NEW ACCOUNTING

Integration of Azerbaijan into the world economy makes adoption of the international standards by the nation's economic entities inevitable.  This, inter alia, implies speaking the international financial "language," that is, transition from the Soviet-era accounting standards, which at many of the Azerbaijani enterprises are still in use, to the new ones.  Precisely this factor greatly hinders mutual understanding with foreign investors who want to invest in Azerbaijani companies.  They simply do not understand financial documents and demand audit reports in the financial "language" which they understand.

But only banking institutions fully adopted the new methodology of accounting thus far, although before 2004, they used to send to the National Bank two reports:  One was compiled to the international standards and another -- to the local ones.  From 2008, the situation in this sector is to change almost cardinally.

Cabinet's List

According to the cabinet-approved list, 20 socially important organizations should adopt international accounting and financial reporting standards before 1 January 2008.  The criteria for selection of those organizations were the worth of their assets, which are to exceed AZN 100 million, annual revenues of AZN 5 million and the number of employees more than 1,000.

The State Oil Company of the Azerbaijan Republic (SOCAR), Azerenerji, BakiElektriksebeke, Azercell Joint Venture, SOCAR departments for oil pipelines, marketing, and economic operations, Azneft, H. Aliyev and Azneftyag oil refineries, Azerbaijan State Railroads, Bakmetropoliten, AZAL State Concern and its National Aviation Company, Kaspar, Azerigaz, Azerigaz Naqliyat, Azersu, Aztelecom, Azerkimya State Company, and its ethylene-polyethylene factory meet these criteria.

In the meantime, according to the law "On accounting," the commercial organizations were to switch to the national accounting standards which are based on international ones by the end of 2007.  In view of this, the state programme on introduction of national accounting standards sets forth the schedule of adopting the standards in 2005-2008.  The budget-funded and nongovernmental organizations have to complete transition by the end of 2008, medium and small businesses -- by 1 January 2006. The deadline for municipalities, budget organizations and state funds is 1 January 2009.

Development of national standards is the Finance Ministry's responsibility.  The ministry reported that reception of the first financial reports of the IFRS standards will begin in Azerbaijan on 1 May 2008, after the socially important organization adopt the new accounting standards (1 January 2008).

By that date, 10 more national accounting standards should be approved.  Organizations which will fall behind the transition schedule will pay fines.  Preparations are under way for monitoring missions for this purpose.  Let us note that currently there are 28 IFRS standards -- their number has decreased from the earlier figure of 41-48 standards.

SOCAR leads

Elhan Jafarov, head of the Finance Ministry financial policy and reporting department, said that although Azerbaijan was late to start the process of transition to IFRS standards, the progress in this field is dynamic.

"Among the organizations which started transition to IFRS, Azercell, SOCAR, Azerenerji and Azerigaz demonstrate the best results.  These organizations are to submit reports by IFRS standards before 1 May 2008.  Other organizations still have three months to adopt IFRS," E. Cafarov said.

The SOCAR adopted IFRS quickly and effectively.  PricewaterhouseCoopers international auditing company consulted SOCAR in the process.  It took part in developing the plan, methodology of introduction of information technologies, planning of business processes and preparation of consolidated financial reports for the year 2007 according to IFRS requirements.

In the meantime, the adoption of international accounting standards by SOCAR does not mean that it will be undergoing international audit every year.  SOCAR does not deem this necessary.  And it seems that international financial institutions too, which in the past insisted on auditing of the economic activities of the company by the major auditing organizations (for instance, this requirement was stipulated by the European Bank for Reconstruction and Development during the Sah Daniz deposit development project), do not make these demands any more. The SOCAR argues that annual international auditing by the Marketing and Economic Operations Directorate, which is directly involved in signing contracts on oil and gas projects, would suffice.  SOCAR subsidiaries may also invite international auditors, and auditing all the company's assets is quite a labour-intensive job which requires great expenses.

The World Bank will help here too

The World Bank launches a $25-million project of corporate and state sector accounting in Azerbaijan (CAPSAP).

The bank will issue an $11 million loan via the International Development Association. The rest of the project funding will be provided by the Japanese PHRD Fund grants, State Secretariat for Economic Affairs SECO, European Union, and the Azerbaijani Government.  The World Bank mission said that in late February, the official negotiations on the credit agreement for the project will be launched to be approved by the World Bank board of directors.

The project will include three components.  The first envisages accounting reforms in the corporate sector, including introduction of international financial reporting standards in socially important organizations, providing assistance in writing and adopting  the new law "On audit" and in developing and reforming the Audit Chamber.  The second component envisages reforming the accounting system in the government sector.  And the third component envisages creating a centre for research, education and professional training in the field of accounting in Azerbaijan, translating IFRS, developing national accounting standards, providing bookkeepers and auditors with new instruments, and supporting a special training programme.

Because of the schedule of introduction of IFRS, the government too is interested in accelerating the implementation of the project because it already had to postpone the deadline for reporting according to international standards to May 2008.

Cadres are all-important

The transition to the new standards makes the issue of training accountants an extremely important one.  The Eurasian Council of Certified Accountants and Auditors (ECCAA) already suggested that the Certified International Professional Auditors Association should be created in Azerbaijan.  As Council Executive Director Dmitriy Shutts said during his visit to Baku, the goal is quite realistic.

"There is one Azerbaijani organization among the ECCAA members, the Audit Chamber.  We want to create the Certified International Professional Auditors Association in Azerbaijan with their help, so we are planning to hold a few meetings.  Azerbaijan has great potential and possibilities of opening this type of organization," D. Shutts said.

There are already about 30 professional certified accountants in Azerbaijan.  Many of them hold the CAP (Certified Accounting Practitioner) certificates, which are the initial stage of CIPA (Certified International Professional Accountant) certification.  In Azerbaijan, 8 accountants have been nominated for CIPA status.

The CIPA certification system was founded in 2001 by the ECCAA, the union of professional bookkeeping and auditing associations of the CIS countries, whose goal is high professionalism of the members of associations.  Now the ECCAA has 23 professional associations as its members.

The CIPA programme was launched in Azerbaijan in 2007.  At present, the program covers all the sectors of the economy. CIPA certification is internationally recognized.

So, we can hope that the transition to international accounting standards will not become a major problem for local enterprises because of the lack of the professional staff who can work according to the new standards.