Control Freakery

I was astonished and appalled to hear of Donald Trump’s admiration for Vladimir Putin, especially because of the reasons he gave for it – that ‘Vladimir Putin has his country under control.’

I was reminded today, at the Gardens of Marqueyssac (8.80 EUR and open every day of the year), of how much I dislike control. The gardens comprise several acres of topiary overlooking the Dordogne. My friend Caroline and I bicycled from Siorac en Perigord, an easy mild up and down of about 20 km, on empty roads in bright late summer sunshine through a largely uncontrolled landscape. Uncontrolled, but not unmarked by man.

These gardens, by contrast, illustrate man’s appetite for crushing domination, his determination to tame, torture and distort nature so that nothing of wildness, or colour, or spontaneity remains. Of course, Topiary can be an amusing adjunct to a garden that is more than simply sculptural or architectural, a garden, for example, containing borders and flowers. Perhaps, for a very few moments, if you’re in the right kind of mood, a bush that looks like a bunny rabbit can amuse.

But if all that you can do with your trowel and your master’s degree in landscape architecture is trim and shape, then it’s not enough. If you like box and little else then these gardens might indeed be your Garden of Eden, but if you find it a gloomy shrub, and if its imperfections worry you, or if you dislike its sour smell, then these gardens will depress you, unless, in your view, control is the highest aspiration of mankind.

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I greatly prefer the illusion of wildness that the English Garden cultivates. If there is control (and of course there must be) then it is subtle. It is exerted only so that flowers and shrubs can thrive as themselves. Set the starting conditions and step back, barring a little weeding and dead-heading.

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So should it be in politics. What is it that Trump could possibly admire about the kind of control that  Putin has achieved, or, in fact, failed to achieve. Total control of the press, of the judiciary, and the political landscape. Total control over his own wealth. Total control over his henchmen – well, perhaps not entirely. Is Russia a country to emulate – where corruption is rife, where bureaucracy stifles enterprise, where homophobia and racism thrive and are not discouraged by the state or by the police, where lies surround every foreign military adventure?

Is that what Trump wants for his own country? This kind of total control?

Look at these ailing, distorted box hedges and lament. Gardens need freedom, as do nations.

 

A Gulf of Disbelief

When Nikolai Khrushchev visited the United States for twelve days in 1959 he refused to believe what he was seeing. The vast choice of tacky consumer products available in a typical US supermarket, he thought, was entirely a put-up job – smoke and mirrors. There simply couldn’t be so many different things available to ordinary citizens. This reminds me of a soprano I once knew slightly in the 1980s. She’d escaped from Romania to sing in the United Kingdom (and to obtain British Citizenship as a singing asylum seeker). On her first visit to a well-stocked Woolworth’s she cried – not so much, I suppose, with joy at what she’d found there, though she did buy a pair of multi-coloured slippers with bright pink pom-poms, as for the miserable paucity of choice available to the family she’d left behind, and for all the other indignities of living in a ruthlessly misruled nation that she had escaped and in which they still languished.

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That it would have taken implausibly extraordinary efforts to deceive Khrushchev so extravagantly counted for nothing. The almost impossible was easy enough to believe because the Soviet Union would have stopped at nothing to deceive a visiting President, Prime Minister or Monarch.

Blunt denial, lying, and deception, have characterised Russia’s response to the West ever since. Take the allegations in yesterday’s WADA report into doping at the Sochi (and other) Olympics. If they are to be believed, which, probably, they should be, the FSB and the Russian Sports Ministry colluded in massive deception, substituting clean urine samples for contaminated ones. The scale of their operation was vast – agents pretending to be plumbers passing samples through a wall separating the testing laboratory from the FSB building next door. They also employed special methods for opening ‘sealed’ test tubes but these, it turns out, were not quite clever enough because they left tiny scratch marks invisible to the naked eye, but detected by WADA.

Smoke and mirrors

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Some Russian media have dismissed the WADA report as part of an organised conspiracy against Russia. But even  if they know the allegations to be true, those involved will simply believe they were unlucky to get caught, and that the rest of the world must be doing exactly the same kinds of things, only doing them better, and getting away with it. That is their mind-set – all governments deceive their people and each other. If no one can prove it, then they’re just doing it vey well indeed.

From the Russian point of view, truth and moral principle are irrelevant, because the assumption is that every government must share their point of view and their methods, whatever they might say. I am sure the President Putin sincerely believes that, whatever assertions there might be to the contrary, the so-called independent judiciaries and media of Western states MUST be, in reality, tools of the state.

The report into the murder of the ex-FSB agent Litvinenko in London MUST be a fabrication. Well, of course, they also know it to be correct, but they could never believe that the truth was independently arrived at. The allegation that Russian troops have been assisting the rebels in Eastern Ukraine MUST be false, just as there was no advance guard in Crimea before the referendum on its absorption into Russia (well, actually, they later admitted that the ‘little green men’ were theirs, but it was certainly a false allegation for a while). And the suggestion that the rebels in Eastern Ukraine shot down a Malaysian passenger jet using rockets supplied by Russia, MUST be false. Carefully fabricated photographs showed, beyond a shadow of doubt, that a Ukrainian jet shot the ill-fated Malaysian jet down from the air.

Somewhere in the Kremlin, Putin’s henchmen will be smarting at the fact that they’ve been caught out doping their athletes, but you can be sure that they will simply be smarting at the fact they lost at a game that everyone else plays, but which they believe they’re generally best at. Perhaps I am a victim of Western ideology and too credulous in believing that by and large we’re not dupes of our Western governments in the way Russian citizens are of theirs.

SunSystems in Russia – Perfectly Possible for the Determined Amongst Us

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SunSystems’ financial modules can adapt themselves to almost any statutory regime, but in some countries implementation is more difficult than in others. Probably none is more difficult than Russia (and all those other countries where Russian accounting standards apply).

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What’s so difficult about it?

Isn’t it just a matter of capturing data and reporting it, just like everywhere else?

Yes, but it’s also a matter of defending yourself against the suspicions of statutory auditors.

First of all there’s a statutory chart of accounts. You must decide very carefully whether this will be your primary chart of accounts, with each local account mapped to a corporate account, or whether it’s better to do it the other way round.

Then there’s the issue of ‘correspondence’. Every debit must have a corresponding credit. So when you book a sales invoice you must book it this way:

Debit DEBTOR account, Credit SALES account,

Debit DEBTOR account, Credit VAT account.

The DEBTOR account is the corresponding account both for the SALES account and the VAT account.

‘So what?’ you might ask. That just means a few more debits and credits than you would usually post to your ledger. The overall balances will still be the same.

True. However, the problem, such as it is, lies in the reports you must show when you’re defending the correctness of your ledgers to a statutory auditor. An auditor may ask for a cross reference or tabular report that shows all the correspondences between accounts – debited accounts on one axis, credited accounts on the other. And woe betide you if there are some debits or credits between accounts that are NOT ALLOWED to correspond.

SunSystems cannot, itself, produce this kind of report, even if you’ve taken the trouble to record the corresponding account for each debit or credit in a transaction analysis field. There are some commercially-available add-on programs that can determine correspondence and produce the cross-reference report by following the relationships established within each journal, as long as debits and credits individually balance, but it’s not straightforward.

Then there are the negative debits and credits.

And there’s the obligation to submit your statutory reports using XML.

SunSystems wasn’t initially designed with Russian accounting in mind, though  SunSystems’ Extended Analysis concept certainly helps with statutory reporting. The issue is a profound one. SunSystems is a ‘Western’ accounting system, like all the others that you may be familiar with, such as SAP and Oracle. All ‘Western’ systems struggle to manage Russian accounting rules and conventions with ease. At best they mimic the home-grown systems that were created specifically to meet Russian standards. Foremost amongst these is 1C, which almost every company in Russia and in the countries of the former Soviet Union (Kazakhstan, Moldova, etc.) uses. It’s regularly updated as statutory reporting changes, and it works more or less straight out of the box. The XML reporting formats defined by the state are exactly those that 1C produces.

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And yet, 1C doesn’t easily serve corporate reporting and management accounting needs, and often doesn’t even meet ‘Western’ corporate auditing standards in terms of controls on journal modification, period closure and so on.

So, when implementing SunSystems in Russia, you have a number of choices:

Implement ONLY SunSystems.

  • Your local accounting staff won’t like this. It’s harder work for them to construct the reports that 1C would do at the press of a button.
  • You’d be well advised to enter the corresponding account on every debit and credit using a T-code. Easy to make mistakes.
  • You’ve got to use some specially written software to create a cross reference report if someone asks for it.

Implement BOTH SunSystems and 1C.

  • You’ve either got to enter every transaction twice, or
  • You’ve got to build an interface from one system to the other to transfer the transactions

In the end it depends on your determination and on the flexibility of your local accountants. My experience is varied:

  • I’ve worked on a SunSystems implementation for a large US consumer goods distributor where only SunSystems was used, and without the posting of ‘corresponding’ account into a transaction analysis field. A locally provided program was used for the construction of cross-reference reports and other statutory reports, as required.
  • I’ve seen a SunSystems implementation at a hotel where only SunSystems was used, and a transaction analysis field was used for the posting of corresponding account.
  • I’ve seen a SunSystems implementation where all transactions were additionally and separately recorded in 1C.
  • I’ve seen a SunSystems implementation where all transactions were initially entered into 1C and then exported into SunSystems for adjustment.

None of these scenarios is straightforward, but all can work. LLP Group has been supporting SunSystems in Russia through its Moscow office for nearly twenty years. If anyone can help, we can. See more on our approach to global SunSystems implementations on LLP International.

One last but important point: don’t for a moment think that you can ignore Russian reporting requirements and just accept whatever sanctions might follow. That would be a very foolish choice (see High Inflation)!

The horrors of high inflation…the messenger doesn’t always get shot

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In the mid-1990s, a few years after I’d started LLP Group, I was asked by one of our international customers to go to Moscow to sort out the mess they’d made of their SunSystems implementation. They were using the system for the purchase of their affiliates’ products, for inventory management, and for sales to their direct customers and distributors all over Russia. And of course they were using SunSystems for both local Russian accounting and for balance sheet, cash flow and P&L reporting to their head office in the USA, in USD.

The mess was a mess of several kinds. The Russian authorities were accusing the company of understating its Ruble profit and of implicit tax evasion, and Head Office couldn’t make sense of the USD-denominated reports it was getting, which seemed to overstate profit. A major factor in both of these messes was the fact that Russia was then a ‘hyper-inflationary’ economy. Special accounting rules are supposed to kick in when cumulative inflation over three years exceeds 100%, but this organisation hadn’t even got the basics right, let alone Inflation Accounting.

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Now, SunSystems is a superb tool when it comes to dealing with demands from multiple directions. It can manage local Russian reporting in Rubles against a statutory Russian chart of accounts at the same time as USD reporting against a corporate chart of accounts. And it can do all of this without your having to enter a transaction more than once. Of course, there are always a few adjustments you need to make to reflect differing accounting policies (depreciation rates, for example) but these are few. LLP Group’s LLP International team has built its reputation on helping international organisations to do these kinds of things in SunSystems.

So my job was to set up the right structures and processes, export the entire set of ledgers, and bring them back into the system in the right way.

The biggest difference was that the previous set up had taken no account of the rules that apply in a hyper-inflationary situation, in particular of the requirement that for corporate reporting stock must be valued at historical exchange rates. When stock is bought in USD it gets valued in the Rouble balance sheet based on the exchange rate on delivery day. But when it’s sold, you can’t just convert its delivery Ruble value into USD on the day of sale, since this will show it as having depreciated materially if exchange rates have changed markedly. Profit, as stated in USD, and reported to Head Office, will thus be overstated. Margins will have been exaggerated.

When we’d finished the reprocessing of the ledger we ran the corporate balance sheet and discovered a ‘translation difference’, a loss, of more than a million USD. This translation difference, which always emerges when you go through the process of converting a balance sheet at a variety of different exchange rates, is reported as part of the P&L. I thought at first we must be wrong, so we checked and checked and checked again, and came reluctantly to the conclusion that it was right. The company needed to report an additional unexpected loss to its Head Office of more than one million USD.

The Russian Chief Accountant and I, once we were absolutely certain of our findings, nervously reported this to the CEO.

‘Are you sure?’ he asked.

‘Yes.’

‘Are you really sure?’

‘Yes, really sure.’

‘@!£$,’ he said, ‘but not your fault. I was afraid it would be bad news. But thanks for sorting out the mess.’

You don’t always get shot for passing on bad news, even in Russia.

SunSystems is still one of the best options for businesses that need a common accounting system all around the globe. It is extremely agile, powerful, and cost effective. And you can find SunSystems consultants to support you in almost every country in the world. Contact me to find out more.

Correspondence Accounting – The Russian Way of Debits and Credits

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Have you ever heard of correspondence accounting?

If you’re not an accountant, or financial systems consultant, stop here. And if you’re an accountant and you’ve never had to debit or credit your accounts in Russia or the Russian-influenced world then you won’t need to know about this either.

Correspondence accounting is the Russian way of accounting, and it’s the bane of ‘Western’ financial accounting systems and of companies like mine, since we struggle to make the systems we sell work in Russia. My company, LLP Group, works with SunSystems, a British-born financial system that works more easily than most systems almost anywhere in the world  Indeed, we’ve implemented SunSystems for international companies in the USA, South America, Asia, Africa and Europe, ensuring a consistent view of finance even if local rules differ markedly.

But Russia is more difficult (any surprise?), and I write this in the hope that someone can tell me WHY!

Most accounting systems have a chart of accounts that lets you debit and credit to any series of accounts as long as you end up with a balance of zero. So you might do this for a sales invoice:

DEBTOR          1,000   D

SALES              800 C

TAX                   200 C

You can have any accounts in your journal, and any number of them (two credits and one debit in this case) as long as the final journal balance is zero.

But in Russian correspondence accounting each debit must be matched by a credit, and the two accounts involved must ‘correspond’. Indeed, the state issues a list of accounts that are permitted to ‘oppose’ each other. A Russian journal would look like this:

DEBTOR             800 D                    SALES                 800 C

DEBTOR             200 D                    TAX                      200 C

Each line, debiting a single account and crediting a single account must balance.

Most financial systems can imitate this style of accounting by imposing constraints on the way traditional journals are structured, but the real difficulty arises when you try to construct your statutory reports, since these rely on the corresponding account being known for every debit or credit. There’s even a kind of cross-reference report, a vast table, showing the values that have been posted between corresponding accounts. Statutory auditors, when not soliciting bribes, need only glance at this table to determine if the rules have been broken, and if fines are therefore due.

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A small team of Russian auditors

All this is possible in ‘Western’ financial systems and in our company we’ve worked out a method that makes it possible. But it means that implementation time is longer and more expensive.

What is it all for? Who benefits? What possible management benefit comes from all of this? What statutory benefit?

Can someone tell me?!

And then there are ‘negative’ credits and debits!

Riding the Russian bear

I’ve been living in Central and Eastern Europe for nearly three decades, so I’ve seen the region take three steps forwards, and then a step or two back, both politically and economically. Never more so than in Russia. I particularly remember the heady 1990s, when the Russian economy burst into chaos after the collapse of the Soviet Union. Freedom reigned in Moscow, too much of it for some. It was exuberant, expressive, socially liberating, unpopular, and on the whole disastrous.

We were well into the more sober Putin era when my company (LLP Group, based in Prague) was persuaded to dip its toe into the Russian market. We took over the customers of a firm for whom things had gone disastrously wrong. It was difficult at first because almost everything gets in the way in Russia (the form-over-substance financial regulations, the appalling cost of business services, the aggressive nature of customer-supplier relations, the prejudice against ‘Western’ software), but we made progress, and even some small profits in due course.

But these last few months have been more difficult. When the rouble fell in value some weeks ago we found that our bank simply couldn’t or wouldn’t convert our rouble balance into a safer currency and we saw our bank balances shrink in EUR value.

We resell software and consulting mainly to international companies investing in the Russian market. The accounting software we sell, Infor’s SunSystems, can meet both Russian and corporate requirements simultaneously. But, now, with many companies downsizing, or even leaving, it’s hard for us to know what to do. There are fewer companies who need what we sell.

Russian bear

Where is Russia going? Has the country set out on a path towards isolation, or has it been unjustly expelled?

Whatever the situation, we have no plans to leave. We have an excellent team of consultants in Moscow and St Petersburg, and we can break even at the moment, serving our current clients. It’s hard to know, though, if there will ever be new business for us in the future.

Granted, Western ideology informs much of Western reporting on Russian issues (Ukraine first and foremost), but I can’t help thinking that, for the moment, Russian pride has trumped pragmatism. Surely, things will only get worse for ordinary Russian citizens if Putin doesn’t seek a change of direction.

We don’t want to abandon our business. If only Russia were a little more like us, we wouldn’t have to.