Auditing Risks in Transition Economies. A Study in the Post-socialist Auditing Environment

Abstract

Problem area: When preparing financial reports of entities in transition economies certain problems arise that are solely a product of the past economic system and hence an situation which exists only in the states that are going through a transition from a planned to a market economy. The problem area of this thesis is from the auditor’s perspective when preparing the financial reports. The thesis will analyse how the old – the Soviet socialist – system of reporting has influenced the new.

Purpose: The purpose of this thesis is to investigate the specific auditing problems that the former Soviet type planned economy has caused. The study will identify the fundamental differences and the liabilities of a transition from a planned to a market economy.

Delimitation: This research will not focus on the political transition or the macro economic changes and the resulting benefits from a sound financial reporting system. The thesis will rather look at the problems from an auditor’s perspective and the factors which he or she may consider important.

Method: The primary research is carried out as a qualitative study by means of four interviews with accountants and a researcher who have relevant experience. The empirical study has been analysed with reference to the theoretical framework.

Conclusions: It has been concluded that there exist two categories of auditing problems in the transition economies. Category one represents those problems which are directly linked to the legacy of the old system such as the old accounting procedures and the insufficient internal control systems. Category two represents those problems which are more a product of the transition from a planned to a market economy. These problems include the economics of transition, legal aspects, and the neglect of the ‘going concern’ principle to name a few.

Recommended future research: The authors recommend future research to be carried out in two areas which have been mentioned in this thesis. Firstly, the authors recommend a study concerning if detail tests have become more common or important since the recent accounting and auditing scandals. Secondly, the authors recommend future studies to determine how a sound financial reporting system would benefit and encourage the transition from a planned to a market economy.