detailed results of
internal accounting are needed to prepare IFRS statements for consolidation purposes. However
this need can often be satisfied by reporting only specific items. Thus, now both financial and
managerial accounting serve foreign owners. Needs to more accurately measure company
performance, optimize costs and sharpen pricing policy have emerged.
From the historical standpoint managerial Accounting in the Czech Republic has become an
important part of the managerial systems of companies since the 19th
century. A qualitatively
different stage of this development was brought by the widespread introduction of computer
systems in the1970s and specialized software leading to development of integrated information
platforms in the 1990s. These systems had already been developed in centralized regimes for
purposes of central planning and centralized economic data. However, the logic of in-company
systems of economic data generation had already been significantly developed at the beginning
of 20th
century, e.g. in the recognized Bata shoe company in the 1920s (see e.g. Lesingrova,
2008; Zeleny, 2005; Bata, 2013).
The phenomenon of IFRS came to the Czech Republic in the 1990s as a by-product of
internationalization. Even though interest in IFRS reporting is not great in general, the practice is
gradually spreading due to the influence of international trade and globalized production in some
sectors (mainly in mass or automated production- machinery and car industries). Managements
of some companies appreciate additional better detailed information needed for production of
IFRS statements because it can be used for more efficient management and improvements to
internal management systems. However, this can also be used in a different way: more detailed
38
information produced for internal managerial systems can be used to prepare international
accounting statements (IFRS statements), that enhance a firm’s reports to shareholders, investors
and other interested parties. Thus, influence is strengthening both ways.
This article is structured as follows: The introduction provides background to the study. The
second part presents brief characteristics of transformation in Czech accounting systems after
1990. The third part provides a literature review of managerial accounting research in CEE
countries and highlights the dominance of financial accounting topics. It provides an overview of
recent studies in management accounting in the CEE countries and in the Czech Republic in
particular. The fourth part presents the methodology of our paper, which is a based on a survey
questionnaire embedded in the platform of contingency theory. The questionnaire structure and
its logic are explained here, as well as characteristics of the used sample. In part five we analyse
the results of the study following the questionnaire structure we interpret the information with
regards to the state and use of managerial accounting in Czech companies. In part six we provide
discussion and summary on the current state of managerial accounting and its implications to the
transformation from Czech accounting standards to IFRS for managerial accounting. The
assumption that better quality internal managerial information is a by-product is assessed. The
last part concludes and details some limitations of our research and suggests further implications
for future studies in this field.
2. CHANGES IN THE SYSTEM OF CZECH ACCOUNTING AFTER 1990
The new Accounting Act No 563/1991, which was introduced on 1 January 1993, was a crucial
step in conversion of the accounting paradigm. It is based on the principle that accounting should
provide appropriate information to company financial managers to make financial decisions
(Schroll, 1995). This act introduced a system of new solutions to describe the current corporate
financial situation. However, those solutions contained many features of the previous approach.
This was the cause and reason for continuous modifications to the Act in ensuing years.
Concurrent dynamic changes in the economic and political environments also required new
modifications.
The first important and extensive change to the original text of the Accounting Act was
adjustment by Act 353/2001 Sb., changing the Act No. 563/1991 on Accounting, as amended,
and certain other Acts. The new wording formulated the topic of accounting more exactly. It
emphasized accrual basis accounting and it established the obligation to comply with the chart of
accounts, classification and identification of items in financial statements, content of the
accounting book sand used accounting procedures in the preparation of individual and
consolidated financial statements in accordance with regulations (decrees). The special Class No
9 was defined in the Chart of accounts to record internal processes for the use of managerial
accounting. The construction of the internal accounting was to describe internal operations in
more detail, taking into account that it is an internal business prerogative.
The interest in voluntary adoption of IFRS for preparation of financial statements was relatively
low but it is increasing with time, e.g. Mullerova, et al., 2010; Pasekova, 2012; Jindrichovska &
Kubickova, 2016. The causes can be seen in many aspects and characteristics of the Czech
economy - its historical context as well as the trajectory of transformation. We also suggest that
as preparation of IFRS statements requires more detailed information on the processes and
accounting items (e.g. depreciation of long term assets, valuation of inventories, recognition of
real value of assets, etc.), internal managerial accounting will be also impacted.
39
Managerial accounting was changing with alterations of management in particular companies
according to changes of ownership structure. We assume that the most important changes have
taken place in big companies.
3. PREVIOUS LITERATURE
3.1. Seminal literature on managerial accounting from developed countries and concept of
hybridization
The need for managerial accounting (principally cost accounting) had emerged already in the
19th
century with development of industry. One of the initial works in the field was the seminal
work on overhead costs by Clark (1923). Further studies were performed in 1950s and 1960s as
summarized by Berliner & Brimson (1988) in their edited book Cost management for today's
advanced manufacturing. A significant revolution in management accounting brought authors
Johnson & Kaplan (1987) in their book Relevance lost: the rise and fall of management
accounting.
Later in 1998 article, authors Granlund & Lukka speak about homogenization of the two
accounting streams of accounting (financial and managerial) and analyze the drivers of this
development from economic and institutional perspectives. They come to the conclusion that this
tendency comes from economic needs of companies. The authors suggest that firms use their
management accounting systems to improve their own operational efficiency.
More recent developments in the field concentrate on the basic purpose of management
accounting for internal purposes and detailed costing and management incentives. However, the
recent update of the text on advanced management accounting by Kaplan & Atkinson (2015)
shifts the attention from costing issues to overall management of company based on the concept
of activity-based costing. Their resent focus is on non-financial measures of company
performance - customer satisfaction, management of internal processes and managing further
development. Other key topics are motivation of company managers and quantitative
measurement of all in-company processes coming from the BSC approach of management
incentives, which deals explicitly with satisfaction measures and management motivation
schemes.
In the recent decades, the role of management accounting continues to undergo major changes.
Management accountants are no longer only recorders of past performance of the company as
their role has changed especially with the new ERP systems, e.g. Scapens & Jazayeri, 2003;
Burns & Baldvinsdottir, 2005; Byrne & Pierce, 2007; Järvenpää, 2007; Albu et al., 2011;or
Lanto, 2014. Management accountants have become important members of management teams,
creating information for improvement of operational efficiency, and for preparation of corporate
strategy. A significant development in this new role is a great increase in the importance and use
of non-financial measures of performance. New management accounting practices have been
adopted by progressive enterprises around the world.
Management accounting change in organizations has to be seen as an evolutionary process in
which existing ways of thinking, power structures and trust in accountants can all have an impact
on the way in which the actors within the organization respond to external institutional and
economic pressures. It is just this complex process of inter-related influences which shapes
management accounting practices and explains the diversity we see in the practices of individual
companies.
40
Understanding of changes in management accounting requires a comprehension of various
organisational and historical contingencies. Scapens & Roberts (1993) suggest that there has
been a change in the management accounting research topics in the last thirty years -from
explaining the diversity of practices in an academic community, to making sense of the practices
in individual companies. In management accounting research, the 1970s was an era of
economically oriented mathematical models. Going into the 1980s, management accounting
researchers began to recognise that there was a gap between theory and practice, and that
research to describe “practice” was urgently needed. In the 1990s a variety of theories and a
number of different methodological approaches started to be used to study management
accounting practices. This change is reflected in the shift in the research methods – from
quantitative survey work to qualitative case studies (Scapens, 2006). But the challenge for
current and future work is to use theoretical perspectives which researchers have developed to
provide insights that are relevant and helpful for practitioners. This is the case especially when
academic works theorise issues closer to managers’ daily lives such as accounting changes
(Burns & Scapens, 2000), and accounting in inter-organizational relationship (Mouritsen &
Thrane, 2006), which proposed that accounting can be conceptualised as an instrument helping
to mediate, shape and construct inter-organisational relations through self-regulation and
orchestration mechanisms.
The element of so called hybridization was first analyzed by Caglioa (2003), who examined
how the adoption of the new Enterprise Resource Planning (ERP) system challenges definitions
of expertise and roles of accountants within organizations, leading to new, hybrid positions. The
author has found that expertise and roles of accountants within organizations change due to
adoption of an ERP system and lead to new, hybrid positions.
Burns & Baldvinsdottir, 2005, adopt institutional theory and write about the role of accountants,
suggesting that in recent years we have witnessed a change towards more business-oriented roles
for management accountants. Their paper describes the emergence of new team/process-oriented
roles for so-called ‘hybrid’ accountants in the manufacturing division of a multinational
pharmaceuticals organisation. Further, Lanto, 2014, claims that understanding of the roles of
management accountants is problematic and criticizes the increasing regulatory burden which
may decrease accountants' chances of getting involved in business. She claims that little is
known about corporate reporting practice and whether, if at all, regulation impacts on
accountants' work.
3.2 Literature on different aspects of managerial accounting in the CEE region
Development of managerial accounting in CEE countries during the centrally planned economy
did not take place in isolation from the development in other countries. Even within centrally
controlled enterprises, expansion of technology and increasing complexity of business processes
forced companies to use methods and procedures that enabled effective management.
Components of management accounting - especially costing and use of economic centres- have
become a tool for improving efficiency and cost reduction linking the interests of individuals and
businesses. Development of both theory and practical experience have been linked to
development of accounting practices in the former Soviet Union, where some original works
were published e.g. Livsic, 1971; Popov, 1972; Aksenenko, et al., 1988; etc.).
After changes in the economic and political systems in 1990s in the CEE region the role of
accounting has changed from providing descriptive evidence to an instrument of decision
making and monitoring company performance. Managerial accounting knowledge and its best
practices has been gradually– with the acquiring the methods and tools adequate to the market
economy - disseminated to newly established companies. The first monographs on managerial
41
accounting adapting the former system of knowledge for new conditions were published at
universities in the early 1990s (e.g. Schroll et al., 1993; 1995; Hradecky & Kral, 1995), at the
same time the first empirical research studies were performed (Schrollet al., 1995). The function
of accounting has shifted its descriptive nature to become a decision-making and performance-
monitoring tool. Key management accounting topics ranged from company cost management
and changes in management accounting systems to environmental management accounting and
control.
On the other hand in the realm of financial reporting, the international standards (IFRS) came
pretty early in CEE countries. Recent studies on application of IFRS in the region show that
international standards have been gradually adopted or incorporated by East European countries
in recent decades and enter the process of rebuilding companies information systems for market
conditions. Studies of the impact of IFRS in the CEE region have been recently summarized in a
special issue of Romanian journal Accounting and Management Information Systems 2, 2014,
which deals IFRS application in Central and South-Eastern European countries. This issue
recapitulates findings in eight cases of application of International Financial Reporting Standards
(IFRS) in Central and South-Eastern European (CSEE) countries and provides an overview of
IFRS practices (Albu & Albu, 2014). Most literature, however, focuses on some aspects of
financial accounting and reporting and only a minority of studies dealt with managerial
accounting and problems of management.
Regarding management accounting in the region, the Hungarian author Vamosi (2000), used
case study frame work to examine how interpretation of new concepts and ideas affected
management accounting in a previously government-owned Hungarian company. He analysed
how the concepts of ´market´ and ´market economy´ were brought into the company and how
they affect priorities and the logic related to management accounting, just as they change the
relations between economy and production. There is a special focus on how ´economic matters´
and management accounting are constituted between ´cargoes-of-thoughts´ and a new ´reality of
everyday life´. It has been shown that calculation practice (surprisingly) technically is almost
unchanged in the new ´reality of everyday life´ - despite a new purpose, whereas cash
management is quite anew discipline; the market economy appeared as an alternative but with
recognizable inscriptions.
Polish author Szychta (2002) researched the scope of application of management accounting
concepts and methods in 60 Polish enterprises using questionnaire survey carried out between
November 1998 and December 1999. The author has found that Polish enterprises mostly
implement the methods and techniques of operational management accounting and short-term
budgeting for cost centres is the most widely used method of management accounting.
Dumitru et al. (2011), analysed management accounting research in Romania since the early
1900s. In Romania, researchers were more concerned with costing techniques than with
management control, which came to the forefront of research topics after 2005. For the last three
decades, the role of the management accountant was to improve the competitiveness and the
profitability of the firms’ rational decision-making process. The article concluded that the
research topics in Romanian journals were more traditional compared with topics in the
Management Accounting Research Journal (MAR).
The Czech author Prochazka (2011) worked on various aspects of management accounting and
suggested that the IFRS may be a special driver for the convergence of financial and
management accounting in transitional countries. He claimed that IFRS adoption has increased
the quality of financial reporting in transitional countries despite significant additional costs and
heavy influence of tax legislation. The paper illustrated a conceptual approach of information
42
flows from financial to managerial accounting and in-company use of additional information that
lead to hybridization of accounting.
In the last research the same author assesses the influence of IFRS adoption on management
accounting of Czech unlisted companies under foreign control belonging to groups, for which
consolidated financial statements in compliance with IFRS are prepared (Prochazka, 2016). As
these Czech subsidiaries prepare their statutory accounts in compliance with Czech GAAP, IFRS
are incorporated into management accounting in order to optimise reporting system costs for
meeting information demands of all interested parties. The paper investigates the perception of
management on the importance of IFRS for internal decision making.
Polish author Zarzycka (2012) analysed the role of information system (ERP) in Polish
companies and asked, whether ERP system impacted on the management accountant's tasks and
functions. The author evaluated the role of managers using field studies on six enterprises owned
by multinational corporations.
Albu & Albu (2012) investigated the existence and use of management accounting techniques in
Romanian companies using contingency theory analyzing institutional and environmental
factors. The authors have found that adoption and use of management accounting techniques
were mostly associated with the presence of foreign capital.
Jinga & Dumitru (2015) explained the process of change in management accounting in Romania.
The authors claimed that during former regime of central planning there was only a full cost
computation process, which was used for the determination of the selling price. As prices were
fixed, the role of the cost determination was limited. The authors concluded that changes in the
management accounting system of the company under analysis occurred in the same time as the
institutionalisation of the company management accounting system, which was modelled by the
contingencies specific to particular company (e.g. environment, industry, strategy).
4. RESEARCH METHOD AND SAMPLE
4.1. General underpinnings
The methodology of this paper is based on contingency theory, institutional theory and critical
analysis of historical development of accountancy in connection with development of economy
in transitional period.
Contingency theory implies that contextual factors affect management of companies and impact
its management accounting system. Influencing factors are objectively determined by social
political and institutional environment (Bhimani, 2006). The theory is based on the work of
organizational theorists suggesting that the organization’s structure (including its management
accounting system) depends on contingency variables (such as its environment, size, or strategy).
Institutional theory is a widely accepted theoretical posture that emphasizes rational myths,
isomorphism, and legitimacy (Powell & DiMaggio, 1991) and implies that in order for an
organization to survive, it must conform to the rules and belief systems prevailing in the
environment (Scott, 1995).
43
4.2. Questionnaire structure
The aim of our investigation was to reveal if the IFRS adoption has influenced the managerial
accounting of the firms. The investigation was based on the assumption used in prior literature,
that the IFRS adoption results in increasing interest of company management in internal
information system and in the improvements of techniques used and/or implementation of new
techniques. The method of the research was used the questioning. The questions in the survey
were formulated employing these hypotheses:
1) The adoption of IFRS will be reflected in greater importance that firms devote to internal
management accounting processes and procedures. The management accounting will be
used more intensively by firms that use IFRS.
2) The IFRS adoption and its higher demands on the quality of information has led to better
quality of management accounting information. The request on the high quality led to the
change of tools and methods. This higher quality will be recognized by firm managers and
other relevant employees (our respondents).
Along the lines of our general interest the questionnaire was composed containing five parts. The
first part was aimed at identification of respondents including the potential obligation of IFRS
usage. The second part included the questions investigating the scope of usage of management
accounting in the firms. Investigation was organized in three steps, which gradually enhanced
our findings. First, whether firms use any management accounting as a system without specifica-
tion of their individual components. Second, which components of managerial accounting are
used in the said company? The third part included open questions to provide personal opinion of
respondents on whether adoption of IFRS had any influence on the quality and availability of in-
company information system. The last part concentrated on general evaluation of the effects of
IFRS adoption, overall comments and possible further remarks to the questionnaire.
4.3. Research sample
In our research we have used a database by Bisnode, containing 1,613 medium and large firms e-
mail contacts to chief financial officers and chief accountants. In total we processed 105
completed questionnaires. This means a response rate of 6.5 per cent. The research was run
between January and February 2015. The final sample included 78 small and medium firms and
27 big firms. And there were 22 companies that use IFRS.
Industrial production is prevalent in the Czech companies in general. This is reflected also in our
sample where production companies represent almost 50 percent of companies in the sample.
Trade and services together represent about 22 per cent. With regards to the ownership there
were 52 subsidiaries of foreign companies with the ownership share of more than 25 per cent.
Details of industrial structure of the sample are in the lower part of table 1.
Table no.1 - Sample description
Sample size: 105 ( =100% )
Company size SME 74,30 [pax] < 10 11 - 50 51 - 250 > 250
Large 25,70 No. of employees 0,95 10,48 44,76 43,81
IFRS yes 20,95 [mil. EUR] < 2 2 - 10 10 - 43 > 43
no 79,05 Assets 13,33 20,00 35,24 31,43
Foreign ownership> 25% yes 49,52 [mil. EUR] < 2 2 - 10 > 10 x
no 50,48 Net turnover 10,48 20,95 68,57 x
Industrial sector (%)
Manufacturing Trade Services Construction Agriculture Other
49,50 12,40 18,10 5,70 1,90 12,40
Source: own investigation
44
5. RESULTS
5.1. The scope of usage of management accounting and impact of IFRS
The second part of the questionnaire focused on the scope of usage of management accounting
and its components. The majority of firms (89 firms, i.e. 85 per cent) confirmed the use of
internal management accounting or some element of management accounting. The most
frequently used component of management accounting in companies was costing system. This is
co-determined also historically as the cost management skills were between of the first tasks of
management accounting and has subsequently become the part of managing costs of production
processes, even under the condition of state owned enterprises. This area explained the
continuing high need for costing information. At the same time it showed relatively good
preparedness of company management to use cost information.
Another frequently used component of managerial accounting, was the use of cost centres and
cost centre budgeting. Cost centres were actively used in 82 per cent of companies (86 firms).
The main reason for the use was measurement of efficiency and creation of managerial
incentives. This rationale was chosen in 49 per cent (i.e. 51 firms), while the motivation of cost
reduction was chosen only by 22 per cent of respondents (i.e.23 firms).
Furthermore, we investigated whether companies use any analytical calculations for managerial
decision-making and analysis. We asked about the way how is organized deprecation of fixed
assets. The used system of depreciation also pays attention to the quality of accounting
information. Tax depreciation usually does not reflect the change of value of asset (there is no
duty to calculate two depreciation plans) Tax depreciation does not take into account the
condition in which the fixed assets are used and how is the asset value decreasing. Asset
depreciation according to accounting rules (not tax rules) is used by 81 per cent of respondents
(i.e. 85 firms). Out of this 25 per cent (26 firms) prepare accounting depreciation plans at least
for some selected accounting items. It should be noted that accounting depreciation (different
from that according to tax rules) has become a part of Czech accounting system relatively
recently - in 2010. From the large number of positive responses, we can judge, that companies
devote considerable attention to this area of budgeting expenses, which may be partly explained
by tax and cash flow implications. On the other hand this treatment can be also interpreted as
that the company pays higher attention to quality of accounting information.
The differences in these aspects between IFRS-adopters and IFRS non-adopters are presented in
table 2 and illustrated in figure 1. The system of managerial accounting or the system of using its
partial components is frequently used in firms that adopted IFRS for financial reporting. All
IFRS-adopters (the 22 firms) used managerial accounting, while only 78% (65 firms) from the
group of IFRS-non adopters used managerial accounting. This implies, that 18 firms that do not
use managerial accounting or any partial component.
Table no. 2 - Usage of managerial accounting and its components by IFRS non-adopters and IFRS
adopters
The company uses: IFRS non-adopters (83) IFRS adopters (22) Total (105)
yes % Yes % yes %
system of managerial accounting 65 78% 22 100 87 83
methods of costing (calculation) 61 73% 19 86% 80 76
system of internal cost centres 63 76% 21 95% 84 80
acc. depreciation (financial analysis) 61 73% 21 95% 82 78
Source: own calculation
45
Figure 1. Components of managerial accounting and its usage by IFRS-adopters and IFRS-non-
adopters
Source: own investigation
In summary, it can be concluded, that a system of management accounting is used relatively
frequently and intensively. The key component of managerial accounting remains costing: 76 per
cent of firms confirmed the usage. The managerial accounting and its various components are
used more often by the group of companies that use IFRS (IFRS- adopters). These findings can
be regarded as a preliminary confirmation of our assumption that the use of IFRS for financial
reporting brings improvement on the level of internal managerial accounting system.
5.2. Quality of management accounting and impact of IFRS
In the next part of the questionnaire we investigated how respondents perceive the quality of
internal management accounting system. Quality of a management information system was
broken down by the following parameters: (1) accessibility and diversification of data, (2)
availability of data for further analysis, (3) sufficiency of information for internal management,
(4) accuracy and timeliness of data for all managerial levels, (5)linkage of managerial accounting
to financial reporting, and (6) cost of the managerial information system. Respondents subjective
answers to these questions were organized on 5 point Lickert scale where 1 represented the
highest evaluation and 5 the lowest evaluation. We assumed that the higher evaluation will be in
the subset of the firms which uses IFRS (IFRS adopters). The results are summarized in table 3
and in table 4. Table 4 summarises the perception of management accounting from the
perspective of individual subgroups of respondents. To identify different influencing factors, we
have reclassified the responses according to responses in three categories: (1) presence of IFRS
reporting, (2) existence of foreign ownership, and (3) size of firm (medium versus large). The
weighted average marks were calculated for each property.
Table no. 3 - Perception of management accounting system by research sample
1-
Strongly
agree
2-
Agree
3-
Neutral
4-
Disagree
5-
Strongly
disagree
Total
(1)
Data for internal management
are sufficiently diversified and
available in places where they
are needed.
Abs 33 44 23 4 1 105
% 31,4 41,9 21,9 3,8 1,0 100,0
46
1-
Strongly
agree
2-
Agree
3-
Neutral
4-
Disagree
5-
Strongly
disagree
Total
(2)
Information for management
and analysis of financial data in
the company is available and
sufficient.
abs 23 47 23 10 2 105
% 21,9 44,8 21,9 9,5 1,9 100,0
(3)
Economic information system
provides enough information
for internal management.
abs 30 48 X 20 7 105
% 28,6 45,7 X 19,0 6,7 100,0
(4)
Management information
system in your company
provides adequate quality and
timely information for all levels
of management.
abs 25 48 X 26 6 105
% 23,8 45,7 X 24,8 5,7 100,0
(6)
Is the interconnection of
internal (management)
accounting with financial
reporting provided?
abs 38 35 21 8 3 105
% 36,2 33,3 20,0 7,6 2,9 100,0
(5)
Is providing this information
system for your business
expensive?
abs 7 23 42 23 10 105
% 6,7 21,9 40,0 21,9 9,5 100,0
Source: own calculation
To compare the proportions between groups or the test of independence between two categorical
variables can be determined by the Chi-square test. If more than 20 per cent of the expected
frequencies less than five, then it is recommended to use the Fisher’s exact test. This statistical
test enables us to calculate the exact probability of observed frequencies. The values of the
Fisher test are presented in table 4 for each of the three previously classified categories.
The results show, that there were significant differences detected between the group of IFRS
adopters and IFRS non adopters (in four out of six questions). The quality of managerial
accounting systems was perceived as higher in the firms using IFRS. The fifth question
concerned the relation of financial and managerial accounting – in adopters and non-adopters,
and there were no significant differences confirmed. The sixth parameter concerned the
perceived costs of the information system. Here the result of the Fisher test confirms no
differences between the IFRS adopters and IFRS non-adopters.
In the other two cases of classification i.e. difference in the firm ownership and differences in
firm size there were no important discrepancies detected by Fisher´s test. These findings
confirm, that there is no important difference in the perceived quality of management accounting
system between the companies with significant foreign ownership and Czech companies. Neither
is there an important difference in assessment of quality of management accounting between
small versus big companies. This can be interpreted that the influence of foreign parent company
on the subjective perception of quality of management accounting is not significant. Neither are
the significant the results verifying the significance of impact of difference in size of companies
on the quality of management accounting system. Even though it is obvious that subjective
perception of management accounting quality by workers that form an active part of the system
and are its active users could be overshadowed by their direct experience and other factors. This
47
finding can be considered as indicative and worth further exploration. It is therefore possible to
conclude, that our analysis supported the hypothesis that adoption of IFRS has positive impact
on quality of managerial accounting.
Table no.4 - Assessment of the management information system by sample subgroups
(Total number of observations = 105)
Question Total
mean
Q1 Data for internal management are sufficiently diversified and available in places where they
are needed. 1,97
Q2 Information for management and analysis of financial data in the company is sufficient. 2,23
Q3 Economic information system provides enough information for internal management. 2,01
Q4 Management information system in your company provides adequate quality and timely
information for all levels and levels of management. 2,1
Q5 Is the interconnection of internal (management) accounting with financial reporting
provided? 2,03
Q6 Is providing this information system for your business expensive? 3,06
Presence of IFRS reporting Existence of foreign
ownership
Company size (medium vs.
large)
yes no Fisher
test yes No
Fisher
test SM L
Fisher
test
mean/sd mean/sd p-value mean/sd mean/sd p-value mean/sd mean/sd p-value
Q1 1,955 1,974
0,003** 1,608 1,959
0,152 2,038 1,926
0,523 0,95 0,868 0,493 0,2 0,904 0,829
Q2 2,091 2,269
0,018* 2,02 1,918
0,222 2,282 2,148
0,709 1,109 0,935 0,883 0,886 1,031 0,77
Q3 1,955 2,026
0,012* 2,196 2,265
0,54 2,064 1,963
0,444 0,785 0,882 0,96 0,995 0,917 0,707
Q4 2 2,128
0,002** 2,098 1,918
0,273 2,115 2,148
0,341 0,756 0,858 0,9 0,812 0,882 0,718
Q5 1,864 2,077
0,502 3,078 3,041
0,79 2,026 2,222
0,526 1,046 1,066 1,146 0,999 1,093 0,974
Q6 3,045 3,064
0,982 2,118 2,082
0,213 3,068 3,111
0,399 1,046 1,085 0,84 0,838 1,086 0,934
No.
of
Obs. 22 83 52 53 78 27
Note: ** p-value < 0.05, there is significant difference of means at 10% level of statistical significance, *** p-value
< 0,01 signifies 1 per cent level of statistical significance
Source: own calculation
The comparison of proportions between two groups or the test for independence between two
categorical variables can be determined by the Chi-square test. If there are more than 20% of the
expected frequencies < 5, it’s recommended to use the Fisher’s exact test. This statistical test
enables to calculate the exact probability of observed frequencies.
48
5.3. Subjective assessment of impact of IFRS on quality of management accounting system
In the third part of the questionnaire we investigated the subjective perception of the impact of
IFRS adoption on the in-company information system. The results are presented in table 5.
Table no.5 - Impact of IFRS adoption on management information system - subjective assessment
1-
Strongly
agree
2-
Agree
3-
Neutral
4-
Disagree
5-
Strongly
disagree
Total mean/
sd
(7)
Adoption of IFRS allows
more diverse data for internal
management according to
their purpose. abs
1 4 8 3 6 22
3,409 1,221
% 4,5 18,2 36,4 13,6 27,3 100,0
(8)
Transition to reporting
according to IFRS improved
information facilities abs
1 3 9 5 4 22
3,364 1,093
% 4,5 13,6 40,9 22,7 18,2 100,0
(9)
Using IFRS leads to an
overall improvement of
economic information for
internal management. abs
1 4 8 6 3 22
3,273 1,077
% 4,5 18,2 36,4 27,3 13,6 100,0
Source: own calculation
As it can be seen, only 4 or 5 respondents from the companies adopting IFRS (i.e. less than one
fifth, or from 20 to 25 per cent) strongly agreed or agreed with the statements that IFRS led to
improvements of internal management accounting, with the statements that IFRS improved
informational facilities or that IFRS improved economic information for internal management of
the company. The answers were not very favourable. However in the final set of questions we
had only 22 respondent companies that used IFRS (22 per cent of the total set), therefore due to
the small number of answers this findings cannot be generalized and we present it just as
indicative responses. The results of statistical test show, that these finding were not statistically
significant.
6. CONCLUSION
The goal of this research was to find the possible implications of IFRS on management
accounting. This research is one of the first studies that adopts the broader view on management
accounting in CEE region and looks at specific aspects in the Czech Republic. The impact of
IFRS adoption has been already investigated from the standpoint of financial reporting, however,
the special aspects of implications on managerial accounting has not yet been extensively
examined.
Management accounting and costing provided necessary support for early industrial
development. With the increased use of computer equipment since 1960s, the use of
management accounting for internal managerial reporting system increased in both quality and
quantity. Enterprise resource planning was used at that time Czechoslovak enterprises. After the
political change in 1990s, and following transition to market economy it became necessary to
rebuilt both financial reporting system and managerial informational systems, usually known as
managerial accounting. Many research studies were conducted to study the issues of financial
accounting including the IFRS adoption. Up to this point, less attention was paid to managerial
accounting and the real situation in firms and to the interaction of financial and managerial
accounting.
49
Methodology of this research is based on contingency theory, institutional theory and critical
analysis of historical development of accounting. We expected that:
1. The adoption of IFRS will be reflected in greater importance that firms devote to internal
management accounting processes and procedures and therefore the management accounting
will be used more intensively by firms that use the IFRS.
2. The IFRS adoption leads to better quality of management accounting information and
this higher quality will be recognized by firms´ managers and other relevant employees (our
respondents).
The results of our research indicate that the IFRS adoption influences the usage of managerial
accounting. The impact of IFRS adoption on quality of internal information system was
investigated from three perspectives - influence of IFRS adoption, company size and presence of
foreign ownership. Only the presence of IFRS adoption shows statistically significant results in
the qualitative assessment of the management information system. Other influences - presence of
foreign ownership and company size do not seem to have any impact on the perceived quality of
management accounting. However the result needs to be treated with caution due to small
sample size.
This finding is in contrast with recent Romanian study by Albu & Albu, 2012, which found that
adoption and use of management accounting techniques were mostly associated with the
presence of foreign capital. In the Czech Republic, management accounting was used relatively
equally across the whole research sample. The improvement of internal information system
through existence of foreign ownership has not been in our set of firms confirmed, but there is
some evidence of improvement of management accounting system enticed by IFRS adoption.
Our results based on questionnaire survey show that IFRS-adopters steadily integrate the IFRS
principles in their management accounting system. In case of Czech subsidiaries the IFRS
influence is derived from the structure of management information systems of the parent
companies. The parent companies incorporated the executive compensation schemes, that
primarily impact used key performance indicators and set other financial targets (Prochazka,
2016). These indicators determine the structure of the managerial information systems and in-
company managerial accounting as a whole. We also find evidence that with increasing number
of areas, in which management accounting utilises the IFRS-based measures, the subjective
perception of their importance increases.
The research has more potential and further aspects of management accounting should be more
thoroughly investigated including the role of enterprise resource planning and the change of role
of accountants in management teams of large companies. Other research-worthy topic is the
question of software support of company information system and the degree of its usage in daily
practice of managers.
Significant changes in the information systems are needed not only for managers, but for all
company stakeholders affecting both: in-house information system, as well as the scope and
concept of information system for external reporting. This process is manifested by hybridization
of the accounting profession, the emerging practice of integrated reporting, by pressures for
environmental accounting, etc. offering a huge potential for future research linked to potential of
managerial accounting.
50
Acknowledgements
This paper was prepared with support of Research Project STF-AAU-2016-1 „IFRS and
managerial accounting in the Czech Republic”.
The authors also acknowledge the support of Research project IGA VŠFS No 7767 “Political
and economic effects of IFRS adoption in conditions of Czech Republic” funded by the
institutional support for long-term strategic development of research organization University of
Finance and Administration, Prague. The authors would also like to thank participant of
conference AMIS 2016 and our two collaborators Barbora Úlehlová and Martin Kohout for
technical assistance.
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53
SPECIFIC ASPECTS REGARDING THE NEW PROCEDURE
FOR SOLVING COMPLAINTS FOR THE AWARD OF PUBLIC
PROCUREMENT CONTRACTS, SECTOR CONTRACTS,
PUBLIC WORKS CONCESSION CONTRACTS AND PUBLIC
SERVICES CONCESSION CONTRACTS
Anda Mihaiela IOSIF
West University of Timisoara, Romania
Csaba Bela NÁSZ
West University of Timisoara, Romania
Abstract
Reformation of the public procurement system takes place in the context of the new transposition
European directives. The new legislation package is an integral part of the national strategy of public
procurement. Thereby, the new strategy proposes a rearrangement of the public procurement system in
the context of the paradigm shift in the field, and thus, in the whole European Union. The fundamental
elements which are different from the previous legislative framework refer to stability, uniformity,
predictability and, last but not least, an integer approach.
This paper discusses specific aspects of the new law regarding the review procedures in the matter of
awarding public procurement contracts, sector contracts, public works concession contracts and public
services concession contracts, as well as aspects of organising and functioning of The National Council
for Solving Complaints. These aspects refer to: the introduction of a new instrument, called notification,
as a mandatory condition, prior to the formulation of a complaint in front of The National Council for
Solving Complaints or in court; the administrative-jurisdictional remedy system; the review procedure
against decisions of The National Council for Solving Complaints; the juridical remedy system (the
court); measures for the unification of law practice.
Keywords: public procurement; notification; review procedure; juridical remedy system
JEL Classification: H57
1. INTRODUCTION
The award of public procurement contracts by a member state of the EU is performed in
compliance with both the principles of the Treaty on the Functioning of the European Union and
the principles derived from it. Aiming to stimulate on one hand economic growth and strengthen
the confidence in the single market and on the other hand the development of the single market,
the European Commission adopted two sets of measures embodied in the Single Market Act
(2011) and the Single Market Act II (2012).
The reshaping all applicable rules in the matter was done simultaneously with the launch of
Europe 2020 Strategy. Public procurement plays a major role in the Europe 2020 strategy for a
smart, sustainable and inclusive growth, the mechanism of which being considered one of the
most effective tools for putting into practice, i.e., for materialising the principles contained in the
documents mentioned above. The consequence was the legislative reform of the European Union
in the field of public procurement, resulted in three directives adopted in the year 2014, Member
States disposing of two years to transpose into national law the new directives aimed at
simplifying and making more flexible the public procurement process.
54
Reforming of public procurement system in Romania took place in this context, and national
public procurement strategy1
proposes a rearrangement of the system, in the context of changing
the paradigm at European level as well, according to the new directives adopted.
2. SOLVING COMPLAINTS IN THE MATTER OF AWARDING PUBLIC
PROCUREMENT CONTRACTS, SECTOR CONTRACTS, PUBLIC WORK
CONCESSION CONTRACTS AND PUBLIC SERVICES CONCESSION CONTRACTS
The national legislative package is part of the National Strategy on Public Procurement,
consisting of four regulations, the law dealing with2 the subject in discussion is the one
concerning the remedies and appeals concerning the award of public procurement contracts and
concession contracts and the organisation and functioning of the National Council for Solving
Complaints. The new law also applies to applications involving the granting of compensations
for damages caused by the assigning procedure, as well as those on the execution, cancellation,
rescission, termination or unilateral termination of contracts.
The stated purpose of the Law no. 101/2016 is to ensure nationwide effective mechanisms and
procedures for rapid and effective referral and remedial action to ensure compliance with legal
provisions regarding the assignment of contracts. This norm replaces Chapter IX Settlement of
appeals of GEO no. 34/2006 (as amended). Similar to specific legislation in the field of
contentious administrative law3, Article 2 of Law no. 101/2016 defined referral topics for the
National Council for Solving Complaints or the court, as appropriate: any person who considers
himself injured in a right or a legitimate interest by an act of a contracting authority or failure to
solve within legal term an application may request either by administrative-jurisdictional way, or
by judicial way the annulment of the act, order the contracting authority to issue an act, or to
adopt corrective measures, recognizing the claimed right or legitimate interest.
A new aspect is the provision of paragraph 2 of the same text, according to which any member of
an association of economic operators, without legal personality, may formulate any form of
appeal regulated by law4
.
The person who considers himself injured in a right or a legitimate interest may address either
the National Council for Solving Complaints or the competent court, but if the administrative-
jurisdictional solution of the appeal is chosen, the petitioner must address to the Council.
However, if the same person who considers himself aggrieved filed an appeal against the same
act of the contracting authority both to the Council and the court, it shall be presumed that the
person in question dropped the jurisdictional administrative path, the judicial proceedings having
priority.
1 http://www.anrmap.ro/documents/10180/0/Strategia+Nationala+Achizitii+Publice+final.pdf/84dc3889-a7c7-48db-
907f-fa9a63d9822c; 2 Law no. 101/2016 on remedies and review procedures concerning the assignment of public procurement contracts
and concession contracts for works and services, as well as for the organisation and functioning of The National
Council for Solving Complaints, published in the Official Gazette no. 393/23.05.2016; 3 Article 1 of Law no. 554/2004 amended;
4 In the regulation issued by GEO no. 34/2006 ammended, any economic operator had the right to participate,
individually or in a group of operators to the award procedure (art.41), but art.44 stipulated the following ”Several
economic operators have the right to associate in view of submitting an application or a joint tender without having
the obligation to legalize their association formally. The contracting authority has the right to request the legalisation
of the association only if the joint tender is declared winner and only if such a measure represents a necessary
condition for the proper performance of the contract”.
55
For the same reasons, the contracting authority that acknowledges the submission of appeals by
different persons against the same act of the contracting authority, both before the Council, and
in court, has the obligation to inform the Council and the court about it, which will pronounce
joined appeals, requesting the Council to present the case.
The advantage for the person who considers himself aggrieved and who filed the appeal only to
the Council is that, in this case, it is not necessary to pay the stamp fee, whose value is
considerable.
2.1. Prior notification
Unlike the previous regulations, the failure to notify does not prevent the filing before the
National Council for Solving Complaints, the new law expressly provides that, under penalty of
rejection of the appeal as inadmissible, which can be invoked ex officio as well before
addressing the Council or the competent court, the person who considers himself aggrieved has
the obligation to notify the contracting authority of the request for correction, in whole or in
part, of the alleged violation of the legislation, the deadline is 10 days5
from the day following
the acknowledgment of the act of the contracting authority considered unlawful or respectively,
5 days6 from the day following the acknowledgment of the act of the contracting authority
considered unlawful7.
Prior notification is made in writing and contains at least the identification data of the person
who considers himself aggrieved; the irregularities noticed and remedial measures considered
necessary to be taken, as appropriate.
Fulfilling the prior notification procedure is not necessary in case a person considers to be
prejudiced by the corrective action taken by the contracting authority.
Given the compulsoriness of the notification procedure, it was natural that the legislature also
provides a direct effect of the formulation in due time of such a notification, namely the
suspension of the right to conclude the contract. The contract concluded before the expiration of
10, respectively 5 days, depending on the estimated value of public procurement procedure,
sector acquisition or concession is null and void8.
2.2. The appeal filed by administrative-jurisdictional path
The person who considers himself aggrieved by the response to the prior notification or did not
receive any response within 3 days from the submission of the notification, as well as any person
who considers himself aggrieved by the remedial action taken by the contracting authority may
refer to the Council requesting the cancellation of the act of the contracting authority, forcing it
to issue an act or adopt remedial measures and the recognition of the claimed right or legitimate
interest.
5 If the estimated value of public procurement procedure or concession is equal to or greater than the thresholds in
relation to the compulsory submission for publication to the Official Journal of the European Union notices under
the law on public procurement legislation or sector procurement legislation works concessions and service
concessions; 6 If the estimated value of public procurement procedure or concession is lower than these thresholds;
7 Art. 144 of Law no. 101/2016;
8 Art. 7, paragraph 4 of Law no. 101/2016;
56
Deadline for notification is 10 days, if the estimated value of public procurement procedure,
acquisition or sector acquisition or concession is equal to or greater than the thresholds in
relation to the compulsory submission for publication, in the Official Journal of the European
Union, of participation notices, according to the legislation on public procurement, or sector
acquisition or legislation on work and services concessions, as appropriate, or 5 days, if the
estimated value of public procurement procedure, sector acquisition or concession is lower than
these thresholds.
Regarding the calculation method for the procedural deadlines settled by Law no. 101/2016 no
changes were made to the previous regulations. The appeal filed by administrative-jurisdictional
means is not subject to taxes. It was also eliminated the obligation to the guarantee of good
conduct for the entire period between the date of filing the complaint, request or complaint and
date of the final Council decision or the court decision regarding its settlement, guarantee
introduced by GEO no. 51/20149 and whose amount was determined by reference to the
estimated value of the contract that was to be assigned. Moreover, the very terminology used by
the legislator was questionable since "good conduct" suggests the idea of observance of rules of
conduct, ethics, which is not the case in the situation of formulating an appeal or complaint,
when the complainant only exercise a constitutional right - the right to free access to a
jurisdiction, even an administrative one.
After receiving the complaint, the contracting authority may adopt remedial measures it deems
necessary due to the appeal, measures that must be communicated to the objector, the other
economic operators involved in the assigning procedure and the Council, no later than one
working day from the date of their adoption.
If the petitioner-appellant considers that the measures taken are sufficient to remedy the invoked
acts as illegal, submits to the Council and the contracting authority a request for waiver of
appeal. The contracting authority has the right to conclude the contract only after the Council
decision related to the settlement of the litigation was communicated within the waiting period
stipulated for the conclusion of the contract; the contract concluded with non-compliance of
these provisions is null and void.
Regarding the appeal elements, two things must be taken into consideration:
▪ the first issue concerns the fact that the new law no longer provides "proof of legitimate
interest" (element introduced by GEO no. 51/2014 and which was, in our opinion, completely
unnecessary since Articles 32 and 33 of the new Code of Civil Procedure sets forth the
following: any application can be formulated and sustained only if the author, among others,
justifies an interest; the interest must be determined, legal, personal, born and real; however,
even if the interest is not born and real, an application can be submitted in order to prevent
violation of a threatened subjective right or to prevent the production of an imminent damage
which could not be repaired);
▪ the second issue concerns the solution that the Council may adopt; if in the previous
regulation, in case it is appreciated that the appeal does not contain all information required by
law and the appellant, within 3 days from the notice did not understand to supplement the
appeal, it was dismissed as inadmissible, the new regulation, for the same event, the appeal is
canceled.
Similarly to the actions and demands of summons and complaints are distributed randomly to be
settled by the court and in order to ensure the imposition of unitary solutions in each step, the
appeals formulated in the same procedure are going to be joined.
9 Published in the Official Gazette no. 486/30.06.2014;
57
Until the resolution of the appeal by the Council, economic operators interested in participating
in the award procedure or, where appropriate, economic operators participating in the award
procedure may bring with notifying the parties of the case, application for voluntary intervention
in litigation, according to the Code of Civil Procedure10
, within 10 days from the date of
publication in the Electronic System of Public Procurement (ESPP) of the fact that an appeal was
submitted regarding the procedures whose initiation is not accomplished through publication in
ESPP, the term being calculate from the day the fact that an appeal had been submitted was
communicated.
Within 5 business days from the date the complaint was received, the contracting authority has
an obligation to provide the Council and the appellant of its own motion, its point of view
regarding the appeal and also has to provide the Council a copy of the file of public procurement,
sector acquisition or concession, as well as the proof of having submitted its point of view to the
appellant and any other relevant documents, the lack of point of view does not prevent the
settlement of the appeal, but it triggers disqualification of the right to bring evidence and to
invoke exceptions, except for those of public order, unless the law provides otherwise.
The new law has preserved the character in writing of the procedure to the Council, the parties
being heard only it is deemed necessary by the panel of the settlement of the appeal. Similar to
the previous regulation, the parties may be represented by lawyers or legal advisors and can
submit written conclusions during the procedure and can ask to submit conclusions orally before
the Council, without affecting by it the legal deadline for settlement of the appeal. However, it
has been expressly provisioned, that it is inadmissible to put forward new grounds of appeal
and/or formulate new heads of a claim by written or oral conclusions, or by specifications to the
appeal, subsequent to its legal formulation term.
The Council settles the substantive appeal within 20 days from the reception of the case of public
procurement, sector acquisition or concession, respectively within 10 days in the event of
incidence of an exception that prevents the substantive analysis of the appeal, in duly justified
cases the settlement term can be extended by 10 days.
In case the complaint is formulated against the Council decision, the contracting authority has
the right to suspend its execution and/or the award procedure until the day the Court
communicates the settlement decision of the complaint.
2.3. Means of appeal against the decisions of the National Council for Solving Complaints
(the review procedure)
Council decisions regarding the settlement of appeal may be attacked by either party of the case,
by submitting a complaint to the competent court, both on the grounds of illegality and of
groundlessness, within 10 days from notice. It is welcome the indication that the legislature
formulates, meaning that, in the complaint, the appellant cannot rely on other reasons against
acts of the contracting authority, than those in the appeal addressed to the Council.
The complaint against the decision of the Council is charged with 50% of the stamp duty
provided for applications submitted to courts under the provisions of Chapter VI System of
judicial remedies of Law no. 101/201611
.
10
The New Code of Civil Procedure was adopted by Law no. 134/2010, being republished in the Official Gazette
no. 545/03.08.2012, with several later amendments; 11
If the tender procedure is organised in batches, stamp duties are calculated in relation to the estimated value of
each disputed lot; exemption from judicial tax only applies to complaints submitted by the contracting authorities.
58
The party which submits the complaint is obliged to communicate, within the submission term of
the complaint to the court, a copy of it and of the supporting documents to the other party/parties
involved in the appeal procedure before the Council, by submitting evidence of communication
until the first hearing.
The contestation is mandatory; the defendant must notify the court and the petitioner on the
contestation within 5 days from the reception of the complaint, failure to submit contestation
generating the cancellation of the right to bring evidence and to invoke exceptions, except for
those of public order. As a novelty as well, new evidence cannot be submitted, except for new
documents that can be submitted, under penalty of forfeiture, together with the complaint,
respectively the contestation.
In terms of material and territorial, there are no changes: the court competent to hear complaints
against the decision of the Council is still the Court of Appeal, Administrative and Fiscal
Contentious Department, in whose territorial jurisdiction the headquarters of the contracting
authority are located, the complaints being to be settled by courts specialized in public
procurement, and the court competent to hear complaints against the decision pronounced by the
Council on procedures for awarding services and/or works related to transport infrastructure of
national interest, as defined by legislation, remained Court of Appeal of Bucharest,
Administrative and Fiscal Contentious Department.
The complaint is urgently settled and mainly within a period not to exceed 45 days from the date
of legal notification of the court, by chambers specialised in public procurement, consisting of
three judges. Moreover, according to the new procedure, the Council is not a party in the trial.
In duly justified cases and to prevent an imminent damage, the court may order, at the request of
the interested party, the closing date of summoning the parties, suspend the award procedure
and/or the execution of the contract until the settlement of the case, the conclusion is final. The
court solves the suspension request taking into account its likely consequences on all categories
of interests that might be damaged including the public interest. The court may order the
measure if its negative consequences could be greater than its benefits. The decision to not
suspend the award procedure and/or execution of the contract shall not prejudice any other right
of the applicant.
To get the measure of suspension, the applicant must provide in advance a bail, calculated by
reference to the estimated contract value or the set value of the contract.
The bail is returned on request, after settlement by the final decision of the complaint or after the
cancellation of the suspension of the award procedure and/or the execution of the contract, to the
person who submitted it, after a period of 30 days from the date of the final of the decision, and
only if and to the extent that the contracting authority had not submitted request for payment of
compensation due until the expiry of that period or, if applicable, from the date the effects of
suspension of the award procedure and/or the execution of the contract ended.
The refund shall be made immediately if the contracting authority expressly declares that it does
not aim at forcing the payment of compensation for the prejudice caused by the approval of the
measure for which it had been submitted.
The court pronounces on the application for the bail refund by summoning the parties, by a
conclusion subject only to appeal to a higher court, the appeal suspending the execution. If the
59
suspension request with bail submission was rejected, the court shall ex officio orders refund of
the bail.
Following the admission of the complaint, the court changes the decision of the Council,
ordering, as appropriate:
• cancellation of all or part of the act of the contracting authority;
• obligation to issue the act by the contracting authority;
• fulfilment of an obligation by the contracting authority, including the elimination of any
technical, economic or financial discriminatory specifications of the participation announcement,
of the assignment documentation or of other documents issued in relation to the award
procedure;
• any other measures necessary to remedy the violation of legal provisions related to public
procurement, sector procurement or concessions.
The Court notified of a complaint against a decision by which the Council settled the appeal by
settling a procedural exception, by admitting the complaint, abolishes the decision and retains the
case for trial on the merits, taking into account the reasons that caused the cancellation of the
decision. Thus, the Council's decision is modified and finds that the act of the contracting
authority was issued in violation of legislation on public procurement, sector procurement or
concessions, and the contract was concluded before the notification of the decision by the
Council, Articles 58-61 of Law no. 101/2016 concerning the invalidity of contracts apply
correspondingly.
If the Council considered only part of the reasons given in the appeal and the court considers that
the complaint against the Council's decision is grounded, admitting the complaint, holds the case
for trial on the merits, analysing the reasons for the appeal which were not subject to the analysis
of the Council. Last but not least, the court may reject the complaint on the merits or by settling a
procedural exception, and in justified cases, if the court does not take the decision immediately,
it may defer pronouncement for a period of 5 days.
The decision by which the court settles the complaint is final, and it has to be drawn within 7
days from pronouncement and will be communicated to the parties forthwith. The decision
motivated, pronounced by the court is submitted, in copy, within 15 days from the date of issue,
to the National Agency for Public Procurement, which publishes in ESPP, without reference to
the identification data of the parties, personal information and those information which the
economic operator specifies as confidential, classified or protected by an intellectual property
right.
3. CONCLUSIONS
We appreciate that the new regulation of review procedures concerning the award of public
procurement contracts, sector contracts and concession contracts for works and services is more
supple and it may prove to be more effective, without unjustifiable narrowing the right of free
access to justice of persons prejudiced by an act of a contracting authority or failure to solve
within the legal term an application in the framework of procedures for the award of public
contracts which may lead to a significant decrease in financial corrections, oppositions filed
under Law no. 101/2016 having, undeniably, an important role in removing errors committed by
the contracting authorities in award procedures.
60
REFERENCES:
⁎⁎⁎, Council Directive 89/665/EEC of 21 December 1989 on the coordination of the laws, regulations and
administrative provisions relating to the application of review procedures to the award of public
supply and public works contracts, being published in the Official Journal of the European Union L
395, 30.12.1989;
⁎⁎⁎, The New Code of Civil Procedure, adopted by Law no. 134/2010, being republished in the Official
Gazette no. 545/03.08.2012, with several later amendments;
⁎⁎⁎, Directive 2014/23/EU of the European Parliament and of the Council of 26 February 2014 on the
award of concession contracts;
⁎⁎⁎, Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public
procurement and repealing Directive 2004/18/EC;
⁎⁎⁎, Directive 2014/25/EU of the European Parliament and of the Council of 26 February 2014 on
procurement by entities operating in the water, energy, transport and postal services sectors and
repealing Directive 2004/17/EC;
⁎⁎⁎, The National Strategy on Public Procurement available online at
http://www.anrmap.ro/documents/10180/0/Strategia+Nationala+Achizitii+Publice+final.pdf;
⁎⁎⁎, Law no. 101/2016 on remedies and review procedures concerning the assignment of public
procurement contracts and concession contracts for works and services, as well as for the
organisation and functioning of The National Council for Solving Complaints, published in the
Official Gazette no. 393/23.05.2016.
61
COST CENTERS FROM HOSPITAL UNITS. STUDY CASE
Alina PUȚAN
“1 Decembrie 1918” University of Alba Iulia
Oana Raluca IVAN
“1 Decembrie 1918” University of Alba Iulia
Attila TAMAS
“1 Decembrie 1918” University of Alba Iulia
Abstract
Current status of the hospital units is worrying: insufficient funding, increasing the number of cases
considered / treated, providing quality services at public hospital unit. In this research we have
undergone an empirical research carried out in the hospital units of category III and IV, from Alba
County, this sample selection aims to identify an optimal solution to exercise management control which
should serve to management decision-making. Responsibility centers, at the level of hospital unit,
establish the liability for each segment of expenditure, expenditure tracking and proper grounding even
their places of training, delimitation expenditure which does not strictly dependent on the production
activities that are related strictly by the process; establishing the deviations of preset expenses levels;
establishing a system of rules allowing highlighting the responsibilities of each performer, introducing a
system of resource allocation and tracking of the use of their by developing specific cost budget for each
responsibility center. The disadvantages of decentralization based on activity centers consists in increase
the consumption of resources in certain activities, unclear delimitation of cause-effect relationships that
create difficulties in adopting the relevant decisions by management, etc.
Keywords: cost centers, hospital costs, decentralization.
JEL Classification: I18, M41
1. INTRODUCTION
Romanian health system is a sector of the economy with difficulties; inadequate funding, poor
health of the population, the situation of doctors working simultaneously in the public and
private sectors, the alarming situation of the cost medicines, fight against corruption intrasystem,
and quality of service care are the main problems of this system. Pursuing operational costs
achieved through decentralization activity is one aspect of process optimization.
2. RESEARCH METHODOLOGY
Our study has two parts: a theoretical part achieved by literature review and a part empirical -
case study on the existence of cost centers in the Romanian public hospital units.
Our empirical research carried out in the hospital units of category III and IV, from Alba County,
this sample selection aims to identify an optimal solution to exercise management control which
should serve to management decision-making. We identified hospital units that follow closely
cost calculation on each responsibility center; unfortunately, only a unit of the sample we found
to do this.
62
Hospital units that are subject to our case study is a county hospital, a municipal hospital and a
city hospital. The motivation for selecting these three public hospital units is supported by the
following considerations: national weight is considerably significant as shown in Figure no.1,
sicknesses treatable are part of typology most commonly treated, this type of hospitals are found
in most counties of the country, as can be observed in the distribution of hospitals by county,
shown in Figure no.2, we consider that this study is with impact at national level.
Figure 1. Classification of public hospitals in Romania
Source: Own processing from data on the situation of public hospitals classified into categories,
http://www.ms.gov.ro/ accessed on 26 May 2014.
Figure 2. Distribution of hospitals by counties
Source: Antunes, Mordelet, De Groote (2011)
Units’ hospitals with beds are dispersed across the country to provide the best quality healthcare
conditions. Typology of hospitals and territorial dispersion represents a starting point in
developing our empirical study, identifying the main categories of units. This study focuses on
public hospital units in Romania and aims at identifying an instrument to exercise management
control which should serve to achieve an efficient management.
The methods used in our study is case study, participatory observation as well as the non-
participating and documentation.
63
3. DECENTRALIZATION OF ACTIVITY ON RESPONSIBILITY CENTERS
Management control is discussed in context of organizing pilotage of entity based on
segmentation activity by centers of responsibility. A responsibility center is an organizational
entity that holds a delegation of authority concerning the means (material, human, financial) and
negotiating capacity on the objectives (Tabără, 2004).
Activity entity can be fractionated in terms of consistent accounting sections which allow
effective and efficient management of available resources. Decentralization of responsibility
centers activity entity can:
Isolation the responsibilities of each manager;
activation capacity to decentralize management tasks and delegate a part of his
responsibilities;
A manifestation of management's ability to master the conflicts between local and global
interests, preserving own dynamics on decentralization.
Decentralization of responsibility centers should be adapted to the degree of real autonomy units
and current practices in the performance management; the essential point is consistency between
the principles of leadership, on the one hand, and the assessment of responsibilities, content
activities and their competences, on the other hand.
The arguments for establishing the structure of the entity on responsibility centers are as
following: the possibility of establishing of responsibility for expenditure effected, monitoring
and correctly foundation for expenditure on their formative locations; delimitation expenditure
which does not strictly dependent on the production activity that are strictly related to the
process, setting spending deviations from predefined levels, establishing a system of rules which
allows highlighting the responsibilities of each performer, introducing a system of resource
allocation and tracking of the use of them by developing budgets of expenses specific to each
responsibility center.
Characteristics of a responsibility center are: it is placed under the authority of a charge; pursue
one or more missions with objectives of quantity and value well defined; has a set of resources
needed to achieve objectives; it has a certain relative autonomy within budget resources.
Depending on the elements controlled by responsible and established financial performance
measures in terms of cost, profit, financial flows, profitability, we following types of
responsibility centers: Cost Centre; Revenue Centre; Profit Centers / cash flows; Investment
Centre.
Cost center is a responsibility center in which inputs are measured in monetary terms and outputs
are not measured. Measuring the performances is made of financial cost in the form of standards
which must be respected. It is delicate to treat discretionary costs namely not correlated with
outputs by objective relationship. Budget costs are, in practice, inadequate performance
evaluation tool of discretionary cost center. In order to meet budget costs, responsibility may, for
example, to reduce the work or to just guide the responsibility assigned, which is not in any way
aim searched. Therefore must appeal to other instruments outside the financial performance
evaluation.
Cropping the responsibility centers is related to the technical organization of the business, under
which thinking and identifies "Account section" which fall within the area of management
accounting are objects of calculation. Sectorisation of cost center must meet the requirements of
64
the technical and economic interests. For this purpose, cooperation between specialists in
production and those in the economic field is irreplaceable. Interweaving of the two specialties
lead to cutting up the center, depending on the particular production techniques, in conjunction
with the criteria for identifying and measuring inputs and with final objective, the assessment of
economic performance, by drawing lines of their optimization. It is stands to reason that
fractionation of an enterprise of responsibility centers facilitate the management, empowering
managers at all levels. Empowerment is on both its sides: domination and employment. A
manager, regardless of where they are, is responsible to a specific goal, but his actions in
responding to the leadership at the top level.
4. COST CENTERS FROM HOSPITAL UNITS
Following the analysis the organizational structures of the three hospital units, identify next cost
centers:
Table no.1 - Synthesis cost centers of the public hospital units
No.
crt.
Cost centers County
hospital
Municipal
hospital
City
hospital
1. The emergency X X -
2. Sections / compartments with beds X X X
3. Speciality ambulatory X X X
4. Paraclinical laboratory X X X
5. Pharmacy X X X
6. Other functional structures – sterilizing, the
operating room, transfusion point, etc.
X
X
X
7. Supply, transport and public acquisitions X X X
8. Technical and administrative X X X
9. Accounting X X X
10. Financial X X
11. RUNOS, Statistics and Medical Informatics,
Legal proceedings, nosocomial infections,
public relations, audit.
X
X
X
12. Management - general manager, Deputy general
manager, Head of nurse, Administrative
director, Head Accountant
X
X
X
Source: Own realization
We mention that we have presented only the cost centers of the centers of responsibility because
they are the subject of our study. We believe that the net difference between the 3 is number of
hospital beds, medical staff and number of patients treated.
Delimitation of cost centers allowed us establishing the elements of the cost for each patient; it
is calculated in view of the direct costs, indirect and general.
A. Direct costs incorporated into cost for each patient are identified in the following cost centers:
1. Emergency;
2. Section/ compartments with beds;
3. Specialty ambulatory
Direct costs are composed of:
- Personnel expenses of the cost center
- Material costs of the center
a) Identifiable from each patient (light, heat, water, laundry, inventory, etc.).
b) Identifiable patient level
- Medicines
65
- Food allowance
- Analysis and investigations as appropriate
The direct costs shall be inserted at the level of hospital unit the patient at the section in which it
is treated.
Establishing direct expenses is the first step in determining tariff / day hospital / department as
well as the cost of medicines and sanitary materials / department.
B. Indirect expenses are identified in the following cost centers:
1. Paraclinical laboratory
2. Pharmacy
3. Sterilization
4. Transfusion point
5. Block operator
Indirect costs are allocated through distribution keys on the cost of patient based on documents
issued by cost centers mentioned include:
- Personnel costs
- Expenses for medical services performed related material structures not identified at the
patient level and rates / benefit medical / patient.
The result of the indirect costs are reflected in the tariff calculation / performance / laboratory
paraclinical, pharmacy, sterilization, point transfusion, surgical unit.
C. General expenses that will be included in the total cost per patient were identified in the
following cost centers:
1. Supply, transport and public acquisitions
2. Technical and administrative
3. Accounting
4. Financial
5. RUNOS, Statistics and Medical Informatics, Legal proceedings, nosocomial
infections, public relations, audit
6. Management - general manager, deputy general manager, nurse head of, managing
director, Head Accountant.
General expenses are distributed based on distribution keys approved by the hospital
management and include:
a) Staff expenses
b) Materials and services expenses related to structures that are not identified at the
patient level.
We appreciate that the allocation key can be used in our study because they are well established
and provide a rational allocation of expenditure on each item cost.
Determining the level general expenses is the last step in setting the tariff/day of
hospitalization/supply, transport and public acquisitions, technical and administrative,
accounting, financial, RUNOS, Statistics and medical Legal proceedings, nosocomial infections,
public relations, audit, management - general manager, medical director, director of financial
accounting, treatment director.
We selected for analysis the surgery section of each hospital to observe the implications of each
hospital types. The motivation for selecting this type of section consists of:
high number of cases considered in these sections;
partial reimbursement of the full costs / patient of the funds allocated by the
Health Insurance Alba;
high costs of activity performed under these sections.
66
Following an analysis of the business department of surgery three public hospital units, as a cost
center, we have seen a number of developments / involution of the main indicators as well as the
expenditure section. The analyzed period extends over three calendar years 2012, 2013 and
2014, we had as unit calendar month and up used is a period of 6 months. Therefore we studied
the evolution of the main indicators of section from March 2012 to September 2014.
Evolution of nonfinancial indicators from the surgery section the hospital units
selected
Number of patients
Figure 3. Evolution of the number of patients in the surgery section
Source: Own processing (The database of selected hospital units)
As we have presented the chart above, Department of Surgery county hospital provides medical
services to an increasing number of patients. This is due primarily to the fact that the county
hospital is equipped with modern equipment, offering patients a wide spectrum of treatments.
The decreasing trend in the number of patients treated in the municipal hospital as well as the
city hospital much better due to hospital emergency facilities, which also has regional hospital
and rank, as a result, emergency hospital patients who take cases with a high degree of
complexity that other hospitals in the county do not have material, financial to solve.
Number of beds
Figure 4. Evolution of the number of beds in the surgery section
Source: Own processing (The database of selected hospital units)
Number of beds in the emergency section of the hospital surgery increase since September 2013,
due to a decision of the hospital management for additional reception capacity. This is due to the
increase in the number of cases solved, by increasing the number of beds, the hospital meets the
needs of citizens. The situation is, however, exactly opposite the city hospital. The decrease is
67
due in beds and hospital classification of IV category hospital units with beds, but compliance
plan. Should be considered and appearance hospital funding. High costs / bed is not justified,
since a large part of the patients were / are treated in other hospitals, such being the county
hospital.
Number of hospitalization days
Figure 5. Evolution of hospitalization days in the surgery section
Source: Own processing (The database of selected hospital units)
Following the analysis history of solved cases, county hospital management decided to
supplement the number of beds. As a result, we observe increased the capacity of receiving and
treatment of patients. Indicator that compares the treatment of patients in the wards is the number
of days of hospitalization. As we can see, the other two hospitals analyzed have a net activity
decreased, but an activity that provides necessary medical services locally.
Use of beds = bedsNo
dayshospNo
.
..
Figure 6. The use of bed in the surgery section
Source: Own processing (The database of selected hospital units)
Use indicator beds presents a slight downward trajectory in the case the county hospital, which
means that for the moment, increasing the number of beds is off. This is the effect of increasing
the number of beds in relation to the days of hospitalization. Using municipal hospital beds is
very high as compared to the number of beds required hospitalization days treating patients is
significantly reduced. City Hospital is experiencing a significant increase in the use of beds, it is
the direct effect of providing medical care that requires continuing treatment hospital patients.
68
The average of hospitalization = patientsNo
dayshospNo
.
..
Figure 7. Evolution of average of hospitalization in the surgery section
Source: Own processing (The database of selected hospital units)
The average hospitalization indicator is the basis for expenditure calculation of days of
hospitalization / patient. Following the analysis carried out during the three financial years, we
see that this indicator known significant oscillations in September-November 2013. When the the
average hospitalization in the city hospital decreases increase the average hospitalization in the
hospital county. The direct cause of these fluctuations is the transfer of patients from the first to
the second hospital.
Indicators's financial activity of surgery department from hospital units selected
Evolution of directs costs
Figure 8. Evolution of direct costs in the surgery section
Source: Own processing (The database of selected hospital units)
In the surgery section, we see an increasing trend in the period of expenditure relating directly to
patients. One reason for this growth is the increasing number of patients hospitalized. These
costs are allocated in proportion to the number of patients treated in each hospital section of
surgery. We appreciate the increased attention to the management of hospital units, issues about
the cost / patient, with the future directions reduction of those, especially given the funding by
the County Health is achieved by caseload respectively solved.
69
Evolution of indirect costs
Figure 9. Evolution of indirect costs in the surgery section
Source: Own processing (The database of selected hospital units)
During the three financial years, the county hospital known significant fluctuations in indirect
costs. At the end of the period, we observe a significant decrease in indirect costs that will be
assigned to cost / patient, which derives from a better management of resources, and the use of
modern equipment, such as the city hospital.
Evolution of general expenses
Figure 10. Evolution general expenses from the surgery section
Source: Own processing (The database of selected hospital units)
General expenses are increasing. This is mainly due to the complexity of the leadership and
organizational structure of the hospital unit.
Evolution of section expenditure
Figure 11. Evolution of surgery section expenses
Source: Own processing (The database of selected hospital units)
70
Total expenditure of the surgery section from the county hospital experienced substantial growth
in 2013. Nonfinancial indicators as well as the financial indicators listed above are closely
interrelated. The total expenditure complies with the direction of the department direct costs
mainly.
Evolution of the average cost / patient= patientsNo
tionenditureTotal
.
sec.exp.
Figure 12. Evolution of average cost / patient
Source: Own processing (The database of selected hospital units)
The average cost / patient fluctuate substantially in the situation of the county hospital. However,
at the end of the reporting period decreased significantly just because of modernizing medical
equipment used. Modern equipment has reduced some costs for certain medical services, some
of which were externalized and this significantly increases medical costs. An alarming situation
is the municipal hospital, as costs per patient are growing. We consider that a detailed cost
analysis could lead to the identification of growth factors such costs.
Evolution of the average cost/day hospitalization = daysationhospitalizNo
tionenditureTotal
..
sec.exp.
Figure 13. Evolution of average cost / day hospitalization
Source: Own processing (The database of selected hospital units)
71
The average cost / day of hospitalization presents a situation similar to indicator Average cost /
patient. As can see, the average cost from the surgery section of the city hospital increase
significantly.
Evolution of the average cost / bed= bedsNo
tionenditureTotal
.
sec.exp.
Figure 14. Evolution of average cost / bed
Source: Own processing (The database of selected hospital units)
The average cost / bed is a constant indicator during the analyzed period. We observe even a
slight decrease, the only exception being September 2013. We believe that the analysis of the
municipal hospital allows us to establish cause-effect relationships that underlie the adoption of
future decisions. Including this indicator, spending saw an upward trend. Consequently, there is
need to examine in detail the situation, especially cause-effect relationship within this section.
In our study, we can identify the advantages of hospital activity decentralization in
responsibility centers, respectively cost centers:
Facilitating "General" of current management problems by channeling attention to
strategic issues. Following diachronic study conducted in the 3 sections of the 3 hospitals
we notice delimitation of expenditure: direct costs, indirect and total general
administration departments, this division helps identify problems of the section
of hospital unit based on the history of the activity, to identify subjective and objective
factors of influence in the section also serves to foundation some medium and long term
strategies. Through cost centers, identify centers that generate the largest amount of
expenditure, these centers are the main targets of the strategy adopted by hospital unit
management: identifying ways to reduce costs optimize resource consumption, finding
alternative insurance quality health services.
Approximation decision makers by clients / patients (allowing better targeting the supply
of medical services to the needs of patients). Management of hospital units, according to
the activities that provide the best quality service, but to generate the smallest deficit at
the level of hospital unit the station, is oriented towards the development of those
sections. The public hospital units in the last 10 years, there has been no surplus end of
the period, if any sections, at least in Alba county.
Improving the speed of reaction of reducing public hospital decision circuit. Through the
centers of responsibility, satisfying and medical staff leadership positions in the section,
division or unit level, identify problems in each responsibility center: excess energy
consumption, excess water consumption, medical staff overtime should remunerated,
absenteeism from work, expenses exceeded the stock of medicines, etc.. After identifying
72
the difficulties, we appreciate that managers can take short-term decisions aimed at
improving the situation.
Increased motivation of medical staff, giving them more autonomy of decision. We
appreciate that achieving management control through cost centers shall monitor
operational costs, so monthly each section, department know the situation expenditures
and performance level achieved by calculating the financial and non-financial indicators:
average cost / day hospital stay, average cost / bed average cost / patient, indicating the
use of beds, the average hospitalization, etc.. In each responsibility center, we believe
that decisions may be made in the short term to improve the situation. We note that at the
end of the financial year, there may not be fully reimbursed the cases treated. Taking into
account this, the medical staff of each section follows efficient spending of financial
resources.
Contributions to qualified managers at the intermediate level (section, department,
service) wide field skills. Every responsible cost center follows judicious use of available
resources within them. As we mentioned previously, future financing depends on activity
history section, department, and hospital unit.
Into disadvantages of decentralization activity area of public hospital units, in cost centers we
mention:
Could lead to local decision making, inadequate at a general level. Identifying problems
cost center at the level of hospital unit and decision-making to resolve difficulties arising,
may create discrepancies in general strategy of hospital unit. In this regard, consider the
following situation within surgery section of the 3 hospitals, where direct spending an
increasing trend in this case the head of the department decides to cut the cost of
materials identified in the patient, the hospital unit because it is against policy, the
reduction could lead to failure of the quality standard ISO 9001: 2008.
Lead to increased resource consumption as a result of certain activities. Lack of
correlation between decisions in each responsibility center we appreciate that will lead to
wastage of material and financial resources. For example, in City Hospital surgery
section are 3 rooms of, in winter, in each room are beds unused, maintenance and heating
costs each room would increase considerably if the facilities are not managed effectively
and the resources made available.
Increase the need for coordination. Individual adoption of decisions at the level of cost
center without these decisions to be connected to the overall strategy of the hospital unit,
leads to wastage of financial, material and human. At the same time, reduce the surplus
of hospitalization at the level of cost center affects the entire hospital: reducing the
number of beds leads to the reduction of the reception and treatment of patients, namely
to reduce the costs incurred with providing medical services under this funding is
allocated based on the history of activity, mainly.
Cannot be clearly identifiable cause-effect relationships, the adoption of relevant
decisions on cost reduction. After the diachronically study achieved, we conclude the
impossibility to determine the exact cause-effect relationships at the level of cost center.
5. CONCLUSIONS
Management controls evaluate the performance of decentralized institutions and analyzing the
causes of deviations between objectives and results. However, management control must identify
the real responsibility of a center where it has not achieved its objectives. Latter should be
justified to the hierarchically superior bodies to take measures such as dangers reduction,
dismissing persons responsible; closure of the facility.
73
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74
THE CURRENT REPORTING CONVERGENCE STATUS AND
THE FAIRNESS OF THE TERMS ANGLO-SAXON OR
CONTINENTAL ACCOUNTING
Adrian GENCIA
West University of Timisoara, Romania
Abstract
The evolution of the accounting profession, dating from its earliest times to present form is constantly
shaped by a complex number of socio-political factors. In recent years we are faced by an accelerating
pace of technological breakthroughs that together with the rapid change in the global economic
dynamics, have forced a review upon the financial reporting practices. The main demand for this review
is the necessity of rendering accounting information genuine to all users that are participating in the
global market. The status quo that has coexisted with the early efforts of accounting harmonization is a
dichotomy that divides reporting into two distinct systems. What is commonly referred to as Anglo-Saxon
and continental accounting systems, is recently being questioned in the light of the growing partial
adoption of the International Financial Reporting Standards (IFRS) by wealthy countries that once
defined the two system paradigm. The present paper uses a qualitative approach, by reviewing the two
system classification models, and by determining the factors that have caused the current convergence
status. Concluding upon this insight, it is established that the terms of anglo-saxon and continental are
not obsolete, but are redefined carrying less descriptive value in comparison with the 20th century
mindset.
Keywords: anglo saxon accounting, continental accounting, IFRS, harmonization, globalized market
JEL Classification: M41, M48
1. INTRODUCTION
Accounting, as a self-governed occupation does not have a very clear genesis. Archeological
findings, such as various clay tablets written in cuneiform script, indicate that of book keeping
existed as far back as the Mesopotamian Bronze Age. Mankind, even from its earliest stages of
civilization has deemed necessary to devise a system of recording its various forms of
commercial transactions. By 1494, historical evidence points out to the existence of a more
familiar form of double entry accounting, in the writings of the Italian mathematician Luca
Paciolo. From this point in time onward, book keeping in terms of debiting and crediting
accounts has went through a perpetual evolution, and by the 18th century a division between
accounting practices into two groups is beginning to take shape. The industrial revolution and the
birth of the corporation have created the need for external financing, mainly by means of share
selling. This, in turn, required a system of accounting based on a larger degree of transparency,
so that a certain bridge of trust between borrower, lender and stock market could be established.
The expansionist policies of the British Empire led to a wide spread use of this system
throughout its vast number of colonies. At the opposite end we find continental Europe, where
the implications of industrialization arguably took effect at a slower pace. According to Prof.
Walton Peter, the totalitarian culture of mainland Europe has resulted in a different form of book
keeping that formally draws its origin in the French Savary Code of 1673. The continental
system, as opposed to the Anglo Saxon one, is defined by rigorous codes of law that seek to
establish a cohesive formula for levying taxes on commercial activities. This system, also
managed to spread on a large scale in the form of the Napoleonic Commercial Code and as a
75
result of the territorial expansion of the 19th
century French Empire. The Anglo and continental
accounting heritage in the 20th
century has been further influenced by a different set of socio-
political factors. The outcome of the Great War has brought about the end of imperialistic
powers, and thus accounting schools of thought generated national reporting standards and
regulations that would answer the new contemporary social and commercial needs. In the second
half of the 20th century the academic world has invested a lot of effort into grouping accounting
practices. The differences, however, between the above mentioned systems, had created a
demand for a common accounting language that would alleviate the negative impact of reporting
inconsistencies on cross country import-export activities and stock market listings and
investment. The International Accounting Standards Committee, a nongovernmental
organization, was tasked with satisfying this demand by developing a set of financial reporting
standards that aim to become unanimously applied in a globalized world. As this process is
unfolding, the present paper seeks to establish whether the evolution of international standards
and their selective adoption in various countries, have turned the debate on the classic accounting
system dichotomy into a moot point. Once determining an answer, the paper seeks to make
recommendations – if applicable, for future scientific research in the field.
2. THE PARADIGM OF THE 20TH
CENTURY AND ITS VARIOUS DISSIDENT
FACTORS
A 20th
century literature review on the subject matter identifies two forms of classification, based
on extrinsic and intrinsic elements. The first type of classification states that accounting practices
are solely influenced by factors independent of the profession itself. The 1968 Muller model, for
example, finds that the process of setting accounting regulations is the product of political
environment, economic circumstance and other less specific factors (Nobes & Parker, 2000).
While this model, in retrospect, has gained a lot of negative attention, mainly due to its approach
lacking accounting inherent explanatory variables, it represents the corner stone for a number of
future valid classification models that take into account extrinsic aspects like a countries’ cultural
and legislative background, type of government, private party implication, or economic well
being. Opposing the extrinsic point of view, the intrinsic classification models focus on a direct
measure of accounting, by analyzing either collected or simulated econometric data pertaining to
the accounting practice in various countries (Nobes & Stadler, 2013). For a broad understanding
of the phenomena, table 1 summarizes a number of classification models, by country, based on
approach and factor of influence.
Table no.1 - Central listing of common accounting classification models with practicing countries
Approach Model Factor of
influence/classification
Practicing countries as per model
criteria
Historic Walton Summary Anglo-Saxon Tradition United Kingdom, Ireland, United States
of America, Canada, other English
speaking former colonies
Napoleonic/Continental
Tradition
France, Germany, Italy, Spain, the
Lower Countries (including the
Netherlands for a brief period of time)
other East European countries prior to
the Warsaw Convention
Extrinsic The Puxty Model
(governmental, market
and private sector
influence over
accounting practices)
Associationism United States of America (also
embodies minor liberalism elements),
United Kingdom
Legalism Germany
Corporatism Sweden
The Grey Model
(main factor of
influence: the general
Professionalism and
Flexibility
Anglo Culture – the United States of
America, United Kingdom, Ireland,
Canada
76
cultural background of
the country in question)
Optimism and Transparency Anglo Culture – the United States of
America, United Kingdom, Ireland,
Canada
Professionalism and
Uniformity
Germanic and Latin cultere in
developed countries (the model does not
explicitly name the practicing European
Latin countries)
Conservatism and Secrecy Germanic and Latin cultere in
developed and under developed
countries
Statutory Control and
Uniformity
Latin Culture in under developed
countries (the model refers to some
European Latin culture, but only
nominates countries of Central and
South America)
The Richard Model
(the influence of
governmental type and
economic philosophy
over accounting
practices)
Class: Capitalism
Type: Liberal
Philosophy:
entrepreneurship
United States of America, United
Kingdom, Ireland, Canada
Class: Capitalism
Type: Social Democrat
Philosophy: public
regulation
France, Italy, Spain
Class: Soviet
Type: N/A
Philosophy: centralized
Obsolete – carries historic value only,
the USSR and former satellite countries
Intrinsic The Nobes Model
(based on accounting
information reported
by companies listed
primary capital
markets)
Class A The United Kingdom, the United States
of America and other English speaking
former colonies
Class B Belgium, France, Germany, Italy, Japan
Modelul Doupnick
(based on information
derived from a
modified PWC
database)
Micro Group The United Kingdom, the United States
of America, the Netherlands, Belgium,
Canada and other English speaking
former colonies
Macro Group France, Italy, Germany, Portugal, Spain
While the above models base each criteria of classification on different considerations and
explanatory variables, they mostly group the same countries under a single banner. In other
words, table 1 - regardless of the factor influencing the result of any given model, mostly
identifies the United States, the United Kingdom, Ireland and Canada as being the prevalent
members of a specific group. The continental European countries, with the exception of the
Lower Countries in some cases, make up a second distinct group. It is worth mentioning that a
further division into subgroups may be applicable, in both cases, as differentiating details of each
model may require. Without getting into excessive details regarding each individual model, the
above table is a testimony behind the reason why the use of the terms Anglo-Saxon and
continental accounting may have gained such popularity over the past decades.
Given the recent international standard adoption efforts by countries found in the fourth column
of table 1, contemporary professionals worldwide question whether the terms defining the two
major groups are any longer applicable or useful. The terms Anglo-Saxon and continental are
often times regarded as past elements of an era when the practice of multiple national standards
was an impending factor to the globalization process. The negative consequences of using
multiple accounting standards in cross-state trade operations include and are not limited to
opportunity loss, distortions in managerial behaviour, activity inefficiency, etc. While these
issues were identified as early as the 19th
century (Pântea & Cristea, 2009), when a clear dividing
line between Anglo-Saxon and continental existed, recent events put this statement to the test.
77
From an economic stand point, the period immediately following the Second World War is
marked by a rapid growth in international trade, and by a large number of mergers and
acquisitions of European businesses by US corporations. During the 1960s and 1970s, more than
in any other historical period, arose the demand for a singular harmonized system of financial
reporting (Zeff, 2012). This call was answered in 1973, when the International Accounting
Standards’ Committee (IASC) consulted with accounting professional delegations from
Australia, Canada, France, Germany, Japan, Mexico, Netherlands, the UK, Ireland and the US.
The result of this meeting had no real impact on the general state of affairs for years to come, as
most Anglo-Saxon countries resented the new effort on grounds that their national reporting
standards were superior to the new international one, while continental countries were
dissatisfied with the IAS approach on various issues of taxation in respect to domestic legislation
requirements (Zeff, 2012). Therefore, the two system dichotomy has survived for most of the
20th
century without contest. The following events, however, have determined a change in the
way countries view accounting regulations and the need for an international set of standards:
- The adoption of the European Council’s IVth directive: offers regulation guidelines on
accounting principles and annual statements, with a large degree of freedom on behalf of
member state regulatory bodies. Initially publicized in 1978 and applicable to all member
states at the time, the rule is still in effect today.
- The publication of the first international accounting standards (IAS): first 39 standards
were released in 1998, followed by an additional two standards shortly thereafter. By this
time 120 accounting regulating institutions, from 101 countries, are IASC members
(Dellouite Touche Tohmatsu Limited, 2014).
- The publication of the international financial reporting standards (IFRS): on april 1st
2001, a new organization – the International Accounting Standards Board (IASB)
foundation, takes over the IASC activity. IASB makes use of the IAS’ in their existent
form, and releases an additional 15 IFRS’ by the end of 2014.
- The adoption of the European Council’s rule 1606 of 2002, and its 297(2008) and
1361(2014) amendments: rule that makes IFRS implementation mandatory on
consolidated annual statements of publicly traded companies, listed on capital markets
regulated by any member state (R EC 1606 art. 4, 2002). The rule is applicable for all
companies that meet the criteria, starting with January 1st 2005.
- The NYSE – EuorNext fusion: after a long series of fusions and mergers, the NYSE –
EuroNext conglomerate is one of the largest corporations in the capital market trade.
Currently it operates through the following subsidiaries: the New York Wall-Street stock
exchange, the NYSE Arca platform in Delaware, USA, NYSE MKT national stock
exchange, Euronext Stock exchange with floors in Paris, Bruxelles, Amsterdam, London,
and Lisbon, and NYSE Liffe secondary capital market with floors in Paris, Bruxelles,
Amsterdam, London, and Lisbon (SEC Archive Form 10-k, 2013). This particular private
sector event is very relevant to the accounting harmonization effort, especially in the
context of the EC 1606 regulation and the 2009 US Securities and Exchange
Commission’s decision to allow IFRS usage by foreign companies listed on national
stock markets without US GAAP (US general accepted accounting principles)
conversion. To this end NYSE-EuroNext is one of the largest IFRS vessels, highlighting
the need for a cohesive set of reporting standards at an unprecedented scale.
The new economic context, in the aftermath of the above mentioned events, created a dissident
opinion where academics questioned the validity of the two accounting class status quo. Two
prominent academic works, Alexander & Archer (2000) and D’Arcy (2001), raise issues even
preceding the IFRS partial adoption in the European Unions.
- D’Arcy – the research attempts a similar clustering analysis to the Doupnik model, but its
result does not clearly indentify an anglo-american category. The main critics of this
model dismiss its results, considering the information contained by the used database to
78
be erroneous. While the D’Arcy model is not unanimously accepted as a valid
classification model, its merit is raising awareness on the issue of evaluation, recognition
and consolidation of accounting information, as applied in IFRS adoptive countries
(Pântea & Cristea, 2009).
- Alexander & Archer – another attempt at accounting practice classification, based on a
comparative analysis of regulations and legislation that might influence the various
accounting practices. In regards to the United States and the United Kingdom, a number
of lasting similarities have been identified such as transparency in annual statement
presentation, principle based framework, common law background, and a trend for
external source financing (Alexander & Archer, 2000). In spite of these similarities, the
differences of regulatory nature governing the two systems are so fundamental that the
existence of a particular Anglo-Saxon group is out of the question. The argument against
this theory consists of its lacking focus on accounting practices. While accounting
regulations may very well differ, the practice itself is conducted along similar patterns
(Nobes, 2011).
Although discredited, the dissident opinion of the above research does raise awareness to the fact
that a reevaluation in accounting system classification may be required in the light of converging
to an international set of principles and regulations. To this end, even the opponents of the
D’Arcy and Alexander & Archer models agree to the fact that in the new IFRS governed world
the descriptive power of the terms continental and Anglo-Saxon has diminished in relation to
consolidated annual statements (Nobes & Parker, 2000). Further research however, does offer
mathematical based arguments that support the claim of national accounting influence still
having an active role in the decision making process of IFRS adoptive corporations (Nobes,
2011). Also, in the aftermath of the January 1st 2005 deadline imposed by the 1606(2002) EC
directive, the continental family has started to re-invent itself by reclassifying. The current state
of affairs, therefore, has a certain level of confusion associated to the topic. Further evidence is
looking to clarify the situation, and also attempts to reposition the terms Anglo-Saxon and
continental accounting in their new adaptive form.
3. PROPOSING A NEW CLASSIFICATION MODEL
Starting from the premise that in the modern world accounting systems are the ones subject to
classification, and not the countries practicing these systems (Nobes & Stadler, 2013), Sellhorn
& Gornik-Tomaszewski (2006) explore the possibility of a classification strictly based on the
degree of IFRS adoption. The need of European corporations to gain access to foreign capital
markets, especially the US stock exchange, during the years 1990-1998 came at a very expensive
price. During this period corporations were issuing consolidated annual statements both in
accord with the US GAAP and their national accounting principles (Sellhorn & Gornik, 2006).
In a sense, the CE 1606(2002) regulation is a relative answer to private sector demand, which
called for accounting normalization practices out of the necessity of double reporting cost
reduction. Shortly after the regulation’s deadline, the researchers indentify two factors that
differentiate accounting practices at European Union level: the degree of public responsibility
(depending on whether a certain company is publicly traded or not) and the type of annual
financial statement that a given economic entity is required to publish (consolidated vs.
individual). Table 2, proposes a shift from groups of countries to groups of entities, regardless of
national identity, that practice a certain accounting system based on legislation and IFRS
implementation choices (Pântea & Cristea, 2009).
79
Table no.2 - Accounting classification based on IFRS degree of adoption Consolidated annual statements Individual annual statements
Publicly traded companies Group 1: IFRS imposed Group 2:IFRS allowed or imposed,
at member state discretion
Privately held companies Group 3:IFRS allowed or imposed,
at member state discretion
Group 4:IFRS allowed or imposed,
at member state discretion
Source: Pântea & Cristea (2009: 41)
With the exception of group 1, where the accounting system is clearly defined by IFRS norms,
apparently this classification is not contradictory to the classic two system models. A closer look
upon the way certain EU member states have understood the freedom allowed under groups 2-4,
proven through their national accounting reform acts, may however bring additional insight upon
a possible reclassification within the continental sphere. One such case is the Romanian
3055(2009), succeeded by the 1802(2014), ministry of finance ordinances that have solely
adopted IFRS principles that suited national economic context, without incurring expensive
transition costs. An even more representative example is the case of Germany, where in 2009 the
federal parliament adopted Bilantzrechts-Modernisierungsgesetz (Accounting Modernization Act,
in short BilMoG). As of 2009, BilMoG decides on a number of measures in accord with IFRS,
making the entire system a bit more similar to the Anglo-American practices, as defined by
Nobes (Hellman et al, 2013). While the German reform may have produced a system that fits
with the Sellhorn & Gornic model, it certainly does not fit the previous ones. Therefore BilMoG
has kept a number of elements specific for the continental family, such as practices catered for
credit financing, focus on taxation, or conservative spirit; but it also adopted Anglo-Saxon
practices such as principle based framework established by a newly born nongovernmental
institution, similar to the US FASB, or making consolidated cash flow statements for non
publicly traded companies mandatory, similar to the UK. As the German authorities opted for a
radical and costly road to accounting modernization, favoring a national point of view instead of
IFRS adoption, BilMoG is a hybrid between Anglo-Saxon and continental professional values,
and is very selective in regard to what international values should be made norm.
As per the opinion of a different effort of general reclassification, focusing exclusively on EU
member states, the German point of view has been labeled as IFRS antagonistic (Forst, 2014).
Having the Sellhorn Gornik model as starting point, and analyzing the arguments behind the
Doubnik, Nobes and Leuz models (the last is not discussed in the current paper), the Forst model
concludes that the IFRS implementation efforts do not result in the obsoletion of the former
accounting system dichotomy, but it does highlight a number of its practical limitations. In short,
using a hierarchical cluster analysis on IFRS implementation decisions of European countries,
the Forst model determines three classes of accounting systems practiced within the EU: IFRS
antagonistic, IFRS supportive, and IFRS integrated. The correlation with the Nobes 1998 model
is as follows:
- IFRS supportive identifies with group A (EU representative: Ireland and the United
Kingdom), practicing countries of both systems having a culture of capital market
financing
- IFRS antagonistic identifies with group B (EU representative: Germany and France,
where Germany, as shown has adopted a hybrid system that migrates towards group A,
and France having a strong opinion in favor of national standards), in both cases the
credit financing culture remaining strong.
- It is assumed that the IFRS integrated group becomes a class within itself.
Due to possible change in European Union future policy on international standard adoption, and
legislation volatility at the member states level, the Forst model is based on a rather fragile
platform. This argument is strengthened by the Nobes 2013 revised model, which takes into
account the legislative factor of the examined sample. The model examines the effects of IFRS
80
implementation on a global sample, taking into account EU member states (France, Germany,
Spain, Italy, the UK), and non member states (Switzerland, Australia, Canada, South Korea, and
Hong Kong - the US not having mandatory IFRS adoption regulation for the domestic sector is
being excluded for the purposes of the present model). Nobes, therefore, like Forst identifies the
existence of two distinct groups of accounting systems – an Anglo-Saxon and a continental (this
group being made up of all EU states from the population, with the exception of the UK), but
also finds the classification to be very sensitive to changes in the legislative factor, regardless of
whether the specific applicable code of law is statutory or common (Nobes, 2013). All in all,
evidence points out to the fact that the present two system classification is not only valid with a
great number of limitations, but is subject to constant change depending on regulatory attitude
and legislative measures of each adopting IFRS country.
4. CONCLUSIONS
Examining the issue of Anglo-Saxon and continental accounting, not just in current context, but
over an extended period of time – ranging from its early formative years of the industrial
revolution to the IAS/IFRS adoption movement, we conclude that the two accounting families
have always been valid terms, but never kept a constant meaning. In fact, prior to 20th
century
events, the accounting world has highlighted the problematic issues deriving from conflicting
accounting standard usage in cross national economic activities, but did not necessarily find a
need for a rigorous classification. The official coinage of the terms Anglo-Saxon and continental
class of accounting systems is the product of the intrinsic models of classification, and is the
direct result of the need to understand and do away with reporting inconsistencies in an ever
growing globalized market. While researchers could not always agree on a unanimous set of
factors that define the two terms, it is generally accepted that a constant number of countries fall
in the category of one accounting family or another. Private sector pressure, in addition to
governmental response, by means of favorable regulations towards IFRS implementation, has
diminished the cultural factor’s impact over setting national reporting standards. In conclusion,
our research indicates that a two group system can coexist with the current stage of accounting
harmonization, but due to a fast changing legal climate and accelerating pace at which capital
markets demand a harmonized fashion for accounting information presentation, the former
characteristics of the accounting families are less descriptive. As far as its past value, the classic
dichotomy brings a generous contribution towards understanding how national culture has
chosen to interpret the international standards, and therefore selectively accept or refuse to adopt
the IFRS. Current models of classification offer further understanding, but their conclusions are
applicable only as long as the current legislative and regulatory values remain constant. As far as
future research, it is our opinion that the development in the IFRS convergence process will
frequently change the meaning of the terms Anglo-Saxon and continental, while the point of
their total obsolesce will coincide with full accounting harmonization. However, since it is
highly difficult to predict a successful deadline for IFRS implementation in domestic practices of
individual countries, a constantly updated two system paradigm remains the best educational tool
in explaining accounting practices from an international perspective.
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investigation”, Organizations and Society, vol. 26, issues 4 – 5, pp. 327 – 349.
David, A., Archer, S. (2000) ”On the Myth of ‚Anglo Saxon’ Financial Accounting”, The International
Journal of Accounting, vol. 35, vol. 4, pp.539 – 557.
Delloitte Touche Tohmatsu Limited (2014) IFRS în your pocket 2014, London: Creative Studio at
Deloitte
Doupnick, T., Perera, H. (2007) International Accounting 6th edition, New York: McGraw Hill Reader.
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Doupnick, T., Salter, S. (1993) ”An empirical test of judgemental classification of financial reporting
practices”, Journal of International Business Studies, no. 1, pp. 41 – 60.
European Council Directive no. 4/1978 ”Treaty on the annual accounts of certain types of companies”,
OJ L 222/14.08.1978: 11
Forst, A. (2014) ”IFRS Implementation in the European Union and the Survival of the Accounting
Families”, Advances in Accounting, incorporating Advances in International Accounting, no. 30, pp.
187 – 195.
Hellmann, A., Perera, H., Patel, C. (2013) ”Continental European Accounting Model Advances in
International Accounting”, Advances in Accounting, incorporating Advances in International
Accounting, no. 29, pp. 124 – 133.
Nobes, C., Parker, R. (2000) International Classification of Financial Reporting, 6th edition, USA: Person
Education.
Nobes, C., Stadler, C. (2013) ”How arbitrary are international accounting classifications? Lessons from
Centuries of Classifying in many Disciplines, and Experiments with IFRS Data”, Accounting
Organizatins and Society, no. 38, pp. 573 – 595.
Nobes, C. (2011) ”An accounting Classification Based on IFRS Practices”, Seminar Session 1, School of
Management, University of London.
Pântea, P., Cristea, S. (2009) ”Importanta clasificarilor internationale în domeniul raportarii financiare în
contextul procesului de armonizare contabilă”, revista Audit Financiar, no. 71, pp. 34-42.
Walton, P. (2015) ”Accounting in Europe, ESSEC Financial Reporting Center”, available online at:
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82
ANALYSIS OF THE LEGAL BASIS OF RESEARCH
PROGRAMMES FUNDED BY THE EUROPEAN UNION
BETWEEN 2007-2020 FROM AN AUDIT PERSPECTIVE
Alexandru BOCEAN
European Research Council Executive Agency, Brussels, Belgium
Abstract
The Framework Programmes for research funded by the EU are directly managed by the European
Commission. The first programme of EU funding for research was conducted between 1984 - 1987 with a
budget of €3.75 billion and the eighth and last programme called Horizon 2020 runs from 2014-2020
with a budget of €80 billion in current prices. The 7th Framework Programme (FP7) was conducted over
a period of seven years from 2007-2013 with a total budget of over €50 billion. The budget was a
substantial increase compared to the 6th Framework Programme (FP6), as a result of the priority given to
research in the European Union. FP7 was designed to respond to Europe's needs in terms of jobs and
competitiveness, and to maintain leadership in the global knowledge economy targets.
The administrative rules of the framework programmes for research have experienced changes with an
emphasis on simplification and cutting red tape. The main criticism of the FP7 rules took into account
their complexity, large number of procedures, long waiting times for conclusion of the financing
agreement and for receipt of financing. The research community suggests amending the concept of
funding from cost-based to the one based on results. The current paper analyses the simplification
measures included in the last two Framework Programmes (2007-2020).
Keywords: audit, rules, simplification, framework programmes, research, legal basis
JEL Classification: M420, O320, O380
1. INTRODUCTION
The EU research budget is spent for grants to research actors across Europe and outside Europe,
which are awarded on the basis of calls for proposals and peer review, with strong competition
between researchers. Many areas of research such as nuclear fusion research are so complex that
they can only be addressed at European (transnational) level with participants from different EU
Member States and other countries. The current Framework Programme for funding projects in
research and innovation, called Horizon 2020 brings together for the first time in a single
programme all the EU funds for research and innovation, focusing on the transformation of
scientific discoveries into innovative products and services that provide business opportunities
and improve people's lives. At the same time, the programme aims to drastically reduce
bureaucracy by simplifying the rules and procedures to attract more top researchers and a
broader range of innovative businesses.
2. ASSUMPTIONS OF THE RESEARCH
Several hypotheses have been proposed for the research on legal basis for the audit of EU funds
from an audit work perspective:
1. The evolution of the legal basis for the audit provisions of European funds aimed at
simplifying rules and requirements in order to reduce the administrative burden for the
beneficiaries of funding and for the monitoring and control bodies
83
2. The changes during the legal basis of a framework programme have positive consequences for
the grant beneficiaries, for the monitoring and control bodies and for project implementation in
general
3. The legal framework for European funds aimed at reducing the audit pressure on the
beneficiaries of EU funding
4. The legal basis for EU funds is elaborated by considering how the management of these funds
can be shared with the EU member states, or directly carried out by the European Commission
3. THE LEGAL BASIS FOR THE RESEARCH PROGRAMME FP7 (2007-2013) IN
TERMS OF AUDIT WORK
The EU Regulation 1906/2006 [8] on the rules for participation in actions under FP7 contains
provisions that are relevant to the audit of the grants. (Art. 18-19 [8]), types of grants (Art. 30
[8]) and the eligibility of costs (Art. 31-34 [8]).
The grant agreement is the legal instrument that establishes provisions for awarding funding, the
rights and obligations of beneficiaries (including new beneficiaries added during the action) in
accordance with the legislative framework for FP7 programme mentioned above and the relevant
EU legislation, including the EU Financial Regulation [1] and its implementing rules. The
agreement shall specify what categories of costs are based on actual eligible costs or on unit
costs, lump sums or flat rates. Art. 19 [8] mentions that a model grant agreement established
together with the Member States will be revised, if necessary also in collaboration with Member
States. The grant agreement will also include provisions on monitoring and financial control
carried out by the European Commission and its representatives and by the European Court of
Auditors.
Art. 30 [8] presents four types of financing: the actual costs, scales of unit costs, lump sums and
flat rates. Art. 31 [8] concerning eligible costs mentions the principles of co-financing and non-
profit (by deducting of any income generated by the project, at the final payment). Eligibility
criteria include:
• the costs are actual costs
• the costs are incurred during the project
• the costs comply of management and accounting practices beneficiaries
• the costs are used to achieve the project objectives in terms of economy, efficiency and
effectiveness
• the costs are recorded in the accounting of the beneficiary and contributions received from third
parties are to be found in the accounts of the third parties
• ineligible costs are VAT, other identifiable indirect taxes (excise tax), interest on loans,
provisions for possible future losses, foreign exchange losses, return on capital costs, costs of
another project, costs that are exaggerated (excessive) and irresponsible.
The term excessive costs means to pay significantly more for products, services or personnel
than the market rates for the quality or skill required. The term irresponsible costs refers to lack
of caution in choosing products, services or personnel resulting in a financial loss that could have
been avoided for the project [10, p. 54].
Average personnel costs were considered eligible (if they meet certain criteria to be detailed in
the dedicated section within the grant agreement) by decision C (2011) 174 [9] the European
Commission on three simplification measures which applied retroactively to the entire FP7
programme. The other two measures relate to flat rate financing for SME owners or other
84
individuals who do not receive salaries and the establishment of a validation committee for
research in order to manage issues related to the implementation of the entire FP7 programme.
Art. 32 [8] explains the concepts of direct costs and indirect costs. Costs can be direct or indirect
depending on the possibility of identifying the link with the action financed, in which case the
costs are considered as direct costs. Indirect costs cannot be directly allocated to the project but
these costs should have a direct link with the eligible direct costs. In this regard, an example
might be the case of a beneficiary who has two buildings A and B and the financed project is
conducted in building A, among other projects. The utility costs of the building B cannot be
considered as indirect costs to direct costs of projects carried out in building A. The cost of
utilities for building A are indirect costs that cannot be attributed directly to the EU funded
project because other activities (projects) take place in the building. For the case when indirect
costs model adopted by the beneficiary is the actual cost, a plausible calculation method is
needed for the indirect costs of the project. Beneficiaries may use a method in accordance with
their accounting practice or a simplified method, described in detail in the FP7 Guide to
Financial Issues [10, p. 70].
The grant agreement may set a maximum limit on reimbursement of indirect costs as percentage
of eligible direct costs (minus subcontracting costs and the reimbursements received from third
parties) for support and coordination actions and specific training measures. The beneficiary may
choose a tariff based on a flat rate established by the European Commission based on estimates
of indirect cost and this rate must be specified in the grant agreement.
In general, non-profit organisations, institutions of higher and secondary education, research
organisations, or SMEs cannot accurately identify real indirect costs, therefore a single rate
specified as a "transitional flat rate" was approved, which was to be applicable for grants under
proposals drawn up before 01.01.2010. The objective was to help organisations during the
transition to move from a flat-rate calculation of the indirect costs, to a method of calculating the
actual indirect costs. However, on 15.06.2009 the European Commission decided to maintain the
transitional flat rate of 60% for indirect costs for the rest of the Framework Programme FP7
(Decision C (2009) 4459 [11] European Commission).
Art. 33 [8] presents the EU contribution on research actions under the 7th programme. There are
different maximum funding limits, 50%, 75% or 100%, depending on the type of activity or
action and type of beneficiary:
• financing of 50% applies for research and technological development and
demonstration
• financing of 75% applies for research and technological development related to the
security of the development of equipment in areas where market size is very limited and for
beneficiaries that are public bodies, non-profit organisations, institutions of higher and secondary
education, research organisations, SMEs
• financing of 100% applies to the activities of the actions of "frontier research"
coordination and support actions, training and career development of researchers, networking,
dissemination and management activities of all types of actions
The financial contribution will take into account the eligibility of costs and if applicable, project
revenues, according to the principle of non-profit.
Art. 34 [8] refers to reporting and audit of eligible costs. Coordinating beneficiaries of projects
financed by the European Commission FP7 programme submit periodic reports on eligible costs,
on revenues in connection with the action, evidence of existence for the co-financing and
depending on the size of the funding, possibly an audit certificate certifying the costs claimed.
85
The audit certificate of costs claimed is only required when the aggregate value of payments to a
beneficiary (interim and final) reaches €375,000 or more for an action. For actions with a
duration of 2 years or less, there is a single audit certificate at the end of the project. The audit
certificate is not required for indirect actions entirely reimbursed by means of lump sums or flat
rates.
For public entities, the audit certificate can be issued by a competent public officer (for other
cases the auditor must be independent from the beneficiary).
The Regulations 1908/2006 and 139/2012 of the EU Council on the rules for participation in
actions under FP7 in nuclear research contain the same provisions as Regulation 1906/2006 on
the eligibility of costs and audit: Art. 29-33 are the equivalent of Art. 30-34 of Regulation
1906/2006 [8] above.
4. THE LEGAL FRAMEWORK FOR THE HORIZON 2020 RESEARCH
PROGRAMME (2007-2013) IN TERMS OF AUDIT WORK
Regulation 1291/2013 [12] establishing the Horizon 2020 research programme mentions at Art.
9 the direct management of the programme by the European Commission under Regulation
966/2012 [1]. A new element of Horizon 2020 is the concept of synergy referred to in Art. 13
[12] and specifically the synergy with Structural and Investment Funds (Art. 21 [12]). The
concept of synergy on EU programmes is addressed in a document written by a working group
led by the regional and urban policy directorate and the directorate for research and innovation in
collaboration with other directorates of the European Commission [2]. Synergy means joint and
coordinated efforts to achieve a greater impact and efficiency, for example by combining
structural funds and the Horizon 2020 in the same project or in a group of coordinated actions
(successive or parallel projects), provided that there is no double funding for the same expenses.
Actually, there is a derogation from the principle of non-cumulatively funding through the
details of the Regulation 1303/2013 [4] on the common provisions for the Structural Funds (Art.
65.11) and Regulation 1290/2013 on the rules of participation in Horizon 2020 ( Art. 37), which
exclude double funding for the same costs [2, p. 5].
Art. 29 [12] speaks about the reasonable assurance provided by control and audit work
concerning risk management, efficient operations and effective and transactions that comply
with rules and legal basis. It seeks audit missions based on a representative sample of all
programme costs and reducing administrative pressure on beneficiaries. Art. 30 [12] provides for
the possibility of audits by the European Commission representatives, the European Court of
Auditors, investigations conducted by the European Anti-Fraud Office (OLAF) on beneficiaries
of financing (including subcontractors). Audits may be launched during the programme in two
years after the final payment to the beneficiary.
The Regulation 1290/2013 [13] on the rules for participation and dissemination in Horizon 2020
brings clarifications on cost eligibility at Art. 26 [13] referring to the criteria of Regulation
966/2012, Art. 126 [1]. An entire article is devoted to personnel costs (Art. 27 [13]) which may
include costs for wages, social contributions and other related costs if provided by the legislation
in the Member States and by the contracts of employment of those working on projects funded
by the programme. For beneficiaries being non-profit legal persons, additional wage costs up to
€8,000 annually per worker are accepted if the person devotes all his productive time to the
project work. If the person works on other projects, the additional hourly rate is limited to a
value corresponding to the amount of 8,000 divided by the number of productive hours per year
complying with the requirements of Art. 31 [13] which will be detailed below. Such additional
86
salary payments must be the normal practice of the beneficiary, not just subjectively applied only
to the project funded by the programme.
The principles underlying the financing are subject to Art. 28 [13] and there is a difference from
the previous programme, namely establishing a single funding rate per funded action. In Horizon
2020 there are no longer different funding rates for different activities (research, management) or
by type of beneficiary (while in the FP7 programme there is a funding rate of 75% for
universities, research centres and SMEs and the 50% funding rate for the rest of beneficiaries).
The principle of funding on eligible costs is still valid. Project revenues and resources received
free of charge are deducted from the eligible costs. Funding may reach 100% of eligible costs
except for innovation projects and projects co-financed from other funds which receive up to
70% of eligible costs. However, 100% funding for innovation projects carried out by non-profit
entities is accepted.
Art. 29 [13] refers to indirect costs and it is to be noted the elimination of actual costs and the use
of a flat rate at 25% of eligible direct costs (minus the costs of subcontracting and costs of
resources provided by third parties and used outside the premises of the beneficiary). Indirect
costs based on unit cost or flat rate can be used if the financing agreement provides for these
arrangements.
Art. 31 [13] is dedicated to yearly productive hours that can be a fixed number or they can be
calculated by the beneficiary using a plausible method. The beneficiary must prove the actual
hours worked, and in this respect the grant agreement for Horizon 2020 contains a new provision
on the need for recording the time worked: if there is 100% allocation of people working on the
project the lack of records on hours worked is accepted by providing a statement which shows
full time dedication work on the funded project. The number of yearly productive hours is used
for the calculation of the hourly rate and personnel costs. Art. 32 [13] deals with unit costs which
can be used for people who do not receive salary, with reference to Art. 124 of Regulation
966/2012 [1]. These unit costs are set by the European Commission on statistical and historical
bases. Regarding unit costs the Art. 35 [13] indicates the possibility that the beneficiary will
develop a methodology subject to approval by the European Commission on the calculation of
costs claimed which applies to all actions where the beneficiary participates within the program.
Art. 34 [13], and Art. 36 [13] refers to the audit certificates concerning statements of costs. There
is a change in the funding threshold over which such certificates are required i.e. €325,000
instead of €375,000 in the previous program. Only one audit certificate at the end of the project
is needed, while in the previous programme an audit certificate was required for each tranche of
financing exceeding the threshold of €375,000. We can see that lowering the threshold for the
required certificate of audit (which is an ex-ante control) is also aligned with the strategy to
reduce ex-post controls that provides for the launching of financial audits within two years from
the final payment instead of the five year interval after the end of the project for audit initiation
as it was in the previous programme for 2007-2013. The rules require the auditor independence
in relation to the beneficiary in issuing audit certificates, in particular, the auditor must not be
involved in the elaboration of cost statements.
5. COMPARATIVE ANALYSIS BETWEEN GRANT AGREEMENTS FROM
RESEARCH PROGRAMMES FP7 (2007-2013) AND HORIZON 2020 (2014-2020)
The grant (financing) agreement is the legal instrument that establishes provisions for financing
costs for actions within the research program. The EU is co-financing the total eligible cost of
the action as defined in the grant agreement. The grant agreement sets the upper limit of the
87
contribution of the EU and includes, a breakdown of the estimated budget and financial
contribution for each activity performed by each beneficiary (in the case when there are multiple
beneficiaries who form a consortium on the project). However, the grant agreement does not
define the actual total amount payable to the beneficiary once the action has been completed.
The actual financial contribution is calculated in accordance with the provisions of the grant
agreement and it is based on the accepted costs of the unique beneficiary or of the whole
consortium which includes more beneficiaries.
The grant agreement consists of a core text and several annexes. There is also a list of special
clauses to be introduced in the grant agreement where necessary. The model is customized
appropriately for specific programmes in the field of research (such as for example "Marie
Curie" or "Ideas").
The financing agreement for the new Horizon 2020 programme [15] is designed in a way to
simplify the language used and to present more clearly the rights and obligations of the European
Commission and of the beneficiary. All the provisions are included in one document, as opposed
to the previous programme where a large part of the provisions were included in the Annex II.
The provisions are largely similar to those of the previous programme but there are also
differences which will be highlighted in a comparative analysis table below. Thus, the grant
agreement remains the way of funding and the reimbursement of actual costs remains in fact the
main cost model. It is observed an increased use of flat rates and unit costs and the possibility of
grants based on reimbursement of lump sums. Details and clarifications on the provisions of the
grant agreement for the 2007-2013 period are included in a separate document called Guide to
Financial Issues. Many of the details and clarifications from the Guide were adapted and
introduced inside the new grant agreement for 2014-2020.
The grant agreement for the new programme Horizon 2020 (2014-2020) provides favourable
simplifications for the financed action, such as single funding rate for an action, extended
opportunities based on flat rates (e.g. 25% flat rate for indirect costs and the elimination of actual
indirect costs), VAT irrecoverable by the beneficiary as eligible cost, decreasing the pressure of
audits by reducing the period in which an audit can be launched to two years after final payment,
reducing the number of audit certificates on the financial statements and lowering the threshold
at which this certificate is necessary, there is no more the need to reimburse the interest on pre-
financing to the EU. However, there is more emphasis on rules for subcontracting and
procurement and there are provisions related to the extrapolation of the audit findings to other
grants than those audited. Also, the grant agreement for 2014-2020 aims to increase awareness of
beneficiaries regarding the consequences of breaching rules by mentioning these consequences at
the end of the relevant articles.
88
Table no.1 - Comparative analysis between financing agreements from research FP7 (2007-2013)
and Horizon 2020 (2014-2020)
Description Horizon 2020 (2014-2020) FP7 (2007-2013)
Financing rate
Art. 5.2 [15] states that funding may reach
100% of eligible costs except in
innovation projects and those funded from
other funds which is up to 70%. However,
it accepts 100% funding for innovation
projects for non-profit entities.
The principle is to use a funding rate for
an action (following the trend of
simplification) as opposed to the FP7
programme where funding rates vary by
activities within an action.
Art. II. 16 [14] provides funding rates for
eligible costs depending on the type of
action, type of beneficiary and type of
activities of an action:
- 50% funding rate on collaborative and
networks of excellence projects on
activities of technological development
and research (except public bodies, non-
profit institutions of secondary and higher
education, research orga-nisations and
SMEs benefiting from rate 75%)
- 100% funding rate for coordination and
support actions or actions of the specific
Programme "Ideas".
- 50% funding rate on demonstration
activities
- 100% funding rate on management,
training, networking, dissemination
activities.
Eligibility
requirements
for costs
Art. 6.1 [15] provides three types of costs:
actual costs, unit costs and flat rate costs.
Art. II.14 [14] provides actual costs, the
only exceptions being average personnel
costs and personnel costs based on a flat
rate for owners of SMEs or individuals
who do not receive a salary. The
retroactive exemptions were introduced by
the European Commission decision C
(2011) 174 [9].
Additional
staff costs for
non-profit
entities
Art. 6.2.A.1 [15] allows additional
personnel costs according to Art. 27 of
Regulation 1290/2013 [15] described
above
There are no references to additional
personnel costs
Costs for
individuals
(who are not
employed but
provide
services)
Art. 6.2.A.2 [15] specifies the eligibility
criteria:
- Persons working under the supervision of
the beneficiary, its location or not
(teleworking)
- Work results belong to the beneficiary
- Costs are not much different from costs
of employees who do similar work
There are no details in the grant
agreement, there are only guidelines for
financial matters [14, p. 61] where there
are two additional requirements:
- Remuneration is based on hours worked
(i.e. actual costs) and not on results
- The costs of travel for these people are
paid directly by the beneficiary
Personnel
costs for
owners of
SMEs and
individuals
who do not
receive salary
Art. 6.2.A.4 [15] and Art. 6.2.A.5 [15]
mentions the eligibility of such costs and
of unit costs.
Art. II.14.1 [14] was updated with these
provisions after the adoption of Decision
C (2011) 174 [9] European Commission. It
describes the method of calculation that is
used and the specific programme "People".
89
Description Horizon 2020 (2014-2020) FP7 (2007-2013)
Personnel
costs
calculation
The calculation method is presented in
Art. 6.2. [15] (hourly rate calculation
includes actual costs and unit costs). For
the productive hours per year there are
several options:
- The value of 1720 hours per year
- Individual productive hours per year
- The standard number of productive hours
per year according to accounting practice
of the beneficiary
For actual costs, the hourly rate will be
calculated as the ratio between personnel
costs and productive hours of a financial
year covered by the reporting period.
The grant agreement does not include
details on the calculation method for
personnel costs, hourly rates and
productive hours. Details exists only in the
Guide to Financial Issues [10, p. 57-60].
Subcontracting
costs
Art. 6.2.B. [15] and Art. 13 [15] refer to
these costs. Items that are not present in
the Art. 7 [14] of the FP7 grant agreement:
- Acceptance of subcontracting without the
need to be mentioned in Annex I
(description of the action) and Annex II
(budget)
- The possibility to audit a subcontractor
- The following articles of the Grant
Agreement [15] also apply to
subcontractors: 35 (conflict of interest), 36
(privacy), 38 (promoting action) and 46
(promoting action)
- Procurement requires compliance with
national legislation (based on EU
directives 2004/17 / EC and 2004/18 / EC
on public procurement).
It is noted that Art. II.7 [14] in FP7 grant
agreement contains provisions that formed
the basis of Art. 13 [15] of the Horizon
2020 grant agreement and the latter
contains a number of additional
provisions.
Other direct
costs
Art. 6.2.D.1-4 [15] relates to the eligibility
of other direct costs such as travel,
equipment, supplies, and audit certificates.
It is noted that non-recoverable VAT is
eligible and there is Art. 10 [15] on
procurement rules.
There are no such details in the grant
agreement, only in the Guide to Financial
Issues [10, p. 64-68].
Indirect costs
Art. 6.2.E [15] provides a flat rate of 25%
applied to eligible direct costs of which
were subcontracting costs, costs of
resources provided by third parties and
used outside of the premises of the
beneficiary. For operating grants as
defined in Art. 121 (1) (b) of Regulation
966/2013 [1] indirect costs are not eligible.
Art. II.15.2 [14] presents methods for
calculating indirect costs:
- Actual costs
- Cost-based on 20% flat rate of if the
beneficiary does not opt for actual costs
- Cost-based on 60% flat rate only for
non-profit public bodies, secondary and
higher education institutions, research
organisations and SMEs
- Maximum 7% of eligible direct costs of
which subcontracting costs, costs of
resources provided by third parties and
used outside the premises of the
beneficiary, for coordination and support
actions
90
Description Horizon 2020 (2014-2020) FP7 (2007-2013)
Non-eligible
costs
Art. 6.5 [15] mentions other non-eligible
costs, in addition to the previous program:
bank fees on transfers from the European
Commission, costs for the period when
action is suspended in accordance with
Art. 49 [15].
However, only recoverable VAT is
ineligible cost, deductible VAT is accepted
as eligible cost.
In Art. 6.6 [15] declared ineligible costs
rejection is mentioned with reference to
Art. 42 [15] specifies general terms,
calculation and effects on rejection of
these ineligible costs.
Art. II.14.3 [14] (not eligible costs):
VAT, other identifiable indirect taxes
(excise tax), interest on loans, provisions
for future costs, foreign exchange losses,
return on capital costs, costs of another
project, exaggerated and irresponsible
costs.
Consequences
of non-
compliance
The grant agreement specifies at each
article containing obligations and
requirements, what are the consequences
of non-compliance, usually rejection of
costs or reduction of funding.
Unlike the grant agreement for Horizon
2020, the grant agreement for the FP7
programme is not clear on the
consequences of non-compliance.
Retention of
documents
Art. 18 [15] specifies the period for
keeping genuine documents and records
for five years after the final payment, or
until the completion of the procedures for
verifications, audits (including extension
of audit findings) or investigations.
Details are provided concerning the types
of documents to be kept to justify the
actual costs, unit costs, flat rate costs (such
as invoices, contracts, and accounting
records).
Recording of the worked time must be
documented and approved by the
beneficiary at least monthly. However,
alternative evidence may be accepted in
case the time recording does not provide
reasonable assurance.
There is no need for time recording for
persons working exclusively on the project
funded by the programme.
Art. II.22.3 [14] states that original
documents or certified copies must be kept
for five years from completion of the
project and that they should be available in
case of an audit.
91
Description Horizon 2020 (2014-2020) FP7 (2007-2013)
Checks,
reviews,
audits,
investigations,
Art. 22.1 [15] provides that the checks,
reviews and audits aim at the
implementing of the action and at the
compliance with the obligations of the
grant agreement. Checks are carried out by
the European Commission which may be
accompanied by external individuals or
entities. Reviews and audits are carried out
directly by the Commission or indirectly
by representatives, while the beneficiary
provides access to the necessary
information and locations.
In Art. 22.1 [15] there are provisions for:
- Checks: they involve evaluation of the
results and of the reports related to the
action
- Reviews: they can take place within two
years after the final payment, are similar to
checks, but they also include an evaluation
of the scientific and technological
developments; they can take place on the
spot; a report in the language of the grant
agreement (usually English) is elaborated,
to which the beneficiary may submit
comments within 30 days.
- Audits: they can take place within two
years after the final payment; they can take
place on the spot and on the basis of the
audit findings a report in the language of
the grant agreement (usually English) is
elaborated, to which the beneficiary may
submit comments within 30 days; the
comments of the beneficiary will be
considered in the final report to be sent to
the beneficiary; a deadline for sending the
final report is not stated, as in the previous
programme 2007-2013 which refers to a
period of 60 days.
Investigations can be conducted by the
European Anti-Fraud Office (OLAF). The
audits may be also carried out by the
European Court of Auditors.
Art. II.22 [14] provides for the possibility
of carrying out audits during the project
duration or within five years after the end
of the project by the European
Commission or by representatives of the
European Commission, by European Anti-
Fraud Office (OLAF) and by the European
Court of Auditors. The audits may focus
on financial aspects, on system aspects, or
on methods (for accounting or
management). Beneficiaries must provide
the information required by auditors and
the access to locations. Retention period
for original documents or certified copies
is five years from completion of the
project. An initial audit report is sent to the
beneficiary who can provide comments
within 30 days and a final report is issued
within the next 60 days. As a result of
audit findings the Commission may decide
to partially or fully recover the sums paid
to the beneficiary.
Art. II.23 [14] provides for the possibility
of conducting technical audits and reviews
during the project duration or within five
years after the end of the project by the
European Commission, which may be
accompanied by external experts.
Different aspects are assessed, such as
results, the relevance of objectives,
resources used, project management,
impact, dissemination plan. Audits and
reviews are performed remotely or on the
spot, while the beneficiary must provide
access to information and locations. An
initial audit report is sent to the beneficiary
who can provide comments within 30
days.
According to Art. II.23.9 [14], the
European Commission may accept or
reject the outputs (results) delivered by the
project, may propose changes to the
description of the activity (Annex I to the
grant agreement), may trigger termination
of the grant or termination of the
participation of a beneficiary within the
consortium (according to Art. II.38 [14])
and may decide partial or total recovery of
payments.
Ethical audits may be carried out within
five years from the end of the project in
compliance with the provisions for
technical audits and reviews mentioned
above.
92
Description Horizon 2020 (2014-2020) FP7 (2007-2013)
The
consequences
of the findings
during the
inspections,
reviews, audits
and
investigations
– extension of
findings
The findings during the inspections,
reviews, audits and investigations on a
grant may lead to the rejection of
ineligible costs (Art. 42 [15]), reduced
funding (Art. 43 [15]), recovery of funding
(Art. 44 [15]), or other measures described
in Chapter 6 [15] such as penalties,
suspension of payments, suspension of
implementation of the grant, the grant
termination or the termination of the
participation of a beneficiary. Following
the findings it is possible to change the
Description of work (Annex I to the grant
agreement) in accordance with Art. 55
[15].
The conclusions arising from an
investigation of the European Anti-Fraud
Office (OLAF) may result in prosecution
under national law.
The existence of systematic or recurrent
errors, irregularities, fraud or breaches of
obligations may lead to an extension of
findings for other grants (extrapolation). It
is necessary that the beneficiary is notified
of the findings and of the list of grants
affected by these findings, within two
years after the final payment of the grant
where there have been findings.
The findings can refer to eligibility of
costs and in this case the European
Commission requires within 90 days of the
notification, that the beneficiary submits
its observations and revised financial
statements for all affected grants by
calculating the necessary adjustments, or
by using the flat rate proposed by the
European Commission or by an alternative
method of correction which is duly
justified and accepted by the European
Commission. If the beneficiary does not
provide financial statements reviewed by
one of the methods mentioned above, or
the method proposed by the beneficiary is
not acceptable, the European Commission
will inform the beneficiary that the
initially proposed flat rate will be applied
by the European Commission.
The findings may relate to the inadequate
implementation of the action by the breach
of obligations, in which case the European
Commission requires the beneficiary to
submit observations on the list of affected
grants and to apply a proportional flat rate
correction proposed by the European
Commission. If after 90 days the
beneficiary does not send its comments,
does not send an alternative properly
documented flat rate correction, or the
alternative flat rate is not accepted, the
European Commission will inform the
beneficiary that it will apply the flat rate
The consequences of the findings are
presented in Art. II.23.9 [14] described
immediately above.
The extrapolation procedure is not
included in the grant agreement, being
mentioned only in the FP7 Guide to
Financial Issues [10, p. 98]. It is noted that
the Horizon 2020 grant agreement refers
to this procedure.
Art. II.24 refers to liquidated damages as
these may be requested by the European
Commission, and Art. II.25 refers to
penalties for breach of obligations of the
grant agreement.
93
Description Horizon 2020 (2014-2020) FP7 (2007-2013)
Audit
Certificate on
financial
statements
According to the Art. 20. 4 (b) (ii) [15],
there is a single audit certificate
accompanying the final financial statement
for each beneficiary requesting a grant of
€325,000 or more if actual costs or unit
costs (calculated in accordance with
accounting practices of the beneficiary)
are reimbursed.
Art. II.4.4 [14] identifies the need for an
audit certificate for the financial
statements on applications for payment
(interim, final) if the requested amount
plus the amounts in prior payments, for
which no audit certificates on financial
statements were required, is €375,000 or
more. For projects lasting two years or less
than two years, if the requested amount
plus the amount of the previous payments
is €375,000 or more, only one audit
certificate for the financial statements
accompanying the request for final
payment is necessary.
Interest on
pre-financing
There is no reference to this issue
therefore interest on pre-financing is no
longer due to the EU in accordance with
Regulation 966/2012, Art. 8.4 [15] and its
implementing rules.
Art. II.19.2 [14] has undergone a change
during FP7 stating that interest on pre-
financing is no longer due according to the
EU Regulation 966/2012 (Art. 8.4) [1] and
its implementing rules. Also Art. II.6.5
[14] is abolished as a dedicated interest
bearing bank account for pre-financing is
no longer required. The revised FP7 Guide
to financial issues states that the new rule
for interest on pre-financing shall apply as
of 01.01.2013 for all ongoing and new
grants [10, p. 92].
6. CONCLUSIONS ON THE LEGAL BASIS FOR THE AUDIT OF EU FUNDS
The research conclusions regarding the legislative provisions that are relevant to the audit of EU
funds can be highlighted by analysing the formulated working hypotheses.
Hypothesis 1: The evolution of the legal basis for the audit provisions of European funds aimed
at simplifying rules and requirements in order to reduce the administrative burden for the
beneficiaries of funding and for the monitoring and control bodies – confirmed.
A first step towards simplification is the reduction of the number of funding programmes in the
EU policies. An example is the merging of programmes for research and innovation for 2014-
2020 period. This merging leads to synergies as presented in [2], to a set of common rules, i.e. to
a common audit strategy. Also, a synergy has been established between the agricultural and
environment funding in the area of direct payments for agriculture, by Regulation 1307/2013 [7]
which provides payments for good environmental practices up to 30% of direct payments at
national level according to Art. 47 [7]. The merging approach is also valid for the structural
funds, where for the 2014-2020 period, investment funds were added and the common provisions
(Regulation 1303/2013 [4]) cover five funds compared to three funds in the 2007-2013 period,
by including funds for rural development and fishing in addition to the regional development
fund, social fund and cohesion fund.
Simplified cost options were mainly inserted for structural and investment funds through unit
costs, flat rates and lump sums. In the research programmes the mandatory flat rate for indirect
costs was foreseen for the 2014-2020 period. This approach leads to a simple calculation for
indirect costs and it will substantially reduce the errors. The actual indirect costs involve
94
complicated methods of calculation that could lead to errors, making the work difficult for
beneficiaries and auditors. The trend on simplification within the research programmes also
existed in the 2007-2013 period, for instance the European Commission proposed a simplified
method for calculating actual indirect costs. Even this simplified method that was described in
the FP7 Guide to Financial Issues [10, p 70] was subjected to errors. The simplified method is a
way of calculating the actual indirect costs, which applies to organisations that do not identify
indirect costs at a detailed level (centre, department), but they may identify indirect costs across
the organisation (at the organisation level). It is a system that can be used if the organisation does
not have an accounting system with a detailed allocation of costs and must allow the allocation
of a part of the total indirect costs across the organisation to the individual projects by using an
inductor of cost, also called a cost driver (e.g. total productive hours or total personnel costs).
Indirect costs account for a total at the whole organisation level as indirect costs cannot be
distinguished on activities, departments or cost centres. For example, the cost driver is used to
calculate the relevant rate through dividing the total indirect costs by the total number of
productive hours for all staff (it is the total number of hours for all activities not only the specific
hours for research) or by the total cost of staff. Also, the beneficiary must be able to justify the
total amount of indirect costs, the total productive hours, or the total amount of personnel costs.
Within the audit practice, many errors were also encountered regarding the indirect costs
simplified method while the flat rate method is less prone to errors.
It is to be noted that simplification initiatives took place during the course of the programmes.
Thus, for the research area, provisions for average personnel costs and flat rates for owners of
SMEs or individuals who do not receive salaries, were entered into force retroactively through
the European Commission decision C (2011) 174 [9]. Since 01.01.2013, the interest on pre-
financing should no longer be reported and paid to the European Commission under Art. 8.4 of
Regulation 966/2012.
An interesting case is the eligibility of VAT. In fact the main reason why VAT (recoverable or
not) would not be eligible is that the funding of VAT from EU funds would subsidize the
national budget of Member States, instead of financing projects to fulfil the objectives of EU
policies [17, p. 19]. In the Regulation 478/2007 [16] which amends Regulation 2342/2002
implementing the Financial Regulation 1605/2002 (later repealed by Regulation 966/2012 [1]) a
provision was inserted in Art. 172a 2.c, stating that the Authorising officer may consider eligible
the VAT that cannot be recovered by the beneficiary of the grant. Despite of this provision of
2007 that was subsequently included in Art. 126.3.c of the Regulation 966/2012 [1], for the
2007-2013 research programme, the VAT was deemed ineligible, no matter if VAT could be
recovered or not by the beneficiary of the EU research funding. In the 2014-2020 research
programme the non-recoverable VAT became eligible. Similarly, the operational programmes
financed from structural funds in Romania in the period 2007-2013, Art. 12.a of H. G. 759/2007
[5] initially provided that VAT is not eligible (with no reference to irrecoverable VAT) and later
by H. G. 1135/2011 [6], Art. 12.a the H. G. 759/2007 is amended by specifying that only
deductible VAT is not eligible. For the period 2014-2020 the general rule which applies to all
EU funds is to consider as eligible non-recoverable VAT, with limited exceptions for
programmes under the Structural and Investment Funds in the area of internal affairs (home
affairs) and within the mechanism for interconnection of Europe (MIE) (Connecting Europe
Facilities - CEF) as shown in the European Commission's Communication COM (2014) 114 [18,
p. 8].
As a conclusion on simplification of rules and legal requirements, we may underline that this
approach leads to a reduction of error rates in EU-funded projects, according to the opinion of
the European Court of Auditors [18, p. 7-8].
95
Hypothesis 2: The changes during the legal basis of a framework programme have positive
consequences for the grant beneficiaries, for the monitoring and control bodies and for project
implementation in general - partially confirmed
In general, the changes arising within the legal framework of a programme are aimed to simplify
the rules and requirements of the European funds and are beneficial for the beneficiaries. The
FP7 Guide to Financial Issues [10, p. 2] stated that the changes on reducing payment deadlines
for financing, on the abolition of duties on opening an interest bearing bank account and on the
payment of the interest generated by pre-financing to the EU, comply with the Financial
Regulation 966/2012 [1]. The same can be said about the retrospective application of changes
related to average personnel costs and funding based on flat rates for owners of SMEs and
individuals who do not receive wages according to the Commission Decision C (2011) 174 [9]
which was beneficial from the point of view of the beneficiaries. However, retrospective
application throughout the seventh research programme laid open issues for audits that were at
advanced stages of development of audit reports, where all proposed adjustments for costs
needed to be revised in order to comply with the new rules. However, for subsequent audits that
are considering the changes to simplify the rules and requirements of the EU funds, the audit
work also becomes simpler and error rates should be lower.
However, in the situation when some type of cost becomes eligible during the course of a
programme, there is a problem of insufficient budget that was initially allocated for the projects
funded within the programme, which should be supplemented in order to make the payments to
the beneficiaries of funding.
Hypothesis 3: The legal framework for European funds aimed at reducing the audit pressure on
the beneficiaries of EU funding - confirmed
It can be seen that reducing the burden of auditing starts right at the time of the request for
funding by imposing a threshold of €750,000 for the requested funding, above which there is a
need for an audit report issued by an external auditor certifying the financial situation of the
applicant for last financial year in accordance with Art. 196 of the Commission delegated
Regulation 1268/2012 [3] on rules for implementing Regulation 966/2012 [1, p. 250]. In the
research area, audit certificates of payments are required only for funding exceeding €325,000
according to Art. 207.3.a the European Commission Delegated Regulation 1268/2012 [3] on
rules for implementing Regulation 966/2012 [1, p. 258].
Further examples of reducing the audit pressure, are to be found in Art. 148.1 of the Regulation
1303/2013 [4] - common provisions for the Structural Funds. Thus, the Art.148.1 provides for
not more than one audit until the completion of the action funded for eligible costs not
exceeding:
€200,000 for regional development funds and cohesion fund,
€150,000 social fund and fund
€100,000 for maritime and fishing funds.
These thresholds comply with the principle of proportionality. Also, the paragraph 43 of the
preamble of Regulation 1303/2013 [4] states the reducing of administrative burden on
beneficiaries by performing audits mainly on managing authorities and less audits on final
beneficiaries. However, the reducing of the audit burden on beneficiaries of EU funding is
sometimes too high, as highlighted by a critical position of the European Commission regarding
the size of the non-statistical sample of only 5% of transactions for which costs have been
declared by the European Commission in a financial year. This percentage was laid down by Art.
127 of Regulation 1303/2013 [4] adopted by the European Parliament together with the Council.
96
In a document [19], including statements relating to Regulation (EU) no. 1303/2013, the
European Commission states that non-statistical sample size cannot be smaller than 10%,
because it is not sufficiently representative and may lead to poor audit assurance.
In the agricultural area the checks performed tend to reduce the interaction with beneficiaries by
using methods such as:
verification of land through Satellite,
examination of transactions,
data verification from records and databases,
cross-checks on information from various sources.
For research programmes the reduction of the audit burden is performed at both ex-ante and ex-
post level compared to the moment when a payment is made to a beneficiary. Thus, at the ex-
ante level, the rules enable beneficiaries to apply for certificates on the methodology they use in
the management of EU funding, and if such certificate is approved by the European
Commission, the audit procedures are reduced accordingly. Also, for the period 2014-2020 of
the research programme a single audit certificate is required at the final payment, only if the
financing exceeds €325,000. At the ex-post, it is observed that the 2014-2020 research
programme reduces the time interval in which an audit can be launched from 5 years after the
end of the project within the 2007-2013 programme to 2 years after final payment for 2014 –
2020 research programme. It is expected that a rate of up to 7% of the beneficiaries of Horizon
2020 (2014 – 2020 research programme) to be audited, actually covering a larger percentage of
the programme budget because the selection using sampling in monetary units, leads to the
choice of many projects with big budgets [20, p.3].
Hypothesis 4: The legal basis for EU funds is elaborated by considering how the management of
these funds can be shared with the EU member states, or directly carried out by the European
Commission - confirmed
If the EU funds management is shared with the EU Member States it is to be noted that the legal
basis comprising basic legislative acts, legislation implementing delegated acts issued by the
European Commission and the laws adopted by Member States is much more elaborate, with
clear information on the thresholds, exceptions to rules and options. Basically, the audit strategy
is included in these acts which provide clarifications regarding the choice of sample for detailed
control and audit procedures or relatively complex statistical or risk basis, as for example in the
funds for agriculture. These provisions contain technical details to enable Member States to
develop appropriate rules, under EU law. However, Member States may apply the provisions of
the European regulations in a flexible manner by choosing the appropriate financing schemes
that lead to achieving the objectives of EU policies. Shared management involves greater risk
than direct management and therefore we can say that there is a prevailing emphasis on ex-ante
controls. The legal basis provides for the establishment of specific bodies with the role of
management and control subject to system audits on their proper functioning. There is a
tendency of expanding the forms of funding based on unit costs, lump sums and flat rates, which
are more manageable, they ease the administrative burden for beneficiaries and they greatly
simplify the controls and audits, leading to the assurance that European funds management is
conducted in terms of economy, efficiency and effectiveness. In general, the rules laid down by
Member States under the EU regulations are stricter for funds with detailed specifications
regarding the categories of eligible costs.
For the research programmes managed directly by the European Commission, it is to be noted
that legislation adopted by the European institutions does not contain detailed references on audit
strategy, which is subsequently developed by the European Commission and the emphasis is on
97
ex-post audits conducted on a representative sample. European Court of Auditors noted this in
the Special Report 2/2013 on the effectiveness of implementing the 7th Framework Programme
(2007-2013) for research, stating that the reduction of ex-ante controls aimed at alleviating the
burden on beneficiaries regarding the provision of evidence before the payments [21, p. 42].
Also in this report, there is a comparison with the management conducted by national funding
agencies who carry out more ex-ante checks, although in this case the checks require a large staff
and they put pressure on beneficiaries. To reduce the pressure on the beneficiaries, some national
agencies use ex-ante controls that are focused on beneficiaries with high level of risk, in order to
alleviate the burden for beneficiaries with low risk. One can notice that in the direct management
of research programmes the actual costs model prevails. Only in the new 2014-2020 programme,
the mandatory use of 25% flat rate for indirect costs was foreseen, but the main cost model for
direct costs remains the actual cost. If regulations for the research programme are not so much
developed as those for structural funds and agriculture, this is due to the trend of simplification.
In the document Rules of Horizon 2020 [20] it is specified that the legal basis was presented as a
unique regulation for research and innovation for simplification purposes in these fields and
there is a single regulation regarding participation, which also covers the requirements on
eligibility of costs. One can also notice a highly elaborated model grant agreement for the 2014-
2020 research programme compared to the previous research programme, which includes
numerous details and explanations. Some of these details and explanations were only present in
the FP7 Guide to Financial Issues for the 2007-2013 programme, but they were not part of the
grant agreement, which actually is the legal basis for the funding. The model grant agreement for
the 2014-2020 research programme seeks to provide more accurate information to beneficiaries
about the consequences of non-compliances, regarding the obligations and regarding eligibility
requirements, which are listed immediately after each article of the grant agreement, where
appropriate.
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UN(MODIFIED) AUDIT REPORTS AND THE APPLICATION
OF THE ACCOUNTING STANDARDS – EVIDENCE FROM
THE AERO SEGMENT OF THE BUCHAREST STOCK
EXCHANGE
Costel ISTRATE
Alexandru Ioan Cuza University of Iasi, Romania
Ioan Bogdan ROBU
Alexandru Ioan Cuza University of Iasi, Romania
Abstract
We propose the analysis of the audit reports and the identification of the main reasons for which the
financial investors provide modified opinion or emphasize some aspects in the case of the companies
listed on the financial market. We obtained the audit reports from the websites of the companies that are
listed on the AeRo segment of the Bucharest Stock Exchange (BSE) or from the website of the stock
exchange and we selected the justifications of the modified opinions, as well as the issues that the auditor
emphasized. Of the 1255 observations, we identify the auditor for 565 observations and, of them, we only
had 448 reports to analyze. 11% of the reports are signed by Big 4 auditors. Approximately 20% of the
reports are qualified, the main justification being assigned to the impairment of the receivables, and
generally, by the manner in which the companies made the inventory. The going concern is also a usual
explanation for the qualified opinions. Regarding the auditor’s observations (other aspects), the most
frequent cause is also given by going concern issues. As far as we know, there has yet been no studies on
the justifications introduced by the auditors in the audit reports, on the case of the Romanian companies
listed on the AeRo segment of the BSE. The classification of the qualified opinions’ source and the
observations in the auditing report may allow analyses regarding the optimization of the companies’ and
auditors’ activity, as well as the sharpening of a company profile that does not really meet the accounting
standards.
Keywords: auditing report, AeRo listed companies, qualified opinion, other aspects in the auditors’
opinion
JEL Classification: M41, M42
1. INTRODUCTION
The auditing opinion comes to increase the trust the users have in the financial statements of the
listed companies. The auditing opinions can go from unqualified opinions, to the contrary
opinion, passing through the intermediate variants of the unqualified opinions, though
emphasizing some aspects of the qualified opinion or of the disclaimer of opinion. Tahinalis &
Samarinas (2016) notice that, in the case of listed companies, the market will ascribe informative
value both to the unqualified opinions, as well as to the modified opinions, through the
connection made with variables such as the size of the audited company or its difficult financial
situation.
Researches in the case of the audit opinions may regard numerous aspects. We will present a
descriptive analysis of the justifications that were published by the auditors in the audit reports
with modified opinion, issued for the companies listed on the AeRo segment of the BSE.
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According to the accounting standard corresponding to 2010-2014 (OMPF 3055/2009), the
intervention of the financial auditor was mandatory in the case of the companies that overpassed
two of the three size criteria (3.650.000 EUR total assets, 7.300.000 EUR turnover and 50
employees). As well, the object of the financial auditing was also represented by the financial
statements of the public entities defined by the accounting law. The list of this public interest
societies is long and includes: societies whose securities are admitted for transactions on a
regulated market (such as, nowadays, the Standard and Premium segments of the BSE); the
credit institutions; the non-banking financial companies, insurance and reinsurance; the private
pension funds, the optional pension funds and their administrators; the financial investment
services companies, the investment administration companies, the collective placement
organizations, the main depositories, the clearing houses, third central parties and the
authorized/approved market/system operators by the Romanian Securities and Exchange
Commission (ASF – Autoritatea de Supraveghere Financiară); national societies/companies;
totally or partially state owned companies (irrespective of the juridical form). In the case of the
Romanian companies, the analyses were exclusively made on the data that the listed companies
on the regulated BSE market reported. Thus, Gajevsky (2014) provides an analysis of the
relation between the auditor’s opinion and the earnings management and concludes that the
probability of the earnings management existence is diminished by the issuance of qualified
opinion and the auditing of a Big 4 member. Moreover, Robu & Robu (2015) analyze the
influence of the auditing opinion on the financial information relevance and notice that, for
example, the stock exchange is influenced by the reported net income of the companies for
which the auditing reports were unqualified. In the same context, Păunescu (2015) analyzes the
audit reports of the listed companies on the regulated BSE market (around 80 reports/year
between 2011 and 2014) and, after the identification of three auditors categories (Big 4, other
international companies and local auditors), notices that it is more probable that a small, local
auditor, to issue an auditing report that would not totally meet the ISA requirements (including
the ones that do not generate any additional costs).
As far as we know, the study we propose is the first that focuses on the auditing reports of the
companies that are listed on the AeRo segment of the BSE.
2. SAMPLE AND METHODOLOGY
The data we describe in this paper also originate in the Romanian listed companies in the AeRo
segment of the BSE. This segment was launched in 2015 and took over a significant part of the
companies that were previously listed on the RASDAQ. Though, from more than 800 RASDAQ
listed companies, more than 270 ended up on the AeRo. As well, some of the companies (few of
them) were listed on this segment of the financial market for the first time. The corresponding
financial and non-financial data of the AeRo companies were manually collected from:
- the financial statements on the BSE website (Financial Information field from the
corresponding link of each company, as well as from the annual report that was issued on the
same location;
- the annual financial reports/statements that were identified on the own websites of companies;
- annual reports posted on the website of an intermediate from the financial market
(tradeville.eu);
- the admission prospects of the AeRo market.
We limited ourselves to the 2010-2014 period, from data availability reasons, as well as due to
the fact that starting with 2010, and even until 2014, the OPFM 3055.2009 had been applied,
which makes the provided information to be unitary and comparable, from the accounting
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standards perspective. Another argument is that, until the time of the issuance of this paper, we
could merely identify the data from 2015 for a low number of companies.
We must mention that, compared to the companies listed on the regulated market, most of the
companies listed on the AeRo do not pay much attention to the issuance of the financial
information on their own websites: some of them issue nothing, some of the only provide
minimal data. This behavioral difference can have more explanations: either the companies are
not very interested in the financial transparency, either they have shareholders (eventually, main
ones) which meet their information needs straight from the source, either the pressures of the
users are insignificant regarding the issuance of more information.
Regarding the subject of this paper – the audit reports – things are a little more complicated.
Considering that the AeRo listed companies use the Romanian accounting standards (and not the
IFRS, like the ones on the regulated market), in many cases, the only available information is
represented by the financial situations set that is mandatory completed in order to place it to the
tax authority. These documents include the balance sheet, the profit and loss account and some
informative data, without details. Moreover, many AeRo listed companies in 2015 did not have
an auditor for the financial statements until 2014. For the 2013 and 2014 exercises, this can be
easily verified from the financial statements’ form placed at the tax authority, because, on the
first page, the name of the auditor must be also written. Where nothing is written, we can
suppose that no auditor has been involved. On another side, considering the size of the AeRo
listed companies, some of them understood that they could have been fulfilled with the
verification of the annual financial statements by the censors.
In Table 1, we have gathered the main elements that define the sample of the study.
Table no.1 – Observations regarding the auditors of the companies listed on the AeRo segment of
the BSE
Year
Number of
available
observations
Number of
observations
with an explicit
declared auditor
Number of
observations for
which we have
an audit report
Number of
observation with
an internal
auditor report
Number of
observations for
which we did not
identify neither the
external or internal
auditor
N % N % N % N %
2010 181 30 16.57 29 16.02 4 2.21 147 81.22
2011 256 68 26.56 55 21.48 12 4.69 176 68.75
2012 263 86 32.70 69 26.24 14 5.32 163 61.98
2013 278 168 60.43 99 35.61 32 11.51 78 28.06
2014 277 213 76.90 196 70.76 38 13.72 26 9.39
Total 1,255 565 45.02 448 35.70 100 7.97 590 47.01
The number of observations is lower in 2010 - we haven’t found auditing reports in the above
described sources. The best situation is in 2014, with almost complete information for the
companies in the sample. The percentage of the observations for which we have found explicit
auditing reports is just 35.70% (less than 70% in 2014), which does not really allow us to
generalize the eventual conclusions. Though, we hope that the high number of auditing reports
available in 2014 will allow us to appreciate that the explanations can be available for the whole
period considered in the study.
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3. FINDINGS ON THE OPINIONS IN THE AUDIT REPORTS OF THE AERO LISTED
COMPANIES’ FINANCIAL STATEMENTS
The publically issued audit report, designed for the users of the financial statements has a form
which includes standard phrases, according to the specific regulation. The main information
found in this phrases regard the (IAASB, 2015, pp. 728-733):
- the identification of the audited entity, the fact that it regards the individual or consolidated
financial statements, as well as the financial year the respective financial statements consider;
- the content of the audited financial statements – there are statements where the auditor
explicitly claims that there was no way he could audit some components;
- who assumes the responsibility for the issue of the financial statements;
- the auditor’s responsibility;
-eventually, several significant financial indicators for the description of the audited company;
-the accounting standards applied by the company (in our case, the Romanian standards in force
for the analyzed period – OPFM 3055/2009);
-a short description of the auditing process;
-an assertion according to which the audit evidence is sufficient and adequate in order to
formulate the opinion;
-the audit opinion (unqualified, qualified or contrary opinion) or the disclaimer of opinion;
-if there is a qualified opinion, a contrary opinion or the disclaimer of opinion, the justification of
the auditor’s opinion;
-eventually, the introduction of an paragraph in order to emphasize some aspects – so that these
observations would not change the opinion in any manner;
- theusers of the auditing report;
-elements regarding the compliance of the annual report with the financial statements;
-the name of the auditor that signs the report, and, eventually, the affiliation to an auditing
company;
-the signing date and place of the auditing report.
The auditors can surely add another information and explanations they consider useful and
relevant to investors. We must also consider the fact that the auditing standards evolve and,
alongside, the form of the auditing report can be completed.
3.1. Big 4 vs Non-Big 4 auditors
In the literature regarding the audit, the difference is frequently made between the auditors
affiliated to the big four auditing and consultancy companies (Big 4, still B4) and the ones that
are not affiliated to this companies (non-Big 4 – still nB4). This difference represents an
evaluation criterion of the auditing process quality (Persakis&Iatridis, 2016), though the quality
can also come from other features (the type of opinion, the auditor’s rotation, the joint audit, the
emphasizing of some earnings management attempts, the client’s features etc).
Moreover,Comprix& Huang (2015) conclude that there is no convincing evidence regarding the
fact that the auditing reports issued by small auditing companies would have a lower quality than
the ones of the Big4, though it is noticed that in the case of such audited companies, there is a
higher level of the earnings management by using the accruals.
In Table 2, we present the data regarding the auditors category that work for the AeRo listed
companies.
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Table no. 2 – The affiliation or non-affiliation to the Big4 of the AeRo listed companies’ auditors
Year
Number of companies
with explicitly declared
auditor - total
Of which
B4auditors nB4 Auditors
N % N %
2010 30 4 13.33 26 86.67
2011 68 7 10.29 61 89.71
2012 86 9 10.47 77 89.53
2013 168 21 12.50 147 87.50
2014 213 22 10.33 191 89.67
Total 565 63 11.15 502 88.85
The share of the nB4 auditors (most of them, local auditors) is predominant in the total of the
available observations and, if in the first year of the sample, the observations are less numerous,
we can benchmark the 2014 exercise, for which we have almost complete data –we can see that
the percentage has not really changed in the five observed years.
3.2. Types of opinion expressed by the AeRo listed companies’ auditors
The auditor’s mission is to verify the manner in which the companies meet the accounting
standards when elaborating and disclose the financial statements. The auditor surely does not
rebuild the financial statements, he only verifies, frequently using the survey, how the companies
applied the procedures and if those procedures were set according to the accounting standard.
The abstract of the opinion types expressed in the 448 reports we have found, regarding the
AeRo listed companies are displayed in table 3.
Table no. 3 – Opinion types of the AeRo listed companies’ auditors
Year
Observati
ons with
audit
report
Unqualified
Unqualified
with issues
emphases
Qualified
(sometimes
with
observations)
Disclaimer of
opinion (and with
observations)
N % N % N % N %
2010 29 17 58.62 8 27.59 4 13.79 - -
2011 55 35 63.64 11 20.00 9 16.36 - -
2012 69 44 63.77 12 17.39 13 18.84 - -
2013 99 56 56.57 22 22.22 20 20.20 1 1.01
2014 196 92 46.94 52 26.53 50 25.51 2 1.02
Total 448 244 54.46 105 23.44 96 21.43 3 0.67
3.3. The justification of the qualified opinions in the auditing reports of the AeRo listed
companies
According to the ISA 705 (IAASB, 2015, p.737), the auditor expresses a qualified opinion when
he concludes that “the changes, either individual or cumulated ones, are significant, but not
critical, for the financial statements or (…) he cannot reach sufficient and adequate audit
evidence in order to underlie his opinion, concluding that the possible effects of the unidentified
modifications on the financial statements, if they exist, could be significant but not critical”. A
qualified opinion is considered to be a clear proof of the auditor’s independence (Garcia-Blandon
&Argiles, 2015).
Of the 96 reports where the auditor’s opinion is qualified (see table no. 3), we selected the main
justifications brought by the auditors in order to explain their opinion. In table 4, we summarized
and ranked the main reasons for which the AeRo listed companies have been given a qualified
opinion between 2010 and 2014.
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Table no. 4 – Elements for the justification of the qualified opinion in the audit reports of the AeRo
listed companies, 2010-2014
Explanation Frequency Percentage
(%)
Receivables depreciation 33 18.44
Inventory 24 13.41
Tangible assets impairment 17 9.50
Financial assets impairment 17 9.50
The going concern issues 15 8.38
The existence of litigations that could significantly affect the
company’s financial statement 11 6.15
Inventory depreciation 9 5.03
Revaluation of tangible assets 8 4.47
Inventory evaluation 7 3.91
Assets recognition 6 3.35
The matching principle 5 2.79
Relations with affiliated individuals 4 2.23
Debts’ ranking 3 1.68
Internal procedures 3 1.68
Internal audit management 2 1.12
Accounting errors 2 1.12
Disclosure of charges 2 1.12
Fiscal problems 2 1.12
The equity content 1 0.56
Assets’ content 1 0.56
The distribution of the reevaluation reserve 1 0.56
Events after the closing date 1 0.56
Short term financial investments’ depreciation 1 0.56
Grants accounting 1 0.56
Lack of financial statements’ components 1 0.56
Procedures’ documentation 1 0.56
Other provisions 1 0.56
Total 179 100.00
From table 4, we can see that the main source of modifications that can have significant but no
critical effects on the financial statements is represented by the receivables’ depreciation: from
the auditors’ perspective, companies were not convincing enough regarding the manner in which
they have established the probable value of the receivables and, if it was lower than the nominal
value, they haven’t recognized adjustments for the depreciation at the auditors’ expectation.
Otherwise, in the case of the receivables’ depreciation we add the depreciation of other balance
sheet elements (tangible assets, financial assets, stocks and short term investments), we reach 77
appearances, which represent 43% of the total explanations.
From the accounting perspective, the notice of the depreciation is usually made during the
inventory. Sometimes, the auditor did not take part in the inventory (being, for example, named
after the inventory) and he could not either reach sufficient auditing evidence which could allow
him to confirm that the inventory was made according to the standards, or he even noticed that
the inventory requirements were not really met. Considering that the inventory is the second
reserve source (24 apparitions) and that many of the other elements have a less or more direct
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relation with the inventory (provisions, the identification and approach of some litigations,
assets’ revaluation), we can say that, in fact, most of the reserves expressed by the auditors in the
sample we selected represent the result of the inventory procedure, in a different manner
compared to the one the auditor considers complete.
A significant place (15 observations) is taken by the auditors’ estimations regarding the going
concern. Usually, in the notes, the leading staff of the company expresses its opinion regarding
the meeting or not of the activity continuity principle by the company. The administrators of the
companies are always optimistic and do not doubt the meeting of this principle, irrespective if
the company goes through hard times or not (negative equity, recent systemic losses, insolvency
status declared in court).
The auditor comes with his own opinion and the analysis he makes based on the calculated
indicators for the company can lead him to the conclusion that there is evidence suggesting the
existence of significant difficulties that put doubt on the company’s ability to continue its
activity.
A last statistic regarding the 96 reserves expressed in the analyzed audit reports: we noticed that
the average share of the B4 auditors in the sample is approximately 11%. Of the 96 qualified
reports, 23 originate in B4 auditors. This represents 23.6%, namely a higher percentage over
their share in the total sample. Would it be a proof of the fact that the B4 auditors are more
exigent or that the company they audit have more complex and harder to reflect activities in the
financial statements?
3.4. Observations that complete the auditing opinion
We used the “observations” concept as it is short and fits the tables better, but the official
concept in the auditing standards is the “emphasizing of some aspects”. According to the
auditing standards (IAASB, 2015, pp. 764), “if the auditor considers necessarily to spark the
interest over an issue presented or described in the financial statements, which, according to the
auditor’s thinking is so important that it is fundamental for the users’ understanding of the
financial statements, the auditor must include a emphasizing paragraph of some aspects in the
report (…)”.
In our sample, we identified 105 unqualified reports, but with an observation paragraph. There
are also observations made by the auditors in the qualified reports: in 44 cases, the reserve comes
with other aspects. Observations also appear in one of the situations where the auditor cannot
express his opinion. We thus have, a total of 150 reports from which it is interesting to extract
the aspects the auditor considers “fundamental for the users’ understanding of the financial
statements”. In table 5, we summarized the elements that represent the subject of the “other
aspects” paragraph in the audit report.
Table no. 5 – The main arguments for which the auditor includes, in the audit report, a paragraph
regarding other aspects, AeRo 2010-2014
Justifications of the “Other aspects” paragraph Frequency Percentage (%)
Going concern 73 30.17
Litigations 21 8.68
Affiliated 19 7.85
Taxation 18 7.44
Internal audit and control 14 5.79
Receivables’ depreciation 14 5.79
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Justifications of the “Other aspects” paragraph Frequency Percentage (%)
The exposure on one activity 13 5.37
Inventory 12 4.96
The non-auditing of some financial statements’ components 9 3.72
Revaluation 9 3.72
Consolidation 7 2.89
Stocks depreciation 7 2.89
Other provisions 4 1.65
Financial assets depreciation 4 1.65
Tangible assets 3 1.24
Transactions’ opportunity 3 1.24
Share capital adequacy 2 0.83
Documents 2 0.83
Incomes recognition 2 0.83
Other auditor 1 0.41
Errors 1 0.41
Evaluation 1 0.41
Incomplete notes 1 0.41
Comparability 1 0.41
Assets’ recognition 1 0.41
Total 242 100.00
No wonder that the reference to the going concern represents the most significant aspect on
which auditors focus in the auditing report. Negative equity (9 situations), the insolvency (13
situations), on the limit financial indicators, justify the auditor’s concern of informing the users
regarding the risks of the company’s activity continuity. Vichitsarawong&Pornupatham (2015)
cite Francis (2004) which identifies, in the case of the USA, two main auditing opinion types:
unqualified, on one hand, and with the emphasizing of the aspects regarding the going concern
on the other hand. As for the going concern, previous research revealed that, for example, in the
case of the companies going through hardship, the persistence of the loses, the classification of
the audited company in the category of the small companies, and also the auditor’s affiliation to
a small company are factors that increase the probability of expressing, in the audit report, of
concerns regarding the continuity of the activity (Gallizo&Saladrigues, 2016). An opinion that
includes an explicit reference to continuity can classify an auditing report as being more
qualitative (Lamoreaux, 2016); this opinion type can also be influenced by the quality control
that is made on the auditors by the professional organization. The opinion on continuity can be
also influenced by the auditors’ rotation. In the literature, we find articles that appreciate that it is
less probable for the auditor to mention the continuity of the activity, thus the rotation of the
auditors is not certainly a warranty of thequality of the audit (Corbella et al., 2015).
In fact, if we consider the share of the reports regarding the continuity from the total number of
the reports, we reach a percentage of 16.29% (73/448). Lamoreaux (2016) provides data from
which we deduce that, on a sample of approximately 10,000 observations regarding the foreign
companies listed in the USA, the auditing reports that mention something about going concern
reach a share of 10,29%.
The other aspects have significantly lower shares compared to the continuity: litigations are a
significant source of observations, as well as the relations with the affiliated persons or the tax
elements that can generate risks for the company.
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3.5 How is the impossibility of expressing an opinion justified?
The auditing standards (IAASB, 2015, pp. 738) show that “the auditor must refuse the
expressing of one opinion when he cannot obtain sufficient and adequate auditing evidence on
which he can base his opinion and concludes that the possible effects of undetected
modifications on the financial statements, where it is possible, could be both significant and
critical”. Also, “the auditor cannot express an opinion when, in extremely rare cases which
involve multiple uncertainties, he concludes, that, despite of the fact that he obtained sufficient
and adequate auditing evidence regarding each of the individual uncertainties, it is impossible for
him to shape an auditing opinion on the financial statement, due to the possible interaction
between the uncertainties and their possible cumulated effect on the financial statements”.
In our sample, we have 3 cases where the auditor cannot express his opinion – for three different
companies, one in 2013 (B4) and the rest in 2014 (a B4 and anB4). In the case of the company in
2013, the justification is given by the naming of the auditor after the closing of the previous
financial year and the impossibility of the accurate establishment of the truth of the initial
balances in 2013. For the two reports in 2014, the justifications are somehow similar, as both
include serious concerns regarding the continuity of the activity, with some of the most critical
consequences on the companies.
4. CONCLUSIONS
The analysis of the auditing reports can provide information regarding the way in which the
accounting standards are applied by the listed companies. Starting from 2015, the BSE has
created a sector – AeRo – designed for some smaller companies which desire the easier access to
the resources on the financial market. The financial reporting obligations of these companies are
limited to the meeting of the Romanian accounting standards – they do not use the IFRS,
according to the models of the companies listed on the regulated market.
Of a total sample of 1,255 observations (for 5 years, 2010-2014), we have identified auditing
reports in 448 cases (35.70%), but we can consider that the sample is representative, especially
due to the fact that there are more than 70% of auditing reports in 2014 (of which 11%
elaborated by B4 auditors).
Our scope was to analyze the justifications provided by the auditors when supporting the
modified opinion. 54% of the reports are unqualified and without any paragraph that emphasizes
other aspects. The other 46% of the reports represent a rich and significant data source about the
way in which some Romanian companies use the accounting standards. Thus, we have 21% of
the reports with qualified opinions and other 23% of the reports with the emphasizing of some
aspects.
The most frequent reserves are due to the inventory – evaluation of the receivables at the closing,
but the explanations that also consider other elements regarding the inventory are, overall,
significant for the justification of the reserves expressed by the auditors. We also must notice
that the share of the B4 in the qualified reports is higher than their share in the total sample.
When emphasizing other aspects, the main cause is represented by the auditors’ concerns
regarding the continuity of the companies’ activity. In fact, this element frequently appears when
justifying the reserves.
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We consider that our study can be useful to the auditors, the organizations that control the
auditors’ activity and also of the listed companies that can find evidence regarding the elements
that they should focus on in order to correctly elaborate the financial statements.
The limits of the study are especially represented by the unbalanced annual content of the
sample, and also by the lack of attempting to set up a link between the auditing opinion and other
variables such as the company’s performance, the type of activity, the shareholders…It would
also be extremely useful to make a comparison to the companies on the regulated market (though
they do not use the IFRS), and also to companies that are listed on other regulated markets in the
region.
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Accounting, incorporating Advances in International Accounting, vol 31, no. 1, pp. 11-20.
Corbella, S., Florio, F., Gotti, G., Mastrolia, S.A (2015) “Audit firm rotation, audit fees and audit quality:
The experience of Italian public companies”, Journal of International Accounting, Auditing and
Taxation, vol. 25, pp. 46–66.
Gajevszky, A. (2014), “The impact of the auditor’s opinion on earnings management: evidence from
Romania”, Network Intelligence Studies, vol. II, no. 1 (3), pp. 61 – 73.
Gallizo, J.L., Saladrigues R. (2016) “An analysis of determinants of going concern audit opinion:
Evidence from Spain stock exchange”, Intangible Capital, vol 12, no. 1, pp. 1-16.
Garcia-Blandon, J., Argiles, J. M. (2015) “Audit firm tenure and independence: A comprehensive
investigation of audit qualifications in Spain”, Journal of International Accounting, Auditing and
Taxation, vol. 24, pp.82-93.
Habib, A. (2013) “A meta-analysis of the determinants of modified audit opinion”, Managerial Auditing
Journal, vol. 28, no. 3, pp. 184-216.
IAASB (2015) Manual de Reglementări Internaționale de Control al Calității, Audit, Revizuire, Alte
Servicii de Asigurare și Servicii Conexe – ediția 2014, volumul I, IFAC și CAFR, București
Lamoreaux, P.T. (2016) “Does PCAOB inspection access improve audit quality? An examination of
foreign firms listed in the United States”, Journal of Accounting and Economics, vol. 61, no 2-3, pp.
313-337.
Păunescu, M. (2015) “The Quality of Independent Auditors Reports – Is it Room for Improvement?”,
Audit Financiar, vol. XIII, no. 10 (130), pp. 61-68.
Persakis, A., Iatridis, G.E. (2016) “Audit quality, investor protection and earnings management during the
financial crisis of 2008: An international perspective”, Journal of International Financial Markets,
Institutions and Money, vol. 41, pp. 73-101.
Robu, I.B., Robu, M.A. (2015) “Statistical Analysis of the Audit Opinion Influence on the Value
Relevance of the Financial Information Reported by the Romanian Listed Companies”, Audit
Financiar, vol. XIII, no. 11 (131), pp. 73-81.
Tahinakis, P., Samarinas, M. (2016) “The incremental information content of audit opinion”, Journal of
Applied Accounting Research, vol 17, no. 2, pp. 139-169.
Vichitsarawong, T., Pornupatham, S. (2015) “Do audit opinions reflect earnings persistence?”,
Managerial Auditing Journal, vol. 30, no. 3, pp. 244-276.
110
BANKRUPTCY RISK PREDICTION MODELS BASED ON
ARTIFICIAL NEURAL NETWORKS
Doina PRODAN-PALADE
Alexandru Ioan Cuza University, Iasi, Romania
Abstract
The purpose of this research is to study the ability of artificial neural networks to forecast the companies’
risk of financial distress. We predicted the bankruptcy risk using the associated financial ratios (overall
liquidity ratio and the overall solvency ratio) and two artificial neural network models based on the
backpropagation algorithm. The proposed models were implemented and tested using the PyBrain
software and have been applied to 55 companies listed on the Bucharest Stock Exchange during 2010-
2014. After a total of 19,944 iterations for the learning stage, the two algorithms converged and the
errors obtained during the tests reached the fixed target. The empirical results showed that the artificial
neural network models are efficient and reliable in detecting the risk of bankruptcy. The artificial neural
networks are very useful in economic analysis when the complexity of data makes it difficult to implement
functions that proper describe the link between economic variables. The use of the neural networks
method for predicting the risk of bankruptcy is less common in Romania. This study intends to fill this gap
in the literature and we believe it could be of interest not only for the companies listed on the stock
exchange, but also for investors, shareholders and banks.
Keywords: Artificial Neural Networks; backpropagation; bankruptcy risk; overall liquidity ratio; overall
solvency ratio
JEL Classification: M41, C53, G33
1. INTRODUCTION
For enterprises’ competitiveness in the fast changing economic environment of the international
market, the accurate prediction of the financial risk is one of the key factors. The globalization of
the financial markets shortened the time that policy makers should respond and take decisions
(Aydin & Cavdar, 2015). Meanwhile, the interconnections between the financial institutions
magnify the consequences of the economic crises (Glasserman & Young, 2013). As a result,
there is a high request for accurate forecasting of the firms’ financial distress and bankruptcy
risk. The accurate predicting models help the policy makers to take the right decisions and to
reduce the trading risk (Airinei, 2012). The recent financial crisis emphasized the weakness of
the traditional statistical models. If there is a significant difference between the predicted and the
audited profits, the companies would lose their credibility to investors and all stakeholders
(Bunget et al., 2014). The data analysis can be performed using diverse techniques such as
descriptive statistics, regression analysis, data mining, fuzzy logic algorithms or neural networks
models.
2. LITERATURE REVIEW ON APPLYING ARTIFICIAL NEURAL NETWORKS TO
BUSINESS
In a healthy economy there is a high request for a proper distribution of resources in the financial
markets. Nowadays firms are complex systems, the economic environment is changing very fast
and the managerial functions can no longer be performed by a single person. Managers have
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shorter time for taking decisions and evaluation of the companies became a very difficult issue,
requesting a good qualitative and risk oriented analysis. Accurate results require suitable
accounting data (Bunget, 2009), including qualitative variables, such as political and
environmental indicators, calendar anomalies and business cycles (Tjung et al., 2011) as well as
the use of proper statistical methods (Vallini et al., 2009). The research papers showed that
ANNs can forecast the companies’ financial performance with a high accuracy.
Salama Ahmed and Omar Amany developed and tested a backpropagation ANN model that
could detect and predict fraudulent financial reporting (Salama & Omar, 2014). Shang Hongtao,
Huang Jiahui, Yang Jun, and Zhou Dan studied the financial risk forewarning of the Growth
Enterprises Market (GEM) companies belonging to the Chinese Strategic Emerging Industries
(SEI). They used the stepwise regression model and backpropagation neural network (BPNN)
model. The empirical results showed that BPNN can better predict the financial risk than the
regression model (Shang et al., 2015). They found that the accuracy of NN and other Artificial
Intelligence (AI) methods is superior to that of traditional statistical methods. Compared to other
models of predicting stock prices, the empirical studies showed that ANNs have the best
performance (Ardebili et al., 2015).
Trying to discover complex patterns in data by using multiple discriminant analysis (MDA) and
ANN, Coats Pamela and Fant Franklin found that NN approach is more accurate and effective
than MDA (Coats & Fant, 1993). Yildiz Birol and Yezegel Ari performed a fundamental
analysis trading strategy on a sample of firms traded in the New York (NYSE), American
(AMEX) and NASDAQ exchanges. They showed that the neural networks have the ability to
predict future returns in NYSE/AMEX/NASDAQ securities for the period 1990-2005 (Yildiz &
Yezegel, 2010).
Traditional statistical models are valid only under some restrictive assumptions such as linearity,
the normal distribution of data and the independence of predictor variables (Alborzi et al., 2015;
Yildiz & Yezegel, 2010). As a result, they do not accurately reflect the economic processes and
environment. They cannot inductively learn from new data dynamically, thus greatly affecting
the forecasting accuracy (Khademolqorani & Farimah, 2015).
Using linear regression and ANN methods, Ahangar Reza Gharoie, Yahyazadehfar Mahmood,
and Pournaghshband Hassan estimated the stock price of the companies listed on Tehran Stock
Exchange. Comparing the performance of the two algorithms, the empirical results showed that
ANNs are more efficient than the linear regression model (Ahangar et al., 2015). John Wei-Shan
Hu, Yi-Chung Hu, and Ricky Ray-Wen Lin used a sample of daily oil prices from Brent, West
Texas Intermediate (WTI), Dubai, and International Petroleum Exchange (IPE) between 1990
and 2005 and tested the prediction accuracy of ANNs for the prices of crude oil futures. During
the empirical tests they used Elman recurrent neural network (ERNN), recurrent fuzzy neural
network (RFNN), and Multilayer Perceptron (MLP). The results showed that the RFNN has the
best predictive power and the MLP has the worst one. They also found that the predictive power
of the ANNs is better when the training time increases (Hu et al. 2012).
3. BACKPROPAGATION NEURAL NETWORKS
The human brain is endowed at birth with the ability to process information and perform
complex activities such as motion control, pattern recognition, interaction with the environment
and the ability to learn from experience. It is made of neurons which transform the inputs into
outputs. Artificial Intelligence (AI) stores knowledge, being able to use it to solve problems and
it acquires new knowledge from experience. For this purpose, it uses a language made of
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symbols that helps to seek solutions and solve the given problems. The semantic expressions
used in AI are complex, syntactic and rule-based, being similar to the natural language.
As part of the Artificial Intelligence, the neural networks are systems that use approximation
methods based on the learning process. Neural computing is a discipline that attempts to simulate
the functioning of the human brain using computer systems (Aydin, 2015), algorithms, and
combining knowledge from different disciplines such as biology, chemistry, physics,
mathematics, and economics. An important feature of these networks is that they are capable of
self-organization and therefore, to solve the problems, they do not require the implementation of
some programs with powerful algorithms. Instead, they need a training phase for building
knowledge using some specific data sets.
After storing the knowledge, through a process of “thinking” that mimics human reasoning, they
are able to solve very complex problems. Thus, starting from a training set containing a lot of
examples that are given as input values, the neural networks create a specific model based on the
given problem. Other approaches are the neuro-fuzzy systems and the hybrid models based on
genetic, fuzzy or neural networks (Pradhan et al., 2015). They are based on the fuzzification -
defuzzification process applied to the inputs and outputs of the neural network, bringing the
artificial reasoning closer to the human one.
Due to their universality, the application fields of neural networks are very diverse, from the
natural sciences, industry, agriculture, arts, and entertainment. With the help of neural networks,
the analyses and predictions for the management of companies and the capital markets can be
performed with high accuracy. Among the most frequently used applications include natural
language processing, image processing, pattern recognition, handwriting interpretation, robotics
and modeling in economy and finance.
During the business activities, highly difficult problems can be solved by experts, namely
professionals who have extensive experience. The Artificial Neural Networks (ANN) can also
gain experience after performing some iterative learning processes. They are able to solve the
highly complex problems of the economic environment, without resorting to the knowledge of
specialists.
4. BASIC PRINCIPLES OF NEURAL COMPUTATION
The neural computations are based on mathematical models taken from neurobiology, having
three main components:
Computation units
Layers made of computation units
Rules for changing the intensities of connections between the computation units
The neural computing concept was launched in 1943 in “A Logical Calculus of Ideas Immanent
in Nervous Activity” published by teachers McCulloch and Pitts (McCulloch & Pitts, 1943). In
1969, Minsky and Papert presented the neural model made of layers of neurons that transmit
information from input to output through connections similar to the synaptic connections
(Minsky & Papert, 1969). The most important step in the developing of the neuronal networks is
the implementation of learning by the backpropagation method, discovered by Werbos in 1974,
which has been still used (Werbos, 1974). Depending on how the neurons are connected, there
are three types of networks: directly connected, backpropagation (BP) or recurrent. BP networks
are common in many applications. They use a multilayer neural architecture that have at least
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one hidden layer of neurons and apply algorithms to minimize the function error. The activation
function of the hidden layers is a logistic function of the following form (Enăchescu, 2009):
f (x) = 1 / (1 + e ^ (- x))
The number of nodes in the hidden layer can be determined using the trial and error method or
by the formula method. The most used formulas are (Shang et al., 2015):
Where:
m = number of nodes in the hidden layer
n = number of nodes in the input layer
l = number of nodes in the output layer
The neural networks can be used for prediction, classification, conceptualization, data filtering
and association. To perform the evaluation of the model, the data set is usually split into three
sets: training set, validation set and test set (Badea, 2013). The accuracy of ANNs forecasts
depends on some factors with significant impact on their performance, including the selection of
input variables, the network architecture, and the quantity of data used for the training step
(Walczak, 2001). Despite other programming methods, the artificial neural network has the
ability to learn. Learning in a neural system is based on two steps. The first step is designed to
train and to accumulate the knowledge. In the next step they perform functional modifications to
the neural network nodes that modify the internal structure. A neuron or node has several input
signals and produce a single output signal, each of the entries having assigned a specific synaptic
weight.
During the learning process, the neurons change the weights of the input variables, depending on
the errors between the target output and the predicted output of the network. Based on the
weights of the neural connections, the algorithm synthesizes a specific model to solve the
problem. Through this mechanism, the neural networks can perform complex tasks, for which
the implementation of classical algorithms for processing would be very difficult.
In the typical structure of a backpropagation (BP) network type, the neurons are connected in
multiple layers. The first layer receives the input values, the last layer network provides the
output, and between these two layers there could be one or more hidden layers. Each computing
element of a neural network is assigned a combination of inputs that is turned into an output
value, based on the previously stored knowledge. During the training-learning process, the
network receives a large number of input values and adjusts the weights using the BP algorithm.
Based on the inputs, the network of artificial neurons identifies certain patterns and connections
and gets an output that will be compared with some known values, called target values. The
errors computed as the difference between the outputs of the network and target values flows
back through the hidden layers of the network. The process repeats until the difference between
the output value of the network and the target one reaches a minimum set a priori.
One drawback of these systems is the time interval required to load and store knowledge.
Another problem is the large amount of input information necessary for the learning process
(Kaastra & Boyd, 1996). In order to provide a proper solution, the system should receive
complete details of the task. As the large amount of input data needed to be processed is time and
resource consuming, the researchers are currently seeking to develop new training systems that
can operate efficiently with a smaller amount of initial knowledge.
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5. EMPIRICAL STUDY USING NEURAL NETWORKS TO PREDICT BANKRUPTCY
RISK
The paper proposes two supervised ANNs model based on the backpropagation method for
predicting the risk of bankruptcy using the associated financial ratios. The learning process is
supervised, based on a sample of inputs and outputs. The supervised learning includes error-
correction process, reinforcement learning, stochastic learning and error-convergence (Salama
and Omar, 2014). The error convergence concept means that the differences between the target
and the computed output values must be minimized. For this purpose, the algorithm changes the
weights and creates the appropriate model. The neural network models predict the risk of
bankruptcy based on the analysis of past events of the corporate activity (Prodan-Palade, 2016).
Romania is an emerging country that has a dynamic market and presents numerous opportunities
for the international economic environment, along with more risks than other developed markets.
In the last 26 years our country has experienced many transformations, transitioning from a
centralized to a market economy. Regarding the dynamic business environment, according to the
National Trade Registry Office, on 31 December 2015 in Romania there were a number of
773,781 active legal entities. During the same year, a total of 10,269 entities have involved into
insolvency proceedings, representing a rate of 1.33% of active entities, down from the previous
period with 50.38%, while 2.29%, respectively a number of 17,698 entities had suspended their
activity, meaning an increase by 12.10% compared to 2014.
Many of the entities listed on the Bucharest Stock Exchange (BSE) are in their first stage of
development and require much investment, the bank loans being among the most important
sources of funding for the Romanian companies. The problems of liquidity and debt repayment
capacity are essential in analyzing their financial balance. Therefore, we consider necessary the
building of a base knowledge and the formalization of prediction models for liquidity and
solvency of the entities, based on the concept of neural networks.
Our research proposes two prediction models, one designed for prediction the overall liquidity
ratio and the other designed for prediction the overall solvency ratio. The two indicators are
considered to be the main ones in analyzing the financial stability of an entity. The overall
liquidity ratio is expressed by the fixed assets ratio, the global financial autonomy ratio, acid test
ratio, the cash ratio and the profit ratio. The overall solvency ratio is expressed by the fixed
assets ratio, the global financial autonomy ratio and the overall liquidity ratio (Prodan-Palade,
2016).
The sample consists of 55 entities listed on BSE during 2010-2014 from the manufacturing
industry. The accounting information used for determining the financial indicators was extracted
from the companies’ annual reports published on the website of the stock exchange.
The application has three working stages for training, testing and prediction. During the training
stage the network is learning, based on the information provided at the input and identifies a
particular model. For the first stage we used the accounting input data corresponding to the
financial exercises between 2010 and 2013. The predicting and testing the accuracy of the
algorithm were performed using accounting data for the year 2014.
5.1 Building a Neural Network Model for the Prediction of Overall Liquidity Ratio
The concept of liquidity expresses the company's ability to pay its short-term debt obligations. It
is the coverage level of short-term debts by current assets. The acceptable values for this ratio
vary from one industry to another. The literature recommends a general value more than 1. On
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the other hand, there are certain cases where a too high overall liquidity ratio (current ratio), for
example much more than 2, may signify the presence of inventories and receivables that
consume significant financial resources and therefore being a negative sign for the company
(Mironiuc, 2009). Hence, in the prediction model of overall liquidity ratio we considered useful
to include the acid test ratio that takes into account the inventory levels of the entity.
The architecture of this ANN is shown in Figure 1. The proposed model consists of:
5 neurons in the layer 1 (the input layer);
19 neurons in the layer 2 (the hidden layer);
1 neuron in the layer 3 (the output layer).
Figure 1. The neural network model to predict the overall liquidity ratio
Source: own processing
Where:
R1 (Fixed assets ratio) = fixed assets/total assets
R2 (Overall financial autonomy ratio) = shareholders’ equity/total passive
R3 (Acid test ratio or Quick ratio = (current assets – inventory)/current liabilities
R4 (Cash flow ratio) = net cash flow/current liabilities
R5 (Net profitability ratio) = after-tax profit/net turnover
Y1 (Overall liquidity ratio or Current ratio) = current assets/current liabilities
Considering:
, the input neurons;
, the hidden neurons;
Y1, the output neuron;
, the weights of connections between the neuron i placed
in layer number k-1 and neuron j placed in layer k;
; , the activation function corresponding to the layer k, ,the neural
network is working in the following way:
For the layer 1(input), the input vector is R = (R1, R2, R3, R4, R5)
116
For the layer 2 (hidden): j =
For the layer 3 (output):
The number of hidden nodes is determined by the model’s complexity. As it is showed in Figure
1, entries in the system include ratios R1, R2, R3, R4 and R5 which, after the model building
process, are given different weights. Every ratio has assigned one node in the network. Each of
the 19 nodes of the hidden layer is connected to all input and output nodes. The output layer
contains a single node (Y1), which is the overall liquidity ratio.
The first step for building the model is the training period, which is the learning process when
the weights are given the optimal values. Our model uses a supervised learning process because
it is based on a pair of training data consisting of an input vector (R1, R2, R3, R4, R5) and a
desired output Y1. The learning method used in the model is backpropagation. The goal of the
algorithm is to find the proper function that can give the right output, based on the input vector.
The network’s training period tries to gather knowledge about the studied model. During the
training period, the algorithms determine the weight of each node and the type of relationship -
direct or reverse - between them. During the storage of knowledge, the network tries to minimize
the errors determined by the difference between the values provided by the model and the target
values, changing the weights. Taken together, the sets of input values that consist of the five
financial indicators values for the years 2010, 2011, 2012 and 2013 is the information that is
used by the neural network to change its structure.
The result of the test (see Figure 2) confirms the accuracy and predictive power of the designed
model.
Figure 2. General liquidity ratio, comparison between the value predicted by the neural model and
the target value
Source: own processing in Excel and PyBrain
To implement the proposed model, we used the open source application PyBrain (Tom et al,
2010) built in the Python programming language. The training error value is set to 0.0001, with a
learning rate of 0.05, using a total of 19,944 iterations for the learning stage. Following the
stored knowledge, we tested the model using the appropriate database comparing forecast values
for the year 2014 with target values for the neural network. The process is repeated using the
neurons from the hidden layers. It was found that the algorithm gave an accurate model which
can be used in the prediction analysis.
117
5.2 Building a neural network model for predicting the overall solvency ratio
The solvency or the patrimonial solidity of an entity is its ability to pay on the due dates its long-
term debts and interests. In our application, we built a neural network to predict the overall
solvency ratio (see Figure 3).
Where:
R1 (Fixed assets ratio) = current assets/total assets
R2 (Overall financial autonomy ratio) = shareholders’ equity/total liabilities
R3 (Overall liquidity ratio) = current assets/current liabilities
Y2 (Overall solvency ratio) = total assets/total liabilities
Figure 3. The neural network model to predict the overall solvency ratio
Source: own projection
As shown in Figure 4, there are 23 nodes, three input nodes, one output corresponding to the
general solvency ratio Y1, and 19 hidden nodes (Prodan-Palade, 2016). The inputs in the system
include ratios R1, R2, R3. For each of them there is one node in the network. During the model
building process, they receive different weights.
Figure 4. The solvency ratio, general comparison of the value predicted by the neural model and the
target
Source: own processing in Excel and PyBrain
An important aspect of neural networks is the convergence error that means minimizing the
differences between the model output vector obtained by learning and the target vector
containing the set of a priori given values. When the inputs values cannot explain the output
target values, namely there is no correlation between them, the network cannot build the neural
118
model and the recorded errors don’t converge. Our network is convergent and the errors reach a
local minimum (see Figures 5 and 6).
Figure 5. The evolution of errors recorded during the 19,944 training steps
Source: own processing in Excel and PyBrain
Figure 6. The evolution of moving average errors during the 19,944 training steps
Source: own processing in Excel and PyBrain
6. CONCLUSIONS AND PERSPECTIVES ON THE USE OF NEURAL NETWORKS IN
ECONOMY
The purpose of our research was to develop two neural networks of backpropagation type, a
widely used technique, to predict the overall liquidity and solvency ratios of the entity. We tested
each model’s accuracy by comparing the output of the predicted model with a set of target values
taken from the audited financial statements of entities listed on BSE. The novelty of the research
is that we used a sample of Romanian entities and for our investigation we used the recent
available financial accounting information for the years from 2010 to 2014. With the mentioned
tools, we built the neural networks using a combination of financial indicators which were
chosen based on the specialized literature and own reasoning. The research is justified by the
ever increasing request for implementation of performance algorithms that can make a correct
prediction of the firms’ evolution on the rapidly growing contemporary markets. The accuracy of
the predictions is impressive, proving once again that information technologies in symbiosis with
financial information produce value for the entities and constitute basic elements of modern
management.
Due to a broad spectrum of factors that influence a firm’s activity, the prediction of its evolution
is a difficult process. To obtain reliable results, the analysts must use complex models and a
large amount of data. If the forecasted results differ significantly from the values recorded in
annual reports, they represent an impediment to the management process. The risks are
magnified and the entity loses its credibility for the investors. Therefore, the analysis and
moving average error
119
prediction activity play a very important role, influencing the company's relationship with its
stakeholders. All these elements justify the need to develop modern and efficient methodologies
of analysis and prediction of the risk of bankruptcy.
In the research works, the financial risk is defined by several indicators, depending on the
context of the investigation. For banks, it can suggest the entity's inability to pay debts at
maturity, while for the stock exchanges companies that register losses or negative equity for
three consecutive financial exercises have high financial risk (Shang, 2015). At the same time,
the suppliers take decisions based on the solvency, liquidity and going concern ratios of the
entity, usually pursuing a less time horizon compared to the financial creditors. From the
corporate governance’s point of view, risk reduction involves increasing the liquidity and
solvency and making the best decisions to ensure a financial autonomy and a competitive
favorable position on the market. Therefore, we consider appropriate the prediction of these
indicators, namely the overall liquidity and solvency ratios. For a proper risk assessment, we
need to analyze and interpret the significant aspects of the entity’s business activity and the
ability to predict any unforeseen future events that may occur. An example is the financing
activity, which is an important part of the investment and development process. It is an essential
part of the economic policy for a company. Financing decisions must be based on the
information provided by economic and financial analysis. If an entity has provided more
alternatives for financing, the manager will have to choose the best option that fits the business
needs, according to its specific activity and long-term strategies. Since long-term financial
resources are part of the permanent capital of the entity, being in direct connection with the
entity's financial mechanisms in the long term, the selection of the most efficient variant is made
by following a detailed review process.
Conventional techniques for risk prediction have some drawbacks. For example, in the case of
the Z score function, there is no theoretical basis of strict linear dependence of the variables used
in the regression model. The application of fuzzy logic, which works with logical values in the
range zero and one, show more accuracy in prediction algorithms, but requires advanced
knowledge and experience from the practitioners. The neural networks learn by themselves, but
they need experience based on the examples provided at the input, without specifying certain
modeling functions and without resorting to specialist knowledge.
Research papers published in the field show that a well-trained neural network can predict the
financial risk with great accuracy, recording higher performance than the multivariate linear
regression algorithms (Coats & Fant, 1993; Shang et al., 2015). They can be properly
approximated by non-linear functions, using neurons placed in the hidden layers and weighting
the links between nodes. Neural networks offer valuable solutions to various complex issues of
corporates activities and they are very useful tools for stock exchanges, investors, managers and
financiers.
As future research, we plan to use neural networks to detect fraud in financial reporting. The
model that we recommend for further work should use values of certain financial ratios predicted
by the neural network, which can be compared with the target values taken from annual and
audited reports. Significant discrepancies may be a signal of fraudulent reporting activity and the
auditors can enhance their control over these items. The backpropagation method which is used
in this paper can be replaced by other methods (Enăchescu, 2009). At the same time, for
predicting bankruptcy risk we have to consider other financial and non-financial variables related
to the governance of an entity.
We should mention some research limitations: the sample was composed of only 55 entities
which were analyzed over a short time period. The efficiency of neural networks increases
120
proportionally to the amount of input data. It could be interesting to study all the Romanian
entities, including those which are not listed on the Bucharest Stock Exchange. To provide an
overview of the Romanian companies, we mention that on 31 December 2015 there were
773,781 active firms registered in Romania. A comprehensive study, taking a sample of all these
entities may be of particular interest for the economic environment of our country.
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122
COST STRUCTURE USING ABC METHOD
Sorin BRICIU
„1 Decembrie 1918” University, Alba-Iulia, Romania
Adrian Ioan ŢÎRĂU
„1 Decembrie 1918” University, Alba-Iulia, Romania
Abstract
This paper aims to summarize the ways in which accounting management fulfills its attributes and
supports decisional processes at entity level. Continuous operations of economic activity require a
continuous consumption of inputs. The trader optimizes the combination of available production factors
with the objective to maximize the resulting economic benefits. But maximizing profits can be achieved
only through cost minimization. The starting point in shaping and adapting ABC method to the specifics
of an entity represented by a good analysis and correct distribution of the major indirect costs originating
from the design phase of the product.
Keywords: ABC method, managerial accounting, expenditure, consumption, profit
Classification JEL: M21, M41.
1. INTRODUCTION
This paper is a summary of the ways in which accounting management fulfills its attributes and
supports decisional processes at entity level and modification costs are directly reflected in the
performance of organizations.
Costs behavior looked through the ABC method suggests that our interest at the origins, causes
of occurrence and the particularities of this method, focusing on the importance of the
information for ABC in the management process, the possibilities for applying the methods and
the advantages, disadvantages and recent developments of Activity Based Costing method. Our
objective was to highlight necessity of using modern methods of managerial accounting and
ABC into all economic entities from the Romanian market, depending on the activity of the
entity.
2. MODELING BEHAVIOR COSTS
"Activity" and "inducing activity" are among the most important concepts promoted by ABC
method. This method allows companies to understand precisely how and in what way a product
or activity is producing substantial profit, based on careful apportionment of costs.
ABC appeared in the United States in the late 1980s in "The hidden factory", developed and
published by Jeffrey G. Miller and Thomas E. Vollmann. The two authors has subjected to a
critical study areas and places of common costs, concluding that the main step for controlling
indirect costs is to develop a model detailing and structuring causes of these costs.
Account management system provides pieces of information which help managers in business
planning and control. Management activity includes the gathering, classification, processing,
analyzing and reporting information to the management team.
123
The usage of this method is becoming more widespread, its usage is being sustained by the
changes that economy has suffered over the last 20 years, changes which relate to refocusing the
attention of companies to manage and increase efficiency of the processes in their entirety,
unlike limited management for cost-producing centers and simplifying operations. The necessity
to consider the impact of indirect costs on the entity's performance was another good reason to
use ABC method.
ABC method is very useful to determine specific costs of standardized and repetitive processes.
From this point of view, it has an extensive application in mass production environments and for
providers of standardized services. For example, in the case of banks, this type of analysis is
used to determine the cost of goods / services (eg. Open an account, a loan, etc.) and to analyze
the profitability of the service. Similarly, cumulating more products, it can calculate the
profitability of a customer or group of costumers. Another benefit of implementing the ABC
method is the ability to estimate the real value of required resource by comparing existing
capacity (eg number of operators from one department) to capabilities needed to carry the
current volume of work. Consequently, the organization can properly size the resources
according to real needs.
The method focuses on the real nature of cost behavior, contributing to identify non-valuable
basic activities using multiple cost drivers which highlight the direct cause-effect relationship
between assignable spendings and the assigned hired bases.
Technical strategic development of the entity is called piloting. Even staff actions may be part of
the strategy of piloting. The performance of each activity levels are assessed through indicators
and developments that will be compared with previous goals, rules or results. Piloting entity is
therefore essential to achieve strategic objectives and action is primarily on behavior.
Besides the ability to calculate profit margins, to properly size capacity and to estimate the
domestic prices of transfer based on actual costs, ABC method allows identification of a
potential optimized processes, indicating redundant activities, activities with the highest costs
and facilitating internal and external Benchmarking.
But like any other method the ABC method has boundaries. Among the main weaknesses is the
difficult identification of techniques that produce valuable activities and cost drivers. Another
weakness of the method could be the difficult of applying the method when business has trouble
identifying hidden costs, while other weaknesses can be the interest in physical indicators when
the majority uses only financial indicators.
The concept method assumes that the products are not consuming resources, but activities. After
the appearance of activities accounting, it has been found that the method of the traditional
calculation costs can create significant differences in the final cost of the product. Experts say
that the differences come from the manner of expenses apportionment, practiced by traditional
accounting. The difference in cost allocation can shape the final price of outputs and also can
lead to wrong managerial decisions, the method’s promoters say that this methodology can be
applied by large companies especially the sensitive to any possibility of reduction and cost
control.
Accounting utility brought to a company by using this method can be seen in terms of a
summary document of accounting management which allows viewing gains and / or losses on
the activities and processes undertaken.
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We can draw a parallel between using the ABC method and the usage of this method with
specific financial accounting processes that identify a common element, the overall image of
development for the entity, pursued by management in order to establish objective and relevant
decisions for the proper management of the entire activity.
An important step in implementing the ABC method is to identify the main activities, the
associated costs and cost drivers. At the end of each activity, the cost of production of that phase
consists of the sum of operating costs that are involved in the production of a previous phase plus
processing costs incurred for various activities.
Regarding the cost of each activity, they can be grouped into specific direct costs and necessary
costs to conduct such activities. Direct costs will include labor costs on the manufacturing
process or control upon consumption of auxiliary materials, cost of operation and maintenance
for specific equipment, costs for depreciation of equipment, costs of energy and water, and other
costs that can directly identify with specific activities to be analyzed. Additional or auxiliary
costs include the costs of auxiliary activities that are needed to run the main activity.
First, should take into account the correlation of processes-activities-associated costs - cost
drivers, which will be further developed in the case study by allocating appropriate monetary
values.
Table no.1 - Scheme process-activities- associates costs - cost drivers
Processes Activities Associated costs Cost
Inductors
Logistic
entrances
Transport Direct costs:
- transport
- Insurance
- Special transport Stack
Per piece
Hours
Workers N
\days
Reception Direct costs:
- Main worker (handling)
- equipment
Storage Direct costs:
- Main worker (handling) -
stock’s depreciation
Production
Supplying line Main worker
(Supply)
Supplying equipment
Per piece
Workers N.
Production Main worker
Technical equipment Electric
energy
Compressed air
Water
Safety equipment
Final testing Main worker
Testing equipment
Logistic
Exits
Storage Main worker
Transport equipment
Administrative
activities
Building’s utilities Indirect workers
External services
Energy
For
products
range
Departments’ funds
Salary costs for indirect
workers
Source: own systematization
125
For all activities, the relationship will be a recurrent: Added value =logistics cost for entrances+
cost of production + logistic cost for exists + administrative cost.
The next step is the allocation of direct costs on the activities identified in the ABC method. The
next step is to allocate indirect costs to cost inductors. After discussions with employees, the
activities were determinant
Figure 1. Costs apportionment for indirect activities
1200
2400
1200
4800 4800
2400 2400
1200
2400
1200
515
1030
515
1030
2060 2060
1030
515
1030
515
1000 1000 1000
3000
7000
3800
200
1000 1000 1000
100 100 100 100 100 100 100 100 100 100200 200 200 200 200 200 200 200 200 200
490588
98
3920
1960 1960
98
490
98 98
1500 1500 1500 1500 1500 1500 1500 1500 1500 1500
1935 1935 1935
0 0
2300
0
1935
3225
1935
0
1000
2000
3000
4000
5000
6000
7000
8000
A 1.1 A 1.2 A 1.3 A 2.1 A 2.2 A 2.3 A 2.4 A 3.1 A 3.2 A 3.3
Costs apportionment for indirect activities
Admin. Wages Various materials
Indirect wages Maintenance halls
Ener./water for admin. Ener./water for production
Activ. Annexes Sourcing raw materials
Source: own systematization
To calculate the unit cost for activities and processes is necessary to determine quantitative cost
drivers, which is based technological production records, and accounting data.
126
Table no.2 - Calculation of unit cost of production by ABC method for the chosen product The cost of
activities
independent
Main Costs
Indirect
costs
Total
cost
Inductor
Value
Cost/Inducto
r
Inductor’s
value/
product’s
value
A1.1 10000000 6940
1000694
0 120 palet 833391,16 Eur/stack 416694,58
Eur/Stac
k
A
1.2 240000 8753 248753
1.000.000
buc
0,25 Eur/piece
0,0000002
5
Eur/piec
e
A
1.3 18000 6548 24548 5 mun 4909,6
Eur/worke
r 981,92
Eur/
worker
10258000 15693
1027369
3
1.000.000
buc 4919,86 Eur/piece 417677,5
Eur/piec
e
A2.1
553000 23480 576480 15 m 38432 Eur/ piece 2562,13
Eur/
worker
A2.2 140000 23480
163480 3 sch 54493,33 Eur/ piece
2,024.76 Eur/sch
A2.3 19800 0 23480
221480 10 m 22148 Eur/ piece
1,104.72
Eur/
worker
A2.4 150000 5528 155528 120 zile 1296,06 Eur/days
3,690.35 Eur/h
199900
0 279620 2278620 9381,96
A3.1 650000 6940
656940 600 h
1094,49 Eur/h
1094,49 Eur/h
A3.2 980000 9553
989553 600 h
164,93 Eur/h 109,95 Eur/h
A3.3 31000 6548
37548 600 h
6,26 Eur/h 2,08 Eur/h
2223000 302661
2525661 309,9 1206,52
Total production cost 428265,98
Produced guarantee
1000000
Unit production cost
0,43
Source: Own calculi
The calculation was made for the year 2015, recent Euro currency used. Converted in Ron,
product price is 1.94 ron/ piece from the specified range.
3. CONCLUSIONS
Establishing managerial decisions involves the use of modern tools for measuring performance,
the main objective for the company's performance it is determinant by calculating costs using
modern methods.
We believe that ABC fulfills the entities needs to properly determine production costs. The
method provides relevant information regarding the cost provides solutions to reduce costs but
also it can determine the entity's performance.
Continuous operations of economic activity requires a continuous consumption of inputs. The
trader optimizes the combination of available factors of production with the objective to
127
maximize the resulting economic benefits. But maximizing profits can be achieved only through
cost minimization.
Meanwhile, the production cost is an essential criterion in strong decisions regarding production
of new products. Only through a simultaneous accurate estimation of production costs and
selling price of goods appreciate if incomes will exceed expenses and whether it is possible to
obtain an acceptable rate of profitability.
REFERENCES
Allen, B.R., Brownlee, E.R., Haskins, M.E., Lynch, L.J., Rotch, J.W. (2004) Cases in Management
Accounting and Control Systems (4th Edition), Prentice Hall.
Bouqiun, H. (2008) Controle de gestion, Presses Universitaires de France, Paris.
Briciu, S., Căpuşneanu, S. (2010) “Effective cost analysis tools of the Activity-Based Costing (ABC)
method”, Annales Universitatis Apulensis, Series Oeconomica, nr. 12 (1), pp. 25-35.
Briciu, S. (2006) Contabilitatea managerială. Aspecte teoretice şi practice, Editura Economică,
Bucureşti.
Briciu, S., Căpuşneanu, S., Rof, L.M., Topor, D. (2010) Accounting and management control.Entity
performance assessment tools, Editura Aeternitas, Alba-Iulia
Căpuşneanu, S. (2006) “Dashboard and Firms Performance Optimization Using Piloting Indicators”,
Theoretical and Applied Economics, no. 5, pp. 85-90.
Căpuşneanu, S. (2008) Elements of cost management, Economic Publishing House, Bucharest.
Cokins, G. (2009) Performance management: integrating strategy execution, methodologies, risk and
analytics, John Wiley & Sons Inc., Hoboken, New Jersey
Ebbeken, K., Possler, L., Ristea, M. (2000) Calculaţia şu managementul costurilor, Editura Teora,
Bucureşti.
Ionascu, I., Dinamica doctrinelor contabilitatii modern, Editura Economica, Bucuresti, 2003,
Kaplan, R.S., Atkinson, A.A. (2010) Advanced management accounting, PHI Learning, New Delhi.
Hughes, M. (2016) The Simple Analytics of Matrix Accounting, Activity-Based Costing, and Linear
Programming
128
HIDDEN COSTS OF SELF-MANAGEMENT SERVICES OF
ACCOUNTING ACTIVITY IN A COMPANY
Gary COKINS
SAS Institute Inc., Cary, North Carolina, USA
Sorinel CĂPUŞNEANU
„Dimitrie Cantemir” Christian University, Bucharest, Romania
Dan Ioan TOPOR
“1 Decembrie 1918”, Alba-Iulia, Romania
Oana Raluca IVAN
“1 Decembrie 1918”, Alba-Iulia, Romania
Abstract
This article addresses some relevant aspects of the hidden costs of self-management services of
accounting activity within an accounting department of a company. Based on this objective, the authors
conducted a study using a questionnaire and the results were analyzed and interpreted. The hidden costs
of self-management of business accounting services observed in the accounting department of the
company have been assessed and the causes of their generating sources were identified and
analyzed. The debate of these hidden costs involved the treating of existing notions in the accounting
language but unexplored enough by the specialists in the area. There were also presented and analyzed
the causes of the hidden costs of self-management of accounting activity, and a reporting document for
failures arising from the case study. The article ends with the authors' conclusions regarding the hidden
costs of self-management services of accounting activity.
Key words: hidden costs, financial reporting, company, owners, managerial accounting, management
JEL Classification: M41
1. INTRODUCTION
From the beginning we will say that the theme of this approach is valid both for public entities as
well as economic ones, addressing the conceptual unit and each type of activity can be found in a
certain extent. In addition to the relevance of some aspects we will use practice or interest in the
profitability of a business, but it is equally important result for a public entity, where the budget
and budget implementation are significant.
The success of a profitable and lasting business, but also of public activity largely depends on its
management who must assume the primary responsibility to propel the entity into the orbit of the
specific market segments that it will guarantee to provide a important place in the top rated
companies in the market or the most popular public entities who have duties. The management
team selected by strict criteria must prove notable experiences and demonstrate the viability of
its decisions, whether short term or long term decisions. It often happens that the management of
a company fails to deal with unusual situations arising from money’s management company, due
to weak or inadequate accounting practices. More specifically, the information provided by
accounting is typically not accurately or incompletely measured and reported, and this
contributes to the failure of subsequent decision-making. Most small companies, but also some
larger companies, prefer to practice "house accounting" and use its own staff to provide
accounting. This is because the owners are afraid of their data privacy and security. As a result,
129
they try to hold control over the information provided. Some entities practice this approach since
they do not have sufficient financial resources to hire external accounting services, or they do not
trust the services provided by third parties. Whichever chosen option by the management,
regardless if the accountants are more or less experienced; the company finances can not be left
to chance. All the issues mentioned are a result from hidden costs whose causes we will discuss
in this article. Our main objective is to highlight the hidden costs of self-management services
related to accounting activity in the accounting department of a company.
2. LITERATURE REVIEW
The literature brings to the fore a number of studies on hidden costs, the most significant of
which was marked by testing hidden cost-performance method and development proposal which
belongs to Professor Savall H. (Savall and Zardet, 1992). Any cost element that lacks one of the
three fundamental properties (has a known label which is accurate and normal; it is measured
accurately based on known rules; it is monitored in order to verify progress based on a fixed
lens) can be called hidden cost (Savall and Zardet, 1991). Choosing objectives that will
determine the costs focuses on what is visible and tangible, such as: production, means of
exploitation or responsibility centers. Later, this definition is extended by a more consistent
formulation, which is called the hidden costs when they do not appear explicitly in the
information system of a company, such as for example: budget, financial accounting or
management accounting, or in the journal or other document summary (Savall and Zardet, 2008).
Hidden costs do not allow a quantification of results and deviations, but may allow for an
analysis of their causes at the root assembly as a phenomenon closely linked to the high
performance of an entity (Briciu and Căpuşneanu, 2011).
Based on this definition, in the literature there have been other approaches of the concept of
hidden costs that will be played in terms of their identification through to the accounting
information systems and the factors that lead to the onset or at the level of entity. Thus, some
authors believe that the hidden costs are generated by official formal procedures employed
outside the company and achieve a considerable level (Ionaşcu et al., 2003). Hidden costs
presents two categories: the hidden costs that are included in visible costs and potential hidden
costs represented by the presence of internal malfunctions, such as the existence of virtual costs
of corresponding subtasks (Ionaşcu et al., 2003). The causes of these potential costs can be
external in nature, such as: malfunction of public services, strikes, failure of the judiciary
institutions to resolve disputes in a considerable period of time or solutions that could not be
provided etc. Other authors think that there are other costs formalized interests to managers or
administrators such as: waiting interval between two batches, inadequate design, poor quality,
absenteeism from work unit and others (Iacob et al., 2007), and large buffer stocks that consume
valuable resources and generates hidden costs (Salawati et al., 2012). Identification and
monitoring of hidden costs is very important because they have a direct impact on the
performance of a company (Albu and Albu, 2003).
General failures are caused by certain anomalies, perturbations of deviations between ideal
functioning and actual operation of the company, identifying the following elements:
absenteeism, staff turnover, accidents at work, quality defects and loss of productivity directly
(Savall and Zardet, 1991). With the advent of these elements are found and the emergence of
hidden costs related to: time management, working conditions, application of strategies,
integrated training and internal communication or coordination of various activities. The
organizations’ socio-economic theory is focusing on the high performance of the company or the
productive capacity of entities to manage their material resources, physical, monetary and
human. Correcting these failures is the monetary aspect and involves hidden costs: loss due to
130
lower operating level, extra pay personnel compensation, additional external services, decrease
of product quality etc. All these disturbances lead to a consumption of financial or human
resources, as follows: decrease product quality leads to redesign products by mobilizing
additional staff or, as in the case of absenteeism, waiting times between batches generate
financial losses (Iacob et al., 2007).
In the managerial accounting we can identify the following hidden costs: opportunity costs (costs
of lost opportunities, costs of lost profits), environmental costs (Betianu, 2007), quality costs
(Giakatis et al., 2000), subactivity costs (Taicu and Roman, 2009) etc.
3. METHODOLOGY OR RESEARCH
3.1. Research questions
The purpose of this article is translated by the authors’ attempt to identify some hidden costs of
self-management services of business accounting activity from the accounting department of
some Romanian economic companies. In this sense, we were trying to find answers to a series of
questions as follows:
1. Is it possible to identify the hidden costs of self-management accounting activity in the
accounting department?
2. Where are the hidden costs of self-management accounting activity within your department?
3. Can you identify the root causes of the hidden costs of self-management accounting work?
4. Can you control the hidden costs of self-management accounting activity?
3.2. Instrumentation
The design of our research focuses on the theoretical approach of the implications arising from
development problems described by questions launched at the beginning of the study. For the
relevance of the study were used as instruments: induction, deduction and questionnaire which
was considered one category of respondents to launched questions namely, specialists in
accounting, grouped into two types (heads of departments and accountants).
3.3. Sample and data analysis
The study sample was drawn from a number of 1424 persons, according to the categories
mentioned above. After collecting the questionnaires and conducting data centralization, the
situation is as follows (table 1):
Table no.1 - Situation of responses on respondents categories
Questions
Respondents
Heads of
departments Accountants
Yes (%) No (%) Yes (%) No (%)
1. Is it possible to identify the hidden costs of self-
management accounting activity in the accounting
department?
87.57 2.43 86.29 13.71
131
Questions
Respondents
Heads of
departments Accountants
Yes (%) No (%) Yes (%) No (%)
2. The hidden costs of self-management accounting
activity within your department come from:
2.1.Reporting inaccurate information to management
2.2. The occurrence of errors in the calculation of
salaries and other accounting documents
2.3. Inadequacy in meeting deadlines
2.4. Using inexperienced accountants
2.5. Other causes
50.31
7.45
9.00
22.68
10.24
0.94
49.69
5.59
7.76
18.64
16.15
1.55
65.78
20.50
24.33
10.34
10.16
0.45
34.22
9.53
8.63
7.62
7.08
1.36
3. Can you identify the root causes of the hidden
costs of self-management accounting work? 54.03 45.97 81.30 18.70
4. Can you control the hidden costs of self-
management accounting activity? 54.65 45.35 77.49 22.51
Source: Authors’ calculation
As can be seen, the largest share of the two categories of specialists surveyed suggests
identifying, analyzing and combating hidden costs. Given this situation, our study results
empirically continued to the identification, analysis and presentation of preventive measures
which are described below. In terms of graphics, situation analysis of the questionnaires (figure
1) is as follows:
Figure 1. Situation of positive responses obtained on two categories of specialists
87,5786,29
50,31
34,22
54,03
18,7
54,65
22,51
0
10
20
30
40
50
60
70
80
90
Question 1 Question 2 Question 3 Question 4
Heads of departaments
Accountants
Source: Authors’ representation
4. IDENTIFICATION OF HIDDEN COSTS OF SELF-MANAGEMENT SERVICES OF
ACCOUNTING ACTIVITY IN A COMPANY
Based on findings by analyzing data provided by the questionnaire applied to specialists it has
been trying to explain the hidden costs of self-management of accounting activities identified in
the accounting department, as follows:
4.1. Inaccurate reporting of information to management
Accounting data flow tracking should become priority number one for each manager.
Accountants’ duties should be well separated from those of managers, but full responsibility for
the correctness and accuracy of accounting data returns to the accountant. All accounting
132
operations must be properly recorded in the accounting records and tracked monthly by the
accounting officer and the manager. The goal is to eliminate possible errors of registration or
creeping ambiguity of accounting information reporting. The inaccuracy of the data provided can
lead to the misinterpretation of results and issues that may affect the company's image and
reputation. Based on accurate and well tested information, accountants can submit the
information to managers. The information should then result in better decisions for the short or
long term business finances.
4.2. The occurrence of errors in the calculation of salaries and other accounting documents
All economic entities, regardless of size, should have an accountant or accounting department
very well organized to avoid mistakes in the calculation of employees’ salaries. The accuracy
and timeliness of calculating salaries depend on many aspects that can disrupt the smooth
conduct of internal activities. Employees who do not receive their salaries on time correctly will
not be sufficiently motivated to do their jobs effectively, thus giving rise to lower labor
productivity. This affects the families that they were dependent triggering other social issues that
are not intended to be manifested and continued, thus affecting one of the basic principles of
accounting i.e. going concern. Therefore, the accounting department must have constituted an
effective and well-qualified staff to meet these challenges monthly. Rewarding staff in charge of
these activities can be one of the keys to successful elimination of errors or mistakes in counting
and calculating salaries, thus eliminating any dysfunctionality in a company.
4.3. Maladjustment in meeting deadlines
Running a business is a very serious work and requires much time to head to the desired
direction. Activity involves making payments and receipts by various third parties such as
suppliers, banks, state, customers etc. If accountant is not perfectly adapted to these situations, it
will block the normal activity of the company, thereby obstructing other current menus activities.
All these situations can have serious repercussions on the company and its financial stability and
corrupt decision-making process in key situations for the entity. Thus the reporting of data to
other organisms will be affected, and the company's image will be obsolete before the occurrence
of prolonged hearings processes. So can we say that it is incompetence or negligence?
4.4. Use of inexperienced accountants
As is well known many economic entities pay a lot of money to accountants who are more or
less competent. Is it not better to employ well-trained accountants based on an impressive CV
that can guarantee the normal course of accounting activities, giving them a good salary, than to
employ accountants with less experience, paying them good wages, but can not ensure normal
course of accounting activities? Do we think that we only save money? Or do we want the
company to operate normally and efficiently?
4.5. The use of accounting software updates
These costs can be found especially after the implementation of accounting software when a
regular accountant needs for writing and providing information to the management of a data
update. For this, most made software companies do not provide free additional services such as:
regular updating of software or additional software components. These costs for a company can
be translated as hidden costs, especially knowing the growing need for information which must
have a company to ensure efficient decision. In other words, the cost of implementing software
attracts mostly hidden costs as mentioned above.
133
4.6. Participation in training information or improvement courses for accountants
Business environment is constantly moving and adapting to all legislative requirements
occurring during the activity of a public or company. All changes in the accounting and tax
legislation with direct or indirect effects on the entity's activity should be considered by directly
informing accountants or through their participation in information courses, training, updating or
improvement. All of them include some hidden costs due to higher total costs involved monthly
or annual unexpected and to some extent affect the final result.
5. EVALUATION OF THE HIDDEN COSTS OF SELF-MANAGEMENT
ACCOUNTING ACTIVITY IN THE ACCOUNTING DEPARTMENT. IDENTIFYING
THE CAUSES AND SOURCES OF GENERATING HIDDEN COSTS
The evaluation of hidden costs is realizing as follows:
Over salaries or additional wages are caused by errors made in preparing the supporting
documents (payroll, cost sheets, other documents) or staff rotation caused by changes made by
function, when other responsible (managers and specialists) to take over duties of subordinates
or colleagues of them. So the entity is obliged to pay additional amounts for the performance of
additional tasks by management or other executive persons. The general causes of production
include: changes in function due to absenteeism, lack of staff or lack of experience, taking over
tasks governing persons due to overload subordinates tasks etc.
Over time or additional time are generated by some additional activities that do not add value to
the department. They give rise to costs because the infrastructure and equipment working in the
department are not used properly. Causes of production is due to: errors (errors detected due to
staff negligence), unnecessary activities (unnecessary procedures), the lack of precise
information (lack of organization and information), distractions (information and analysis
weekly sessions), inefficiency of work equipment (use of old equipment or software inefficient)
etc. Over consumption or additional consumption of consumables is generated from those inputs
that could have been avoided. Causes of production are due to: error (printing errors), the use of
low quality supplies (cheap) and waste of consumables etc.
Non-value is the inaccurate reporting of key information to senior management or specialized
departments with major involvement in detecting malfunctions and insufficient time for the
information activities. The general causes are due to the use of low-skilled, inexperienced
(know-how). A company is considered to be composed of a series of interactions between
different structures and behaviors. According to our investigations, we identified the following
generators factors of hidden costs in the accounting department of a company (Savall and Zardet,
2008): (1) Administrative dysfunction (work organization, communication, coordination,
information processing, time management, information system errors due etc.); (2) Behavioral
dysfunction (individual, group, community, pressure groups); (3) Structural dysfunction
(physical, technological, organizational, demographic, mental).
To play a proper calculation relation for hidden costs, we opted for option below.
(1) Hidden Costs (HC) = OE + OC
Where:
OE = Organizational Expenses (additional wages for overtime, additional expenses);
OC = Opportunity Costs (non-quality, low productivity).
134
6. CREATING SITUATIONS FOR REPORTING DYSFUNCTIONS
Once identified and evaluated, the hidden costs must be recovered to be translated thus
contributing to achieving economic performance. The conversion of hidden costs is the process
whereby once they have been identified; assessed attempting recovery to some extent contributes
to achieving economic performance.
The most important problem is to separate the general hidden costs of other hidden costs,
knowing the fact that some hidden costs generate some other hidden costs (e.g., costs of
preparing accounting staff generate other costs related to acquisition of software or updates
thereof). To watch the hidden costs of producing frequency, causes and their impact on
economic performance we can draw a centralized situation thus (table 2):
Table no.2 - Analysis of dysfunctions in terms of economic impact produced by the hidden costs
The name of hidden
cost
Production
frequency
Identification of
production causes
Economic impact produced
by hidden cost
Absenteeism Monthly Time management Over salaries
Staff rotation Quarterly Integrated training
Strategic implementation
Over times
Over consumption
Work accidents and
professional diseases Monthly
Non-production
Non-value
Product quality Monthly
Risks
Work conditions
Wok organization
Deviations from
productivity Monthly
Communication-cooperation-
coordination
Source: Authors’ determination
7. CASE STUDY ON THE DETERMINATION OF HIDDEN COSTS OF SELF-
MANAGEMENT ACCOUNTING ACTIVITY
In the accounting department of a Romanian company in a year is set a forecast budget that
includes income 500000 lei, expenses 460000 lei and profit 40000 lei. In preparing the forecast
did not take into account the opinion of the legal service on legal actions of some employees
They obtained final and irrevocable execution. During the year, increase revenue and decrease
costs due to failures and actual outturn account are as follows: 500000 lei income, expenses
520000 lei, lei 20000 deficit. Such hidden costs amounting to 40000 lei (non-income). Costs
savings are 35% of 40000 lei, i.e. 14000 lei. Had it not been overspending related failures, the
actual or supposed to be visible: 460000 lei - 12000 lei = 448000 lei. Overspending (over
salaries) = (460000 lei + 20000 lei) - 448000 lei = 32000 lei. The hidden costs amounting to
40000 lei + 32000 lei = 72000 lei. After these calculations, the situation in the income statement
is as follows (Table 3):
Table no.3 - Income statement highlighting hidden costs
Explanations Amount (lei) Explanations Amount (lei)
Visible expenses 448000 Provided expenses 460000
Hidden cost of dysfunctionalities: 72000 Non-value 40000
- over salaries 32000 Provided income 500000
- non-value 40000 Deficit (loss) 20000
Total 520000 Total 520000
Source: Romanian company’s data
135
From the above example, the company carried out an investment in a computer program and the
situation is as follows (Table 4):
Table no.4 - Total cost of creation of potentially gained through an investment
Explanations Value (lei)
1. New software (computer program) 4000
2. The period of training of personnel 6000
3. Total cost of creation of potentially won 10000
Source: Romanian company’s data
The conversion of hidden costs in value-added due the creation of potential is realized as follows
(Table 5):
Table no.5 - Conversion of hidden costs
Impact of won potential creation
Annual
hidden costs
(lei)
Conversion rate of
hidden costs in
value-added
Annual hidden
performance
expected (lei)
1. Inaccurate reporting of information to
management 2700 2/3 1800
2. Use of inexperienced accountants 1200 2/3 800
3. Reception of responsibilities from some
subordinates or colleagues 6000 1/3 2000
4. Errors made in the preparation of
supporting documents 2000 3/3 2000
5. Staff rotation caused by changes made
by function 3600 2/3 2400
Total 15000 58.06% 9000
Source: Romanian company’s data
In terms of graphics, this can be shown as follows (Figure 2):
Figure 2. Reporting of annual hidden costs and annual hidden performance
2.700
1.800
1.200800
6.000
2.000 2.0002.000
3.600
2.400
0
1.000
2.000
3.000
4.000
5.000
6.000
1. Inaccurate
reporting of
information to
management
2. Use of
inexperienced
accountants
3. Reception of
responsibilities
from some
subordinates or
colleagues
4. Errors made
in the
preparation of
supporting
documents
5. Staff rotation
caused by
changes made
by function
Annual hidden costs Annual hidden performances
Costuri
Source: Authors’ representation
Data analysis
Based on the data analyzed we can see that the won potential of creation impact is reflected by:
inaccurate reporting of information to management; use of inexperienced accountants; reception
of responsibilities from some subordinates or colleagues; errors made in the preparation of
supporting documents; staff rotation caused by changes made by function. If these deficiencies
of managerial kind had not existed, it would not have provision amounts pending court in this
situation would not have been influenced by hidden costs. Of the total annual hidden costs 15500
136
lei only a proportion of 58.06% is recovered, and that is 9000 lei. The situations presented can be
combined and analyzed in accounting synthesis documents like income statement (Căpuşneanu
and Briciu, 2011) or annexes of the results account and along with other synthesis situations
(Cokins et al., 2011) the needs of information required by company’s management.
8. CONCLUSIONS
Hidden costs analysis is one of the priorities of a responsible accounting department of an
company or other persons delegated with this responsibility. The director of the accounting
department, who has a series of responsibilities in this respect, should be assigned this task. In
this case, we plead for delegating this responsibility to a person specifically designated to
analyze hidden costs. All information obtained should be processed and included in the
accounting synthesis documents that will serve to support managerial decisions. The impact of
hidden costs on the performance of a company should be reviewed internally to identify their
causes. Although at first glance it seems to be a complex activity, in time it will become a
routine that will lead to the rapid identification of malfunctions that can eliminate them. By their
conversion it will bring value-added and will contribute to reducing the losses of the company.
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