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Pulling together a fully audited annual report can seem like a costly and time-consuming process. But not when it saves you $100m a year.

That is how much the city leaders of Kiev say they have saved in annual borrowing costs and debt repayments after the Ukrainian capital published its first annual report in December.

It serves as a striking example of the benefits to eastern European businesses and institutions that accrue from increased compliance with the norms of western financial reporting practice.

“Today . . . shows an example of profound changes in Ukraine aimed at implementing the ideas of transparency, openness and accountability of government to citizens and other stakeholders,” said Kiev’s mayor and and former professional boxer Vitali Klitschko, as he presented the report. “[This is] just one of the steps we are taking in terms of public transparency of activities and compliance needs.”

Across central and eastern Europe, governments, regulators and companies are attempting to reap the financial rewards of bringing compliance and auditing standards up to western levels. Such endeavour coincides with a broader effort to reduce corruption and increase good governance across a region where investors often have concerns over the potential for fraud.

According to a 2016 study by Rand, a think-tank, corruption costs eastern European members of the EU as much as $196bn a year in GDP. That estimate does not include countries outside the EU such as Ukraine and some Balkan states.

International bodies such as the World Bank, supported by European governments and a range of professional services firms such as PwC, are engaging with authorities across the region in a push to align standards with EU best practices.

“Our overarching focus is on governance reform and economic reform,” says Tom Pedrick, director at PwC and the company’s lead on helping Kiev draw up its report — a project which was also backed by the UK government.

“As a direct result of that report [Kiev’s] credit rating was improved and saved them $100m a year . . . It is a story about how being more transparent and more accountable to potential investors reaps benefits,” he adds.

Kiev Mayor Vitali Klitschko © AFP

When judged simply on economic growth rates, consumer spending trends and investment potential, central and eastern Europe is an easy sell for foreign capital looking for healthy returns.

But many countries, especially those outside the EU in the Balkans and the region’s south-east flank, still fall behind the west in terms of business practices, corporate reporting standards and tackling corruption, blunting companies’ ability to trade or seek investment.

It is a predicament that Ontotext, a Bulgarian data technology firm, knows well. “We’ve found raising funding in eastern Europe particularly challenging,” says Atanas Kiryakov, the company’s co-founder and chief executive. “Eastern Europe is perceived as a high-risk geography because of a lack of information and, historically, trust.” 

For this to change, local entrepreneurs need to win support from people and organisations which are credible to foreign investors “to help them get a foot through the door and remove preconceptions”, he adds.

Funding is a key issue for small and medium businesses and entrepreneurs in the region, many of whom struggle to convince western capital to invest. That is a drag on economies: SMEs account for 99.8 per cent of all Serbian companies, for example, and provide 71 per cent of the country’s jobs, according to the OECD.

“What these countries need to do . . . is align their standards with the EU’s, to be able to access more of the broader market,” said Henri Fortin, the World Bank’s global lead for governance and financial reporting. “Investors are expecting more than they did maybe 10 years ago, and that has an element of challenge for the countries.”

If countries and their businesses raise their game, it will “give them to access to the European market, and make it easier for them to enter into contracts with EU peers, and facilitate access to finance”, he says.

Mr Fortin and World Bank colleagues are working with governments to change company laws, corporate regulations and accounting rules, alongside setting up regulatory bodies and institutions and implementing oversight processes.

As a result of two programmes run by the World Bank to improve standards, Bosnia and Serbia recently passed new accounting and auditing laws, while International Financial Reporting Standards — designed as a common global language for business affairs — have been adopted in Bosnia, Macedonia, Kosovo and Serbia. Armenia is in the process of establishing a quality assurance and public oversight body for auditors. 

But the key is making sure businesses embrace the new systems and authorities implement them, so that foreign investors are encouraged to provide capital or open trade discussions.

“We have had good success in helping countries develop legal frameworks and adopt modern standards of financial reporting,” says Jerry Decker, head of the World Bank’s Centre for Financial Reporting Reform. “But to have the impact on the ground you have to get businesses to invest in their accounting systems.”

Businesses do not always anticipate that there will be a payback “so part of our challenge is to spread awareness of the benefits”, he adds.

Following its efforts in Kiev, PwC and the UK government have expanded their Good Governance Fund project to Georgia, Moldova, Serbia and Bosnia.

At the same time, the World Bank, supported by the EU, Austria, Switzerland and Luxembourg, is expanding the remit of its programmes in the EU’s so-called Eastern Partnership countries, which include Armenia, Azerbaijan and Belarus.

“There have been a lot of accomplishments. But the glass is both half full and half empty. This is something that involves long-term efforts,” says Mr Fortin. 

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