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Accounting within Communist Societies
Financial accounting and reporting, and the standards involved with both, are crucial to business’s communication with each other and investors. While countries across the world have differing standards and rules, the majority are generally easily comparable with one another, making global business decisions relatively straight forward. This is the truth for capitalist-leaning societies and market-based economies, however it is not the case for those communist societies, or command economies.
Since the government has so much control in communist societies, they set prices without much regard to supply and demand and historically because of this, accounting information has been made useless with regards to determining economic performance (MacLullich, Gurau, 3). Also, since there is no domestic competition within business, financial reporting only matters for the state as opposed to the market. Because of this, financial statements hold no true value. Instead, accounting records are what the state analyzes and compares to an enterprise’s performance based on how the government plans each to perform (MacLullich, Gurau, 4).
This differs from market-based economies where healthy competition is encouraged, and financial statements are important to understanding economic performance as well as investor relations. For businesses to rise and succeed, investment is necessary, and the only way investors will be interested is if companies provide financial statements to be analyzed and prove that they are successful and growing. This is not relevant to business in command economies, so financial statements do not hold the same value.
To understand the difficulties with international business and investment relations, it is easiest to look at those businesses in countries transition out of communist and command economy practices. In those countries, these differences make it especially difficult for investors to get involved with newly privatized businesses. Since the accounting history is not consistent with the same standards and practices, the information specifically regarding profit and assets does not line up with those of the companies in market-based countries, and investors cannot determine and pull information needed for decision making (Doupnik, 32). Besides investment activity, there is also difficulty with communication between global companies and those that have been newly privatized in transitioning communist societies. When analyzing competition or even acquisition possibilities, it is difficult for companies to analyze each other and determine threat levels or opportunities when their financial statements are so different. This can limit companies’ potential and increases the possibility of decision makers being misled and not making the best call for the company.
There may be accounting discrepancies all over the world that provide challenges for global companies and investors to face, however it is extremely prominent with those in or transitioning out of communist regimes and command economies. While time consuming and difficult, their financial statements will need to be reformatted and restructured to fit the general international standards. In the long-run, this will be extremely beneficial for growth and success in the global economy.
Lindahl, Frederick & Schadewitz, Hannu. (2017). Accounting Quality in Eastern Europe after Communism. Journal of East-West Business. 1-26. 10.1080/10669868.2017.1403988.
The Relationship between Economic Performance and Accounting System Reform in the CEE Region: The Cases of Poland and Romania. CERT, 2004, The Relationship between Economic Performance and Accounting System Reform in the CEE Region: The Cases of Poland and Romania, pdfs.semanticscholar.org/d1c9/28f96baa2f116c07d6e7cdc8e1c66a2e9fd0.pdf.
Doupnik, Timothy. “Worldwide Accounting Diversity.” International Accounting, by Hector Perera, 4th ed., McGraw Hill, 2015, pp. 23–57.
© 2018 Julia Leister