An Empirical Evaluation of the Costs of Harmonizing Romanian Accounting With International Regulations

An Empirical Evaluation of theCosts of Harmonizing RomanianAccounting with InternationalRegulations (EU Directives andIAS/IFRS)

ION IONASCU, MIHAELA IONASCU, LAVINIA OLIMID &DANIELA ARTEMISA CALU

Academia de Studii Economice, Bucuresti, Romonia

ABSTRACT After the fall of communism, Romanian accounting has undergone severalwaves of reform. The first began with the 1991 Accounting Law and its 1993Regulations implementing a French-inspired accounting chart and guidelines. Thesecond wave of reform produced Regulations (in 1999 and 2001) for the harmonizationof large entities accounting with EU accounting directives and InternationalAccounting Standards/International Financial Reporting Standards (IAS/IFRS). Aninteresting feature was the inclusion of IASBs conceptual framework into the text ofthese Regulations. Our study seeks to identify and evaluate the costs of harmonizingRomanian accounting with international regulations (EU Directives and IAS/IFRS). Wehypothesize that three types of costs are prevalent: personnel training costs, consultantsfees and costs to adjust existing information systems. We also hypothesize thatharmonization benefits are noticeable for those entities that make frequent use offoreign finance and for those entities with majority foreign shareholders. To collectdata, we sent out questionnaires to the finance directors of listed Romanian companies.As full application of IAS/IFRS by non-financial companies has recently beenpostponed until 2007, we also comment on the benefits and costs of gradual reforms asopposite to a one-step adoption of IAS/IFRS.

Accounting in Europe

Vol. 4, 2007

Correspondence Address: Mihaela Ionascu, Academia de studii Economice, facultatea de contabili-

tate si informatica de gestiune, Piata Romana nr. 6, Sector 1, Bucuresti, 010374, Romania. E-mail:

[email protected]

1744-9480 Print/1744-9499 Online/07/02016938# 2007 European Accounting AssociationDOI: 10.1080/17449480701727965Published by Routledge Journals, Taylor & Francis Ltd on behalf of the EAA

Introduction

This paper intends to study the harmonization of Romanian accounting

with international regulations (EU Directives and International Accounting

Standards/International Financial Reporting Standards (IAS/IFRS)) from thevantage point of a wider costbenefit analysis. Tang (1994) hypothesized that

international regulations will be assimilated only if benefits will exceed

implementation costs. Romanias transition to an IAS/IFRS-based system fol-lowed the political decision of the accounting regulator (The Ministry of

Finance) and represented a radical change of course as the accounting reform

undertaken soon after the fall of communism had implemented a Continental

accounting model, the French model.

The new approach was questionable on several grounds. First, the regulator

tried to harmonize Romanian accounting with the Fourth Council Directive

and IAS at a time when the European Union had not stated its position

toward IAS in individual company accounts (European Commission, 1995).

Second, the harmonization regulations targeted a large number of enterprises,

without taking into account their capacity to implement these regulations.

Third, such regulations, being an approximation of IAS, were of no use to

those enterprises that needed financial statements conforming to IAS; these

enterprises had to perform restatements and therefore incurred additional costs.

Last, the very attitude of regulators was ambiguous, as 2005 witnessed the

reorientation towards the European Directives and the postponement of the

application of IAS/IFRS until 2007.Under these circumstances, several issues arise: is the new direction imposed

by the accounting regulator fitting a trend in the Romanian business environ-

ment? How extensive was the effort that Romanian enterprises had to make?

And particularly, is this effort justified from a costbenefit point of view?

Our paper aims at offering answers to such questions via an ex post facto analy-

sis of the process of internationalization of Romanian accounting during 1999

2005. Accordingly, we have surveyed the companies listed on the Bucharest

Stock Exchange because they were primarily targeted by the Ministry of

Finance to implement the new regulations. Our research focused on identifying

and evaluating the costs entailed by the assimilation and implementation of inter-

national regulations. At the same time, we intended to capture the opinions of

finance directors of listed companies regarding the appropriateness of the

decisions made by the accounting regulator from a costbenefit standpoint.

The Process of Internationalization of Romanian Accounting: From

Harmonization to Conformity with European Directives and IAS/IFRS

After the fall of the communist regime, company accounting was shaped by two

waves of reform (see Table 1). From its very beginning, the process of accounting

170 I. Ionascu et al.

Table 1. Recent history of Romanian accounting regulations

Main regulations Objectives Comments

199198Regulations forMarket Economy

Accounting Law no. 82 of 24 December1991, published in the OfficialJournal no. 265 of 27 December1991

To create an adequate accountingsystem for the marketeconomy allowing an efficientfiscal control.

Ministry of Finance as the accountingregulator.Internal and external users of accountinginformation acknowledged.Accounting is centred on the civil lawconcept of patrimony, also present inFrench accounting.

Government Decision no. 704 of 14December 1993 approving certainmeasures of implementation of theAccounting Law no. 82/1991,published in the Official Journal no.303 of 22 December 1993

To implement Accounting Lawno. 82/1991.

Features significant imports from Frenchcompany accounting.Introduces new accounting principles,valuation rules, accounting chart, debitingand crediting rules for each account,standard formats for the financialstatements.

19992005HarmonizationRegulations

1999 Harmonization Regulation:Order of the Minister of Finance no.403 of 22 April 1999, published in theOfficial Journal no. 480 of 4 October1999

To harmonize the individualaccounts of large enterpriseswith the Fourth CouncilDirective and withInternational AccountingStandards.

The Order, applied only as a limitedexperiment, consists of four parts:Volume I. The Harmonization Regulation;Volume II. IASC Conceptual Framework;Volume III. IAS/IFRS;Volume IV. Professional Guides.The third and fourth volumes werepublished separately later.a

Although the Harmonization Regulationmaintains the accounting chart, it providesfor more disclosure within the model formatfor the financial statements.

(Table continued )

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Table 1. Continued

Main regulations Objectives Comments

Consolidation Regulation:Order of the Minister of Finance no.772 of 2 June 2000, published in theOfficial Journal no. 374 of 11 August2000

To enact ConsolidationRegulations.

Regulations consistent with the SeventhCouncil Directive. Applied only as a limitedexperiment.

2001 Harmonization Regulation:Order of the Minister of PublicFinance no. 94 of 29 January 2001,published in the Official Journal no.85 of 20 February 2001

Same objective as 1999Harmonization Regulation.

Maintains the previous structure in fourvolumes.Slightly changes the 1999 Regulation andallows carve outs for inflation accountingand consolidation.b

2006presentConformityRegulations

Conformity Regulation:Order of the Minister of PublicFinance no. 907 of 27 June 2005,published in the Official Journal no.579 of 11 July 2005

To divide enterprises into twocategories: (1) those applyingaccounting regulationsconforming to EuropeanDirectives and (2) thoseapplying in additionaccounting regulationsconforming to full IAS/IFRS.

Consequence of the process of preparing foraccession to the European Union. Changesthe direction of company accounting,repealing the Harmonization Regulation.All entities will apply the regulationsconforming to the European Directivespending their issue (see European DirectivesConformity Regulations below). For theyear 2006 credit institutions also prepareIFRS financial statements, while otherpublic interest entities prepare IFRSfinancial statements only if they haveimplementation capacity. Furtherregulations governing IAS/IFRSapplication as from 2007 were announced(see IFRS Conformity Regulations below).

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European Directives ConformityRegulations:Order of the Minister of PublicFinance no. 1752 of 17 November2005, published in the OfficialJournal no. 1080 bis of 30 November2005

To enact Fourth and SeventhCouncil Directives.

All entities apply the regulations conformingto the European Directives beginning on 1January 2006.

IFRS Conformity Regulation:Order of the Minister of PublicFinance no. 1121 of 4 July 2006,published in the Official Journal no.602 of 12 July 2006

To enact Regulation (EC) no.1606/2002 of the EuropeanParliament and of the Council.

Mandatory IFRS consolidated financialstatements for listed companies beginningon 1 January 2007. All credit institutions(listed and not listed) also apply IFRS intheir consolidated accounts.Optional IFRS individual financialstatements for listed companies (targeted atother users than government institutions).

aInternational Accounting Standards Committee, Standardele Internationale de Contabilitate 2000 [IAS 2000], translated into Romanian by the IAS Working Party

headed by Aileen Beattie, Editura Economica, Bucuresti and respectively Ministerul Finantelor Publice (2001).bFor a list of changes in the 2001 Harmonization Regulation, see Government of Romania (2001).

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regulation was a public one, deriving from a legislative process where the

Ministry of Finance is the main actor.

The first wave of reform came in the early 1990s with the Accounting Law

which aimed at introducing an accounting system adequate for a market

economy, a system that allowed an efficient control of the legality of commercial

transactions and of the fulfilling of the fiscal obligations (Ministerul Finantelor,

1991). Company law, also passed in 1991, required public companies and certain

private companies to have an odd number of censors elected by shareholders

from among themselves with the exception of the accountant censor.1

The regulations that implemented the Accounting Law, effectively applied on

1 January 1994, had their inspiration in the French accounting system and came

with the stated objective of creating an accounting system compatible with the

Fourth Council Directive2 and International Accounting Standards (Ministerul

Finantelor, 1994). The latter part of this objective was merely declarative:

there is no further mention in the text of these regulations of IAS or compatibility

with IAS.

The various reasons for choosing the French accounting system are discussed

elsewhere (Feleaga, 1992; Dutia, 1995; Richard, 1995; Roberts, 2000) and com-

prise cultural, political and economic factors.

A second wave of reform started in 1996, when the goals of the Romanian

Accountancy Development Programme3 sponsored by the UKs Department

for International Development (DFID, 2000; King et al., 2001) superposed

with the requirements of international financial institutions. The World Banks

PSAL I and PSAL II loan agreements had among their objectives improving

the business environment and required the Romanian government to modernize

the accounting standards and to implement internationally recognized accounting

standards (World Bank, 2001, 2003a). The rationale was that such an accounting

framework would create a favourable environment for direct investment and

privatization. Ionascu et al. (2006) consider that the Romanian government

based its decision to adopt IAS/IFRS on financial grounds, while pursuing inparallel harmonization with the European Directives as part of the political

objective of joining the European Union. Consequently, in 1999, the Ministry

of Finance issued a Harmonization Regulation seeking to harmonize Romanian

large enterprise individual accounts with both the Fourth Council Directive

and International Accounting Standards.

We cannot but notice that the regulator tried to harmonize Romanian individ-

ual company accounting with the Fourth Council Directive and IAS at a time

when the European Union did not have any requirements concerning IAS/IFRSfor Member States. In addition, Romania went much further than the European

Unions strategy at that time, introducing IAS/IFRS for the individual accountsof large companies, listed and not listed, when the EU had not stated its position

toward IAS in individual company accounts:


For those companies which are not directly concerned with the pressure of

international capital markets and which prepare consolidated accounts, it is

intended to continue efforts to improve the comparability of accounts. The

Contact Committee should step up its efforts to facilitate a harmonised

approach by dealing with practical problems which arise in connection

with the application of the Directives.

(European Commission, 1995)

As explained above, the decision of the Romanian regulator was due to the

requirements of the international financial institutions that most large

state-owned enterprises and all banks be compliant with international accounting

standards for financial reporting (World Bank, 2001). Asked why Romania got

ahead of the EU in adopting IAS/IFRS, a representative of the Ministry ofFinance interviewed by Ionascu et al. (2006) stated:

we got [ahead] on this programme with the international bodies . . . on theIMF, WB agreements . . . which conditioned granting the loans [with theadoption of IAS/IFRS] for large entities, those subject to privatization . . .We assumed a responsibility . . . by the conditions [imposed] . . . youcould not carry on a finance agreement with IMF or WB, if you did not

take these steps . . .

The national regulator sought harmonization with both the Fourth Council

Directive and International Accounting Standards. However, well before the

time of the 1999 Harmonization Regulation, Romanian accounting had attained

a significant degree of conformity with the Fourth Council Directive, as the

Accounting Law and the related regulations were inspired from French account-

ing. In fact, the regulations adopted in 1999 reflect the reorientation of the

Romanian regulator towards Anglo-Saxon accounting, via International

Accounting Standards Committee/International Accounting Standards Board(IASC/IASB), because the conceptual framework and the International Account-ing Standards were included as volumes two and three in the Order 403/1999enacting the 1999 Harmonization Regulation. This unusual inclusion of the con-

ceptual framework into the text of a national regulation might indicate the regu-

lators desire to help accountants to understand and apply standards grounded in

an accounting philosophy little known in Romania. Newly introduced accounting

principles, such as substance over form and materiality were justified and

explained by referring to the conceptual framework. Moreover, the 1999 and

2001 Harmonization Regulations provided that, in the absence of a relevant

IAS, the directors should draft accounting policies in accordance with the

Framework for the preparation and presentation of financial statements

(article 3.5 in both Regulations). Ionascu et al. (2006) found out that it was the

World Bank who required the inclusion of the conceptual framework into the

body of the Harmonization Regulation.

Costs of Harmonizing Romanian Accounting with International

Regulations 175

This mixture of accounting philosophies, that is, the superposing of an Anglo-

Saxon accounting system on a legalistic one, with a national chart of accounts and

a strong fiscal connection, was evaluated as a cultural intrusion (Roberts, 2000).

The Ministry of Finance conceived the application of IAS/IFRS as a gradualprocess to allow the audit market growth to keep pace with the demand from the

companies and for accountants in companies to be trained in the new standards

(King et al., 2001, p. 165). For the year ended 31 December 1999, the Harmoni-

zation Regulation and the existing, French-inspired, regulations were applied

simultaneously by 13 enterprises, forming a representative sample of listed com-

panies on the stock exchange and certain enterprises of national interest (Order

403/1999, art. 2, para. 1). In fact, 12 pilot enterprises volunteered to produceaccounts under both the new system and the existing one, each being audited

by one of the Big Five (King et al., 2001). Another volunteering enterprise

was later added as it had received loans from international financial institutions

which required audited IAS financial statements.

The regulator included in the 1999 Harmonization Regulation the possibility to

require the application of the National Inflation Accounting Standard and indeed

the accompanying accounting chart had been adapted accordingly. Hyperinfla-

tion (as defined in IAS 29) marked the Romanian economic environment in

the first decade after 1990 (see Table 2) resulting in decapitalization and taxation

of inflationary profits. In 1995 and 1996, the Ministry of Finance allowed the cal-

culation of taxable profits on the basis of an inflation adjusted tax balance sheet,

but this facility was withdrawn in 1997. About the same time, the accounting reg-

ulator within the Ministry, advised by British consultants, drafted a national

inflation accounting standard by adjusting the balance sheet only. By the end

of 1998, the standard was in the process of field testing (Olimid, 1998), but

was neither issued as a standalone regulation, nor included in the professional

guides (Volume IV, 1999 Harmonization Regulation). Some of the 13 enterprises

in the field test adjusted their financial statements to inflation on the basis of IAS

29 (Ministerul Finantelor Publice, 2001).

The 13 enterprises mentioned above were the only ones to ever apply the 1999

Harmonization Regulation and while it is not certain that it was meant to be an

Table 2. Yearly inflation rate in Romania during 19902006

Year Inflation rate Year Inflation rate Year Inflation rate

1990 5.1 1996 38.8 2002 22.51991 170.2 1997 154.8 2003 15.31992 210.4 1998 59.1 2004 11.91993 256.1 1999 45.8 2005 9.01994 136.7 2000 45.7 2006 6.561995 32.3 2001 34.5

Source: Romanian National Institute of Statistics.


experiment, it remained as such. The issue of Consolidation Regulations in 2000

was also an experiment: five groups named in the respective Ministerial Order

participated in this experimental phase, but we could only infer that it was unsuc-

cessful. The Ministry of Finance has neither published a report, nor the pro-

fessional guides regarding consolidation and other complex standards, such as

those concerning accounting for pensions and financial instruments; the appli-

cation of these standards (IAS 19, IAS 27, IAS 29, IAS 32, IAS 39) remained

optional.

In 2001, the Ministry of Public Finance4 replaced the 1999 Harmonization

Regulation with a slightly different one bearing the same name. The new regu-

lation was almost a copy of the previous one, but explicitly carved out IAS 27

and IAS 29. Once the experiments completed, it is possible that the regulators

feared that Romanian accountants did not possess the skills to apply these

standards in the absence of a common methodology or professional guides.

A year before the issue of the 2001 Harmonization Regulation, the European

Commission proposed the adoption of IAS/IFRS in the consolidated accounts oflisted companies (European Commission, 2000). Acknowledging the practical

problems of using IAS/IFRS in individual company accounts, the Commissiononly encouraged Member States to adopt IAS/IFRS for this purpose, as thiswould facilitate the preparation of consolidated accounts in the future (European

Commission, 2000, p. 7). Therefore, the Commission would allow Member

States to extend the application of full IAS to unlisted companies and to individ-

ual accounts. Accordingly, we notice that, this time, the harmonization process

begun with the advice of British experts and at the requirements of the World

Bank was not so far away from the EUs strategy with respect to IAS/IFRS,although there were still no legal requirements for the Member States.

According to the new regulation, financial statements of eligible enterprises

had to observe the provisions of the Accounting Law, the 2001 Harmonization

Regulation, IASCs conceptual framework and IAS/IFRS. The 2001 Harmoniza-tion Regulation provided for its retroactive application by restating the year 2000

financial statements of approximately 200 enterprises: listed companies on the

Bucharest Stock Exchange, certain national enterprises and companies listed

on the RASDAQ Electronic Exchange.5 Similarly to its predecessor, the 2001

Harmonization Regulation was to be applied gradually, over a five-year period,

according to decreasing size criteria, to include all large enterprises by 31

December 2005. The ultimate large enterprises were those fulfilling two out

of the three size criteria for the previous year indicated by the Ministry of

Public Finance: total turnover more than E5 million, total assets over E2.5

million and average personnel number more than 50.6 According to the lists pub-

lished by the Ministry of Public Finance, over 1,700 non-financial enterprises had

to apply the Harmonization Regulation by 31 December 2003 (Table 3).

The financial statements of these enterprises had to be audited by independent

auditors according to the newly issued Government Ordinance regarding inde-

pendent audit, no. 75 of 1 June 1999. King et al. (2001) highlight the shortage


Regulations 177

of auditors and report the provisional arrangements that were put in place to

qualify as independent auditor.7

For all the other non-financial enterprises, considered small, the Ministry of

Public Finance issued Simplified Regulations, harmonized with the European

Directives only. The Simplified Regulations, applicable from 1 January 2003,

represented a simplified version of the Harmonized Regulations for large

enterprises. Harmonization Regulations were also issued for banking (2001),

insurance (2001) and brokerage (2002) industries.

According to the initial strategy of the accounting regulator, from the finan-

cial year 2006 onwards, company accounting should have functioned at two

speeds: an echelon of large companies applying the Harmonization Regu-

lations and another echelon of small companies applying a simplified

version of these regulations. In practice, the attempt to ensure harmonization

with two accounting frameworks was not a success. Even if IAS/IFRS wereconsidered a part of the 1999 and 2001 Harmonization Regulations, the latter

featured two notable carve outs: IAS 27 and IAS 298 (2001 Harmonization

Regulation, para. 3.4). For example, companies could choose if they wanted

to apply IAS 29 or not: those that did opt for the application of IAS 29 had

to perform the relevant restatements outside the statutory accounts not to inter-

fere with the calculation of the taxable income. Stating that the 2001 Harmoni-

zation Regulation supplemented by the yearly closing rules, differ significantly

from IAS, the ROSC 2003 country report cites inflation accounting,

consolidation, the presentation of own shares and the format of accounts

where masses of additional information, . . . can only confuse foreign share-holders and potential investors (World Bank, 2003b).

In practice conformity with IAS/IFRS was partial with respect to: IAS 1, IAS 2,IAS 7, IAS 12, IAS 16, IAS 17, IAS 18, IAS 21 and IAS 39 (World Bank, 2003b).

Deloitte Audit S.R.L. (2006) also cites IAS 36 with respect to the determination of

recoverable value. Owing to the strong link between accounting and taxation, a tax

application of IAS/IFRS was often made, for instance, the provisions of inter-national standards were applied if they did not contravene the tax regulations

(Ionascu et al., 2006). Likewise, companies did not appear to understand that

Table 3. Number of non-financial enterprises having to apply the Harmoni-zation Regulation for the first time

Financial statements for the year(s) ended on No. of enterprises

31 December 2000 19731 December 2001 76731 December 2002 41031 December 2003 367

Source: Ministry of Public Finance Orders nos. 94/2001, 990/2002, 705/2003 and

1827/2003.


IAS required them to make judgments and often deferred to Romanian tax laws

(World Bank, 2003b, p. 11). One audit report described the financial statements

prepared in accordance with the Harmonization Regulation together with their

interpretation via the year-end secondary legislation as not being IAS/IFRS com-pliant, but fulfilling the Ministry of Public Finances taxation requirements

(Deloitte Audit S.R.L., 2006).

Due to the countrys imminent joining of the EU (expected on 1 January

2007), Romanian regulators had to abandon the regulations harmonized with

the Fourth Directive and IAS and adopt separate regulations conforming to

the EUs accounting requirements. The 2005 Conformity Regulation (see

Table 1) announced the issue of two separate types of regulations: the first con-

forming to the European Forth and Seventh Directives (European Directives

Conformity Regulations in Table 1), and the second to IAS/IFRS (IFRS Con-formity Regulation in Table 1), the latter stemming from the IAS Regulation

(EC) no. 1606/2002.The regulator decided that, for the financial year 2006, all entities should

prepare financial statements conforming to European Directives (introduced by

the European Directives Conformity Regulations); some public interest entities

will also publish IFRS financial statements. This was the end of the 2001 Harmo-

nization Regulation, and also of the regulators attempt to harmonize, on its own,

the European Directives and IAS/IFRS.Beginning in 2006, banking enterprises prepare two sets of financial state-

ments: a statutory one, in accordance with the European Directives, and a

second one, conforming to IFRS and destined for other users. The rest of the

public interest entities (insurance companies, entities regulated and supervised

by the Securities Commission, listed companies, national companies,

companies consolidated by a parent applying IFRS, etc.) may prepare an

IFRS set of financial statements only if appropriate implementation capacity

is available. As this phrase was included in the Conformity Regulation

without any explanation, we may take it as not precluding the voluntary appli-

cation of IAS/IFRS.We therefore consider that, contrary to the original intention of the regulator,

IFRS are now to be applied on a smaller scale. The scope of the IFRS is reduced,

because the eligibility criterion has changed: for the year 2006, only banks are to

apply them on a mandatory basis, other public interest entities are to do so only if

they are able to, while enterprises which do not qualify as public interest entities

are excluded.

The Conformity Regulation stated that EU requirements and the evaluations

of various supervising and regulating authorities would determine the con-

ditions for the application of IFRS beginning with the financial statements of

the year 2007. Owing to Romanias scheduled accession to the EU on 1

January 2007, new regulations concerning the application of IFRS by listed

groups were adopted in 2006 (IFRS Conformity Regulation in Table 1) enacting

Regulation (EC) no. 1606/2002 of the European Parliament and of the Council.


Regulations 179

According to these regulations, starting with the financial year 2007, listed

groups and banking institutions (listed and not listed) will mandatorily apply

IFRS in their consolidated financial statements only, while the European Direc-

tives Conformity Regulations remain valid for all reporting to governmental

institutions. Out of all the options included in Regulation (EC) no. 1606/2002, the Romanian regulator chose to enforce IAS/IFRS for the consolidatedfinancial statements of banking institutions only. Recent history must have

shown that the majority of Romanian enterprises did not have the capacity to

apply full IAS/IFRS.

The Bucharest Stock Exchange

Forty-eight years after it was closed down by the Communist authorities,

the Bucharest Stock Exchange (hereafter BSE) reopened in November 1995.

Ten years later the total market capitalization amounted to E15.31 billion at

the end of December 2005 (19.30% of GDP) and E21.41 billion in December

2006 (22% of GDP9) (Table 4). In 1996 RASDAQ securities market was estab-

lished, as an institutional framework for the exchange of shares distributed

through the mass privatization programme. There were around 3,700 companies

(out of which over 1,900 suspended) listed on RASDAQ Electronic Exchange in

December 2005, with a total market capitalization of E2.24 billion. A year later,

the number of RASDAQ companies fell to around 2,400, but the market capita-

lization increased to E3.13 billion. To create a more attractive capital market, in

November 2005, the shareholders of the two entities approved the merger of BSE

Table 4. Market capitalization of BSE and neighbouring stock exchanges

Stock exchanges

Marketcapitalization

December 2005(euro millions)

GDP 2005 (euromillions)

Marketcapitalization as

percentage ofGDP

AthensExchange

123,033 181,087.5 67.94

Bucharest StockExchange

15,310 79,313.5 19.30

Budapest StockExchange

27,586 87,894.6 31.39

Prague StockExchange

31,059 98,417.5 31,56

Bulgarian StockExchangeSofia

4,279 21,448.1 19.95

Warsaw StockExchange

79,353 243,398.2 32.60

Sources: www.feas.org, www.fese.be, www.bvb.ro, www.eu.int/comm/eurostat/


and RASDAQ Electronic Exchange. Already a single legal entity, with most

RASDAQ companies traded on BSEs platform, the combined capitalization as

a percentage of GDP did not change significantly in 2006, compared to 2005

(22% of GDP).

In December 2005, there were 64 domestic companies listed on BSE, out of

which 20 in tier I and 44 in tier II. To qualify for tier I listing, a company had

to fulfil a number of general, financial and managerial requirements such as:

(i) a share capital of at least E8 million, (ii) at least three years of business oper-

ations, (iii) positive earnings for two of the previous three years (excluding finan-

cial income), (iv) certain managerial aspects, regarding the expertise and moral

integrity of management, cash flows for the previous year, business plan for

the next two years and (v) at least 15% of the issued outstanding shares (repre-

senting a minimum of 75,000 shares) must be held by at least 1,800 public share-

holders. Tier II companies were required a minimum share capital of E2 million

and the filing of an annual, externally audited report.10

In 2001, BSE initiated the plus (transparency) tier; any listed company can apply

for plus tier listing, while maintaining its listing in the original tier. The main con-

dition was to adhere to BSEs corporate governance code, a code based on OECDs

principles. Annual and interim financial statements of plus tier companies must be

prepared according to both Romanian accounting regulations and IFRS and ought

to be available on the issuers website in Romanian and English.

According to BSE regulations, listed companies should disclose information to

the investing public enabling it to make investment decisions. The financial infor-

mation available on BSEs website is limited and includes certain headings and the

corresponding amounts from issuers balance sheets and profit and loss accounts,

overdue payments and average numbers of employees. In February 2006, we sur-

veyed the websites of listed companies to assess the financial information avail-

able. There was only one company listed on the plus tier because it included

BSEs corporate governance code in its Articles of Association but its website

did not feature any financial reports. Of the 20 companies listed in tier I, only

five had links to their annual reports including financial statements (e.g. 2004

annual report). Two companies used IFRS to prepare their financial statements,

while the other three applied the Harmonization Regulation. Five other tier I com-

panies featured annual or interim management reports; one of these included

interim financial reports for the year 2005. Just five tier II companies (out of 44)

included links to their full 2004 annual reports or financial statements, all of

them prepared according to the Harmonization Regulation. The level of financial

information disclosure through company websites has decreased compared to pre-

vious years, as some companies ceased to include links to their annual reports.

Previous IAS/IFRS Transition Costs Research

Research in IAS/IFRS harmonization costs is only in its incipient phase, and weare not aware of related studies published in academic journals. Several surveys


Regulations 181

were carried out by audit and financial services firms, but their results should be

cautiously evaluated as detailed references are not always available and their

results are not validated according to rigorous scientific criteria.

These surveys revealed that the effort to implement IAS/IFRS is significant.JMH Financial Services11 survey of 1,000 British companies estimated an

average compliance cost of around 360,000. This figure is even higher for a

top 500 company (446,000), or for companies with a market capitalization

between 1 billion and 2 billion (625,000), and in excess of 1 million for

companies worth more than 2 billion.

A survey of listed companies in 12 European countries undertaken by the

French accounting firm Mazars SA (Mazars, 2005) in April 2005 revealed that

60% of the Polish companies surveyed consider that moving to IFRS is a

major cost, with only 30% of the respondents judging that benefits will outweigh

costs. The same opinion regarding the size of IFRS transition costs is shared by

companies in Belgium and Luxembourg, but with a more optimistic costbenefit

outlook (55%). Surprisingly, only 20% of Czech companies believe that IFRS

costs are sizeable (one of the lowest percentages in Europe), while 92% of

these companies have subcontracted the relevant accounting services (a percen-

tage much larger than the average of 59%). Moreover, 64% of Czech companies

expect the benefits linked to the move to IFRS to exceed related costs.

A survey conducted in JanuaryFebruary 2004 for Atos Consulting (Atos

Consulting, 2004) asked 200 top listed companies from the UK, France,

Germany and the Netherlands if their expected IAS/IFRS implementationcosts would exceed E1 million. It seems that this estimate is too pessimistic,

as 71% of the surveyed companies in the final implementation phase consider

that the final amount will be less than that and only 19% think that this value

will be exceeded. Only 4% of companies that have started the implementation

phase consider that their costs will rise beyond the E1 million threshold. The

authors nevertheless conclude that IAS/IFRS implementation costs are underes-timated and the related projects are underfinanced. Only 40% of the surveyed

companies expect IFRS to increase shareholder value through greater transpar-

ency of reporting and ease of access to capital markets. However, 47% of the

surveyed companies anticipate share price fluctuations and 20% a decrease in

shareholder value. The results single out UK companies as failing to recognize

a potential positive impact, possibly because of more similarity between UK

accounting standards and IAS/IFRS.The biggest issue reported by the companies on the Continent surveyed is

retraining staff to be conversant in IFRS (ranked second in the UK) followed

by technical accounting expertise (ranked top in the UK). All companies

mention modifying systems and re-engineering processes as the third and

fourth challenges, respectively.

A survey conducted in May 2005 for PricewaterhouseCoopers (Romir

Monitoring, 2004) on a sample of approximately 3,000 people,12 covering

Russian general businesses, audit firms, academics and students ended with


excessively optimistic results. An overwhelming majority believes that IAS/IFRS should be implemented partially (44%) or completely (39%) from 2010

onwards. IFRS were used by a small percentage (11%) of Russian companies,

but over 80% of the respondents are confident that partial or full transition

from Russian accounting to IFRS will be feasible. Although the average level

of international standards knowledge was assessed as basic, the respondents

opinions did not depend on this variable.

The issue of costs related to Romanian accounting harmonization with IAS/IFRS has not been discussed elsewhere. Although the Ministry of Finance

stated that the 1999 Harmonization Regulation was based on a pilot study of a

sample of 13 companies, the results of this study were never made available to

the public. Accordingly, we cannot know if the regulator was aware of the

effort required to assimilate and apply IAS/IFRS.In the context of implementing the European Accounting Directives, Day and

Taylor (2005) underline the importance of sufficient administrative and regulat-

ory capacity at the standard setters in the applicant countries. This prevails over

the exercise of drafting legislation, and the European Commission assessed the

administrative capacity of the responsible ministries as a part of its more

general benchmarking process. In the specific case of the Harmonization Regu-

lation, the issue of the implementation capacity can be raised both at the regula-

tors level and at enterprise level. The important matter of effectively translating

regulations into local languages has been highlighted elsewhere (Larson and

Street, 2004; Day and Taylor, 2005) and current and updated IFRS translations

widely available are essential for the effective implementation of IFRS (Larson

and Street, 2004). In this context, we note that the first official Romanian trans-

lation of the IAS was published in 2000, even though the Harmonization Regu-

lation was meant to be applied for the first time to the financial statements of the

same year.

As to the Professional Guides anticipated as Volume IV of the Order 403, just

Part I was ever published (in September 2001), while the accounting body

CECCAR edited its own professional guides for individual IAS/IFRS in 2004.A four-week intensive IAS course taught by British accountants from the Insti-

tute of Chartered Accountants of Scotland was held at the Ministry of Finance in

the first half of 1997 as part of the Romanian Accountancy Development

Programme. The audience was limited and included: employees of the Ministry,

from both Accounting and Taxation Divisions, a few academics and representa-

tives from the local professional accounting body CECCAR. A similar

course, also given by British accountants at the beginning of 2001 and held at

the main business school in the country, was aimed at academics (with around

100 people attending).

Meanwhile international accounting firms started their own IAS/IFRS coursesas part of their consulting activities: at least one Big Five firm was already oper-

ating such a project in 1999. CECCAR, the Romanian association of accountants,

has organized IAS/IFRS courses since 2001.


Regulations 183

One cannot underestimate the implementation difficulties that eligible enter-

prises faced, making the recourse to professional accounting firms almost a

necessity.

Our contacts in the business milieu suggest that there is a perception that the

decision to introduce the 1999 Harmonization Regulation did not take into

account the enterprises capability of implementation, nor its effects on eligible

enterprises. Hereby is the remark of one finance director of a listed company:

[. . .] it would have been better to fill in this questionnaire 56 years ago.[. . .] Our company was put at a disadvantage by the application of theOrder 94/2001 owing to [certain accounting treatments] that had led tothe taxation of inflationary gains during the first years (20012003), finan-

cial losses in 2004 and probably in 2005. The non-application of IAS 29

decided by the Ministry of Finance led to an increase in accounting

profit and therefore in income tax. The review of the financial statements

by the County Directorate for Fiscal Control gave us many troubles and

there were unending discussions because they were not sufficiently

trained to check the application of these regulations.

Given these circumstances, our study intends to identify and evaluate the costs of

harmonizing Romanian accounting with international regulations and capture the

perception of finance directors regarding the regulators decisions, all from a

costbenefit vantage point. We recognize that even before the issue of the Har-

monization Regulations, Romanian accounting was already in line with the

Fourth Council Directive in most respects. Accordingly, the implementation

costs of these Regulations were mainly due to the IAS/IFRS component. Weshall keep in mind that Romanian Harmonization Regulations are only a rough

application of IAS/IFRS, and that restatement costs may be also incurred toensure full IAS/IFRS compliance.

Research Hypotheses

The three main objectives pursued by our study are: (i) to identify the extent to

which Romanian companies feel the need for IAS/IFRS; (ii) to identify andevaluate the costs involved in the harmonization of Romanian accounting with

international regulations; and (iii) to capture the perception of finance directors

regarding the costs and benefits linked to the harmonization process. We have

built the research hypotheses upon these objectives.

A. Voluntary Adoption of IAS/IFRS

In order to evaluate the direction imposed by the accounting regulator, we tried to

identify if there existed an independent trend to use IAS/IFRS. As late as 2003,the demand for transparent financial statements was described as low, owing to


underdeveloped capital markets, collateral-based lending, and a general lack of

understanding of free market principles (World Bank, 2003b, p. 14). Conse-

quently, we believe that a certain need for a transparent accounting framework,

such as IAS/IFRS or US Generally Accepted Accounting Principles (GAAP),could be felt by enterprises interested in receiving foreign finance.13 It is probable

that these enterprises began the voluntary application of IAS/IFRS even beforethe regulators attempt to harmonize Romanian accounting.

Since the Harmonization Regulations were an approximate application of

IAS/IFRS, we conjecture that enterprises needing full IFRS financial statementswill therefore practice double reporting at present. As large enterprises have the

highest potential for obtaining foreign finance, we believe that it is they who need

IAS/IFRS financial statements and therefore will prepare two sets of financialstatements. Accordingly, we formulate the following hypotheses:

HA1: Enterprises making recourse to foreign financial markets have applied IAS/IFRS before they became mandatory through the Harmonization

Regulations.

HA2: Enterprises making recourse to foreign financial markets prepare two sets of

financial statements.

HA3: Large enterprises prepare two sets of financial statements.

B. Harmonization Costs

Based on certain preliminary discussions and signals from the business milieu,

we believe that harmonization costs consist primarily of personnel training

costs, consultants fees and costs of adjusting information systems. Large

enterprises incur significant costs to prepare and report accounting information

as explained by the increased volume and complexity of their transactions, but

also because of possible geographical dispersion. We do not believe that, at

least in the implementation phase, large companies were able to draw on the

benefits of reporting standardization, such as shared service centres, and

thus lower their harmonization costs. Moreover, some of these companies

might have applied IAS/IFRS to fulfil their own information needs, thusexceeding the legal requirements of the Harmonization Regulation. If so, it

is possible that such companies would have incurred additional costs entailed

by the application of the optional inflation accounting and consolidation

standards.

For that reason, we believe that the implementation costs of large companies

were the highest. As Romanian harmonization regulations are only a rough appli-

cation of IAS/IFRS, enterprises needing IFRS financial statements have per-formed restatements that may entail additional costs. As a result, some

enterprises have organized, within the Accounting Department, a special unit

charged with IAS/IFRS restatement.For these reasons we posit that:


Regulations 185

HB1: Harmonization costs consist mainly of personnel training costs, consultantsfees and costs of adjusting information systems.

HB2: Large enterprises incurred bigger IAS/IFRS implementation costs than therest of the enterprises.

HB3: Enterprises with double reporting incur higher implementation costs.

C. Costs and Benefits

Based on certain preliminary discussions and signals from the business milieu,

we anticipate that, on the whole, finance directors of listed companies consider

that the benefits of the implementation of IAS/IFRS do not cover relatedcosts. Nevertheless, we expect that the costbenefit relationship be evaluated dif-

ferently by different types of enterprise. For example, we believe that companies

wholly or majority-owned by foreign capital and companies making recourse to

foreign finance will deem benefits to exceed IAS/IFRS implementation costs.

HC1: Finance directors judge that IAS/IFRS implementation benefits do notcover related costs.

HC2: Finance directors of enterprises that request foreign finance regularly

consider IAS/IFRS implementation benefits higher than related costs.HC3: Finance directors of companies wholly or majority-owned by foreign

capital consider IAS/IFRS implementation benefits higher than relatedcosts.

Methodology

In October 2005 we e-mailed a questionnaire accompanied by a cover letter to the

finance directors of companies listed on the BSE, that is, to 18 tier I companies

and 44 tier II companies. The design of the questionnaire was based on prelimi-

nary discussions that we had with finance directors from three listed companies.

The initial response was very low, so we phoned each finance director and

reminded him or her of the questionnaire. Thirty-eight questionnaires were

returned, achieving a response rate of 61%. The first questionnaire was returned

in the second half of October 2005 and the last by the end of February 2006. The

respondents asked for complete confidentiality with respect to the identification

of their company.

Data were analysed with the functions of SPSS. The associations between

nominal and ordinal variables were tested using the Fisher exact test, as there

were too few observations for a valid application of the chi-square test. To test

for correlations between numerical and nominal variables we chose the

MannWhitney test and for the investigation of correlations between numerical

variables, we performed a linear regression analysis. Ordinal and logistic

regression models were also used to explore possible correlations between

other types of variables and ordinal or dichotomic variables. The type, nature

and values of variables employed are described in Table 5.


The first 12 variables result from the questionnaire, while the last one,

Company Size, was operationalized as the market capitalization on 23 December

2005, the last transaction day on the BSE, translated in euros at the National

Banks exchange rate on the same day.

Results and Findings

We analyse the research results according to the three objectives stated above.

Table 5. Definition of variables

No. Label Measure Values

1. Type of reporting Nominal Harmonization regulations only;restatement; full IAS/IFRS

2. Date ofimplementationa

Nominal Before Harmonization Regulations becamemandatory; after HarmonizationRegulations became mandatory

3. Type of cost Nominal Multiple response: training of personnel;adjustment of information systems;consultants fees; double reporting

4. Most important cost Nominal Open-ended question5. Implementation

costsScale Continuous

6. Budgets Nominal Has budgeted; has not budgeted7. Advantages Nominal Multiple response: adequacy for capital

markets; access to foreign financialmarkets; solutions for transactions notyet regulated; relevant information formanagers; simpler accounting

8. Costs and benefits Ordinal Benefits lower than costs; presently,benefits lower than costs; benefits exceedcosts

9. Participation inIAS/IFRStraining

Nominal Has participated in IAS/IFRS training; hasnot participated in IAS/IFRS training

10. Use of consultants Nominal Has used consultants; has not usedconsultants

11. Recourse to foreignfinancial markets

Ordinal Inexistent; envisaged; occasional; frequent

12. Type of capital Nominal Wholly or majority-owned by Romanianinvestors; wholly or majority-owned byforeign investors

13. Company size(marketcapitalization)

Scale Continuous

aWe requested the year of application of IAS/IFRS and checked it against the appendices to the Har-monization Regulation to determine if these enterprises have applied IAS/IFRS before the Regulation

became mandatory for them.


Regulations 187

A. Voluntary Adoption of IAS/IFRS

To investigate if there is a trend for the voluntary adoption of IAS/IFRS byRomanian companies we have defined two nominal variables: Type of Reporting

and Date of Implementation of IAS/IFRS (see Tables 6 and 7).We noticed that a small percentage of listed companies (10.5%) applied IAS/

IFRS before the Harmonization Regulations became mandatory for them. Even

after the issue of the Harmonization Regulations, a significant percentage of

listed companies (65.8%) was still not interested in IAS/IFRS financial state-ments, neither restating, nor applying full IAS/IFRS.

Since we believe that obtaining foreign financing is the main reason for which

companies used IAS/IFRS before the Harmonization Regulations became man-datory, we defined an ordinal variable that captures the interest of finance direc-

tors in foreign financial markets Recourse to Foreign Financing (see Table 8).

The association between Recourse to Foreign Financing and Date of

Implementation is statistically significant and we therefore accept hypothesis

HA1 (Fishers exact test, two-sided, p 0.048, see Appendix B, Table B1). Com-panies requesting foreign capital frequently or occasionally have applied IAS/IFRS before the Harmonization Regulations became mandatory. On the other

hand, companies not requesting foreign financing have done so after the issue

of the Harmonization Regulations.

The association between Type of Reporting and Recourse to Foreign Financing

is also statistically significant and we therefore accept hypothesis HA2 (Fishers

exact test, two-sided, p 0.012, see Appendix B, Table B2). Companiesmaking frequent recourse to foreign financial markets have double reporting,

while companies not requesting foreign finance or doing so only occasionally,

prepare financial statements conforming to the Harmonization Regulations.

Table 6. Type of reporting

Type of reporting Frequencies Percentages

Harmonization Regulations only 25 65.8%Restatement 10 26.3%Full IAS/IFRS 3 7.9%Total 38 100%

Table 7. Date of implementation of IAS/IFRS

Date of implementation Frequencies Percentages

After the Harmonization Regulations 34 89.5%Before the Harmonization Regulations 4 10.5%Total 38 100%


It is noteworthy that, even now, enterprises having applied IAS/IFRS beforethey became mandatory according to the timetable included in the Harmonization

Regulations, prepare two sets of financial statements. The correlation between

Type of Reporting and Date of Implementation is revealed by Fisher exact test

(two-sided, p 0.009, see Appendix B, Table B3). In other words, the regu-lations introduced by the Ministry of Finance did not help those enterprises

needing financial statements complying with IAS/IFRS: such enterprises prac-tice double reporting at present, too.

We investigated the relationship between Company Size, as operationalized by

market capitalization (see Table 9) and Type of Reporting. As there is a signifi-

cant association between Company Size and Type of Reporting (MannWhitney

U 95,000, exact sig., p 0.038), it follows that large enterprises prepare twosets of financial statements. We therefore accept hypothesis HA3. This is

explained by the higher potential of large enterprises to obtain foreign financing,

which led to an application of IAS/IFRS on their own initiative rather than as animposed legal provision. This explanation is backed statistically, as large enter-

prises tend to request foreign finance frequently or occasionally (MannWhitney

U 60,000, exact sig., p 0.007).We can safely conclude that there is no manifest demand for IAS/IFRS in the

Romanian business milieu, only a small number of listed companies preparing

such financial statements out of the need to obtain foreign financing. Accord-

ingly, the decision of the regulator does not appear to be based on an existing

Table 9. Market capitalization

Descriptive statistics Values (euros)

Mean 197,345,013Median 27,330,039Standard deviation 452,175,996Minimum 1,382,319Maximum 2,626,441,529Sum 7,499,110,501Observations 38

Table 8. Recourse to foreign financial markets

Recourse to foreign financing Frequencies Percentages

Inexistent 11 28.9%Envisaged 17 44.7%Occasional 4 10.5%Frequent 6 15.9%Total 38 100%


Regulations 189

trend; Harmonization Regulations do not help companies needing IAS/IFRSfinancial statements as restatements are still necessary.

B. Harmonization Costs

According to Table 10, we identified four main types of harmonization costs:

personnel training costs, adjustment of information systems, consultants fees

and double reporting. For that reason we accept hypothesis HB1.

We notice that almost all listed companies surveyed (94.7%) incurred person-

nel training costs. Personnel were trained via training courses (86.8% of compa-

nies variable 9 from Table 5, Participation in IAS/IFRS Training).Consequently, we might believe that these companies intended to assimilate

and apply international regulations with their own staff, rather than externalize

the accounting function. Even though companies intended to implement IAS/IFRS with their own staff, the actual procedures were supervised by a pro-

fessional accounting firm, as 65.8% of companies indicated significant consult-

ants fees.

The companies surveyed mentioned other IAS/IFRS implementation costs,such as: audit costs (seven companies), documentation costs (one company)

and remuneration costs (one company). Since the financial statements prepared

in accordance to the Harmonization Regulation had to be audited, all companies

actually incurred audit costs.

Taking into account the lack of qualified personnel and the delays in the pub-

lishing of IAS/IFRS translations and implementation guides, we are inclined tobelieve that, at least in the incipient phase, the international accounting firms

which were auditing the financial statements were also involved in their restate-

ment in accordance with the Harmonization Regulation.14

It is widely recognized that auditors prepare financial statements on behalf

of their clients because clients lack financial reporting expertise and there-

fore expect the auditors to prepare them. However, clients emphasize that

audit firms gradually transfer knowledge to company staff, who then can

take over the drafting of financial statements.

(World Bank, 2003b, p. 6)

Table 10. Occurrence of IAS/IFRS adoption costs

Type of cost Frequencies Percentages

Training of personnel 36 94.7%Adjustment of information systems 27 71.1%Consultants fees 25 65.8%Double reporting 9 23.7%Total n/a n/a


Apparently, a number of companies in our sample received, from the same pro-

fessional accounting firm, auditing and consulting services that could have

included training courses or adjusting of information systems. It seems that wher-

ever accounting firms gave their assistance in areas related to the implementation

of the Harmonization Regulation, companies had difficulties in distinguishing

between audit costs and other implementation costs. We therefore express reser-

vations on the components of IAS/IFRS implementation costs as they were sup-plied by the respondents, because it is possible that some of them overlapped and

were reported in a less precise way.

A percentage of 36.8% of the finance directors indicated personnel training

costs as the most onerous type of cost (see Table 11).

Based on the answers received (only 23 of the 38 enterprises that returned the

questionnaires disclosed the amount of the costs), we have calculated an average

implementation cost of approximately 30,000 euros (see Table 12), 78.26% of

respondents indicating costs lower than 50,000 euros (see Table 13).

These costs are insignificant when weighed against the annual operating

expenses reported by listed companies: the average IAS/IFRS implementationcost represents only 0.035% of the average operating expenses in 2004.15 Com-

pared to the results of other similar studies done in the European Union (e.g. JMH

Financial Services16), the costs of Romanian enterprises that have implemented

IAS/IFRS are much lower. This is explained by the features of the local labour

Table 11. Most important cost

Most important cost Frequencies Percentages

Training of personnel 14 36.8%Consultants fees 11 28.9%Audit 7 18.4%Adjustment of information systems 4 10.5%Total n/a n/a

Table 12. Implementation costs of IAS/IFRS

Descriptive statistics Values (eurosa)

Mean 30,348.12Median 15,000Mode 30,000Standard deviation 35,506.80Minimum 2,762.69Maximum 151,947.88Sum 698,010.40Observations 23

aTranslated into euros at an average exchange rate for the period November

2005February 2006.


Regulations 191

market, still characterized by low costs: for the year 2004 the National Institute

for Statistics calculated an average gross salary of approximately 200 euros

(around 270 euros in 2005).17 The majority of harmonization costs (personnel

training costs, consultants fees, audit, adjustment of software applications) are

composed of highly qualified professional services delivered at much lower

costs than in Western Europe. It has also been suggested that these comparatively

low costs might be due to a possible minimal application of the Harmonization

Regulation. As explained earlier, the regulator permitted the carve outs of IAS

27 and IAS 29; at their turn, the preparers, not accustomed to making judgments,

often went for a partial or tax application of a number of standards.

The amounts reported as IAS/IFRS costs must be regarded with caution, asthe respondents were asked to make a global evaluation which was not always

consistent in terms of its components (e.g. audit costs).

The second hypothesis, HB2: Large enterprises incurred bigger IAS/IFRSimplementation costs than the rest of the enterprises, was tested using the follow-

ing regression model (Table 14):

Ci a0 a1MCi 1i

where Ci implementation costs of company i and MCi market capitalizationof company i.

Table 13. Size of costs

Cost intervals (euros) Frequencies Percentages

Below 50,000 18 78.26%Between 50,000 and 100,000 4 17.39%Over 100,000 1 4.35%Total 23 100%

Table 14. Regression results

Statistics Values

R 0.696R-square 0.484a0 17,479.552(t) (4,206)a1 0.372(t) (4.331)F 18.759DurbinWatson 1.986Observations 22

Significant at 0.001.


To improve results, we have eliminated an outlier, that is, a single value 4

times higher than the standard deviation. In addition to this, as the two variables

were disproportionate, we have multiplied the values of MC by 0.0001 to avoid

obtaining a too low a1.We therefore accept hypothesis HB2, market capitalization explaining 48.4%

of costs variation. The fact that large companies incur proportionately higher

implementation costs could be explained by the increased volume and complex-

ity of their transactions, but also by possible geographical dispersion. The results

imply that the potential economies of scale of large companies were insufficient

to proportionately lower their implementation costs.

Owing to the specific mandatory application of IAS/IFRS, most listed compa-nies (68.7%) have anticipated implementation costs and included them in their

budgets. We have noticed that large companies have budgeted IAS/IFRS coststo a higher extent than the other companies (MannWhitney U 82,000,exact sig., p 0.019). This is justified if we take into account the fact thatlarge companies expected higher cost amounts and have thus included them in

their budgets.

We also accept the last hypothesis, HB3: Enterprises with double reporting

incur higher implementation costs (MannWhitney U 30,500, exact sig.,p 0.039). This is due to the fact that Romanian Harmonization Regulationswere rough approximations of IAS/IFRS and companies needing IAS/IFRSfinancial statements had to perform restatements leading to additional costs.

C. Costs and Benefits

The vast majority of companies surveyed (89.5%) consider that IAS/IFRS allowa better communication on the capital market, by offering more relevant infor-

mation to investors; half of them welcome the opportunity to access international

financial markets.

A total of 60.5% of respondents consider that IAS/IFRS are a good source ofinformation for managers, revealing that the IAS/IFRS are not only relevant toexternal parties, but also for internal use of the management. These results are

consistent with the findings of Colwyn Jones and Luther (2005) who investigate

the possible effects of IFRS on German controlling.

The analysis of data also showed that finance directors who did not have formal

IAS/IFRS training did not consider that IAS/IFRS are adequate for listed com-panies (Fishers exact test, two-sided, p 0.005), as they lacked the necessaryexpertise.

We have defined Costs and Benefits, an ordinal variable, to assess finance

directors opinions with respect to the relationship between the costs and benefits

implied by the adoption of IAS/IFRS (see Table 15).Given that 60% of the finance directors surveyed deem IAS/IFRS implemen-

tation benefits insufficient to cover related costs, we accept hypothesis HC1.


Regulations 193

We have used ordinal regression models to test hypotheses HC2 and HC3 con-

cerning associations between the ordinal variable Cost and Benefits and the vari-

ables Type of Capital or Recourse to Foreign Financial Markets, but also to test

potential associations between Cost and Benefits and Company Size. We have

also grouped the data in order to run logistic regression models. No correlation

resulted between the variable Cost and Benefits and the other variables con-

sidered. Consequently, we reject these two hypotheses (HC2 and HC3) out of

insufficient evidence to support the relationship between Cost and Benefits, on

the one hand, and Type of Capital and Recourse to Foreign Financing, on the

other hand.

A possible explanation why the costbenefit relationship was not evaluated

differently by companies wholly or majority-owned by foreign capital and com-

panies making recourse to foreign finance could be that these businesses could

not equate the financial statements prepared under the Harmonization Regulation

with IAS/IFRS financial statements. Companies could not fully benefit fromIAS/IFRS financial statements (such as an easier access to foreign finance),since additional restatements were necessary.

Summary and Conclusions

This paper is aimed at studying the harmonization of Romanian accounting with

international regulations (European Directives and IAS/IFRS) from the vantagepoint of a wider costbenefit analysis. To achieve this, we focused on the identi-

fication and evaluation of costs entailed by the assimilation and application of

international regulations. From the same costbenefit perspective, we attempted

to capture the perception of finance directors of listed companies with respect to

the adequacy of the decisions made by the Romanian accounting regulator.

The results show that the harmonization decision of the Romanian accounting

regulator did not fit an existing trend in the business milieu; only a few companies

prepare IAS/IFRS conforming financial statements out of the need to obtainforeign financing. Moreover, the benefits of the implementation of the Harmoni-

zation Regulations were perceived as not being significant by the majority of

finance directors of listed companies, even though implementation costs were

rather low.

Table 15. Assessment of costs and benefits

Costs and benefits Frequencies Percentages

Benefits lower than costs 9 25.7%Presently, benefits lower than costs 12 34.3%Benefits exceed costs 14 40%Total 35 100%


Based on the research results we can question the decision of the Ministry of

Finance to implement Harmonization Regulations, and the particular manner

chosen to carry it out. The fact that only a few companies were interested in

IAS/IFRS may suggest that the Harmonization Regulations submitted Romaniancompanies to an unjustified effort. The comment made by a finance director asked

to point out an advantage of the adoption of IAS/IFRS is illustrative in thisrespect: there is no advantage, it is an obligation.

The decision for gradual reforms that led to an approximate application of

IAS/IFRS (a tax application in certain audit reports) was of no assistance tothose companies that needed or would need financial statements conforming to

IAS/IFRS. These companies had to perform restatements and incur additionalcosts. The actual application of the Harmonization Regulation proved true the

European Commissions warning that as far as the national statutory individual

accounts are concerned, regulatory and tax requirements could make the use of

IAS inappropriate or even invalid (European Commission, 2000, p. 6).

The 2005 decision of the regulator to withdraw the Harmonization Regulations

and limit the application of full IAS/IFRS to the consolidated accounts of publicinterest entities is equivalent, in our view, to the tacit recognition that their issue

was made in haste, before the European Union stated its position towards IAS/IFRS in individual company accounts. Even within the World Banks constraints,

the regulator could have limited the scope of the Harmonization Regulations to

public interest entities only, without going beyond the EUs applicable policy.

We are of the opinion that giving up the size criterion in the application of

IAS/IFRS is a decision that fits the characteristics of the Romanian economicmilieu, as, with the notable exception of public interest entities, the main users

of accounting information are the state and the creditors from the banking sector.

However, we are aware that adapting to the economic background is not

necessarily a prerequisite for imposing an accounting system. Authors such as

Munteanu (2003) believe that large-scale application of IAS/IFRS may beadvantageous even if it is done in a truncated form and without an immediate

goal. IAS/IFRS is an advanced accounting system and its assimilation byRomanian companies could improve the overall quality of financial reporting.

The accounting profession will certainly benefit by relating to a conceptual fra-

mework even if imposed within a Ministerial Order, as accountants will

improve their professional judgement and gain independence from the public

authority. On the other hand, such benefits are difficult to quantify and use to

balance implementation costs.

For that reason we agree with the regulators taking note of the enterprises

capacity of implementation, since, as revealed by our study, for most listed com-

panies the application of IAS/IFRS is not linked to an immediate direct benefit,but advantages may become more visible with time. This could be the reason for

which more than a third (34.3%) of the finance directors surveyed were of the

opinion that the benefits of adopting IAS/IFRS do not cover related costs atpresent. The rationale behind the Harmonization Regulation might have been


Regulations 195

reasonable at the time, and with careful preparations, could have smoothed the

transition to full IFRS, at least for listed companies.

Limitations and Further Research

Out of the 62 companies to whom we have sent questionnaires, 38 returned them

completed, that is, a response rate of 61%. In our opinion, the low rate of response

is due to the lack of transparency of Romanian companies, a relic from commu-

nist times when accounting information was secret. At least two finance directors

replied to our request writing that they cannot provide information since they

have not received managements permission.

Nevertheless, we may generalize the results of our research to all listed com-

panies on the BSE, since respondents do not differ from non-respondents on at

least one important characteristic: company size, as operationalized by market

capitalization. The application of the t-test shows that respondents and non-

respondents do not differ on market capitalization (t-test: t 0.491, df 60,sig. two-tailed, p 0.625). However, the variable Market Capitalization isnot distributed normally (skewness: statistic 6.536, standard error 0.304).

Accordingly, we have treated the data as non-parametric and applied the

MannWhitney test. The results of the MannWhitney test converge with

those of the t-test: the non-respondents do not differ from respondents on

market capitalization (MannWhitney U 338,000, asymp. sig., two-tailed,p 0.088).

Our study revealed a strong causal link between the size of costs and the

company size, that is, its market capitalization. As only 23 companies (out of

the 38) disclosed the amount of the IAS/IFRS implementation costs, theaverage IAS/IFRS implementation costs can only be generalized to the rest ofthe population if, again, there were no significant differences between the two

groups: companies that disclosed their costs and companies that did not (includ-

ing those that have not returned the questionnaires). The results of the t-test

demonstrate that, in relationship with market capitalization, companies that dis-

closed cost information are not significantly different than those who did not

provide this information (t-test: t 0.932, df 60, sig. two-tailed, p 0.355).For the same reasons given above, we have also applied the MannWhitney

test to check the existence of differences between disclosing companies and

the rest of the companies. The test results show that the two groups do not

differ on market capitalization (MannWhitney U 424,000, asymp. sig.,two-tailed, p 0.721) and thus the average IAS/IFRS implementation costmay be generalized to all listed companies.

Our study did not evaluate the benefits of adopting IAS/IFRS, but only theopinions of finance directors concerning related costs and benefits. As finance

managers had to bear the effort of implementing the actual assimilation of the

Harmonization Regulations, we are aware of the fact that their perception may

be biased. The view of finance directors of listed companies is just one


perspective on the relationship between the costs and benefits of adopting IAS/IFRS, and investors or financial analysts may have a different opinion.

For these reasons, we believe that further research is needed to evaluate the

benefits of adopting the international regulations, possibly in an international

context. As European Union Member States also face the issue of the capacity

of implementation of IAS/IFRS by listed groups, such studies could reveal theeffect of compliance costs on companies performance. Moreover, since the Har-

monization Regulation was an approximation of IAS/IFRS, this costbenefitevaluation could also be relevant for the proposed IFRS for SMEs.

Acknowledgements

The authors thank the participants to the INA Research Forum of the 29th Annual

Congress of the European Accounting Association (Dublin, 2006) and to the

IFSAMs Track 7, Internationalization of Accounting (Berlin, 2006), in particu-

lar Dr Ladislav Mejzlik, Dr Susan Hughes, Dr Andrei Filip, and Prof David

Alexander for their helpful comments and suggestions. We acknowledge the

kind assistance of Mrs Maria Manolescu, former Secretary of State at the Minis-

ter of Public Finance of Romania. The authors also thank two anonymous

reviewers of IFSAMs Track 7 for their useful comments. The financial and logis-

tic support of CNCSIS - Romanian National Academic Research Council

(Project: Harmonising Romanian Accounting with EU Directives and Inter-

national Financial Reporting Standards (IFRS), grant 1129/2004), the Faculty

of Accounting and Information Systems, Academy of Economic Studies Buchar-

est and Bucharest School of Management is gratefully acknowledged. We are

also grateful to the editor of Accounting in Europe and to two anonymous

reviewers for their very constructive comments on the manuscript. Special

thanks to Prof Tudorel Andrei and Prof Dirk Jacobs for their suggestions regard-

ing data analysis.

Notes

1The censor is not an auditor in the international acceptance of the word. He is empowered to

supervise the administration of the company, check the legality of the financial statements

and make sure that these are drawn up in agreement with supporting documents. He should

also verify if the company regularly records transactions in the journal and ledger and if the

inventory and valuation of the companys patrimony were done according to the relevant regu-

lations. The rule was to choose an accountant member of CECCAR, the Institute of Public and

Licensed Accountants of Romania.2Two years after the adoption of the Accounting Law, the Romanian government signed the

Association Agreement with the European Community on 1 February 1993.3The Institute of Chartered Accountants of Scotland provided the technical assistance (ICAS,

1999; King et al., 2001).4On 10 January 2001 the Ministry of Finance was reorganized and its name was changed into the

Ministry of Public Finance.5Romanian Association of Securities Dealers Automated Quotation (system).


Regulations 197

6Fourth Directive criteria after their third five-yearly revision in 1994. The Ministry of Public

Finance changed these criteria in 2003. At 31 December 2004, the final criteria were: total turn-

over more than E7.3 million, total assets over E3.65 million and average personnel number

more than 50.7The normal procedure comprised three-year training in an auditors practice, followed by a

series of examinations. The provisional procedure allowed to some 1,420 individuals who ful-

filled the criteria relating to experience and reputation to become provisional members of the

Chamber of Auditors (World Bank, 2003b). The setting of the Chamber of Auditors generated

tensions between it and the professional body CECCAR whose members were previously

censors of companies eligible to apply the Harmonization Regulation.8SIC 19 was also carved out by secondary legislation regulating the financial statements of the

year 2002.9Estimated in March 2007 at RON 342,418 million by the National Statistical Institute

[www.insse.ro/cms/rw/pages/comunicate/pib.ro.do] and translated into euros at theaverage exchange rate of 3.5258 RON/euro.

10These listing rules were valid until September 2006 when the new Rulebook of the Bucharest

Stock Exchange was approved by the National Securities Commission.11http://www.accountancyage.com/News/113586112Accountants in accounting firms 16.66%, accountants in general business companies 50.02%,

students 16.66% and teachers 16.66%.13We have already cited the case of the thirteenth enterprise in the 1999 pilot test.14It is also relevant that the few companies which restated their financial statements to account for

hyperinflation appeared to comply with IAS 29 and these companies clearly enjoyed the

support of local member firms of international audit firm networks (World Bank, 2003b, p. 12).15This average was calculated based on the operating expenses reported by the same companies

that have provided us with information regarding their implementation costs. For translation

into euros, we have used the average exchange rate published by the National Bank of

Romania for the year 2004.16http://www.accountancyage.com/News/113586117http://www.insse.ro, translated into euros at the average exchange rate published by the

National Bank of Romania for the years 2004 and 2005, respectively.

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Documents

An Empirical Evaluation of the Costs of Harmonizing Romanian Accounting With International Regulations