North Korea`s Accounting Law Published for the First Time

North Korea`s accounting law, enacted by its Supreme People`s Assembly in March this year, have been published.

The full text, obtained through the overseas offices of the Korea Trade-Investment Promotion Agency (KOTRA), supports the communist country’s revised economic policies in the form of a written legal framework. North Korea initiated its economic reforms beginning from March of this year, following the introduction of measures to improve economic management.

The accounting regulations encourage economic efficiency on the part of government agencies and the companies within their budgets and focuses on the completion of a self-supporting accounting system.

This indicates that the North is attempting to correct the “soft budget constraints” that are a hallmark of socialist economies and a chronic obstacle to development. Soft budget constraints cause major players in an economy to squander financial and other resources regardless of budget limits.

Kyungnam University Professor Yang Moon-soo said, “In a socialist economy, the relationship between the state and companies is akin to that of father and son, so paternalism imbues the whole relationship. When a company in a communist country wastes its budget, it can ask the state for additional budget provisions. Therefore, they are not usually restricted by budget limits.”

Yang explained that soft budget constraints lead to the squandering of financial resources and inefficiency, which as brought about North Korea`s dire economic situation.

Against this backdrop, North Korea`s newly introduced accounting law requires financial statements and accounting reports to prevent inefficiency and wasted wasting financial resources.

Provision 1 of the law states that its purpose is to ensure financial gains from the economic activities of concerned parties.

Through financial statements and accounting reports, government regulators will distinguish between companies that perform well it terms of capital gains from companies that do not.

Officials found to have intentionally or accidentally falsified statements will be dismissed. Meanwhile, under Provision 26 of the law, companies are obliged to pay keen attention to developments in free-market economies.

Provision 8 states that the government will improve cooperation and exchanges with foreign and international organizations in the financial and accounting fields.

Other features of the law include increased functions of banks and steps toward decentralization in the implementation of economic policies.

Nan Sung-wook, professor of North Korean Studies at Korea University, said, “The contents of the accounting law, which seems to include most elements of the accounting law that China adopted in 1985, should be regarded as radical.”

Another expert in North Korea said what matters most is the way North Korea carries out the law.

Suk-Ho Shin kyle@donga.com