The Accounting Law of Mongolia was passed in 1993 – well before the Company Law (1999) was introduced – and it was one of the first business laws to embrace the country’s transition to a market economy. The Accounting Law introduced the accrual method of accounting and required that entities follow international accounting standards when preparing financial statements. To implement the Accounting Law, about 20 years ago the Ministry of Finance launched a project to adopt Western accounting principles. The ministry held training sessions for accounting professors, faculty members and chief accountants of the major state-owned companies. As part of the project, an accounting and auditing manual was written and the very first Auditing Law drafted. Consequently, state-owned firms implemented international accounting standards by switching to a computerised accounting system from a manual Russian accounting system.

Some 20 years later, the country is considering a major reform of the Accounting Law. Numerous discussions have been held between the Ministry of Finance, professional associations and accounting firms to examine whether the Accounting Law meets international standards. The results were not favourable. In 2011 an assessment of 38,000 entities showed that only about 50% fully implemented International Financial Reporting Standards (IFRS). As a professional service provider, it is doubtful even 50% have done so.

Thus the question is, what went wrong? In my view, there are two questions to be addressed. First, by international standards over 90% of the firms in Mongolia are small and medium-sized enterprises (SMEs). Is it a realistic requirement for SMEs to fully implement IFRS? In the outside world, countries require IFRS to be implemented for companies traded publicly, and those entities are required to file their financial statements prepared in accordance with IFRS.

Secondly, full implementation requires a nationwide programme, commitment and resources. However, no such effort has been made since the aforementioned project. As the capital market is not active, there is little incentive or need for investing in IFRS. It takes significant resources to fully implement IFRS, and it seems we underestimated the complexity of implementation.

The proposed draft of the Accounting Law appears to acknowledge the complexity and the relevancy of the IFRS and requires that publicly listed firms, companies intending to do an initial public offering and stateowned enterprises prepare their financial statements in accordance with IFRS. Over the past 20 years, we learned that a good law does not do the entire job; the law needs to be implemented with the commitment and resources to enforce it. Focusing on the full implementation of IFRS by publicly listed firms and companies offering shares, and requiring them to be audited by the most reputable firms, will significantly improve public confidence in the soon-to-open stock market.

The law just sets forth the policy and often does not spell out all the principles and rules, since the principles and rules are set forth in the accounting standards adopted by the country. Therefore, it is crucial that a standards committee be created and effectively operated, as proposed in the draft law. This committee is going to be the first to oversee the IFRS implementation, review translation of the IFRS into Mongolian and issue implementation guidelines in the local language.

The committee should lead a significant programme to implement the IFRS for target firms and must be committed to completing the implementation by a target date, by which the target companies should have fully adopted IFRS financial statements. The programme’s scale and significance must be of the same complexity and relevance of the Accounting Law implemented 20 years ago, in order to introduce Western accounting principles to the country. The programme needs to once more repeat its efforts to implement the IFRS by carrying out trainings, translating the IFRS into Mongolian, giving guidelines to users and supporting IFRS implementation in state-owned and strategic enterprises to encourage the country’s growth and development.