Economic Transition and Accounting System Reform in Vietnam

European Accounting Review Vol. 20, No.
4, 693 725, 2011
Economic Transition and Accounting System Reform in Vietnam

NGUYEN CONG PHUONG and JACQUES RICHARD
Downloaded by [222.254.78.216] at 11:04 16 October 2012
College of Economics, University of Danang, Vietnam and France
University of Paris Dauphine,
(Received: November 2009; accepted August 2011) ABSTRACT Since 1986, Vietnam has been reforming its economic system, moving from a centrally planned economy to a market-oriented economy connected to the rest of the world. This process has been shaped by the tensions and power relationship between moderate and radical reformers and the interaction of their reform strategies. This paper demonstrates that, unlike many reforms in former socialist countries, the Vietnamese accounting reform resulted from both external pressures and internal needs. Because Vietnam switched from state capitalism to a type of mixed capitalism, the country was in a position to adapt the former socialist accounting system relatively quietly, moving towards a private capitalist accounting model but preserving many fundamental peculiarities of the old system. The maintenance of the old accounting structure can be explained by the continuity of the political, economic and social environment. However, the transformation has also generated some difculties due to adapting a private capitalist accounting system to work in a state-dominated market economy.
1. Introduction Since the purpose of an accounting system is to record and disclose useful information, accounting systems do not function in an isolated fashion, but incorporate and reect the socio-economic and political characteristics of a country (Burchell et al., 1985; Miller, 1994; Ezzamel et al., 2007). An extensive body of literature testies that the accounting system existing in a particular country is a product of the economic and political environment as well as other factors (Mueller, 1967,
Correspondence Address: Nguyen Cong Phuong, College of Economics, University of Danang, 71 Ngu Hanh Son, Danang, Vietnam. Tel.: 84 511 3766862; Fax: 84 511 3836255; Email: phuong. nc@due.edu.vn 0963-8180 Print/1468-4497 Online/11/04069333 # 2011 European Accounting Association http://dx.doi.org/10.1080/09638180.2011.623858 Published by Routledge Journals, Taylor & Francis Ltd on behalf of the EAA.
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1968; Richard, 1977, 1980; Choi and Mueller, 1992; Nobes, 1998; Meek and Saudagaran, 1990; Saudagaran, 2001; Cooper and Sherer, 1984). Thus, the characteristics of an accounting system can be expected to vary from country to country (Berry, 1983) as a result of social change (Gilling, 1976; Hopwood, 1983; Nobes, 1992; Potter, 2005). Vietnam has been moving away from a highly centralised planned economy towards a market economy since 1986, and its accounting system was modied in 1995. The aim of our research is to explain this reform in light of its economic, social and political context. Economic reform is a dynamic process that usually leads to further change in politics and economic policy. As we demonstrate, the entire process of reform and opening up in Vietnam has been shaped by the tensions and power relationship between moderate and radical reformers and the interaction of their reform strategies. We underline that the accounting transformation has generated some difculties due to adapting a private capitalist accounting system to work in a state-dominated market economy. This paper makes four distinctive contributions to the literature. First, while there have been several studies on the changes in accounting of countries in Eastern Europe, no comparable work about the Vietnamese reform has been published so far. Second, the dominant literature on former socialist countries such as the Soviet Union over-emphasises the differences between the former socialist or Marxist accounting systems and the new capitalist ones. We argue that former socialist countries were characterised by a kind of state capitalism, so that the main features of the two accounting systems are not so different. This observation enables us to propose a new conceptual framework for studying the accounting systems of former and present communist countries. Third, we show how the Vietnamese bureaucracy, in a relatively quiet way, transformed the state-capitalism accounting system into a more privately oriented accounting system. This transition preserves much fundamental specicity, while at the same time preserving the political power of the Communist Party. We dene and illustrate the basic principles of accounting for state capitalism. Fourth, looking towards the future, we suggest that as the International Financial Reporting Standards (IFRS) have not yet been totally applied and more drastic changes are to come that will imply a new philosophy of management, it is possible that the quiet change could become a more problematic one, notably with regard to the fate of the state-capitalist bureaucracy in competition with new kinds of capitalists. This paper has six main parts. As the concept of state capitalism and the discussion on the nature of former or present socialist countries play a crucial role in explaining the similarities and differences of accounting systems before and after the change to a new kind of economy, Section 2 discusses this issue at some length. Section 3 explains accounting in Vietnam under the former communist economic system. Section 4 presents the economic reforms, while Section 5 analyses the effects of these reforms on the social environment of accounting. Section 6 deals with the reform of accounting itself and Section 7 reveals the
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contradictions between the internationalisation of Vietnam and its desire to remain a state-controlled country. 2. The Concept of State Capitalism and the Nature of Former and Present Socialist Countries A rich scientic literature devoted to the concept of state capitalism already exists. Our study is mainly based on the writings of Mattick (1947), Gouldner (1955) and Buick and Crump (1986). All these authors contest the dominant thesis according to which so-called real socialist countries differ sharply from capitalist countries, arguing that this division is falsely based on three elements that are not pertinent for judging the real nature of these economic systems, namely, the type of ownership, the nature of the market ties between the units of production and the existence of democracy. Contrary to Le (2008, p. 17), who emphasises the role of state ownership, Buick and Crump (1986, p. 15) state that the substitution of state for private (individual or corporate) ownership does not mean the abolition of capitalism . . . it merely means that capital has come to be embodied by the state, or rather, in practice, by several different state-enterprises. In the same way, while many studies such as those of Guesnerie (1996) and Le (2008) distinguish between socialist and capitalist regimes on the basis of an opposition between a totally planned and a market economy, Gouldner (1955, p. 496) deems that the nature of interrelationships between production units is not a critical factor in differentiating between the two economic systems. Concerning democracy, Mattick (1947) insists that the capitalist system has undergone anti-democratic phases, notably during the pre-Second World War fascist experiments, which prove that the existence of democracy is not the point. We could add that the development of capitalism largely preceded that of democracy. Obviously, democracy in the form of free elections cannot be a valid criterion for capitalism. What then is the main element differentiating a true socialist economic system from a capitalist one? According to these authors, the main issue is labour relations inside the units of production: whether workers can dictate rm policies or are merely wage earners dominated by private employers or state bureaucrats (see notably, Gouldner, 1955, p. 497; Buick and Crump, 1986, p. 17). Thus, the true differentiating factor is not ownership but power. According to Gouldner (1955, p. 496), this focus on labour relations, derived from the work of sociologists and politicians such as E. Durkheim, B. Russell and M. Weber (who were much more interested in social problems than economic or legal ones), explains why Weber (quoted specically by Gouldner, 1955, p. 497) asks, if labour relations inside socialist and capitalist factories are fundamentally alike in that they are both bureaucratic, then does a socialist revolution yield very much improvement for the capitalist proletarian? Accordingly, Buick and Crump (1986, pp. 5 14) show that the key element for the determination of a capitalist economy is the existence of wage labour and a
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wage labour market. The existence of wage labour means that there is prot for a certain dominant class as well as capital, or self-expanding value. This is the reason why, while characterising capitalism as a system where there is an investment of capital in production with a view to prot, they also deem that the fundamental basis for all of this is the existence of the exploitation of wage labour and the existence of a labour market where labour can sell its labour force. On the basis of this reasoning, these authors characterise the so-called socialist regime of the former USSR as state capitalism. Buick and Crump (1986, p. 72) list seven characteristics of a state-capitalist regime: state-ownership of the principal means of production, generalized wage labour, generalized use of money and monetary calculation, a free market for consumer goods in the form of agricultural products and light industrial products, a market for means of production which is closely monitored and directed by the state, a wide-scale planning activity, although a fully planned economy is not achieved and a sizeable black market. Since the publication of Buick and Crumps book in 1986, some features of the Soviet Unions state capitalism have become clearer. In 1984, the economist J. Sapir underlined three main points that contradict the traditional view of the Soviet Union regime. First, not one but at least four economies existed at the same time, including a strict state-planned economy for some companies, a legal private economy, notably for small companies, a non-legal private economy resulting from bartering for raw materials between the directors of big ofcially planned companies, and a criminal economy (1984, p. 26). Second, state planning rapidly disappeared (p. 11) because it was difcult and/or authorities lacked the will to control the division of activities among the four types of economies. Proof of this disappearance is the suppression of the ve-year plan in favour of the one-year plan (p. 11). Third, the planning system was never directly applied to labour and there was always a labour market characterised by strong competition to obtain supplements of labour force in times of growth and the possibility of dismissing workers on the pretext of work errors in times of crisis or zastoj (pp. 13 14). One of Sapirs conclusions is that it was impossible to manage the economy as a single enterprise and that directors had real opportunity to manage their business while being judged on the basis of their ability to obtain production performances (p. 16). All these recent views, especially the existence of a labour market, are totally at odds with the traditional view of the Soviet economy and clearly support the thesis of state capitalism. However, who were the capitalists in this system? According to Buick and Crump (1986, p. 56), they were all the people supervising the extraction of surplus value from the working class, meaning heads of the party, the upper level of the state bureaucracy, the senior management in the economic enterprises and the top ranks of the military and police forces. All these people were in a position to reap very high incomes compared to ordinary workers (Binns, 1987, p. 74).
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Lenin himself had clearly declared that the way to socialism rst went through state capitalism. In early 1918, he stated that our duty is to study the German school of state capitalism, and do all we can to assimilate it; in that country we nd the last word in modern techniques of large-scale capitalism and methodical organisation serving the capitalism of the middle class and the Junkers. If you . . . replace the military state, the aristocratic State (the Junkers State), the imperialist middle class State with another State, a socially different State with a different class content, a Soviet State, i.e. a proletarian State, you will obtain the entire set of conditions that lead to Socialism. (Lenin, 1962, pp. 712 713) This extraordinary declaration was probably inuenced by Hilferdings wellknown thesis on nance capital: the socializing function of nance capital facilitates enormously the task of overcoming capitalism. Once nance capital has brought the most important branches of production under its control, it is enough for society, through its conscious executive organ the state conquered by the working class to seize nance capital in order to gain immediate control of these branches of production. (1981, part 5, p. 25) Thus the Soviet model that Lenin, Stalin and their successors developed, with different variants, from 1917 to the collapse of the USSR was essentially state capitalism. We hypothesise that Vietnam also has adopted a certain variant of state capitalism. If this is the case, the system of accounting that prevailed before the reform of 1995 should display the main characteristics of capitaliststyle accounting. This 1995 reform, in the context of greater cooperation with the private capitalist world, should have brought this former state-capitalist accounting somewhat closer to private capitalist accounting, while preserving many fundamental features. 3. Vietnamese Accounting under a Centrally Planned Economy At the end of the Second World War, Vietnam pronounced its independence as a sovereign state by declaring the establishment of the Democratic Republic of Vietnam on 2 September 1945. When the Geneva Agreement was signed (in 1954) between the Vietnamese and the French, the country was divided into two parts, the Democratic Republic of Vietnam in the North and the Republic of Vietnam, backed by the USA, in the South, with two very different political and economic systems that lasted 20 years (from 1954 to 1975). Divided by politics and war, the economies of both the North and the South developed along two different paths in the two ensuing decades of separation. While the South, nurtured by the US military presence and the comprador
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economy, followed the capitalist path, the North sought to adopt the Soviet approach of political and socio-economic systems for social management and industrialisation and planning. This approach continued to expand over the entire country after reunication (1975) but became less inuential after the renewal policy was launched in 1986 (Grifn, 1998a, p. 2). The socio-economic environment of accounting and the fundamental characteristics of the old accounting system provide a comparative framework for assessing the original features of the new accounting system. 3.1. The Political and Economic Systems Until 1986, the economic system in North Vietnam had all the characteristics of a Soviet-style command economy (Van Arkadie, 2003, p. 39) regulated by the Party-State (Grifn, 1998; McCormick, 1998b; Leung and Riedel, 2001). Nearly all facets of economic activity were subject to central planning and control. All the means of production belonged to the state in the form of state ownership or collective ownership (Van Arkadie, 2003, p. 4). Agriculture was made collective, prices were set and administered by the government, state enterprises dominated the industrial sector and all foreign trade was controlled by the state. Interest and exchange rates, strictly managed by the government, bore no relationship to market prices (Harvie and Hoa, 1997, p. 32). State economic units were set up in accordance with Soviet managerial concepts. The basis of this system was the use of state monopoly to concentrate resources as the top priority task for nation building, and the focus on rapid industrialisation (Harvie and Hoa, 1997, p. 32). Vietnam (like China) had previously adopted a Marxist Leninist ideology and a Leninist political framework from the Soviet Union. The Communist Party of Vietnam established a Leninist state that deployed high levels of despotic power over infrastructure (McCormick, 1998, p. 123). The Communist Partys inuence over the planning process was reinforced by its control of all-important managerial positions in the economy, from the state planning bureaucracy to individual enterprises (Bergeret, 2002, p. 16; McCormick, 1998). All major appointments, promotions and dismissals were decided by various party bodies. Moreover, for every important sphere of state activity, such as a ministry, there was a corresponding group or department within the party apparatus responsible for supervising it (Bergeret, 2002, p. 16). Bergeret (2002, p. 23) observes that under this system enterprises (units) had very little autonomy in decision-making and took little responsibility for the effective use of economic resources; the unit was given a regular production target in terms of quantity, and, to meet this target, the state directly provided it with capital and inputs. According to many economists including Harvie and Hoa (1997) and Lavigne (1999), protability was apparently not a primary objective for enterprises: the top priority task for nation building was to control resources. This point will be discussed in detail later. These specic features of
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the socio-economic system generated a demand for appropriate accounting control and information. 3.2. An Accounting System Oriented towards Strong State Bureaucracy Control In 1948, three years after the foundation of the Democratic Republic of Vietnam, Revenue and Expense Rules and General Accounting (Decree No. 1535/VP/ TDQ, Government of Vietnam, 1948) was promulgated. This regulation was based on the French cash basis system used by the French colonial authority (Bui Van Mai, 2001, p. 43). It was intended mainly to control the monetary ows of the centralised budget system (Dang Van Thanh, 1995, p. 1). However, after 1956, new accounting rules based on the Soviet accounting style were gradually promulgated for each economic sector. This accounting system was used until 1996, when the new accounting system took over. The Soviet-style accounting system, used as an instrument of control, was incorporated into the centralised administrative system to supervise the activities of all state enterprises. This regulation concerned not only various accounting concepts such as equity, income, return on equity, revenue and expense, but also the whole activity of planning and budgeting, the valuation system and the use of charts of accounts. 3.3. The Concept of Equity In the former Vietnamese economic system, the equity of the enterprise was the total sum of resources including all kinds of debts, not only the owners equity excluding the debts, as in the case of private capitalist rms familiar to Westerners. This enlarged concept of equity is a logical extension of the viewpoint that the state is the dispenser and owner of all means of nancing (see Richard, 1977, 1980). It was comparable to the entity approach debated in Western theory of accounting and put forward notably by Paton and Littleton to enlarge the concept of private equity for big entities: to management the bondholders dollars and the money furnished by the stockholders become amalgamated in the body of resources subject to administration (1940, p. 43). There was thus no Marxist doctrine, as Le (2008, pp. 35 39) emphasised, but merely the use of a truly capitalist concept! 3.4. The Concept of Income Nobes (1998) suggests that an economic system is characterised in general by the domination of a particular nancing system. Richard and Collette (2005, p. 38), on the other hand, consider that the question of power is the most important one and that power nds its concrete expression in the accounting denition of income. As in other former socialist countries, the net income of Vietnamese
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socialist enterprises was obtained after the deduction of all traditional expenses from revenues except for tax and interest on loans, which were not deducted. Net income thus was determined in a similar way as for private capitalist enterprises, except for tax and interest on loans. A proportion of the income was retained by enterprises to feed a fund for the emulation of workers, and the rest was paid either to the state as taxes or to the state-owned banks as interest on loans. These taxes and interest were considered not as expenses but as distributions of income (see Richard, 1980 for the example of Soviet-style treatment of interest and taxes). This situation can be explained by the fact that income was considered from the viewpoint of the controller of all assets, the communist state bureaucracy. The income derived from state enterprises was taken to be a part of state income. This type of calculation has sometimes been interpreted as proof of a Marxist type of economy based on the recourse to the concept of surplus value. However, this concept of surplus value as used by Marx applied not to a communist state but to a capitalist society as seen from a global viewpoint without differentiating between equity and debts. Paton and Littleton, not known as Marxist theoreticians, also put forward the idea that from the point of view of the enterprise as an economic entity . . . treatment of interest as a charge analogous to operating costs such as labour and materials is objectionable (1940, p. 43). Therefore, surplus value as used by the Soviet and Vietnamese states was indeed proof of a state-capitalist regime and not of a Marxist-type economy. The crucial point in this matter is that employees salaries were considered as an expense to be deducted from prot (surplus), as in every private capitalist enterprise. Contrary to what was promised by Lenin and Ho Chi Minh before the revolutions, workers were not the owners of created value but only, like their counterparts in the West, the recipients of a contractual part of the value that was dened by the state bureaucracy and was negotiable when conditions were favourable. As Richard (1983) showed, the only socialist accounting system in which the workers pay was treated as the distribution of added value and not as expenses was the Yugoslavian accounting system at the time of the self-management experiment led by Tito. The main conclusions here are that, contrary to Chiapello and Ding (2004), the notion of prot existed in socialist countries and that, contrary to both Le (2008, p. 69) and Chiapello and Ding (2004), it could hardly be said that in the Soviet Union and Vietnam the workers were (are) collective masters of the enterprises. 3.5. The Concept of Return on Equity Thanks to these two concepts of capital and income, Vietnamese communist rms, like their Soviet counterparts, were able to determine a ratio of return on equity that was ofcially considered as the criterion of efciency, to be maximised in accordance with communist doctrine (Richard, 1977, p. 324). This assertion has been challenged, however. A majority of Soviet Union specialists,
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like Sokolov and Petrachkov, contend that in a communist state, a concept of return comparable to the return on equity in use in Western countries cannot exist because of the absence of a real market and a real concept of prot. Other similar studies done by Bailey (1995), Krzywda et al. (1995), Mihaylova (2000) and Le (2008) suggest that Soviet-type accounting systems are not actually oriented towards a measure of economic performance, but are merely bookkeeping. On the contrary, Richard and Collette (2005) asserts that within the frame of state planning, the goal was to maximise a return on equity in a manner very similar to that of large Western enterprises, so the Soviet system could be designated as state capitalism. The fact that this kind of capitalism was inefcient is a not a reason to refuse to take seriously its attempts to create its own instruments of rational counting, to use Webers terminology. This thesis seems to be conrmed by the declarations of retired Vietnamese accounting specialists. When asked by Le (2008, pp. 560, 670, 634), these veterans asserted, surprisingly enough, that the concept of income was important and that it was used to measure performance. This opinion also seems to be shared by some Chinese accountants (Ezzamel et al., 2007, pp. 678, 680). 3.6. The Concepts of Revenue and Expense In the Vietnamese socialist accounting system as well as in the Soviet system, the revenues of a rm were registered at the time of collection, not at the time of invoice. Many commentators have deduced from this that these systems were based on a kind of cash accounting that ignored the benets of modern Western accrual-based accounting, reinforcing the myth that it was mere bookkeeping. This opinion is not correct. Although revenues corresponded to cash movements, this was not the case for expenses, because expenses were not cash expenditures but were calculated on accrual principles so as to reect, in an original fashion, not the cost of goods sold, but the cost of products sold and paid for (Richard, 1977, 1980). Why was it preferable to register revenues at the collection stage? The reason was connected not to any motive of prudence but to a question of efciency: planners struggling with the slowness of rms had elaborated a device to encourage payments for sales by preventing the distribution of any prots before the termination of the accounting process (Richard, 1980). It also had nothing to do with a Marxist view of the economy, which focuses on the famous equation MGM (money, goods, money). 3.7. Planning and Budgeting As in other former socialist countries, the budget was the heart of the state machinery in Vietnam, where there were only state and collective ownerships (Vu Quang Viet, 1998, p. 129). Enterprises funds (capital in the wide sense) were allocated by the state for specic goals such as investment in xed assets, production and payments to suppliers. Each fund allocated could not be used for other ends, and the
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use of the funds was controlled and supervised, notably through the use of a special type of balance sheet without any practical counterpart in Western countries, where nancing is generally freely used. Up to the end of 1995, each enterprise had to list on its balance sheet the funds specied by the government, namely, the xed assets fund, the current assets fund and the specic assets fund. Each fund corresponded to a separate group of assets. The basic accounting equation underlying the nancial statements of all organisations was fund applications equal fund resources. Fund application meant the use of funds to acquire property, goods and materials used in operations, while fund resources represented the various channels to obtain operational funds. This type of fund accounting, as invented by Soviet specialists (Richard, 1977, p. 406), allowed the state to check whether allocated resources were being well used in accordance with the plan. It was intended not to evaluate the enterprises performance (this objective was achieved by calculating the return on equity), but to facilitate central control and implementation of the economic policies of the authorities in terms of resource allowance and use. This was logical because the state possessed all means of production and allocated all resources of enterprises. This system, at least in the case of Soviet enterprises, obviously did not prevent managers from trying to nd non-planned resources by negotiating agreements with their counterparts in other enterprises. According to Sapir (1984, p. 12), this kind of barter, also to be found in Vietnam, might well have represented half of the planned ows! 3.8. Rules of Valuation Both Vietnamese and Soviet enterprises had to evaluate their goods and assets according to a kind of true historical cost system in line with the precepts of the dynamic German school, notably Schmalenbach, who had a strong inuence on the founders of Soviet accounting (Richard, 1980, 1995a, 1998). There was no question of assessing assets at their market value or even evaluating inventories at the lower of cost or market. This point was not so strongly ideological as it would appear from the declarations of Soviet or Maoist politicians against private capitalist accounting (Ezzamel et al., 2007); it was partly due to the absence of failures and above all to the existence of a shortage economy (Sapir, 1984, p. 21). As in other former socialist countries, the recourse to the concept of value in use (based on discounted cash ows) was also unknown since enterprises were not to be sold. The historical evaluation was used to measure the real performance of enterprises, that is, the degree of realisation of the plan. The use of the historical cost system was also justied by the objective assigned to accounting, that is, to give the central authority the means to measure product prices and control manufacturing costs (see Richard, 1980). 3.9. Use of Charts of Accounts In May 1918, in his paper on left-wing infantilism, Lenin wrote that the predominant feature in Russia at present is petit bourgeois capitalism from which there
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is but one single route to both big state capitalism and Socialism, and that route goes through the same intermediary stage, which is called accounting and control (1962, p. 713). We have already seen that this intermediary stage is, as a matter of fact, state capitalism, but the quoted words focus on the main instrument of the realisation of state capitalism: a certain type of control by accounting. Where did the Soviet leaders nd this type of accounting and control? The answer, again, is in Germany! It is known that as early as 1918, Lenin and Soviet specialists were acquainted with the most modern German techniques of management, namely, those recommended by the businessman and specialist in war economics Rathenau. His book The New State (Der neue Staat) had been commented on by Lenin himself (1919), and his collaborators went to Russia in the 1920s (Sapir, 1984, p. 6). It is equally well known that in 1929, Schmalenbach received a visit from a Soviet delegation (Forrester, 1977, p. 60) and that a year earlier his famous chart of accounts was published in the USSR (Mazdorov, 1972, p. 85) and became the basis for the construction of all future Soviet accounting plans (Richard, 1995a). Much later, in 1970 (Decree No. 425 TC/CDKT), Vietnamese socialist accountants also adopted a variant of this Soviet model inspired by Schmalenbachs famous Kontenrahmen. The model was characterised by the principle of formal monism (unity of cost accounting and nancial accounting) and by the logic of the circuit (classication of accounts according to the order of the operating cycle in accordance with the three stages of the reproduction process purchase, production and sale). As Richard (1995b) remarks, there were two logical reasons for the choice of a chart of accounts of a monist type. First, this very standardised accounting plan enabled the state bureaucracy to control the process of production. Second, it also enabled the state planners to aggregate macro-economic indicators efciently, notably concerning the average cost of production. It has been asserted that circuit logic is related to Marxist ideology, but in fact all this is correlated not with a Marxist conception but with concrete needs of management control: this kind of circuit logic had already existed in the cost accounting systems of the early nineteenth century, well before Marxs birth. Thus, the basic concepts and tools of Vietnamese accounting were taken from the capitalist system, including a concept of return on capital comparable to the famous return on assets.
4. Economic Transition to a Market Economy and its Consequences 4.1. Reforms at Macro and Micro Levels Led to Important Changes Affecting the Social Environment of Accounting The Vietnamese economic reform, in conformity with the slogan of Doi moi (renovation) proposed at the Sixth Congress of the Communist Party in 1986, shifted the Vietnamese economy from a centrally planned economy to a socialist market economy. While the majority of Eastern European countries recognised
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the transition as a radical change from a planned economy to a market one, Vietnamese leaders saw Doi moi as a way to improve the socialist model and not to abandon it (e.g. see Dixon, 2003). Macro-economic stabilisation, the restructuring of the economic system and the opening of doors to the rest of the world contributed towards remarkable changes in the socio-economic environment (Cuong et al., 1998; Leung and Riedel, 2001, p. 3) in which accounting took place. Since 1987, many reforms have been implemented, and this process has accelerated since 1989 (Cuong et al., 1998, pp. 37 48; Vu Quang Viet, 1998; Riedel and Turley, 1999). The changes can be seen in the reduction of differences between free market and ofcial prices, the abolition of rationing for many commodities, the removal of the checkpoints on internal trade, the enactment of a foreign investment code and the establishment of the State Committee for Co-operation and Investment. The following changes may also be noted: giving farmers the right to use land for at least 15 years and to cooperate with their partners in agriculture, reducing restrictions on foreign trade and separating the role of a central bank from that of commercial banks. Conspicuously absent were moves to relinquish administered pricing, unify exchange rates, substitute positive for negative interest rates and harden budget constraints on state enterprises. Thus, Vietnam managed to secure a successful macro-economic stabilisation. This stabilisation, once achieved in 1993, has enabled Vietnam to enjoy a favourable macro-economic environment until now. This adjustment was carried out without any signicant international nancial aid, either from the IMF or from anyone else (Dixon, 2003). At a micro-economic level, the reform programme between 1986 and 1995 consisted of fundamentally restructuring state-owned enterprises (SOEs). Piecemeal reforms increased SOE autonomy through 1988 (Decree No. 217/HDBT, Government of Vietnam, 1988), and then in 1989 the government hardened the budget constraint, ended direct operating subsidies and easy bank credits, and shifted to market pricing for both inputs and outputs. Protability and performance of SOEs improved. The number of SOEs declined from 12,297 to 6310 by the end of 1995 (Vu Quoc Ngu, 2002, p. 7). In addition to the restructuring of the SOEs, equitisation was used to increase the effectiveness of the economy in the future. In early 1992, the government promulgated an experimental programme of equitisation (Decree No. 388/HDBT, Government of Vietnam, 1992). However, the experience of Russia raises questions about the approach chosen by the Vietnamese government. In order to maintain the states control over the economy, Vietnam chose a gradualist approach (Le Thanh Ton, 2000, p. 157), unlike the sudden spontaneous programmes of privatisation in Eastern Europe and the former USSR (see, for example, Gros and Steinherr, 2005; Dixon, 2003). Following this approach, the government would retain substantial ownership, while the bulk of shareholders would be managers and other employees. The prevalence of insider equitization (managers and workers taking the majority of shares) and the fact that the state could retain a controlling interest have clearly demonstrated the ability of the Vietnamese government to resist
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external pressures and to maintain a consensus-driven policy approach (Beresford, 2008, p. 232). The development of the private sector was mentioned in the Document of the Sixth Party Congress. After many years of discrimination, the government promoted the development of this sector, although its contribution to the GDP is still relatively small. The Laws on Companies and Private Enterprises, passed in 1991 (No. 47/LCT/HNN and No. 48/LCT/HNN, National Assembly of Vietnam, 1991a, 1991b), gave the informal sector ofcial sanction. This was identied further in the countrys new constitution (in 1992), which claried the rights of the private sector by recognising its important role in the economy and providing explicit protection of private property rights. This policy led to the emergence of groups of users of accounting information (see below).
4.2. The Role of the State These developments in Vietnam in the 1980s and the early 1990s clearly show the key role played by the state in moving away from central planning. By introducing a series of reforms piecemeal, at both macro and micro levels, the state allowed parallel markets to ourish. Moreover, the role of the state was re-dened, moving from that of direct controller of the economy to that of an indirect intervener and partner working with the private sector to promote growth, and from that of company manager to that of owner (see Leung and Riedel, 2001, p. 34). However, although Vietnam is a country where economic reform and developments have gone hand in hand with signicant changes in political attitude, this has been achieved within a framework of continuing governmental control, which remains particularly strong with regard to accounting organisations and decisions. This approach to reform has resulted in a substantial but somewhat uneven development of elements of the market economy. The system, labelled with variations of such terms as market socialism or socialist market-oriented economy, is ofcially depicted as being placed under state management with the key means of production remaining publicly owned (see, for example, Communist Party of Vietnam, 1986, 1991, 1996, 2001). In Vietnam it is claimed that the state uses the market mechanism and applies economic forms and managerial methods of the market economy to activate production and release productive forces, promoting the positive aspects of the market mechanism while limiting and overcoming its negative aspects, and protecting the interests of the working people and the population as a whole. (Communist Party of Vietnam, 2001, pp. 33 34)
4.3. Resistance to Reforms As we noted above, accounting reform in Vietnam has been shaped by the tension between moderate and radical reformers (Guo, 2004, p. 400). In general, the
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conservative leaders have a strong preference for a socialist market economy. They are concerned about the corrosive impact of the pure market economy and the development of private sectors on the Vietnam Communist Party (VCP) leadership and the socialist direction of reform. The radical reformers are more interested in the efcient functioning of the system than in the survival of ideology and have a strong preference for a comprehensive market reform and opening of the economy to the world market. They want Vietnam to change more rapidly and join the global market to enhance its long-term development prospects (Quan Xuan Dinh, 2000). Policy debate about the nature of socio-economic development in Vietnam began during the economic difculties of 1979 80 (see Guo, 2004, p. 398). There were two tendencies as regards reform. The conservative leaders (for example, Nguyen Duy Trinh) disputed the proposal that all sectors, especially the individual and capitalist ones, should be allowed to expand, and furthermore maintained that the scope of relying on markets should be limited by the need to subordinate them to the plan. They also added that the basic reason for failure was the slow pace of change in planning methods and management structure. In contrast, the liberal leaders (for example, Nguyen Lam) took a stand against planning everything and favoured the use of markets and multiple planning levels, underlining the need to pay attention to the material interests of peasants, regions and so on (Fford and de Vylder, 1996, p. 131). The reform policy in the rst half of the 1980s was, in general, a compromise between the two groups: the private sector and free market were to play a more important role but nevertheless should still be subordinated to the state plan; furthermore, subsidised supply would continue as part of state central management, with resources allocated directly to high-priority areas (Fford and de Vylder, 1996, pp. 126 127). However, at the Sixth Party Congress in December 1986, the policy debate began to favour reformers, for whom the central economic management of the state was a key factor inhibiting both economic growth and micro-level reforms. The earlier policies were rejected, starting with far greater formal decentralisation, allowing markets to play a more important role in the allocation of resources and encouraging non-public sectors to develop in production and services. This shift away from long-accepted orthodoxy created opposition from conservatives, and this, yet again, slowed down the transition pace (Fford and de Vylder, 1996, pp. 127 149). In the 1990s, particularly during the 1997 Asian nancial crisis, the internal conict between conservatives and reformers intensied (Guo, 2004, p. 399). Conservatives blamed the crisis of capitalism as a whole and believed that Vietnams lack of economic integration was a blessing. Reformers blamed the crisis of crony capitalism, imperfect markets and too much government intervention. Since the Eighth Party Congress in 1996, the Politburo has been deadlocked and unable to implement any bold reforms to stimulate the economy, because it is divided along ideological lines and unable to come to an agreement on the direction of the reform programme (Guo, 2004, p. 399).
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The tensions between these two groups have determined not only the policy choice of economic reform but also the sequence of economic and political reforms. However, such tensions should not be interpreted as a struggle between those who favour reform and those who oppose it (Guo, 2004, p. 400). Reform was made easier in Vietnam by a highly favourable social consensus, which lowered resistance to change and propelled it forward (Riedel and Turley, 1999, p. 45). Disagreement was over the pace and scope of the reforms, between those who pushed for more radical or speedy reforms and those who favoured gradual and steady reforms. Faced with powerful resistance from the conservatives, the reformists have been careful in their approach to reform and in nding ways to compromise. The lack of agreement between the conservatives and the reformists over the direction, extent, pace and depth of reforms has made the party indecisive over many pressing structural problems faced by the country. The result is a gradual, partial and piecemeal response to those problems and challenges (Quan Xuan Dinh, 2000, pp. 360 388). 4.4. Comparison with Other Former Socialist Countries During the 1990s, the phenomenon of transitional economies in Eastern Europe and East Asia brought a new dimension to the development debate: the discussion on the ideal transition paths from a centrally planned to a market economy. Since 1989, the majority of Eastern European states have adopted a neo-liberal approach, mainly induced by international agencies, major trading partners, investors and aid donors (see, for example, Dixon, 2003; Guo, 2004, p. 393). This approach is seen often as shock therapy. Russia is a specic example of this approach, with its explicit commitments to the development of a full Western-style market economy, combined with rapid democratisation. Central features have been reductions in the centralised direction of the economy and direct state involvement in production, together with the end of single-party rule (Dixon, 2003, p. 292). However, the transition in Eastern Europe has proved to be a complex and problematic process, with recurrent economic and political crises and a wide range of situations and trajectories (see, for example, Dunford, 1998). Vietnam (like China) has adopted a different approach of gradual economic reform while the single party has stayed in power (Guo, 2004, p. 393). This progressive approach has been conducive to the continuation of strong governmental control and of a leading role in economic development for SOEs. The transition from a centrally planned to a market economy, albeit one with a socialist orientation, took place without any kind of political revolution or ideological conversion but with signicant changes in political attitude on the part of the leadership within a framework of continuing strong governmental control (Riedel and Turley, 1999, p. 8). Vietnam, along with China, has, until recently, passed the transition test relatively well, as concerns the way towards a certain type of market economy. As Grifn (1998b) has stressed:
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Vietnam, along with China, stands out as a success story among the transitional economies. All the other transitional economies have run into severe problems, often a combination of falling output, decline in average incomes, sharp increases in poverty, rising mortality and falling birthrates, rapid ination and so on. (p. x) This relative success has taken place in the context of maintaining single-party rule, high levels of state intervention and signicant direct control of production through SOEs. Economic growth has been heavily concentrated in the state sectors. It is argued that a signicant proportion of the growth has resulted from the partystates promotion of growth, establishment of incentives and encouragement of more localised activity. Dixon (2003, p. 298), however, remarks that the positions adopted by Vietnam (and China) on state protection of major parts of the domestic economy, the reluctance to privatise SOEs and the maintenance of central party rule have attracted increasing criticism from international agencies, main trading partners, investors and commentators. Reform and development in Vietnam have been a signicant challenge to the Western neo-liberal and democratic model. It is obvious that the Doi moi that started in 1986 has caused the Vietnamese economy to become a type of mixed economy with a combination of private and public ownership of production means. Vietnam is only partly market driven, retaining non-market capitalist forms of production and ideology. The leading role of SOEs and strong control of the state-party in the socio-economy make the Vietnamese economy different from a traditional mixed economy such as that in France in the 1960s. The Vietnamese economy is ofcially a marketoriented socialist economy under state control (Communist Party of Vietnam, 1991). While developing countries apply Western policies that consider the government as a market facilitator, Vietnam has consistently expressed the intention of controlling the market (Beresford, 2008, p. 222). Dixon (2002) stresses that, in Vietnam, the development of elements of the market economy and integration into the global system are taking place under the auspices of a single-party state that continues to afrm its commitment to state control over the economy. 5. The Effects of Macro and Micro Reforms on the Social Environment of Accounting
These economic reforms have brought about important changes in the social environment of accounting, changes relating to social players, administrative functions, ownership structure, the complexity of operations and relations with the outside world. 5.1. Change of Social Players Although public ownership and the role of the state remain dominant, the private sector has developed quickly (its GDP uctuates at around 55%, but within this
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percentage, the contribution of the informal sector is the largest, at approximately 97%). This change has led to the emergence of certain accounting interest groups, such as entrepreneurs, foreign investors and bankers. However, state bureaucracy still plays a dominant role. Thus, the state sector has continued to be favoured, with large parts of the economy remaining heavily protected and reserved for its activities (Guo, 2004, p. 409). 5.2. The Decentralisation of Economic Administration The restructuring of SOEs and their access to a free market has resulted in greater autonomy for management decisions and in creating nancial incentives for managers (Riedel and Turley, 1999, pp. 3234; Harvie and Hoa, 1997, p. 57). After 1986, the managers of state enterprises no longer had to achieve centrally determined production targets. They had greater autonomy in determining where their output was sold and from where input could be obtained on the basis of market prices. Greater autonomy for enterprise managers has brought a more important role for accounting information. Previously, the performance of state enterprises was measured by comparing the planned indicators with the actual indicators, whereas the new evaluation of performance is based in theory only on market protability. Obviously, the SOE reform and the emergence of the private sector increased the decentralisation of state macro-economic management and the autonomy of enterprises (World Bank, 1993), reecting a gradual evolution in the style of governance from rigid state control towards state regulation. However, Vietnam remains a very strongly bureaucratised and centralised country with multiple power networks co-habiting, at both central and local levels (see Riedel and Turley, 1999; Guo, 2004; Leung and Riedel, 2001). 5.3. Change of Ownership Structure The privatisation of SOEs and the recognition of the private sector have considerably changed the ownership structure in the economy, which in turn has changed accounting. In addition to SOEs and collectively owned enterprises, there are now private enterprises, mixed-ownership enterprises (SOEs combined with collective ownership enterprises) and enterprises with capital owned partially or completely by foreigners (foreign enterprises located in Vietnam, joint-venture enterprises and enterprises cooperating with foreign partners). The introduction of a shareholding system means that the state is no longer the sole user of accounting statements. 5.4. The Emergence of New and Complex Business Operations The new market economy has signicantly affected the economic performance of SOEs and stimulated the development of the national economy. Many new
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business transactions and nancial activities have appeared, such as the transfer of the right of land use, leasing, instalment sale, purchase of intangible assets, etc. The old accounting system covered only certain simple transactions and could not be used in these new activities, so it had to be replaced. 5.5. The Change in Relationships with the Outside World After the fall of the former USSR and countries of Eastern Europe in 1989, Vietnam did not receive any economic aid from them. In order to maintain its position and carry out its ambitious modernisation programme, Vietnam needed international assistance in capital and technology, and therefore adopted an open-door policy to attract foreign direct investment. The Documents of the Sixth Congress of the Communist Party mention the mobilisation of external resources for the development of the country (Communist Party of Vietnam, 1986). According to the Seventh Congress, one of the solutions for the development of the country was to mobilize all possibilities of attracting foreign investments (Communist Party of Vietnam, 1991). Since then, the signs of the success of the policy are numerous: Vietnam is a favourite destination for international investors (from zero in 1987, in 1995 Vietnam attracted 6,530,800,000 USD). Although the law on foreign investment is appealing to foreign investors, it has come up against many obstacles. The old regulations and accounting practices constricted the capital ow of direct foreign investment into Vietnam. Many foreign investors complained that the old accounting system did not meet their needs. For example, Richard Martin, Chairman of the ANZ Bank branch in Hanoi said, We hope to better understand local creditworthiness. Right now, local accounting and audit practices do not give us the level of comfort we need. But its clear theyll change soon (Nguyen Duc Tho and Eddie, 1995, p. 13). This explains how the accounting reform of 1995 was an immediate response to the economic reform, the open-door policy and the promotion of investment (Yang and Anh Thuc Nguyen, 2003, p. 175). 6. Accounting Changes Following the Economic Transition
The main accounting changes concern the modication of accounting objectives; the emergence of a new concept of capital and new denitions of assets, income, revenue and expenses; the modication of valuation principles; the transformation of the chart of accounts; and the reshaping of nancial statements. 6.1. The Modication of Accounting Objectives Modied accounting objectives were incorporated into the new accounting system introduced in 1995 to take into account the information needs of new users. The 1995 accounting system stipulates that the objective of the establishment of nancial statements is to provide useful economic and nancial information for evaluating and predicting the nancial performance and position of
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the enterprise. Financial information is also useful to owners, managers, investors, and creditors in decision-making (Ministry of Finance, 1995, p. 2). Identication of the primary group of accounting information users is a fundamental requirement for any accounting system. No legal text explicitly identies the principal group of users, but identication can be implicit. Clearly, accounting objectives have been modied because the system now has to satisfy the needs of emerging economic groups (owners, managers, investors and creditors). This has been conrmed by Dang Van Thanh, director of the Department of Accounting Policies (within the Ministry of Finance), whose mandate ran from 1994 to 1998: Since accounting is a crucial factor in the system of governmental administration, its instruments play an important role in the management, direction and control of economic activities. . . . Accounting should provide useful information to enable users to take economic decisions. Therefore, the role of accounting is important not only for the State, but also for enterprises and others. (Dang Van Thanh, 1995, p. 1) These objectives are in conformity with the current political and economic situation in Vietnam, where the state enterprises continue to dominate in the major sectors of the economy (the share of the state sector is relatively stable: it accounted for 42.7% in 1986, 43.1% in 1995, 43.8% in 1996 and 44.2% in 2006). Large SOEs are regarded as a macro-economic regulatory instrument of the state despite the weak performance of some of them. Although the private sector has developed quickly since the launching of economic reform, it is still too weak to achieve economic power in general and accounting power in particular. 6.2. A New Concept of Capital Changing the nancing system from a sole funding source (the state as represented by the bureaucracy) to a variety of nancing sources did away with the old concept of capital. The old legal division into the fund of xed assets and the fund of current assets has been completely abandoned. The new Vietnamese balance sheet (see below) now has two headings, Equities and Liabilities, and the private capitalist accounting equation (Assets 2 Liabilities Owners equity) has been adopted. However, the funds for social welfare functions, an element of the old system, remain (see below) within the heading Equities, a survival that testies that many state enterprises use their market-oriented businesses to provide a social welfare function. 6.3. A New Denition and New Content for Assets Within the communist framework, an accounting asset was a fund application; plots of land were excluded because socialist enterprises were not allowed to acquire land, and only goods legally acquired were allowed to gure on the
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assets side. In the 1995 accounting system, an asset corresponds to future economic benet, held and used by the enterprise. This new concept differs completely from the old one. The term good, reecting a traditionally legal concept, has been replaced by benet, reecting the economic concept of accounting in use in many capitalist countries. A property right is not essential to determine an asset. For example, a nancial lease is registered as an asset if the enterprise controls the benets generated from its use even if there is no legal claim on its property. The fact that Vietnamese enterprises can register leased assets under certain conditions reects an economic approach to accounting. 6.4. A New Concept of Income
The income concept has evolved since 1989, but gradually, falling into line with the capital concept (distribution of result according to the interests of the contributors of capital) and taking into account the new economic management rules that have been applied to enterprises since 1987. Under the old system, the income of the enterprise was regarded as the income of the state, and thus it included interest and taxes. Since 1990, interest on loans has been registered as an expense, conforming to bank reforms. This new position reects an alignment with the regulations of private capitalist countries and the recognition of the leadership of equity owners. At the beginning of the reform, taxes, unlike interest, were registered not as expenses but as an element of the distribution of income, a situation that reected the residual bureaucratic power of the state. However, since the 2006 promulgation of the new accounting standard on income taxes, income taxes have been recognised as an expense. 6.5. A New Concept of Revenue The assimilation of revenues with receipts in the old system was removed in 1995. Under the 1995 system, revenues consist of delivered sales and are recognised in conformity with the realisation principle. This fact is not connected to any theoretical consideration, but testies that Vietnamese legislation has adopted a micro-economic denition of income, aligning itself with the dominant world practice. 6.6. A New Concept of Expenses The new requirement to register interest on loans as expenses has created a new problem in a context where two types of rms state rms and private rms can exist. While private rms relying heavily on debts had to reduce their income by registering interest expenses, their rivals, the state enterprises, relying on governmental subsidies and capital funds, did not have to register such expenses; thus the comparison of results was biased. Initially, in 199091, the government wanted to ensure equal competition between the two types of enterprises and so decided that
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SOEs should pay and register a fee on their equities. This logical point of view is not a novelty in the Western world and has been supported by certain theorists. However, in spite of this sound theoretical base, in 1997 the Vietnamese government renounced its original innovation in order to follow world practice; fees on equities nanced by the state were no longer an expense but a deduction from prot, a practice consistent with the traditional Western recognition of the cost of equity. 6.7. New Principles of Valuation The new accounting system privileges the viewpoint of historical cost: in the market economy, all assets and capital must be presented in the balance sheet as real costs. (Dang Van Thanh, 1995, p. 2)
However, a more prudent evaluation also appears in the 1995 accounting system: SOEs must maintain the States capital by creating provisions for inventory obsolescence, loss in value of investments and allowance for doubtful debts which are recognized as expenses. (article 13, Decree No. 59-CP, Ministry of Finance, 1996) The emergence of this type of valuation can be explained by the inuence of the insiders credit nancing system, which accounts for 32% of SOE nancing. Inventories are measured at the lower of cost or net realisable value; nancial instruments are measured at the lower of cost or market value; allowance for doubtful debts is permitted. We know that this traditional conservatism, which is very different from the one in line with the IFRS (see below), aims to measure the liquidity value of assets pessimistically to check the capacity of the enterprise to refund its liability immediately. Historically, traditional conservatism appears when creditors interests are inuential enough to require specic protection (Richard and Collette, 2005, p. 15). The appearance of a prudent valuation in the 1995 accounting system aims at protecting the state banks, since the latter represent 75% of the assets of the nancial sector. Prudent evaluation also aims at avoiding overly massive and rapid distributions to owners, employees and the tax ofce. The Communist Party clearly states that a market economy and market rules do not belong solely to a private capitalist system, but must be integrated into Vietnamese socialism. Since Vietnam now recognises the diversication of ownership forms (see above), if the conservatism principle is not applied, part of the income of SOEs will be distributed in advance to stakeholders other than the state, and this risks reducing state capital in enterprises. In a situation where the state is only one of the contractors and is in partnership with private capital, the considerations that associate the development of conservatism with contracting arguments become meaningful, as Watts has pointed out (2003, p. 214).
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Moreover, a tax evaluation category appeared. Under the planned economy system, as in the former Soviet countries, the problem of tax evaluation did not arise, because the regulatory instrument was the plan: there was no scal policy as understood in the West. Income tax was conceived as a simple deduction from a result determined by the planning rules. The tax reform in 1990 was one of the Vietnamese governments ambitious moves towards a market economy. Taxation had become the major source of the state budget and an important regulatory instrument (Chan et al., 1998, p. 1). Consequently, accounting became the essential control tool of the tax ofce. Tax regulations then entered the accounting eld to set the evaluation rules and the methods for presenting nancial statements. These rules (in particular as regards evaluation at historical cost) were imposed to determine taxable income. In practice, Vietnamese accountants often recognise only tax-deductible expenses, reecting a lack of interest in operational management (Nguyen Cong Phuong, 2010, p. 32). Contrary to Anglo-Saxon practice, but in line with the approach in Continental Europe, there are no signicant differences between accounting income and taxable income. This reects the domination of the interest of the state. This is logical in so far as the majority of enterprises are not joint-stock companies and are not yet listed on the stock exchange, and so do not take other competitive objectives into account in the presentation of their nancial statements. 6.8. New Charts of Accounts The reform of 1995 led to the adoption of a chart of accounts (which persisted in the 2006 version) that constitutes a revolution; it replaced the circuit model inherited from Schmalenbach, through the intermediary of Soviet accounting, with a model based on the balance-sheet principle: arrangement of the classes of accounts in relation to the nancial statements (balance sheet and income statement). Indeed, the new regulation clearly privileges nancial accounts to the detriment of production cost accounts. This viewpoint appeared in an article by Dang Van Thanh published in April 1996, four months after the promulgation of the 1995 accounting system: The arrangement of accounts is based on the principle of balance between the assets and the passive (equity and liability), which is in conformity with the headings of the balance sheet. Moreover, this arrangement relates to the comparison between income and expense. (p. 4) The new chart, summarised in Table 1, arranges the classes of accounts in relation to the synthetic nancial statements in order to improve nancial information for external users, whereas the old model aimed only at satisfying internal users. Although this change was brought about with the help of French experts (the EURO-TAPVIET project), the Vietnamese Ministry of Finance decided not to adopt a purely nancial style chart of accounts like that in France. Although
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Table 1. Summary of the organisation of the chart of accounts (versions 1995 and 2006) No. of classes 1 2 5 7 9 Heading Current assets Fixed assets No. of classes Heading
Balance sheet accounts 3 Liability 4 Equity, reserves Income statement accounts Sales 6 Operating expenses Financial and extraordinary 8 Financial and extraordinary income expenses Prot
the classication of accounts has been modied, the accounts themselves have been largely maintained. This is notably the case for the account cost of production of goods sold, inherited from the communist period. If the inuence of the Marxist circuit model has vanished as far as the classication of expenses is concerned, it has been conserved as far as the calculation of costs is concerned. This curious mix of inuences, which to our knowledge exists nowhere else in the world, can be explained by the conguration of the new nancial statements. 6.9. New Financial Statements To help external users other than the state understand the situation and performance of enterprises more clearly, the 1995 system transformed the Soviet-type balance sheet, based on a balance between fund resources and fund applications, into an AngloSaxon-style balance sheet. However, the structure of the old income statement is largely preserved; it remains a statement with expenses classied by function focusing on the production costs of goods sold. Unlike the Romanian authorities, who decided to switch to a French-style classication of expenses by nature to break with the Soviet style (Richard, 1995b), the Vietnamese authorities, despite collaborating with French experts, thought it was in their interest to conserve the traditional Soviet classication by functions, largely in line with Anglo-Saxon practices. This led to the adoption of some corrections intended to drive the concept of income towards capitalist prot and to identify certain types of expenses more clearly (selling, administrative expenses, capital expenditure and operating expenses). 6.10. Appearance of Accounting Standards alongside the Uniform Accounting System Vietnam promulgated the rst four of its new accounting standards on 31 December 2001. From 2001 to 2006, 26 accounting standards were promulgated with the technical and economic assistance of the World Bank. These standards are aligned almost entirely with the IAS (version 2003). The appearance of
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accounting standards testies to the international harmonisation of Vietnamese accounting in the context of globalisation. However, the coexistence of accounting standards (VAS) and a Uniform Accounting System (UAS) is specic to Vietnam (see below). 6.11. Accounting Organisations and Decisions In the Western world, the evolution of accounting cannot be seriously studied without reference to the interrelationships between the state and private or public organisations, especially accounting organisations. Many studies have been devoted to this question, both in a general way (Miller, 1990) and through case studies, notably concerning the development of cash ow accounting (Miller, 1991; Young, 1995). The problem is totally different in the case of Vietnam because, even in the transition period, the role of accounting and private organisations was minimal. As Nguyen Cong Phuong has shown, the Association of Vietnamese Accountants (AVA) has no power relative to the creation or application of accounting rules, nor sufcient nancial resources, nor independence. Since its creation, the Department of Accounting Policies in the Ministry of Finance has played a major role in the majority of functions of the AVA and has nanced the biggest part of its budget (Narayan and Godden, 2000). One of the tasks of this department is now to have leadership of all the activities of the AVA. The Permanent Committee that rules the AVA is composed of 15 members, mainly from the Ministry of Finance and the State Audit Task Force. No representative of the liberal accounting profession or of private enterprises has participated in the Committees activities. This means that the AVA is not, in fact, an organization representative of the profession but an instrument of the State. (2008, p. 110, translated from the French) In Vietnam, changes to the old accounting system were masterminded entirely by the state bureaucracy.
7.
Contradictions between the Internationalisation of Vietnamese Accounting and the Socialist Stance
The Vietnamese government has initiated an open-door policy and accepted international accounting standards that sometimes clash with its desire to maintain a socialist-style policy. We rst describe this conict and then appraise the difculties of the transition towards the new system of accounting, with a focus on the political conicts inside the Communist Party and their long-term consequences.
Economic Transition and Accounting System Reform in Vietnam 7.1. The Open-Door Policy and International Harmonisation of the Accounting System
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All the endeavours initiated by Vietnamese authorities to change the accounting system were a direct result of the economic reform and open-door policy. The purpose of these efforts is to increase the compatibility and comparability of accounting information at a national level (between domestic enterprises and enterprises with foreign capital) as well as at an international level, thus attracting foreign investment. However, the problems related to international harmonisation have become major ones since 1998, when Vietnam started to concentrate on the development and promulgation of accounting standards with the nancial assistance of the World Bank and the Asian Development Bank (Narayan and Godden, 2000). In general, the standards recommended by the two banks are aligned almost entirely with the 2003 standards of the International Accounting Standards Board (IASB). It was impossible for Vietnam to refuse this alignment because of the heavy pressure exerted by its main commercial partners for the country to be accepted as a member of the WTO. One of the reasons why the USA and Europe imposed dumping duty sanctions on Vietnamese enterprises is that their accounting system does not conform to international standards (Saigon Times, 2009). If all the VAS are taken into account, Pham Hoai Huongs study (2010) shows that the percentage of overall de jure convergence between VAS and IAS/IFRS for key standards is only 68%. This is broken down into its two components: the measurement of de jure convergence is 81.2%, whereas the disclosure of de jure convergence is 57%. The percentage of overall de jure convergence is only 68% because the VAS inherit largely from the 2003 version of international accounting standards and thus are not an exact copy of IFRS. To conclude, it must be stressed that, up to now, in terms of the level of adoption of IAS/IFRS, it is not possible to register potential prots. The VAS contain concepts and principles to guide the professional application of accounting methods based on conventions that evolved in capitalist and developed countries, whereas the UAS, consisting of a chart of accounts and rigid formats for nancial statements, explains how accounts are applied to typical economic transactions and how nancial statements are prepared. The UAS focuses on the recording, recognition and measurement of transactions, whereas the VAS focus on recognition, measurement and disclosure. The implementation of VAS arguably requires a high degree of professional judgement, but the scope of professional judgement is restricted. As the VAS contain concepts and principles that are in line with IASB standards but do not reect the socio-economic reality of Vietnam, enterprises often use the UAS to record, recognise and measure transactions and to prepare nancial statements. The UAS makes statements clear to state agencies and results in more efcient state management (Yang and Anh Thuc Nguyen, 2003, p. 177). According to Dang Van Thanh,1 this is what macro management and accounting practice
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have been accustomed to doing for a long time in order to comply with accounting rules, which explains how the accounts are applied to typical economic transactions and how the nancial statements are prepared. Furthermore, according to Bui Van Mai,2 while accounting standards are concepts and principles designed to guide the professional application of accounting methods, Vietnamese accountants have weak professional judgement, have a technical mindset and would like to minimise uctuations in accounting practices. So why do the UAS and VAS coexist in Vietnam? We think that political inuence must be considered an important factor in this particularity. As in some other former socialist countries, notably China (which also has both a Uniform Accounting System and Accounting Standards; see Xiao et al., 2004; Baker et al., 2010), direct governmental involvement in accounting regulation in Vietnam is a political tradition that originated in the era of central planning. The Ministry of Finance, which established the Accounting Standards Committee in accordance with Decision No. 19/1999 QD-BTC dated 12 February 1999 to facilitate standard setting, also continues to impose the UAS. The latter allows the state to continue to meet the requirements of political and macro-economic control. This gradualist mixed approach differs from that of the former communist countries in Russia and Eastern Europe. 7.2. The Socialist Market Economy and National Particularities in the Accounting System In summary, the particularities of Vietnams current accounting system can be explained by the historical continuity of its political, economic and social environment. First, the objectives of Vietnamese accounting are characterised by the requirements of political and macro-economic control. Accounting is an important part of the States economic and nancial management instruments. Accounting information must meet the requirements of the State administration so that the State prepares the economic plans and controls the economy. (Ministry of Finance, 1995, p. 5; 2006, p. 7) Second, the retention of funds in the social sphere (public service funds nanced by the state budget and funds for emulation and social aid, managed by the enterprise itself) testies to the continuation of a national accounting system: by virtue of the public service funds, the state imposes the obligation to provide public services on many SOEs. This is appropriate in so far as the public service sector has not yet developed, as was the case in the capitalist world in the nineteenth century, when it was mandatory for enterprises to plug the gaps in legislation (Sapir, 1984, p. 18). As a result, during the transitional period, many SOEs (notably all big corporations) continue to adopt a public service vocation in addition to their commercial function, unlike SOEs in pure capitalist countries. This has created difculties for enterprises in a
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competitive environment, which partly explains the weak performance of SOEs (Dang Van Thanh, 1998). Third, as in Chinese accounting (see Xiang, 1998, p. 113; Biondi and Zhang, 2007), Vietnamese accounting includes many industry-specic accounting regulations. Until now, all the actions of enterprises have been heavily dependent on the sector-based policies of the State. Many SOEs are managed by a minister who has related functions and powers. Vietnam made a wise choice to maintain these specic regulations after the promulgation of the accounting standards; this choice was all the more justied since Vietnamese accountants have long been accustomed to rigid rules and the majority of them do not have competence and experience in choosing accounting policies (Bui Van Mai, 2001, p. 24). Lastly, one of the purposes of accounting is to control wealth distribution, calculate tax, and implement rewards and punishments. Accounting is thus the essential control tool for the tax services (Tran Van Ta, 2001, p. 143; Nguyen, 2002). Taxation has a dual inuence on accounting: directly, through rules that aim to impose records and measurements, and indirectly, through management decisions relating to tax expenses. Our earlier analysis shows that tax regulations have a signicant impact on accounting rules; many revenue and expense items are recognised in nancial statements as being tax deductible. This close connection between accounting and taxation constitutes one of the specicities of Vietnamese accounting practice (Nguyen Cong Phuong, 2010). 7.3. The Difculties of the Transition towards a New System of Accounting Despite some contradictions, up to now the situation of accounting in Vietnam seems to be controlled; but the future is less certain. Many studies (e.g. Bailey, 1995; Adams and McMillan, 1997) have shown certain contradictions between the type of accounting adopted and the reality of the accounting environment in transitional countries. Accounting reform in Vietnam is no exception. Faced with difculties, the reformers have been careful in their approach to reform and nd ways to adapt when pushing for reform. First, an accounting system emphasising the needs of the state must be signicantly different from a system that focuses on the needs of investors in equity. According to Dang Van Thanh (1995), Vietnamese reformers have to admit that if they desire an accounting system emphasising the needs of the state and corporate governance, they cannot adopt many accounting concepts and principles established in countries where accounting information is primarily intended for investors in equity. Thus, the reformers have preserved many fundamental specicities of the old system, especially the UAS coexisting with the Vietnamese accounting standards. Second, Vietnam lacks competent personnel and a unied accounting profession to implement the new accounting system (Narayan and Godden, 2000). As Adams and McMillan (1997) maintain, the number and ability of professional accountants in a country affect that countrys accounting practices, public
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information and formulation of accounting principles. The new accounting system with measurement principles based on market value requires highly qualied accounting professionals trained in the context of a market economy. Applying these principles requires judgements and sometimes hypotheses. Despite the rapid expansion of accounting education in Vietnam, the overall quality of accountants remains questionable. Many experienced accountants are poorly trained and have a poor grasp of the requirements of the market (Narayan and Godden, 2000). Finally, the strict links among tax regulations, rules of nancial control and accounting have also caused some difculties. The reformers have always looked for ways to maintain this specicity in the new system (Nguyen, 2002). The adaptations from the private capitalist accounting system and the modications and additions to the current system so far purport to be in line with taxation reporting and nancial regulations prescribed for the state sector (Yang and Anh Thuc Nguyen, 2003, p. 177). However, maintaining those rules can harm operational management and the quality of accounting information. 7.4. Factors Enabling Controlled Transition and Conclusion At rst glance, it may seem astonishing that, up to 2011, a communist state starting from Soviet-type accounting has managed to preserve a lot of the inheritance of the obsolete cold war accounting and transform another part of it without destroying the whole structure, as has been the case in many former socialist countries. This success can be explained by three main factors. First, in the cold war era, scholars paid too much attention to the differences between Anglo-Saxon private accounting and Soviet accounting, while neglecting the similarities: in particular, that Soviet accounting tried to measure a kind of return on assets very similar to the one used by very big private capitalist groups (Richard, 1977), that both Anglo-Saxon and Soviet accounting used charts of accounts inherited from Schmalenbach, and that the Soviet structure of expenses was in line with those of private Western groups (Richard, 1995b). The fact that revenues were based on cash entries has been falsely interpreted as recourse to a kind of cash accounting. On the whole, Soviet accounting was similar to its Western Anglo-Saxon counterpart: capitalist accounting at the service of bureaucrats seeking to maximise their wealth within the framework of state capitalism. This is why, contrary to Le (2008, p. 673), we are hardly surprised to hear from retired Vietnamese accountants that the old socialist accounting system is very similar to the new marketoriented one! Second, the members of the Vietnamese bureaucracy have drawn up a very cautious and clever accounting policy. They have understood that a large part of the old accounting structure could be conserved to build the new system, and they have taken the advice of foreign consultants (notably French specialists) without blindly obeying those who suggested a big bang. They have also
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understood that in order to avoid deadly conicts among themselves they should compromise on a progressive reform. Third, the adoption of IFRS, up to now, has been partial and has concerned mainly classical and relatively simple standards that have only a very slight inuence on management style. According to Nguyen Cong Phuong and Renault (2005), their adoption has improved the quality of nancial information, especially with regard to clarity of content and comparability, but it is not clear whether or not it has changed management goals. Thus, up to now, the situation seems to be under control. However, this situation could change if all the IFRS were to be applied, especially the principle of fair value; in this case historical cost and conservatism would no longer be the rule and accountants would need to take account of stock market values, with drastic change in the accounting system. Considered by Watts (2003, p. 219) as a fatal error, adopting this principle would surely lead to a totally different and much more complicated accounting system, with major consequences for management goals that the current dominant Vietnamese bureaucracy cannot anticipate even though its own fate could be in question. It is possible that todays relative consensus among reformers and conservative leaders could come to an end.
Notes
1
Interview in Stocks Investment, 12 April 2009. Mr Dang Van Thanh was former director of the Department of Accounting Policies, Ministry of Finance, and is president of the Vietnam Association of Accountants and Auditors. 2 Interview in Stocks Investment, 10 August 2008. Mr Bui Van Mai was former director of the Department of Accounting Policies and is vice-president of the Association of Accountants and Auditors.
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