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The country of Mongolia was first under the Chinese rule until 1921 when they got their independence. The following year after it, Mongolia adopted communism. Due to their, Mongolia and the Soviets, closeness, Mongolia used Soviets as a guide for the development they want. In fact, the accounting system used by Mongolian is exactly the same as the Soviets. Their system and record keeping, at this point, were so fine that there was no need for accounting. But it came time for Mongolia to establish using accounting principles for the betterment. At start, Mongolian businesses started using of accrual method accounting and double entry bookkeeping just like other country. They begin to educate people with basic accounting information in order to sustain the economy which, that time, began to flourish. And it was in the late 1980s that Mongolia begun to move away from communism to socialist economy. The stronger accounting infrastructure confirmed to be helpful in shifting Mongolia into more of a market economy.
Starting 1993, World Bank and other bank development partners of Mongolia offered financial and technical support to assist Mongolia develop a legal framework, facilitate accounting education and adoption of IFRS and ISA by enterprises, constitute a new professional body, establish the examination of certified public accountants, and strengthen accounting and auditing in both public and private sectors. As a result, Mongolia has made momentous changes from the old accounting for planned economic system to a new market-oriented accounting system that follows international good practices.
This term paper provides information of the accounting in Mongolia. This presents an overview of accounting and auditing arrangements in Mongolia.
Mongolia is a land of physical extremes and natural beauty. Given with an area of 1.6 million square kilometers and a population of 2.56 million, Mongolia is the least densely populated country all over the world. The nation adopted a new constitution in 1992 that embraces values of democracy and private ownership. The nation has become one of the most open economies in the region, setting at no cost government-administered prices, exchange rates, and interest rates, as well as establishing a two-tier banking structure and opening doors for private proposals.
Since the foundation of economic transformation in 1991, Mongolia achieved remarkable success in the evolution toward market economy and has made significant steps in achieving macroeconomic stability and structural reforms. Economic growth, although positive, is slow as the economy is controlled by its heavy reliance upon mineral resources and animal husbandry.
In spite of embarking on several reform measures, the financial sectors of Mongolia still remain vulnerable. The Bank of Mongolia (BOM) is mainly accountable for implementing the Government's monetary and exchange rate policies, maintaining banking system stability, and supervising the activities of the banks and related financial institutions. The bank of Mongolia can't do their responsibility alone without the help of Mongolian accounting law that will supervise and interpret every transaction which happened.
It is indeed given that accounting is very important to monitor the real situation of an economy. Without this, everything may be impossible.
Mongolian Law on Accounting and Auditing
Accounting Law governs the accounting and financial reporting in Mongolia. The Mongolian Parliament approved the first Accounting Law in 1993 with subsequent modifications in 2002, 2003, and 2006.
As stated: The purpose of the Accounting Law in Mongolia is to determine the legal ground for accounting principles management and institution and to regulate the relationship pertaining to maintenance of accounting records and the preparation of financial statements of the business entity or organization. (Article 1 Purpose of the Law)
But Mongolia has also adopted International Financial Reporting Standards (IFRS). Their Accounting Law obliged all entities whether for profit or non-profit, including small and medium enterprises (SME), state-owned enterprises (SOE), and other entities to prepare financial statements in full compliance with IFRS. However, the majority of entities in Mongolia do not prepare financial statements in compliance with IFRS because it is too costly and too difficult on their part, particularly for small and medium entities. As a result, the Accounting Law lay down double-entry accrual accounting and allows some deviation from IFRS due to Mongolia national context or situation with additional interpretation or clarification in the notes to the financial statements.
The Mongolia auditing system, on the other hand, is mainly regulated by the 1997 Law on Auditing and its subsequent modification was in 2001, 2003, 2005, and 2006. The Law on Auditing is harmonized by MOF and the Mongolian Institute of Certified Public Accountant and is geared toward determination of auditing principles, organization, and administration for registering auditing companies, licensing certified public accountants and organizations in auditing, and overseeing their activities. As stated in the Mongolian Audit Law:
The following entities and organizations written below are required to have their financial statements certified by an audit firm; all shareholding companies that are listed on the stock exchange; a corporation that is requesting to be listed on the stock exchange; business entity having statutory fund amounts of 50 million or more; a company that plans to put up for sale all of its assets to public bidding; business entities and organizations with foreign investment unless otherwise stipulated in the laws and international treaties of Mongolia; fully or partially state owned entities; bank, financial, and insurance organizations; companies engaged in brokerage and dealer or running a business as an investment fund; and labor unions.
The Law on Auditing stipulates that only licensed audit companies can conduct audits. In 2002, the Parliament adopted the State Audit Law resulting in the renovation of the state audit organization from the previous State Audit Board into the Mongolia National Audit Office (MNAO). The State Audit Law dictates that MNAO, as an independent agency, reports directly to Parliament. The MNAO is in charge for annual financial statements audit of all government entities, including state-owned enterprises, and conducting performance audits of selected functions of budget entities. Several sector specific laws and regulations are also in place to regulate auditing activities in Mongolia.
Mongolian accounting principles states:
The financial statements of a business entity and organization shall be in conformity with the International Accounting Standards (IAS); The financial statements shall be based on the correct, neutral and fair material documents, figures and information; Disclosures in report and statements shall simple, clear and easy to understand in order to prevent misinterpretation; For each method used, accounting and reports information shall be organized as possible to compare with present figure and past information; The best choice that met its features should be applied in administrative and cost accounting; And the actions should be continued permanently.
Mongolian accounting standards are building blocks of a 'uniform accounting system' based on the former accounting system of Soviet. In this respect, detailed accounting instructions and reporting formats are issued, of which accounting standards are a vital part. The accounting commands also comprise taxation requirements.
History of Mongolian Accounting
Mongolian country was under Chinese rule until they fought for their liberty in 1921. It wasn't until 1922 that this country first integrated an accounting infrastructure, and parallel to the Soviets, adopted communism also. Due to their proximity, among other things, Mongolia shadowed the Soviets very much. In fact, the Uniform Accounting System used by Mongolia at the time was directly taken from the Soviets.
Communism thrived well into the 1930s and used central planning as a crucial point of communism which promoted standardization, uniformity and keeping statistics. Their rules and record keeping, as of that time, were so fine there was no need for accounting. But it came time for Mongolia as well to start using accounting principles though, in fact, it wasn't very hard for them to adjust as the Soviets had trained them well, laying a well-built foundation. Mongolian businesses started by means of accrual method accounting and double entry bookkeeping, at first. They also have to become skilled at training people, in order for others to be employed in basic accounting positions as the Mongolian economy began to prosper. The stronger accounting infrastructure proved to be useful in changing Mongolia into more of a market economy.
The Mongolians had a very close affiliation with the Soviets for well into the late 1980s. It was then that Mongolia started moving away from communism and move more toward a socialist economy; a time of better cultural and religious freedom, free-multiparty elections and a fresh constitution.
The Need for Accounting Standards in Mongolia
During the early 1990s Mongolia's increased relations with Russia caused it to begin moving toward a market economy. During this time, the country was going through a huge economic dilemma and the practicing of accounting standards were suffering. A few schools even went so far as to close their accounting departments thinking that accounting would no longer be needed in a market economy. Dr. Dondog, CPA, general director of the Department of Accounting Policy and Methodology of Ministry of Finance and Economy, and president of Mongolian Institute of Certified Public Accountants, considered otherwise, and together with a few colleges, of setting out to implement accounting standards that the country could go after.
Development of Mongolian Accounting
In 1993 the Mongolian Ministry of Law and Finance (MOFE) passed the Accounting Law 1993. In this Law, it was stated that businesses must start using balance sheets and maintain accounting records in both the private and public sectors. Also, MOFE had to approve every single financial statements and it required that accounting standards follow International Accounting Standards.
Later that year the National Association of Certified Public Accountants (CPA) was established and the inaugural CPA exam was given in July 1993. It was condemned at first for its weak standards but in 1997, laws solidify with the Auditing Law 1997 which called for a 3-stage exam but no continuing education needed. This helped push Mongolia into developing more accounting policies that were more based on International Accounting Standards.
As stated above, the year of 1993 is when the Parliament passed the Accounting Law. This law defined the standards for Certified Public Accountants and audit firms, required businesses to follow International Accounting Standards (IAS), and outlined the duties of the Professional Accounting Council, who in turn provide CPA certification.
Still after the law was passed, training delayed at universities and the country's lack of IAS familiarity led to no new development of instructions, forms, or regulations. However due to support from Mongolia's three biggest companies, continuity training led to experts gaining knowledge of IAS.
In March 1996, the Mongolian Institute of CPAs was established and intensive training was given to prepare public for the CPA examinations. Of 40 applicants, 18 became certified and the Ministry of Finance and Economics released accounting practices in line with IAS and universities revised their curriculums. When executions of standards were reviewed in 2001 it was learned that the rate of IAS adoption was 27.5 percent. And about 40 percent of companies were still not preparing financial statements.
Current Situation of Accounting and Auditing in Mongolia
Just like other countries, Ministry of Finance of Mongolia obliged entities and organizations to prepare financial statements according to the International Financial Reporting Standards (IFRS) which they implement the standards issued by International Accounting Standard Board (IASB).
As of today, there are 28,201 actively operating entities, from which 24,602 or 87% came from small and medium enterprises. But these small and medium enterprises are in front of difficulty in applying International Financial Reporting Standards effectively and efficiently.
As a result, today, Mongolia is facing issues on civilizing accounting and unifying methods of financial reporting for insurance, banking, financial and mining sector since each sector has their own way of recording their transactions. And unifying their financial reporting as one will be difficult for them to follow and implement.
Professional accountants are next involved parties that will be immediately affected by the rising implementation of international standard and improving accounting. The ethics and professionalism of a CPA are being questioned here.
Implementation of Accounting Today
Implementation of overall accounting standards were so hard in the beginning and the new laws governing public sectors accounting had a slow start in the year of 2003. But now almost all businesses follow the rules and issue financial statements based on the new accounting procedures.
Mongolian Institute of Certified Public Accountants (MonICPA)
MonICPA is a non-state organization that was initially formed on the 9th of March 1996 upon the official registration at the Ministry of Justice.
The main purposes of this Institute are to formulate and make stronger structure for and legal core of accounting and auditing activities all through the country; to support central government agencies in setting, adopting and implementing accounting and auditing standards; to guard interests of CPAs and auditing firms by the means of improving reputation of audit engagements among the public; to make CPAs and audit firms strictly observe the Code of professional conduct; to expand and develop accounting and auditing profession; and to carry out research on accounting and auditing-related topics, provide its members with comprehensive information and meet their training needs.
Those accountancy graduates who have received a Certificate of Certified Public Accountant (CPA) as provided in the Audit Law of Mongolia, and firms, which have received a license to conduct auditing from the Ministry of Finance and Economy, are eligible for full membership in MonICPA.
The main body of MonICPA is the Assembly of members, which meets every four years. Between meetings of the Assembly, the Representatives are allowed and approved by the Constitution to conduct the business of MonICPA on behalf of the Assembly.
The Representatives consists of 11 members, who got designated by the Assembly for four-year terms. The elected President serves as the Chair of the Representatives. The President, who is elected by the Assembly for a four-year term, manages the day-to-day activities. The President hires and manages the personnel, represents MonICPA to other organizations and carries out activities authorized in the Constitution. A Steering Committee, which consists of three members elected by the Assembly for four-year terms, is accountable to report on the accomplishment of the Constitution and the yearly financial statements. Working committees which consists of four sub-committees with five to seven members each who are appointed by the Representatives, is, on the other side, responsible to carry out the activities of MonICPA; these committees are Ethics Committee, Training Committee, Accounting Committee, and Auditing Committee.
Constitution of Mongolian Institute of CPAs\
The Constitution of Mongolian Institute of CPAs consists of 14 articles in which the general background of this Institution is written in the first article which stated that the institute shall carry out its activities in line with the Constitution of Mongolia, Accounting Law, Auditing Law and other legislation adopted in confirmation with these legal acts and the requirements set out in this Constitution.
The rights and obligations of being a member of Mongolian Institute of CPAs is being said here (Article 5). The organizational structure is in the Article 7. While the governing body of the Institute is found in the latter article.
The Code of Ethics of CPAs of Mongolia
There is what they called Ethical code that all Mongolian CPAs are required to follow. This Ethical code was approved at the 2nd Conference of the Mongolia CPAs on 27th Day of September 2000. The purpose of this conduct rule is to regulate ethical relations of Mongolian CPAs and those who engage audit service.
There are 17 articles that can be found in this Ethical code. The things that Mongolian CPAs allow to do and not to do are listed here. The attitudes and way of thinking that a Mongolian CPAs should have is explained in this code. And also the penalties of a CPA who break the code of ethics can be found here.
Confederation of Asian and Pacific Accountants
In 2000 MonICPA joined the Confederation of Asian and Pacific Accountants (CAPA).
CAPA embodies the national accountancy organizations in the whole Asian-Pacific area. As of now, CAPA has a membership of 31 accountancy organizations in 21 countries. CAPA is the largest regional accountancy organization and its geographical area spans half of the globe.
The idea of CAPA was conceived at the First Far East Conference of Accountants that was held from November 28 to December 1, 1957 here in Manila, Philippines. Yet, it was only in the year 1976 that CAPA was formally established.
The mission of CAPA is to offer leadership in the development, improvement and harmonization of the accountancy profession in the Asia-Pacific area to permit the profession to supply services of consistently high quality in the public interest.
Future Trends of Accounting in Mongolia
As I have researched enough about the past of Mongolian Accounting Law in order to give way to a deeper understanding of what is exactly happening, now, I am in the stage of knowing the future trends and plans related to their accounting law.
The new chapter, as in the future, of Mongolian Accounting Law will encompass not only accounting, auditing, asset valuation, financial market regulation, finance, accounting of investment instruments, control issues in whole, but also issues on activity, duty, affairs, and governmental regulation of stakeholders.
Accounting in the future will turn out to be a knowledge services profession. In addition to traditional audit and reporting roles, financial professionals will hand out as analysts, forecasters and managers. Rather than focused on compiling and presenting the numbers, tomorrow's financial professionals will have to dig for data, turn information into knowledge and share their forecasts with senior management.
They will regard past performance, analyze existing data and evaluate changes in the economy. Then they'll use this information to help position companies for future success. Therefore, accountants in the future will no longer be statisticians, but strategic partners.
As financial professionals spend less and less time on conventional functions and more time using their knowledge and insights to help companies grow, the term "accountant" in the future will be replaced by "financial manager" or similar titles.
As investors insist on setting standards that can be used to accurately gauge a company's performance, financial professionals in the future will furnish the factual basis and strategic advice for management's decisions and help demonstrate the impact of those decisions on the bottom line.
Major growth areas for corporate financial professionals in the future will be cash flow forecasting and analysis; computer systems and other technology procurement; strategic planning and management; and international finance.
Looking back into the past, it was observed that Mongolian have gone the long way to shift to the new accounting system since at present, it is clear that their laws are not effectively and efficiently compliant with the hurriedly growing economic and social requirement.
And as of now, they are facing the issues concerning of starting the new chapter of accounting progress in order to sustain future development focus. Assessing current situation of accounting and auditing in Mongolia in whole, we can affirm that the common international setting is indeed introduced in general. But issues such as improving, optimal utilization of reported data, and sustaining its importance lead to be the aim of sector development.
Most countries around the world have been transferring into the next phase of socio-economic development and calling it "Information Society". This notion represents creating independency of space from time, whereas data transmission, processing, storage and knowledge will facilitate the development information technology sector development.
18 years of following accounting and auditing law and valuation rules as basis of Mongolia on recording each of their transactions. These existing laws and rules are considered as the main indicators of economic development.
Now is the time to strengthen and improve the level that we have reached. We should learn from mistakes and achievements then start the perfection of accountancy, auditing and valuation.