Accounting and Financial Administration in Russia

Accounting and Financial Administration in Russia

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From the business administration point of view, the main challenge in doing business on the Russian market is finding enough time for strategic and operative management of the business as opposed to spending this time on administrative and reporting duties. Outsourcing of these duties enables management to focus on the key areas of the business. Accounting is one of the prime areas of business administration to be outsourced; it is also the one most difficult to resolve.

This is simply because the market and regulatory environment is still so young that no single person possesses all the expertise required. Companies therefore look for opportunities to outsource their accounting functions. Frankly, this has not been an easy task. Most accounting firms have not understood that their challenge lies more so with financial administration rather than with accounting. Awara Accounting fills this gap in the market by offering value-added financial administration services combined with accounting services which presents a clear advantage over single business firms. This way we in reality take care of the client’s financial administration and reporting needs, resolve problems, clear hurdles and break the barriers which lie between a good business strategy and profit.

In Awara the client does not hire just a bookkeeper but a financial administration team that delivers results. And while the cost of our service is more valuable than that of a bookkeeper, the same can be said of the results. Our service is not intended as a direct cost-saving effort but as a value-added input into the operations. With our service the client significantly cuts the implementation time of projects and greatly propels growth.

Accounting, Financial Administration, and all combined in Risk Management

While quick in delivery, we are sharp in risk-management. Our team has gained all the necessary experience through 15 years of Russian transition to the market economy. While professionally managing risks, we deliver the best economic savings in financial and taxation choices, for we have the skills, experience and expertise to recommend the best solutions in any given situation.

We have grown through delivering quality and we help our clients do the same.

Not Big, but Few Can Compete with Us in Resources

Awara is among the largest business administration firms in Russia. Our expertise is however unique compared with the others, because it is the only one that combines accounting, taxation and legal expertise on highest level in one firm. We also provide an additional competitive edge in human resources services and recruitment through our affiliation with the recruitment firm, Awara Direct Search. The competition may be able to provide lawyers or accountants separately, but no one else can offer the combination of experts present at Awara. Our tax consulting and business administration consulting are also unparalleled.

On the Russian market, where the regulatory environment is still in the early stages of its evolution and the business practices are young, it is difficult for any firm to state effective provision of financial administration services if the service provider does not offer the complex combination of skills and experience in all these core areas of expertise. In Russia an accounting firm lacking strong expertise in business administration, taxation and law will not qualify as a value-added producer of accounting services. It can merely serve as a bookkeeper recording the events post fact, leaving the client to look for other sources to help him steer his business. The companies that do not realize this early on have often had to realize their mistakes at a later stage after it is already too late.

Awara works together with the law firm, BRICS Consulting with a combined staff of 150 accountants, lawyers, and management consultants. With the affiliation between our law and accounting firms, Awara is the only service provider on the market combining legal with accounting expertise. This ensures that Awara offers four dimensions to work, whereas the competition can handle two at best. In view of the fact that the laws and legal administration and court practices are currently merely a work in progress, it is essential that business administration specialists and attorneys work as part of a single team. In the case of Awara, it means that each recommendation in accounting administration or legal issues is based on a comprehensive analysis and knowledge of the combined effect on all operations. Accounting is not done only for its own sake, nor is legal action taken solely for the sake of law or business administration issues for the sake of bureaucracy. In Russia we have frequently come across situations where a company’s accountants suggest one thing while the attorneys suggest another; this can only result in inefficiency, high overall costs and a loss of business opportunities – pitfalls all avoided by Awara.

At the end of the day the decisive aspect of doing business is communication. In Russia where so much in society has fundamentally changed, communication gets highlighted like never before. Communication in the field of accounting and financial administration is more challenging in Russia than in most parts of the world for a number of reasons: a difficult regulatory environment, heavy bureaucratic traditions, the fact that tax authorities and courts are themselves only learning and practicing the rules, language skills, the challenge to communicate between different business cultures, different accounting systems, different reporting sets, etc. These challenges, combined with a deficit of experienced and professional accountants, mean that accounting in Russia consists of much more than just recording transactions and reporting. To start with we have to understand that this is a broad issue encompassing financial administration and risk management at the intersections of accounting, taxation, law, general business administration – and all on an imperfect market. The accounting service provider thus has to firstly gain for himself a full understanding of all these difficulties and then muster the necessary expertise in all the needed fields. Foremost, he must be able to communicate all that which is of relevance to the client.

An important link in the proper service and thus proper communication is assigning to each client a key account manager with the purpose of ensuring that all of the clients’ vital interests get proper attention and concentrated service. Awara is the first in its field to carry customer service – and hence quality – this far in Russian accounting services.

Achieving Readiness Gradually

To describe our service concept, we illustrate highlights of correspondence with a major client planning to enter Russia with serious and large investments. Eager to seize the business opportunities on the tight real estate market as soon as the opportunities emerged, the client wanted know how fast Awara could put the needed business administration support into place. The foremost concern was to meet the statutory accounting and taxation requirements as well as the client’s own controlling and reporting needs.

In reply to this inquiry we presented our three-stage just-in-time approach to Russian accounting, which we quote below:

Stage 1: No Lag – Time Immediate Accounting and Business Administration Support

When Awara offers to outsource business administration and accounting services, the business administration starts immediately when a company is set up.

In view of this, setting up and registering the company in a timely manner is of utmost importance (while the registration as such in Russia is made within a matter of weeks, we believe that even on a fast track it will take about two months after a decision is made to obtain and process all the necessary documents from required from the client).

During this stage the flexible start is guaranteed by full outsourcing of all accounting and financial administration to our own pool of permanent accountants.

Stage 2: Gradual Development of a State-of–the-Art Accounting and Business Administration Practice – Start-Up Procedures

In Stage 1 we considered a situation where a company had no choice but to start operating without delay to catch the business opportunities as they emerge. In that situation we guarantee that the operations remain under control; at the same time the company has to develop the facilities for continuous growth. This happens in Stage 2

In Stage 2 we work to gradually create a state-of-the-art financial administration and accounting function in the new Russian business entity. Awara has developed a standardized program for start-up procedures which take aim at securing that the most crucial issues unique to the Russian environment are duly considered.

The start-up procedures encompass a study of the needs and processes as well as planning of the procedures to meet the coming needs. In the start-up procedures we do a thorough study of all the relevant aspects of the business in order to establish a clear and efficient base for future operations. In the start-up work we will also study the future organizational needs to cover the different stages of business growth.

Among other issues the work involves:

• Establishing correspondence between home country chart of accounts and Russian accounts (mapping)
• Defining the needs for corporate statutory reports and management reports
• Identifying the staff members involved in the work, both from the side of the client and the service provider, and planning their interactions
• Drafting the necessary accounting policies and procedure descriptions (hereby a bulk of the policies are connected with Russian legal requirement to maintain obligatory human resources documentation)
• Studying the necessary accounting /ERP software
• Studying the organizational needs during the various stages

The time consumed for the start-up procedures is obviously dependent on the size of the business, the group requirements and the resources made available for the work. Based on our experience in similar situations we estimate that three to six months would be required.

Below, under the heading “Details to Stage 2 Services: Processing, Planning, Implementation”, we provide some more details on these services.

Stage 3: Quality Independent Business Administration Function

After the start-up procedures the findings of the study on needs and requirements are implemented with the eventual goal of putting in place a stand-alone quality independent business administration function encompassing all areas of financial administration, accounting and other connected business administration services.

In terms of resources and time, the most challenging part of the work is in implementing the necessary financial administration and ERP software. The implementation of the intended ideal software is usually done gradually with the operations. This means that the team has to produce the necessary accounting data for statutory, group and management needs while momentarily operating with temporary solutions. Awara has solid experience in such a setting, where development runs parallel with the performance of the mandatory functions by temporary means.

Another priority area during this stage is to recruit the financial administration specialists and to forge the individuals into a coherent team suited for the corporate culture of the specific firm.

We believe that the development of the accounting and business administration functions will proceed so that in approximately 4 months the stage will be reached where the company will have a well-organized initial system of business administration where information flow, decision-making and planning will occur regularly during 3 months. It will take about 18-24 months for the system to reach an operational status; where there is regular staff taking care of the standard business transactions and the consultants accompanying the client in further development needs and stand in to assist with unexpected situations.

Value-Added Consulting and Unlimited Resources for Support through the Process

As we cultivate quality financial administration through all stages, we also support the operations with continuous consulting and practical support in all aspects of the work. It is hereby crucial to ensure compliance with Russian tax laws while keeping the operations fluent.

Awara Services

Above we mentioned the services that Awara may offer at various stages. This information is based on our longstanding experience in business administration in Russia with various clients and our experience of dealing with these issues in Russia from the onset of the Russian market economy.

We would like to emphasize once again that the legal framework and practices in Russia are still not sufficiently developed and remain highly bureaucratized. It is important that the investor understands that in Russia there is generally not yet the same kind of stability in the fields of accounting, taxation and business practices as in the West. This means that corporate executives, accountants and lawyers are constantly faced with issues that need to be resolved based on the realities of that particular day, without having the luxury to rely on earlier precedents and tested business practices. Often the business model of the foreign investor gives rise to situations which are new on the market and where no ready solutions are available. This requires research and adaptation to the Russian legal framework.

In Russia, the market economy started slowly emerging only in the early 1990’s, and since then laws and regulations have undergone frequent changes. By now there are signs of stabilization in these areas of legislation, but the difficulties lie in the ever changing practices of government authorities and legal practices.

For the above reasons, it is crucial to realize that in Russia there are no ready off-the-shelf solutions on which a company could rely or which a new company entering the Russian market could make use of by for example simply hiring a qualified chief accountant. A chief accountant in a Western country works in a stable environment where all the rules have more or less evolved over time. Therefore, a talented person becomes an expert in his field through work experience. The business or accounting culture of a major corporation in a Western country has not been developed in a few years by anybody in particular or by a team of specialists, but it has rather gradually taken root. In Russia, where the legal framework and accounting traditions are still young, this is precisely the challenge; the foreign firm immediately requires that the same standards of corporate culture, business administration and risk management are met. The challenge is therefore to reach the highest level of sophistication on a developing and raw market. Nobody in a singular capacity currently has the experience needed to tackle all the problems and challenges on this market. Even experience from a few years ago may be obsolete in dealing with the challenges of today. This is where Awara steps in, for in being the unique service provider specialized in this transition, we are best suited to know what is needed, and we can match our advice with the resources to make it work.

We would like to emphasize all of the above once again, because corporations entering the Russian market should realize that in Russia the question is not only about coping with the accounting practices and statutes, but also about the challenge to put into place an effective system of business administration and risk management. In view of all this, we stress the unique competitive edge Awara’s service comes with offering all the support – consulting and outsourcing – needed from the very beginning of operations and the outstanding expertise, experience and resources needed to build a state-of-the-art financial administration system which will enable the foreign corporation to implement the best practices developed in the West on the young Russian market. All of this is without going through the process of trial and error which has been the experience of most foreign firms operating in Russia. Our services simultaneously consist of day-to-day operative processing work, value-added consulting and strategic leadership.

We feel that it is appropriate to stress that during our 10-year history of operating in Russia none of our clients has faced any serious problems with tax inspections or in similar dealings with government authorities.

Risk Management

We have already drawn attention to the need of emphasizing the link between financial administration and risk management in a Russian context, where these two areas merge in a very special way so that each accounting issue is at the same time an issue of risk management. In addition to the risk management that hence is an integrated part of the whole accounting and financial administration service, we offer a separate development program that we call “Practical Corporate Governance.” Within Practical Corporate Governance we look to guarantee that the company’s decision-making process complies with all the demanding Russian statutory prescriptions, but at the same time remains flexible in order for the company to ensure that the management of the Russian business is at any time firmly anchored in international best practice.

Details of Stage 2 Services: Processing, Planning, Implementation

At this stage we build a dedicated team of accountants and financial administration professionals for the client.

It is crucial to realize that it takes more than just accountants to qualify as a professional team for financial administration. While the accountants will deal with the task of ensuring the business operations are in accordance with the complicated Russian accounting rules, our specialists in business administration and risk management will conceive the necessary solutions for individual business decisions as well as strategic management. They will also devise and develop the chosen IT platforms together with the client’s corporate staff.

Thus, in our model, various specialists will be involved in the work, some based on an outsourcing model permanently assigned to the particular client’s needs and some as consultants drawn in to the matter when needed. The access to the consultants on a stand-by basis means that the client can always be sure that there are resources to meet the business needs even when growth accelerates beyond expectancy, something that should be calculated with in today’s Russia.

In this stage of the development of the accounting function we will thus take care of all the new issues as they arise. Our method of work ensures that we deal with the urgencies while we simultaneously put into place the procedures that will incorporate all the aspects of the work to form part of the day-to-day production of accounting services.

Under this stage the parties will work on the organization and development and deal with issues such as those listed below:

1. Determine the business model and its implications for business administration, accounting and risk management

2. Identify the organizational needs for financial administration required by the business model and plan the information flow within the organization

3. Planning the financing needs and most efficient means of financing considering Russian taxation, forex and banking regulations, corporate decision making and other laws

4. Identifying and planning all reporting requirements: Russian statutory financial reporting, Russian tax reporting, Group financial reporting, management reporting

5. Planning and streamlining of corporate decision-making – including issues concerning the delegation of authority – and adaptation of the process to the requirements of Russian law

6. IT-planning: the choice of financial administration software and planning adaptation of Russian data systems to group systems (At the beginning of engagement Awara will handle the client’s accounting within its in-house systems)

7. Integration of Russian accounting system to group needs and establishing correspondence (mapping) between the various reporting rules:

• Russian statutory financial and tax reporting
• Russian tax reporting
• Group financial reporting
• Management reporting

8. Putting in place the systems, policies and rules for Russian mandatory human resources administration

9. Drafting the necessary accounting policies and procedures

• In Russia it is a mandatory requirement to adopt a host of policies and procedure descriptions (manuals and instructions) to regulate matters within the scope of accounting. Mandatory statutory rules heavily influence the form and content of these policies. The challenge is to adopt policies that comply with the Russian law without impeding the needs of business management.

The following represents a sample of possibly needed policies, procedure descriptions, rules and instructions (later all referred to as “Policies”) for running the Russian accounting function. The Policies which will be relevant for a particular organization have to be established case by case. In addition to the listed Policies others may become needed (sometimes the provisions of one Policy may be included in another):

1. Document flow and acceptance policies

1.1. The procedures, circulation, and the timeframes for the provision of documents required to keep accounting records, and documentation of the decisions pertaining to these issues

2. Payment and cash transactions

2.1. The procedure for circulating and approving suppliers’ invoices and the collection of supporting accounting documents
2.2. Expense reimbursement policy (For this we refer to the documents listed in the appendix on Maintaining of Mandatory Human Resources Policies)
2.3. The procedures for keeping and collecting cash, including the list of authorized persons responsible for payment and cash transactions

3. Accounting policy

4. Stock and Inventory Procedures (movement of goods and materials)

4.1. The procedure for recording, retiring and write-off goods and material valuables, including fixed assets
4.2. The procedure for releasing goods and material valuables from their main storage location to meet the main and auxiliary needs of the Client

5. Cost of goods and services (works)

6. Cost of staff (Pay-roll)

6.1. The procedure for collecting, preparing and transferring of pay-roll base data to the calculation center
6.2. For other procedures we refer to the documents listed in the appendix on Maintaining of Mandatory Human Resources Policies

7. Pricing and discount policies

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If you want to learn more, please contact the authors:

Jon Hellevig, Managing Partner of Awara
E-mail:
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Sergey Minyailo, Financial Director
E-mail:
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Accounting Services in Russia