Accounting in Armenia

I have been working with an NGO, helping them to get a new accounting software package up and running. In a few weeks I will be working with another NGO, again training users on a new software package. This process has been one of my greatest challenges, ever.

I have years of experience with accounting software implementation from a $6 million implementation of Oracle down to QuickBooks and in all kinds of environments, from manufacturing and distribution to non-profits. But accounting software in Armenia is so different.

When Armenia was part of the Soviet Union with its top-down planned economy there was a mandatory chart of accounts (COA), used as a planning device, for all enterprises. Fourteen percent of the average enterprise’s resources were tied up in collecting data. Because everything was state controlled and state owned there was no accounting system as we know it and also because “profit” was not the motive, their system could not be used for a capitalist system. In 1991 when the Soviet Union fell apart, Armenia had to institute its own accounting system. Of course, it was modeled on the Soviet system. So the COA, which is the framework on which accounting transactions hang, is mandated by the government. The mandated COA is entirely inappropriate and insufficient for the particular NGO I am working with which receives donor funds and provides services through various programs to the needy, such as a child care center, a center for disabled children, home services to the elderly, etc. You can imagine that these were not services tracked by the Soviet system.

Three of my favorite accounts on this mandatory COA are “Depreciation of long-lived saplings”, “Grown and fattened cattle”, and “Expenses on irretrievably received assets”. In the late 90’s Armenia adopted International Accounting Standards (IAS) officially, but in fact neither the government, the banks, nor businesses actually used them. In 2002, USAID funded a project to place the standards in use which involved training trainers, major businesses, banks, and the government. In 2005 USAID funded a project to translate the International Financial Reporting Standards (formerly IAS) into Russian because in this way other former Soviet countries could use the books and there would be a basis for measuring and certifying accounting knowledge. So fourteen books were translated in Yerevan into Russian and for Armenia a fifteenth was added, The Armenian Chart of Accounts. The task was far more difficult than anticipated because the Russian language did not include many accounting terms and concepts used by the IFRS. (Neither does Armenian which means that many items that would have one word in English involve long descriptions in Armenian.) Under IFRS entities can adopt their own COA within certain parameters. But the Armenian government decided to maintain something similar to the old Soviet COA because of pressure from government entities and especially the tax collectors who thought the old way was just fine.

The NGO I’m helping essentially uses just three profit and expense accounts. (Grants related to assets, Administrative expenses, and Main production) All income or expenses are put into these three accounts. Sub ledgers are maintained for the breakdown within these accounts. It means that ratio analysis is very difficult as is that quick glance to see if all utilities are included, because all expenses related to the programs are lumped into main production.

USAID started their project because Armenian financial information is not comparable to anything in the European Union or the US, which makes it difficult for investors and donors to analyze information and to determine if money is spent as they require. As a result many beneficiaries have to keep two sets of books, the mandatory one and one for the out-of-country donors and investors. The goal of USAID was to improve the investing climate and provide some transparency. Though the Armenian government says that their goal is the same, the reality is seems quite different. (Armenia is currently 38 on the Index of Economic Freedom with Hong Kong at the top and North Korea at the bottom at 179. The US is at 8. This is a huge improvement for Armenia.)

I think that the only hope will come as the younger generation learns the IFRS standards, becomes certified and licensed, and attends continuing education classes, a whole new concept in Armenia. This process has only been in place for three years. Traditionally accounting was seen as a bookkeeping function, and when it was taught in the universities, only one class was offered. The current group of bookkeepers trained in Soviet times is incredibly resistant to change.

Because the COA is of little use for traditional accounting and analysis purposes, I have to be very creative in helping to set up sub-ledgers to track the information we need. It’s frustrating when I know that there is a much easier way that I cannot use.