Substance over form

There are many areas where the British approach to both the law and to accounting regulations in particular has no real equivalent on the Continent (defined some time ago by the famous headline in the Sun newspaper “Fog in the Channel – Continent cut off).

One such area is the accounting concept of substance over form. This basically says that accounting treatment should follow the economic/ commercial reality of an event or transaction irrespective of what formal name it is given. For a very short period of time (beginning of the nineties) Polish accounting legislation contained substance over form “istota nad treścią” as an overriding accounting priciple. This in effect allowed common sense to prevail in situations where the Polish law had inadequate or indeed misleading definitions. One such area was indeed leasing.

However the lawyers very quickly enforced the removal of this principle arguing that Poland followed the Continental Code Napoleon which requires everything to be defined and in particular that the law should not allow the concept of substance to overrule the strict interpretation of the law.

This would be fine if the legislator was able to foresee all possible forms of transaction and in particular new forms of economic activity such as internet based trading etc. Given that the legislators are totally incapable of writing even simple legislation in a clear manner the result has been predictable.

The subject came up in a recent “round table” discussion where logic dictated that the accounting treatment could not follow the strict wording of contracts as the substance of the trade was actually materially different to that implied by the Polish translation of UK based contracts. Which leads to the nonsense of a completely different basis for preparation of local statutory accounts and that used for head office reporting.

Of course the Polish company could apply IFRS treatment but only if this was in respect of an issue not covered by the Polish accounting legislation.

Why o why has Poland not adopted IFRS for ALL companies and not just quoted entities and their subsidiaries. But then again what would the learned professors of bean counting do if no longer gainfully employed in writing local Polish accounting standards in the full knowledge that sooner rather than later the EU will get around to enforcing IFRS for all reporting requirements.

What will the New Year bring?

With crude oil prices at record lows, the Polish currency regaining streinght and with reasonable growth forecasts will 2015 be a good year for the Polish economy?

The Russian economy in meltdown and the Ukraine facing an uncertain future it would appear that the eyes of Western investors are once more turning to Poland as the country enters the last phase of significant EU contributions to the economy. The new financing round is more specifically targeted and should generate significant growth opportunities for business. On the horizon there are two elections, first presidential in the spring which the current incumbent should win easily and then in the autumn parliamentary elections where although PiS is likely to gain most votes the PO and PSL coalition should gain a working majority. Clearly there is a need for a credible opposition with the capacity to govern rather than being an eternal gadfly on the back of the nation. Will such an opposition emerge is however a moot point as the last several attempts resulted in a once only electoral breakthrough above 5% and were followed by the total collapse of support. But with little alternative available alternatives on the economic policy front and at best irrelevant populist posturing there is actually probably no space for an effective opposition. Such is the modern world linked and voter apathy best described by the French word ennui.


In the words of a former US President “the economy stupid…”.

The real key issue will be how soon European banks in general and Polish banks in particular start once again financing business investment. Or just maybe the old behemoths need to be encouraged to fail and a return to an old style seperation of retail and investment banking reintroduced. And when will banks learn that property values are not predestined to be on a continious upward turn. Maybe adding property inflation indicators to central bank measures of inflation might reintroduce some stability?

The truth is that Polish banks, having in the main part avoided the previous property bubble, are better placed to start financing real growth which is all to do with current and future consumption and not asset financing. As with all assets if no one can afford inflated property related costs and share values unrelated to future performance then we have the perfect recipe for the next crash.

Professional ethics and the cultural divide

It’s that time of year again and continuing professional education rears its head. Whilst the Institute of Chartered Accountants in England and Wales (ICAEW) is satisfied with my confirmation of compliance simply by answering one question on line the Polish Chamber of Auditors requires me to sit through 40 hours of lectures per annum and sign countless forms.

This year one of the available topics was the IFAC (International Federation of Accountants) code of ethics. The lecturer started off by saying that a professional code of ethics was the result of US accounting and audit scandals of the late 90’s. And there I was thinking that the first code of ethics was published by the ICAEW way back in the 19th Century. The reality was that all of the ICAEW training and exams which I suffered in the early 1980’s had as a point of reference ethics and doing the best for the client and society as a whole. Ethics was seen as a state of mind rather than a set of prescriptions.

Of course the UK has the benefit of a legal system which is based on what a passenger on the no. 11 bus would consider to be appropriate and inappropriate. Hence a few principles and examples suffice rather than the US and Continental approach of a three inch thick rule book which at the end of the day fails to guard against fraud.

The questions raised by my co trainees last week suggested that ethics is not something which has been inculcated with “mothers milk” with most of the questions and comments being about how to circumvent regulations. But then I reflected that the users, be they corporations, banks or government do not view Polish auditors as being a true profession, rather a necessary evil. I recall 23 years ago trying to convince a sceptical President of the Polish Association of Accountants that making the Polish qualification a general business qualification based around high standards and ethics would lead to attracting high quality graduates which could only enhance professional standing. The opposite has happened. Clearly evident in the marketing efforts of the Big4 which not surprisingly position themselves in Poland as business consultants and not as auditors.

I will end by stating that practically all FTSE 100 companies have Chartered Accountants on their main board. I would suggest that few Polish quoted companies have board members bound by a professional code of ethics, which although it does not stop fraud at least makes its perpetration more difficult to hide. I wonder who the “whistle blower” at Tesco was?

Negative Inflation and Job Market

Recent data from the Polish Central Statistical Office shows continued deflation and growth in wages. Theoretically the two would appear to contradict each other but let us look more closely.

The Eurozone entered deflation with a vengence a little while ago and is causing significant concern. The contagion was bound to affect Poland for two reasons. Firstly it led to an appreciation of the Polish currency leading to cheaper imports. And secondly as expectations built on the domestic market that prices of Polish goods wiould also fall led to deferral of purchasing decisions both by consumers and companies forcing manufacturers to cut prices. Which actually bodes well for a further fall in Polish interest rates which remain high in comparison with Euro, US$ and GBP rates of near zero. The further falls will hopefully bring forward corporate investment decisions and also boost the domestic property mortgage market. And bring inflation back into positive territory. Time as ever will tell. However Poland with a still unsatisfied (due to low earnings) latent consumer demand is in a far better position than say Germany or the UK. Indeed how often in a given year do do German, UK, French, US consumers actually need to buy consumer durables, restaurant meals etc.

On the job front wage increase of above 3% year on year most probably is a result of actual shortages of workers in the job market suitably qualified to fill vacancies arising as the economy picks up. Many if not most companies went through a period of job shedding during the global downturn and probably shed more jobs that actually necessary relying on fears amongst workforce leading to excessive overtime. This may now be changing. The opposition trumpets the fact that many new job opportunities are “non jobs” in the service sector with low pay and little personal development potential. However the problems Amazon amongst others are finding in filling vacancies suggest that the market has swung in favour of employees who are increasingly looking to work in areas comensurate with their skills and training (even if this is often actually wishful thinking rather than reality). Which leads on to a supposition that labour efficiency and labour replacement with automation will be back on the agenda.

With the dramatic fall in demand for university places caused by the low birth rate 19 years ago hopefully the education sector will be forced to work in cooperation with future employers of their graduates to tailor courses offered to what the market actually requires.

Why the Polish language hinders business

I (Andrew Kinast) was brought up in England by Polish parents and spoke only Polish at home. When I started coming to Poland in 1990 it soon became obvious that my Polish lacked an awful lot of vocabulary of which I guess I had been aware. What came as a shock was the realisation that many words had changed their meaning and certainly did not mean what their direct translation into English means. And thus:

“Załatwić” in English means to sort something out or to deal with an issue whilst to most Poles this has the connotation of using connections and maybe bribery to get what you need.

“Znajomości” means literally people you know and who know you, and thus whom you trust, whilst in Poland there is an underlying implication of a secret clique seeking to use connections to further its own ends.

“Kompromis” does not mean a win win situation but one in which the parties to the compromise are compromised i.e. are seen to lose.

And so the list goes on with even the word for businessman, spell variously “biznesman” and any variation there of having an almost negative connotation and suggesting an Arthur Daley wide boy.

None of this helps anyone to run and grow a business in Poland. For most older Poles certainly, and many of the post fall of communism cohort, business is a dirty word and dirty business. That business is required to generate the taxes which pay for social services and other goodies given out by the state just does not register. And this builds on 45 years of communism and the Nazi occupation before that. In the 19th Century and the inter war period many businesses in Poland had both Polish and non Polish business partners. In turn this led to the Polonisation of German business vocabulary. And thus Polish is still not really a language which can support business.

Which I guess goes an awful long way to explain why many successfull Polish businesses, both large as well as SME’s are foreign owned. Having advised a large number of companies over the years I am more than fully aware of the frustration of conducting business in Polish. Not because I do not know the language but because compromise and seeking common ground is so difficult to achieve without the necessary linguistic tool box.