Romania: Business and Accounting Environment - Essay Example

?Romania: Business and Accounting Environment Introduction Romania is a member country of the European Union and is rich in resources for attracting U.S. investors. It has marketplace for 22 million and cultivable land for over 37 million acres. The workforce in this country is well qualified with over 50,000 experts in information technology. American investors find it lucrative to invest in various sectors in Romania because of the reducing trade barriers and growing economy in the country (“Doing business in Romania”). Business environment Romania’s business development is enhanced by its products, services and technology. Being a member of the EU, Romania in order to comply by the requirements of the membership makes investments for modernization and development of its infrastructure. In the year 2008, Romania showed economic development by an impressive 7.1%, but since then there has been a decline with 1% in 2012. The public sectors act as the buyers of products and services, while the agriculture sector is funded by the EU or developmental banks like the World Bank among others (“Doing business in Romania”). In the 1990s, Romania started to reform its economy to make it completely market-based. The government applied reform methods between 2000 and 2007 in order to maintain growth and stability in the long run. Although there was economic growth in 2008, there was huge disparity in the income between Romania and the EU. For solution, the government implemented many flexible policies to allow firms to use their resources like labour and capital more efficiently (“Romania: Functional Review” 64). Legal environment and forms of business Structuring of market-based economy in Romania in the 1990s has stabilized the legal regulations of corporate entities. Business activities can be performed by any individual who has the professional qualifications to execute commercial activities, or by legal bodies who have documental rights and efficiency to perform business activities. The classes of business entities in Romania as per regulations are “commercial companies, regies autonomes, economic interest groups and European economic interest groups, authorised persons, individual enterprises and family enterprises.” (“Forms of doing business” 27) Joint ventures do not enjoy any legal status as stated by Romanian law and they concentrate on specific operation or series of operations. The members contribute funds and other assets for a common goal and get share of the profit and loss of the ventures. Joint ventures can have shareholders minimum of two with no limit to the maximum number. The number of shareholders can be one to 50 in case of limited liability companies which can include an individual or legal entity (“Forms of doing business” 27-28). The legal aspect of Romanian employment or Labor Code is governed by Law No. 53/2003, collective bargaining agreement by Law No. 130/1996 and labour conflicts are governed by Law No. 168/1999. Ad per the Labor Code, the terms of collective bargaining agreement that are agreed on at national level can be applied on all employers and employees in Romania in any kind of business activity (“Tax and legal guide....” 3). Capital markets For economic development of any country, an active capital market plays an essential role. The capital market should be such that national assets can be freely mobilized for serving the national economy. On the other hand, it should be able to effectively utilize the available financial resources. The role of foreign investment is important for maintaining competitive environment in the receiving country. Foreign investments generated by another economy have huge potential to accelerate the GDP. Similarly, in Romania financial sources in the form of external capital like foreign investments pave the way for both quantity and quality development of internal capital, and also allows optimum use of the unused available resources. With the development of capital market in Romania there emerges “specialized instruments and institutions”, and increases the scopes for investments. All these elements lead to increased savings and capital gathering rates. The foreign portfolio investments can influence the debts in the international markets, and they can have positive effect on Romanian capital market. The portfolio investments increase movement of financial resources, make banking activities more transparent, attracts more foreign and domestic investors by enhancing their protection. However, in Romania there is less mobility of financial resources thereby discouraging huge portfolio investments. The foreign investors feel less inclined to invest in Romania because of their grievance regarding lack of derived products. Such complaints are substantial in Romanian economy as there is less possibility of reducing the risk factors concerned with financial investments (Barna, 1-4). Romania’s merchandise exports percentage of world total merchandise exports was 0.16 in both 2010 and 2011 which was slight decline from 0.17 in 2009 (“Merchandise exports by the reporting economy” 2009-2011). Accounting regulation There is accounting law in Romania which governs accounting in Romania. There are several rules to accounting – 1) in Romania, every company must maintain its own records of accounts, 2) it is obligatory by lay that every company must use double entry system in accounting and proper financial statements should be presented at the end of every financial year, 3) it is the responsibility of the Ministry of Public Finance for fielding rules and regulations in accounting systems for companies, 4) all the documents of account statements are to be kept at company headquarters, 5) the documents need to be stored for a minimum of 10 years from the end of the financial year during which they were drawn up, and 6) in case a business is terminated, its accounting statements should be stored in the state archive (“Accounts – Romania”). The application of international standards like IAS and IFRS in accounting processes in Romania was started in the financial year 2006 by several entities who were applying “regulations harmonized with the International Accounting Standards and the European Directives”. (Rotila, 110) This was done to make national accounting system consistent with the European regulations (Rotila, 112) Accounting measurements In the ongoing economic crisis, Romania faced financial setbacks and for this purpose the application of prevalent accounting system cannot serve the needed purpose of the companies as it can create uncertainty regarding future activities of the companies. So, in order to maintain fair value measurements, the accounting laws of Romania permitted “revaluations for tangible and intangible assets and also included a fair value option for financial instruments but only for consolidated accounts.” (Ionascu, 537) The accounting laws have two objectives – 1) increasing application of IFRS while maintaining accounting records, and 2) creating conformity between national accounting rules and European directives (Rotila, 117). Tax laws In Romania taxes are governed by Codul fiscal (Fiscal Code). There are direct taxes that the firm must pay to state based on the profit which is the difference between “taxable income and deductible expenses”. In general the percentage is 16 in Romania, although there are exceptions. For state owned companies there are no direct taxes to be paid, while micro-businesses need to pay 2-3% of profit as tax. Then there are special taxes for consumers like excise tax which is imposed on certain products even if they are manufactured in domestic sector or imported like beer, wines and other fermented beverages, and ethyl alcohol, intermediate products, processed tobacco, energy products and electricity. VAT (value added tax) is an indirect tax paid to the government and the standard rate in Romania is 19% while the reduced rate is 9% on certain products and services (“Taxes – Romania”) Auditing In the turn of this century, Romanian auditing standards were undergoing transformation from national standards to international standards like compliance with ISA (International standards on accounting) and EU directives (“Romania – Accounting and Auditing” 1). The Audit Authority has the responsibility to operate to fulfill certain objectives regarding to external audit, which is part of Romanian auditing system being a member state of the European Union. The Audit Authority’s has its head office in Bucharest municipality and has the capacity to function independently without being answerable to the Court of Accounts or other authorities. The activities of Audit Authority are financed by the state budget and are included in the “expenditure budget of the Court of Accounts.” The Audit Authority is supervised by one president and two vice presidents all of whom are elected by the Parliament from counselors of accounts (“Romanian Court of Accounts”). There are two approved systems of auditing in Romania – 1) one is conducted by financial authorities who comply by the ISAs and they audit accounts of listed and large entities, and 2) another for smaller entities that have balance sheet total below 5 mln EUR, and their accounts are audited by censors (“The Body of Expert Accountants....” 1). Accountants CECCAR consists of professional accountants in Romania and it is a self-regulating body. All the qualified and accountants of this country need to be certified by this accounting entity. In Romania, all kinds of accounting services are governed by laws and hence can be provided only by certified accountants who are members of CECCAR. Audit services that are permitted by law may be only be provided by “financial auditors, members of Chamber of Financial Auditors of Romania” (“The Body of Expert Accountants....” 1). IASB The application of international standards like IAS and IFRS in accounting processes in Romania was started in the financial year 2006 by several entities who were applying “regulations harmonized with the International Accounting Standards and the European Directives”. (Rotila, 110). This application was done to make specialists aware of the regulations of Framework for the Preparation and Presentation of Financial Statements, and also of the contents of IAS (Rotila, 111). Conclusion For the owners and managers of small business entities and their shareholders, it is becoming increasingly important that they get all kinds of information from internal and external accounting. Therefore, it is crucial that accounting systems must be adopted by business enterprises according to their performance and financial requirements, and also such systems must have no burden of unnecessary administrative formats. References “Accounts – Romania” europa, 2013, May 20, 2013 from: http://europa.eu/ youreurope/business/managing-business/keeping-accounts/romania/index_en.htm Barna, Flavia “The impact of the foreign investments in the capital market of Romania”, 2006, May 20, 2013 from: http://mpra.ub.uni-muenchen.de/7109/1/ MPRA_paper_7109.pdf “Doing business in Romania” export, February 6, 2011, May 20, 2013 from: http://export.gov/romania/doingbusinessinromania/eg_ro_031135.asp Ionascu, Mihaela “Fair value measurements and earnings forecasts accuracy: evidence for Romanian listed companies”, Accounting and management information systems, 11.4 (2012) 532-544 “Merchandise exports by the reporting economy” worldbank, 2009-2011, May 20, 2013 from: http://search.worldbank.org/all?qterm=export%20volume%20in%20romania “Romania – Accounting and Auditing” worldbank, May 9, 2003, May 20, 2013 from: http://www.worldbank.org/ifa/rosc_aa_rom.pdf “Romania - Functional Review: Ministry of economy, energy sector and business environment” worldbank, May 30, 2011, May 20, 2013 from: http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2012/12/10/000425962_20121210164843/Rendered/PDF/NonAsciiFileName0.pdf “Romanian court of accounts” curteadeconturi, 2013, May 20, 2013 from: http://www.curteadeconturi.ro/sites/ccr/EN/Pages/Audit%20authority.aspx Rotila, Aristita “The Implementation of IAS/IFRS in Romania – Advances and Perspectives”, Broad Research in Accounting, Negotiation, and Distribution, 1.1 (2010) 110-118 “Tax and legal guide Romania Romanian employment law”, October 2010, May 20, 2013 from: http://www.deloitte.com/assets/Dcom-Romania/Local%20Assets/Documents/EN/ Tax%20and%20Legal%20Guide/ro_Tax_Legal_Guide_Romanian_Employment_Law_113010.pdf “Taxes – Romania” europa, 2013, May 20, 2013 from: http://europa.eu/ youreurope/business/managing-business/paying-taxes/romania/index_en.htm “The Body of Expert Accountants and Licensed Accountants in Romania” IFAC, n.d., May 20, 2013 from: http://www.ifac.org/sites/default/files/compliance-assessment/attachments/ROM1_Attachment.pdf Read More