Legal Systems Research Paper

The nature of the accounting system of a country is affected by its system of law. UK and USA practice the Common Law system and Bulgaria, whose law system is adopted from Germany, practices the Codified Roman Law. Before accepting the Accountancy Act of 1991, in Bulgaria, there was no law for accounting, but rules established by the accounting community.

The use of double entry system, was also introduced after Directive IV of the European Union and the International Accounting Standards was accepted with the Accountancy Act of 1991, which bring the Bulgarian accounting near to the European one, and thus to the UK one, which is the base for the US accounting. Although the accounting standards become more and more the same in the different countries there are still many differences. Let's take, for example, the contents of financial statements.

In Bulgaria only balance sheet, profit & loss account and notes are used. This gives very limited information, compared to the UK and US financial statements, where in addition to the abovementioned already they have cash flow statement, a statement showing the change in the stockholder's equity, the used accounting policies are stated in detail in the notes, there is also the manager's report included and disclosures much more than the legally required. Without all this elements the Annual Report is incomplete.

Although that US and UK have generally the same financial statements, there are noticeable differences in technical accounting terms (P&L Account in UK = Income Statement in USA), as well as in the balance sheet and the cash flow statement. A major difference is also that US accountants are allowed to use LIFO for inventory valuation, which they do very often. This leads to reduced balance sheet figures, as opposed to the British FIFO. The authorities setting up the accounting practices are also very different.

In USA it is the Securities and Exchange Commission, in UK it is the Accounting Standards Board, and in Bulgaria it is the Government with the help of the Accountancy Act of 1991 and the National Accounting Standards, which were accepted with the Act, prescribe the format of the financial statements. However, enterprises are free to add items to the standard financial statements where it would result in better presentation of the financial information. Providers of finance

The most likely key cause of differences in the financial reporting internationally is the distinction between credit/inside financing and equity/outside financing. The major type of business organizations and ownership also differ very much. In Bulgaria corporations are not largely introduced. The majority of the business legal entities belong to the small and medium enterprises. There are a lot of small family-owned companies, which accounting reports serve merely tax purposes. This could also question their fairness.

For financing Bulgarian companies depend almost entirely on creditors and investors of the form of partnership. This can be an explanation of the lack of the statement showing the change of the stockholders' equity. US and UK capital market-based financial systems means that financial reporting serves the needs of shareholders rather than of creditors and tax authorities. Usually shareholders do not have access to internal information, that is why there is need for disclosures, audit and fair information. Taxation

The major problem and difference with taxation is the so-called deferred taxation, which results from timing differences between tax and accounting treatments. In UK and USA for example, it is paid a lot of attention to the problem of differed taxation, which results in detailed big disclosures. In Bulgaria on the other hand, where the conventional accounting is still ruling, this problem is minimized, since in this country where financial statements are prepared to serve tax purpose, the tax rules are the accounting rules.

That is why Bulgarian financial statements do not provide differ taxation. Depreciation rules can be very crucial for the taxation, since bigger depreciation leads to earnings before taxes and thus to smaller tax. In UK and USA the depreciation is supposed to be systematically allocated among the useful life of the tangible asset, usually by the straight-line method with scrap value usually of zero, because it is easier. The standard is defined more through convention rather than rules.

In the opposite extreme, in Bulgaria, the tax authorities lay down maximum depreciation rates to be used for the assets, which are generally based on the expected useful life of years. Due to the way deferred taxation and depreciation reflect the actual taxable income, very often two types of financial statements are prepared: one for the tax authorities, serving tax purposes, and one for investors and shareholders, serving merely as a performance indicator.

It is possible, therefore, to distinguish between US and UK separation of tax and accounting, and the Bulgarian close connection. The profession The lack of substantial body of private shareholders and publicly owned companies in Bulgaria means that the need for auditors is not very big. The companies using auditors are mainly the multinational companies. The existing certified auditors are mainly usually part from the big international accounting and financing companies established in Bulgaria, like PriceWaterhouseCoopers, KPMG, the Holland TMF and other.

Having or not auditors and certified public accountants for sure would influence the accounting practice. There are many students graduating as accountants from the Bulgarian universities, but few of them understand accounting in depth and even fewer would practice it fairly. In the UK and USA on the other hand, there is a great need for auditors and standardization of the rules. In these two countries also without having the appropriate certificate is impossible for someone to practice the accounting profession. Inflation

Any country may respond to massive inflation, but the reaction of a country's accounting system to inflation is an illustration of the basic nature of the system. Right now Bulgaria has stable inflation. During the transition between Communism and Democracy, though, there were many rough years. During those years the government was responding to the inflation, which was symptomatic of the regulation of accounting. By contrast, in UK and USA it was mainly committees of accountants that developed responses to inflation during the difficult 1970s.