WORKING PAPERS SERIES IN ECONOMICS - doctorat si ...

DOCTORAT ŞI DOCTORANZI ÎN TRIUNGHIUL
EDUCAłIE – CERCETARE – INOVARE
Proiect cofinanŃat din Fondul Social European prin
Programul OperaŃional Sectorial Dezvoltarea
Resurselor Umane 2007-2013
Contract POSDRU/6/1.5/S/11
THE BUCHAREST ACADEMY OF ECONOMIC STUDIES
DOCTORAL SCHOOL DEPARTMENT
WORKING PAPERS SERIES IN ECONOMICS
ENGLISH SECTION
Bucharest 2009

CONTENT:
COLLECTIVE INTELLIGENCE IN MULTI-AGENT SYSTEMS ...................................................................... 5 ¡¢£¤¥¦§¨£©�����������������������������������������������������������������������������������������������������������������������������������������������������������
SHORT CRITICISM OF SOME OF THE APPROACHES OF SUSTAINABLE DEVELOPMENT.............. 12
USING NEURONAL NETWORKS AND SUPPORT VECTOR MACHINES FOR ADAPTING
COMPANIES’ INSOLVENCY PREDICTION MODELS TO GLOBAL CRISIS............................................... 18 ���¤��§�¡�¡¨£�©��������������������������������������������������������������������������������������������������������������������������������������������������
DATA MINING, THE PROCESS OF TAKING DECISIONS AND THE ECONOMIC CRISIS..................... 31 ���¤�¤��§��£���¤¢§���©¢©��©�������������������������������������������������������������������������������������������������������������������������
TREASURY ACCOUNTING – THE KEY IN THE CRISIS PERIOD................................................................ 36 £�©¤¨©�§��¢©��¤���������������������������������������������������������������������������������������������������������������������������� ©¢£© ��©
COST MANAGEMENT IN THE CONDITIONS OF THE ACTUAL WORLD FINANCIAL CRISIS IN
ROMANIA AND AT EUROPEAN LEVEL............................................................................................................ 44 �©�©��¢£��£�©��§�£©�����������������������������������������������������������������������������������������������������������������������������������������
SAVING COMPANIES AFFECTED BY THE ECONOMIC CRISIS – AT HAND OF STAKEHOLDERS
AND ACCOUNTING PROFESSIONALS .............................................................................................................. 53 �¨©§�£©� ©¢£©���¤� £�©¤¨© ��©�§��������������������������������������������������������������������������������������������������������������� �©�©��©��£§���¤�©�£©��¨£�©���©¢�¤©�¨�¢£������������������������������������������������������������������������������������������������
CREATING VALUE FOR ROMANIAN COMPANIES....................................................................................... 60
IN THE PERIOD 2006-2008..................................................................................................................................... 60
CORPORATE GOVERNANCE AND PERFORMANCE MECHANISMS: INTERNAL AUDIT
ENGAGEMENTS PRE AND POST MERGER ..................................................................................................... 71 ����£��¦����������������������������������������������������������������������������������������������������������������������������������������������������������
SUSTAINABLE REPORTING FRAMEWORK.................................................................................................... 81 �¨¤�©����©�©¦������������������������������������������������������������������������������������������������������������������������������������������������ £¢¤¨©��¤�£�¡�©�©�¢£�©������������������������������������������������������������������������������������������������������������ ©¢£© ���¢¤
THE CREATION OF THE EUROPEAN SYSTEM FOR FINANCIAL SUPERVISION AND THE REVIEW
OF MARK-TO MARKET PRINCIPLE – EUROPEAN UNION’S MAIN DIRECTIONS TOWARDS
FINANCIAL STABILITY ........................................................................................................................................ 90
ACCOUNTING IN HISTORICAL COSTS OR ACCOUNTING IN CURRENT VALUES? ........................... 97 ¦��¤��§¦©��§���©�£©�����������������������������������������������������������������������������������������������������������������������������������������
WHAT IS AT THE BACK OF THE WAGE COSTS? ........................................................................................ 107 ¦��¤¨�¦�������������������������������������������������������������������������������������������������������������������������������������������������������������
THE HUMAN FACE OF GLOBALIZATION – A POSSIBLE SOLUTION FOR THE CURRENT
FINANCIAL CRISIS............................................................................................................................................... 114 ¤�£��§�¦§¨£©��©��¢�¤��������������������������������������������������������������������������������������������������������� �©�£¤¨©�£��¨¤�©
PROPOSALS OF MEASURING THE EFFIENCY OF THE ECONOMIC AGENTS REFERENCE TO THE
EUROPEAN COMPETITION POLICY............................................................................................................... 121 ��£�£§��¢©�¤��§�¨¤�©��¢§����������������������������������������������������������������������������������������������������������������������������������
3 �¤¨©�©���©¦��£����������������������������������������������������������������������������������������������������������������������������������������������

ROMANIA’S NOMINAL AND REAL CONVERGENCE TO THE EURO AREA – PROGRESS AND
PERSPECTIVES ..................................................................................................................................................... 125 �¨¤�©��¢©�¨¤�©�§�£�¤¨§������������������������������������������������������������������������������������������������������������������������������������
THE ADJUSTMENT OF PRUDENTIAL SUPERVISION INSTRUMENTS IN TIMES OF ECONOMIC
CRISIS ...................................................................................................................................................................... 133
STRUCTURAL REFORMS IN THE EUROPEAN UNION NON-EURO MEMBER STATES...ARE THESE
ECONOMIES STILL ON THE RIGHT TRACK? .............................................................................................. 139 ©¢£�¤��§��¢£©�©����������������������������������������������������������������������������������������������������������������������������������������������
THE ROLE OF FINANCIAL REPORTING MECHANISM FOR CORPORATE GOVERNANCE............ 146 �¨¤�©��¢§�¤���¤�������������������������������������������������������������������������������������������������������������������������������������������������
COLLABORATIVE BANKING SYSTEMS......................................................................................................... 151 ¤¢�©�¦��§���������������������������������������������������������������������������������������������������������������������������������������������������������
A SERVICE ORIENTED ARCHITECTURE FOR PUBLIC TRANSPORT OPTIMIZATION.................... 159 �¢£��£©��¦�����������������������������������������������������������������������������������������������������������������������������������������������������
EFFECTIVE COMPETENCES MANAGEMENT USING E-LEARNING SERVICES ................................. 164 �£�£§��¢£©�����©�����¤��§�©�£�©������������������������������������������������������������������������������������������������������������������
VERY-LARGE-DATASETS ORIENTED SOFTWARE ARCHITECTURE ................................................... 170 ©¢£©�¦§¨£©�©�©��¡¨§����������������������������������������������������������������������������������������������������������������������������������������
THE DESIGN OF A SEMANTIC WEB AND ONTOLOGY BASED APPLICATION FOR CREDIT RISK
MODELING............................................................................................................................................................. 178 ��¢£��§�£©���¡���������������������������������������������������������������������������������������������������������������������������������������������
METHODS OF GIS SYSTEMS PERFORMANCE IMPROVEMENT............................................................. 184 ���¤��§�©§¢©��£�¥�¤©�§���¢¤¤©��������������������������������������������������������������������������������������������������������������������
KNOWLEDGE BASED AUTHENTICATION IN CITIZEN ORIENTED APPLICATION .......................... 192 ��¤§¢¤©�§�¨¤�©��¢§��§�£�¢¤��§��¤�©��©�£¤¨����������������������������������������������������������������������������������������������
IDENTIFYING AND BREAKING POLICY CONSTRAINTS, THE MAJOR BARRIER TO IMPROVING
COMPANY PERFORMANCE .............................................................................................................................. 198 ����©�¡£��£¨¡��¢©��¥�©¨©��£�¡����������������������������������������������������������������������������������������������������������������������
WORLD FINANCIAL CRISIS IMPACT ON IT INVESTMENTS ................................................................... 206 �¤�¢�£©�©�£�©�¡�����������������������������������������������������������������������������������������������������������������������������������������������
RESOLVING INTERDEPARTMENTAL CONTRADICTION BETWEEN PRODUCTION AND
MARKETING .......................................................................................................................................................... 214 �£�¨©��©�¤¨£©�¨¤�©������������������������������������������������������������������������������������������������������������������������������������������
CREDIT RISK MANAGEMENT .......................................................................................................................... 219 ¦¨£��©¢��¡¢©������������������������������������������������������������������������������������������������������������������������������������������������������
THE CONNOTATIONS OF ONLINE MARKETING TOOLS OVER CRM RELATED ACTIVITIES IN
MODERN ECONOMY ........................................................................................................................................... 226 ��¢¤©¦�©�©�§¢¤¨£©��������������������������������������������������������������������������������������������������������������������������������������������
4 �©¢�¤��©��¤©����������������������������������������������������������������������������������������������������������������������������������������������������

COLLECTIVE INTELLIGENCE IN MULTI-AGENT SYSTEMS
Mărieş Iulia
Ph.D Student, Academy of Economic Studies, Bucharest, Romania, iulia.maries@hotmail.com ��¤����§�©���¤�©�¤�£�¤©¢¤¤��¤��£©¨�� �§�©�¨£�¤��¤¢��¤��£�¤�����¤¢�£������¤�������¤��¨¨¤��£�¤£��¤¨¨£�¤��¤��§¨�£�©�¤��� ��¤����¢§��©��¢¤�§�©�£�� �¢§��©��¢¤�§�©�£��©¢¤�§��©�¤��©¨����¤���£��§¨�£�©�¤���
Key words: collective intelligence, multi-agent systems, trust and reputation
JEL Classification: C63, C92
1. Introduction
The presence of collective intelligence has been felt for a long time: families, companies and states are
groups of individuals that at least sometimes act intelligent. Bee and ant colonies are examples of groups of insects
that are finding food sources acting intelligent. Even the human brain could be seen as a collection of individual
neurons that collectively act intelligent. In the last few years there have been shown up new examples of collective
intelligence: Google and Wikipedia. Google takes the collective knowledge created by millions of people for making
websites, using sophisticated algorithms and technologies to answer the questions typed in. Wikipedia uses less
sophisticated technologies, but very clever organizational principles and motivational techniques, to get people from
all over the world to create a collection of knowledge.
Mathematic, a measure applied is the “collective intelligence quotient”, which can be easier formalized than
the individual intelligence quotient. Individual intelligence has been evaluated based on external results of behavior
during real processes or during IQ tests, while elements of collective intelligence, like displacements, actions of
beings or exchange of information, can be observed, measured and evaluated. Szuba (2000, pp. 2) has proposed a
formal molecular model of computation and mathematical logic for describing the collective intelligence concept.
The process, random and distributed, is tested in mathematical logics by social structure. Humans, ant and bacterial
colonies, and information are modeled as abstract informational molecules that have expressions of mathematical
logic. They are displaced quasi-chaotically due to interactions with their environments. Their interactions in abstract
computational space create an inference process perceived as “collective intelligence”. The formal definition of
collective intelligence has a set of requirements: informational molecules must emerge in a certain computational
space, which can be software agents, ants, humans or social structures; than interactions must emerge between
computational space, which consists in the ability to solve specific problems; and the emergence of collective
intelligence determines specific inferences, in a probabilistic perspective. Based on above conditions, three basic
hypotheses are presented:
• Precedence hypothesis: collective intelligence emerged first, as a result of interacting chemical
molecules on Earth
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5

• Hypothesis of origin: life emerged later, from collectively intelligent actions of stabilization or
development
• Hypothesis on cycles: dependency between life and intelligence (individual or collective) is the result
of a development cycle of evolution.
Heylighen (1999, pp. 1) considers that collective intelligence can be defined as a group’s ability to solve
more problems than its individuals. In order to overcome the individual cognitive limits and the difficulties of
coordination, a collective mental map can be used. A collective mental map is represented as an external memory
with shared access and it can be formalized as a directed graph. The basic mechanism of collective mental map
development consists of averaging the individual preferences, amplifying the weak links through positive feedback
and integrating specialized sub-networks through division of labor. The efficiency of mental problem-solving
depends on the problem representation in the cognitive system. Problem representation can be determined by a set of
problem states, a set of possible actions, and “fitness” criterion, a preference function for selecting the adequate
actions that varies with the specific goals and preferences of the agent. Therefore, a mental map represents a highly
selective representation of features relevant to problem-solving and consists of problem states, actions that lead from
one state to another, and a preference function for determining the best action at any moment. Increasing problemsolving
ability needs two complementary processes: enlarging the map with additional states and actions, and
improving the preference function. In this situation, the better collective mental map is, the more easily problems
will be solved. Intelligence agents are characterized by the quality of their mental maps, knowledge and
understanding of their environment, capacities for action or goals.
Collective intelligence is trying to offer a new perspective to different phenomena. The concept is trying to
suggest another way of thinking about effectiveness, profitability, teamwork or leadership.
2. About multi-agent systems
Agents and multi-agent systems offer a new possibility for analyzing, modeling and implementing the
complex systems. Agent-based vision offers a wide range of tools, techniques and paradigms, with a real potential to
improve the use of informational technologies.
In a dictionary, an agent is defined as “someone or something who acts on behalf of another person or
group”. This type of definition is too common to be considered operational. But agents have been defined to be
“autonomous, problem-solving computational entities capable of effective operation in dynamic and open
environments”, (Luck, McBurney, Priest, 2003, p. 10). Therefore, agents offer a new and appropriate route to the
development of complex systems, especially in open and dynamic environments.
Multi-agent systems can approach problems with multiple solving methods, multiple structuring
possibilities or multiple solving entities, like distributed systems. Thus, multi-agent systems have both the advantage
of distributed and competitive solving problems, and the advantage of representing the complex ways of interactions.
Interactions refer to cooperation, coordination and negotiation.
3. Trust and reputation
In this section will be presented a selection of computational trust and reputation models and describe their
main characteristics, but first we need to clarify the notions of trust and reputation. This field is quite recent, but in
the last years there have been proposed interesting models with direct implementation in different domains.
3.1 Trust
Trust is important to human society due to its social component. The concept of trust has different
meanings, but Gambetta’s point of view is the most significant:
“ ©��£��”. (Gambetta, 2000, pp. 4)
There are significant characteristics of trust mentioned in the above definition:
• Trust is subjective
• Trust is affected by the actions that cannot be monitor
• The level of trust is dependent on how our actions are affected by the other agent’s actions.
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6

From the socio-cognitive perspective of Castelfranchi and Falcone (1998, pp. 2), trust represents an explicit
reason-based and conscious form. While trust means different things, the concept can be seen as:
• A mental attitude towards another agent, a disposition
• A decision to rely upon another agent, an intention to delegate and trust
• A behavior, for example the intentional act of trust and the relation between the trustier and the trustee.
The above concepts imply multiple sets of cognitive elements involved in the trustier mind.
3.2 Reputation
Typologies of trust
In a social manner, there have been identified three types of trust:
• interpersonal trust (the direct trust that an agent has in another agent)
• impersonal trust (the trust within a system that is perceived through different properties)
• dispositional trust (the general trusting attitude)
An agent behavior can be induced by other agents that cooperate, determining a reputation mechanism. The
simplest definition of reputation can be the opinion others have of us. Otherwise, reputation represents a perception
that an agent has of another agent’s intentions or an expectation about an agent’s behavior.
Abdul-Rahman and Hailes (2000, pp.8) have defined reputation as “an expectation about an agent’s
behavior based on information about or observations of its past behavior.” This definition considers reputational
information based on agent’s personal experiences.
3.3 Computational Trust and Reputation Models
This field is quite recent, but in the last years new approaches have been proposed, with direct
implementation in different domains, in order to determine the level of trust.
Marsh (1994, pp. 53-68) has introduced a computational trust model in the distributed artificial intelligence.
An artificial agent can absorb the trust and than he can make trust-based decisions. This model proposes a
representation of trust as a continuous variable over the range [-1, +1). There are differentiated three types of trust:
basic trust (calculated from all agent’s experiences), general trust (the trust on another agent without taking into
account a specific situation) and situational trust (the trust on another agent taking into account a specific situation).
There are proposed three statistical methods to estimate general trust, each determining a different type of agent: the
maximum method leads to an optimistic agent (takes the maximum trust value from the experiences he has), the
minimum method leads to a pessimistic agent (takes the minimum trust value from the experiences he has) and the
mean method that lead to a realistic agent (takes the mean trust value from the experiences he has). Trust values are
used in agents’ decision whether to cooperate or not with another agent.
Zacharia (1999, pp. 37-55) has proposed two reputation mechanisms (Sporas and Histos) in online
communities based on collaborative ratings that an agent receives from others. Sporas takes into consideration only
the recent ratings between agents and users with very high reputation values have smaller rating changes after
updates than users with a low reputation. Histos comes as a reply, taking into consideration both direct information
and witness information. The reputation value is subjectively assigned by each individual, so reputation mechanisms
could generate social changes in users’ behavior. A successful mechanism ensures high prediction rates, robustness
against manipulability and cooperation incentives of the online community.
Abdul-Rahman and Hailes (2000, pp. 10-20) have suggested a model that allows agents to decide which
other agents’ opinion they trust more. In their view trust can be observed from two perspectives: as direct trust or as
recommender trust. Direct trust can be represented as one of the values: “very trustworthy”, “trustworthy”,
“untrustworthy” or “very untrustworthy”. For each partner, the agent has a panel with the number of past experiences
in each category, and trust on a partner is given by the degree corresponding to the maximum value in the panel. The
model takes into account only the trust coming from a witness, the recommender trust, which is considered
“reputation”. This approach could not differentiate agents that are lying from those that are telling the truth, but think
different, so the model gives more importance to the information coming from agents with similar point of view.
Sabater and Sierra (2001, pp. 1-5) have proposed a modular trust and reputation model (ReGreT) to ecommerce
environment. This model takes into consideration three different types of information sources: direct
experiences, information from third party agents and social structures. Trust can be determined combining direct
experiences with the reputation model. Direct trust is built from direct interactions, using information perceived by
the agent itself, and determined trust based on direct experiences. The reputation model is composed of specialized
7

types of reputation: witness reputation (calculated from the reputation coming from witness), neighborhood
reputation (calculated from the information regarding social relations between agents) and system reputation
(calculated from roles and general properties). Witness reputation is calculated based on information from other
agents of the community. Neighborhood reputation is expressed based on social environment of the agent and the
relations between the agent and that environment. System reputation is considered as objective features of the agent
(for example, agent’s role in the society). Those components merge and determine a trust model based on direct
knowledge and reputation.
4. NetLogo Simulation
Preferential attachment is frequently used in describing social, biological and technological networks and it
represents the mechanism of formation models for such networks. Social networks are interaction networks, where
nodes are agents and links between nodes are interactions between agents. In the evolution of social networks, an
important hypothesis is that highly connected nodes increase their connectivity faster than their less connected peers,
called preferential attachment. Experiments reveal that the rate at which nodes acquire links depends on the node’s
degree, offering direct quantitative support for the presence of preferential attachment.
The evolving network models are mostly based on two important hypothesis, growth and preferential
attachment. The growth hypothesis sustains that networks continuously expand through new nodes and links between
the nodes, and the preferential attachment hypothesis
£.
sustains that the rate with which a node with links acquire a
new link is a monotonically increasing function of £
4.1 Preferential Attachment in NetLogo
This model shows a way of arising networks, when there are a few hubs that have many connections, while
the others have only a few. The model starts with two nodes connected by an edge. A new node is added at each step.
A new node picks an existing node to connect to randomly, but there is a tendency observed: a node’s chance of
being selected is directly proportional to the number of connections it already has. In our simulations, we are going
to endow agents with two attributes, “reputation” and “intelligence”.
Fig. 1 a) Fig. 1 b)
We can observe there are two nodes that have many connections, while the most of them have only a few
(figure 1 b)) shows resized nodes, for clearance). Experiences have shown that the popular nodes will acquire new
links faster than the other ones (figure 1 a) and figure 1 b)).
4.2 Simulations
The forthcoming simulations will try to show agents’ behavior assuming that they are endowed with two
attributes, reputation and intelligence. We propose a representation of reputation as a variable over the range [-1, 1]
and intelligence as a variable over the range [1, 100].
Figure 2 a) presents the intelligence values for the agents. The maximum intelligence value is 100 and the
minimum intelligence value is 80, but the difference between them is amplified by the growing number of agents.
8

Fig. 2 a)
In figure 2 b) are shown the reputation values, ranging between [-1, 1].
Fig. 2 b)
The first agent’s intelligence is a random value
between 1 and 100. Agents are going to be linked each
other only if their intelligence is varying with less than
10. For example, if an agent has intelligence 92, it could
have connections only with agents that have intelligence
between 82 and 100.
We can notice that agents make links with those
agents that have the closest value of intelligence. For
example, if there are two agents, one with intelligence
92 and the other with intelligence 95, a third agent with
intelligence 87 will choose to connect to the agent with
the closest intelligence, the agent with intelligence 92.
Agent’s reputation is determined by the number of
connections that agent has with other agents. The more
connections an agent has, the reputation value is closer
to 1.
The first agent has frequently reputation value 1
because it is the agent with the higher number of
connections.
Figure 2 c) shows agents endowed with the two attributes, reputation and intelligence.
9

Fig 2 c)
An agent prefers to connect with another agent that has a high level of reputation, but in the same time with
the closest value of intelligence.
5. Conclusions
The organizational behavior field is interested in studying organizations as complex social systems. Trust is
a decisive source of social capital within social systems. Most of the theories from this field explore individual and
collective human behavior within organizations and their central activities try to identify the determinants of intraorganizational
cooperation. Managing collective intelligence within an organization implies combining all tools,
methods and processes that can lead to connection and cooperation among individual intelligences.
Individual intelligence can not face all the problems in today’s world. To successfully deal with problems
we need to develop collective intelligence as a global civilization. Collective intelligence can improve
competitiveness within organizations in the context of a global market and collective performance has become a
critical factor in the organization’s development. In this situation creating, developing and sustaining trust among
members within teams is the core that leads to performance.
Acknowledgement: This article is a result of the project „Doctoral Program and PhD Students in the
education, research and innovation triangle”. This project is co-funded by European Social Fund through The
Sectorial Operational Programme for Human Resources Development 2007-2013, coordinated by The Bucharest
Academy of Economic Studies.
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Agent Link
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��©�¨£���¤���¤�¤¢©�£������§�£����
�¤��§¢¤���¤�£�����§�¤¢ ��¤��£¥£ ¡ �¢��¤¤�£�������¤� “��¨¨©��¢©�£�¤�¤�§�©�£��
11

SHORT CRITICISM OF SOME OF THE APPROACHES OF
SUSTAINABLE DEVELOPMENT
Popescu Cătălina
Academy of Economic Studies Bucharest, Romania, catalina_oana_popescu@yahoo.com £��©��©¢¤���¤�¤¢©¨£�¤�©��¢��©¨��§��¨£¤© ���¤¢� �¢§�©�¤¡��¤��£�¤��£��©���©������¤�����£�§¤���£¨¨©¢����¤¤��£¢���¤��©¨©�����£©¨��¤�������£��¨© ���£�§� �§��©£�©�¨¤�¤�¤¨���¤��£�©����¤��¤�¡�
Keywords: sustainable development, critical approaches, conflict of interest, cornucopian thesis, economic
development
JEL Classification: Q00, O1
Introduction
Current society, starting from the largest international forums up to a state, organisation, and, somewhat less
obvious, individual level, wishes to embrace ethical goals and actions. At a higher level of understanding, this ethical
dimension translates into the balance between the three, or, according to other interpretations, four interdependent
pillars of sustainable development – economic, social, environmental, and, possibly, cultural. The concept of
sustainable development, although apparently labeled as „noble” and „good”, is still confronted with some criticism.
What’s more, despite the wide circulation of the concept, the quality of air, for instance, continues to deteriorate, this
being one of the many examples of environmental deterioration through excessive exploitation or polution. The
social pillar does not exhibit obvious improvements either.
Suppose an exercise by which we would imagine an account which listed, one one side, the measures and
regulatory processes which sustain this sustainable development, and on the other side the disparate and correlated
actions which have a contrary effect to it (or otherwise put are focus on the accelerated development of one of the
pillars at the base of sustainable development, frequently the economic one, without protecting or even to the
detriment of at least another pillar – usually the environmental one). Despite the parade of values and stated
preoccupation, in letter or in fact, at various levels by key-players or organisations with various branches of activity
and fields of action, the tendency emerging from such an exercise would be of such a nature as to decrease the
credibility in promises of sustainable development or at least raise questions on the effectiveness which which this
goal is pursued.
In long term, the gap between what we know we should be doing and what we are actuallz doing (at the
highest levels) in the sense of sustainable development could have the effect of a bubble, a „speculative scheme
which depends on unstable factors” (according to the definition given by the Laboratory of Cognitive Sciences at the
University of Princeton), which fundamentally contavenes the concept of „sustainability”. As in the case of any other
bubble, the wager on an entity without substance grows up to the point where a comeback to normal parametres is
§��¤¢��©��£�����©���¤����¤�����§��©£�©�¨¤�¤�¤¨���¤���©�¤����£¢���¢£�£�£��¢¤�¤¢�����¤©¨¨����©�§¤�©�§¢¤ ����¤����¤���©¢�§�¤��¡�£��¡¤����¢©�£��¤�� ��¤�§��£�£¤���§��¤¢�����§�¤����¤�©£¨£��£��©�¡¤¨¨©�� ¢¤¡¤��£����¤¤�¤��§©¨����¢©£��§£�£�¤�©�§¢¤����¤�¤¢����¤�����¢£�£�£�����¤���©���¤����¤��£��������¨¤�� ©����¤¢¤��¢¤¢¤¢§£¢¤�©��£�����¤¢§©¨����¨¤�£� �¡�£��©¢¤�£��£�§¨������¢���©�¤©������¤��¤¨�¤�©��£��£�¤� ©����¤¨©�£�����¢�£�©�£����¡�£���© �¤�¤¢©�¤ �¤¢�¤¢�¤¤��¤���¡����§��©�¤����¤�£��©�¢��©¨����£����¤¨ ����£�££���¡¤¤��¢©��¨©�¤�£������¤¢©��£�£�£¤�©�����¤���©���¤¢£����¢©�¤¢�©£�©��£�������¢¤©��£����©¨��¤� ���¢¤��¤¢��¤���£�©�£����¢©��£����£����¤��¢�§���£©���¤�£���¢¤�¨©�£���©�§¢©¨¢¤��§¢�¤�¡£���¤����¨��£�©¨ ��¤�£�£�£���§¢��©��¤¢�§�� ��©¨©�£���¨©��£���£���¤©�¢¤¨ £������¤�©�§¢©¨���£�©�£����¢�¤����¨�� �©� �¤�¤¨���¤���¢£��¢��¤�¤���¡¤��¤¢¤��¢¤��§�����£��¤��£�©�¤��¤����©�¨¤��¡£��©���§�������¤¢¤�¤¢¢£����
�¢����£����¤�¢©���¤¢����¤¨£�¤��§���¢�£��� ��¤�£����§�©��©����©� ��¤�¡�£��£�£��¤¨�©�¢��§�� ���§�©����§���©����¤¢¤��¢¤�§�¡¤�����§�©�¤¢¢�¢©��£��©�©�£� ��¢£�©�£� £��©¨¨����£�¨¤��¤�©¢£��� �£�©¨¨ ���¤¡£�¤���¤�©�¤���§�¤�����¤¢¤¨©�£����£��¤�¡¤¤��§��©£�©�¨¤�¤�¤¨���¤��©��¤�����£��¤�¤¨���¤��� ��©¢¤�§¨�����£�¤�¤¢�£�¤¡¤¡£¨¨�¨©£��§��©£�©�¨¤�¤�¤¨���¤�����¤©�¤�¤��©¢ ©������£�¨¤��£��¨¤�¤�� ����¤��� ¡¤¨¨©��
12

equired and where the gap between perception or convention, as depicted by the entity in question, and reality
becomes obvious. In the case of sustainable development, the „entity” under discussion is formed by the very
concept under discussion, or rather by the its nature, still abstact for some factors of decicion.
In order to deepen the understanding of the concept of sustainable development, we seeked to argument
some viewpoints regarding the purpose, the need and the obstacles which it entails.
The purpose of understanding the concept of sustainable development
Ferry stated that “I know that this term is obligatory but I find it also absurd, or rather so vague that it says
nothing" (Ferry, 2007). However, the issue was outlined by various documents and I dare to say that the main
problem is not the lack of understanding on it under he circumstances when the concept appeals to ethical principles
which are widely used and much debated upon. The problem is rather the conflict with the immediate individual
interests, at the level of an individual and an economic entity. The academic debates on the form may yet be an
excuse for not addressing the substance.
The purpose of pursueing the goal of sustainable development
Another critique put forward by Baden, president of the Foundation for Research on Economy and the
Environment, is that “In economy like in ecology, the interdependence rules applies. Isolated actions are impossible.
A policy which is not enough carefully thought will carry along various perverse and adverse effects for the ecology
as much as for the economy. Many suggestions to save our environment and to promote a model of 'sustainable
development' risk indeed leading to reverse effects”. By this theory I understand that the effects generated by the
concerns and measures due to approaching an issue are not necessarily the ones expected and , ultimately, “the road
to hell is paved with good intentions”, namely no matter how good intended the intervention is, it can lead to
inhibiting the recovery or accelerating the decline and gradation. The diametrically opposed alternative would be the
complete absence of a concern became, beyond useless, a priory contrary to itself, in favour of continuing and
intensifying an economic activity characterised as “self-consuming”. Again, fear of assuming a position and its
derived actions looks like an excuse for avoiding an attitude. By extrapolation, it may be deduced that any action is
associated with the risk of not attaining its aim and at the same time that there is not an acceptable risk level to this
end, therefore it makes no sense to undertake any action. Continuing the discourse, (if yet necessary to promote such
an hypothesis) it may moot the question either of suppressing any type of action, including the ones involving
surviving (for example food finding and eating) or of maintaining exclusively those kind of actions assuming
immediate survival (long term survival assumes a thinking and projection process which on its turn involves a level
complex enough to be subjected to the errors and limitations of human thinking, so, as any kind of complex action
runs the risk of betraying its aim). So, it may be drawn the conclusion of human being returning to primate stage and
conscience repression. Indeed, the adverse effects possible to be generated on the environment by this kind of
community would be minimum but a new debate topic would be if it is worth suppressing conscience and culture,
human civilization aiming at preserving the environment or if the two elements – natural environment and human
civilisation – could not be reconciled.
The purpose of the goal of sustainable development
The third critique comes from the cornucopian paradigm of replacing the natural resource necessities with
technological solutions. Hotelling, for instance, developed theories of optimal rates of resource exhaustion by which
the pricing game would determine the development of an alternate technology to replace the consumed scarce
resource as this scarce resource is being exhausted, and so its price increases as an effect of scarcity (Hotelling,
1931). Otherwise put, the need is the one guaranteeing creativity so as to ensure permanent stock of resources or
alternatives to these. Indeed, Barnett states that the technological changes are self-generating and inseparable from
the circumstances generating a high demand of traditional resources and finally that there are no limitations of the
economic growth related to resource rareness (Barnett, 1974). In extremis, Ausbel disconsiders the environmental
conditions as having a decreasing relevancy for a population who will live soon under domes (Ausbel, 1991).
However, the appeal to technology as an intervention of “deus ex machina” nature ( that is very appropriate for this
specific situation) can be characterised as irresponsible if it is not substantiated on a plan of viable projects.
Moreover, it may be considered as dangerous to the extent to which it allows the irreversible change of the living
environment in an artificial one, man made and consequently vulnerable to human errors owed to previsions and
implementation on the one hand and subject to the human control susceptible of becoming aim of the political
ambitions on the other hand.
13

The natural environment regulates and coordinates the evolution of species, which are seen as components
to this environment with very specific roles, but can ultimately exclude them from its system. Due to a certain
symmetry, humans pretend to coordinate and use the natural environment considered as a component of the broader
spectrum of human activity and just on the line they threaten this natural environment with disappearance of some
components and fundamental altering of some other ones. This game of power has sometimes been named “playing
God”.
The natural environment may very well exist (and I dare stress “very well”) in the utter absence of humans.
In exchange, humans depend at least on some components of the natural environment. Firstly the aspect of necessity
(independence between natural environment and humans and reverse) and then the ethical one will be treated.
The legitimacy of granting to the environment an inclusion and coordination function on the humans is
justified by framing the human species as animal species depending on the environment where it was borne and
developed. Humans, at the present stage of biological and technological development, cannot survive without air
(oxygen implicitly), food (the sources of which, irrespective of the processing degree, are also of natural kind) and
water. Oppositely, in order that humans to assume the role God on nature, they should have the primordial capacity
assumed by this “role” – that of creation – starting (at last) with creating of the means necessary to support the own
life”. However, the efforts assumed by synthesising the fresh air, potable water and animal or vegetal food resources
in the event of their large scale degradation, reduction or even disappearance, exceed the present technology
development stage. If air would disappear or waters would dry mankind would disappear. The scenario is obviously
exaggerated but it shows in the most striking way (if necessary) the human life dependence on the natural
environment. The argument may then be shifted from existence sphere to the quality and health one.
Technology does not have yet the capability to substitute nature. If humans progressively degrade the
natural environment gambling on a cornucopian stake, they have to develop in parallel a research plan aimed at
synthesising an environment able to support life. However, contrary to sustainability principles, the actual
generation consume and pollute and transmit to the future generations only noxious consequences and the task to
undertake measures, ultimately to undertake the above mentioned research. The risks of creating a human system,
therefore subject to errors and omissions, the stake of which would be the very survival of the species survival and
either the specific political implications will not be dealt with here. The question remains whether such a endeavour
of substitution, even a feasible one, would be legitimate from the ethical viewpoint. In another words, humans’ right
to adapt a planet to the unique purpose of serving their need and comfort in the strictest sense – for example to allow
the extinction, due to the conditions they generate, of a species whose products they do not use.
Like in the case of any other academic debate, there are also opinions fundamentally opposed to the
cornucopian one which draw attention on the stringent nature of the scarcity of resources problem and on the need to
implement measures of protecting then, going as far as reduction of consumtion and conditioning human wellfare on
the protection of these resources. 'Vision' is very popular these days, as befitting the approach of the millennium. The
dust-jacket of the book “Beyond growth: the Economics of sustainable Development” informs us that the author, at
least, is a fully paid-up visionary, having been named one of a hundred 'visionaries who could change your life'. He
has certainly been one of the pioneers of the notion that the economics profession has concentrated too much on the
allocation of resources between competing ends without recognizing that there is a problem of the overall scale of
resource use in a world limited by the fixed size of our host ecosystem (Daly 1996). Recycling cannot provide an
escape on account of the law of entropy, a fundamental law of the physical world that is often a cause of great
concern or excitement among many environmental activists, but which, for practical purposes, merely means that
when you have burnt a piece of coal you don't have it any more. Given the physical constraints on growth we need to
aim at a less resource-intensive life-style in the interests of 'sustainable development' as defined by Daly. His
definition raises various questions, such as how long the human race is expected to survive (affecting the cumulative
population for which the eco-system has to provide).
Sustainable development and economic development
A main idea on the “sustainable society” is found in the definition from the recent speech of Lester Brown,
mostly contained in the paper “Plan B 2.0”, namely the society adjusting the economic and social system so that to
maintain the natural resources and life support systems. However, as Bard noticed such prospectuses are focused on
the sustainable development expressed by ,”increase of the national wealth measured by gross domestic income,
value added sum” (Barde 1997) , and not on the sustainable development itself.
Therefore, can the three conventional pillars of the sustainable development be regarded as being in a
desirable relation of Pareto dynamic equilibrium – where each develops without detriment (or cause contraction) to
the others? John G. Clark delivered a critique on the World Commission for Environment and development (WCED)
for “encouraging the non-sustainable idea that the economic development and economic growth would be
14

compatible – or, that the economic development actually supports environment sustainability” (Clark 1995). The
author’s thesis is that WCED subordinates sustainability to development, underlying the need to integrate
environmental reasons with economic goals and not, for ex., economic reasons with environmental goals. Moreover,
“WCED treated the sustainable development more as a mystic goal than as a concrete objective that could be reached
by concrete actions”. The economic activity has the tendency to assume the main role and the “rest” to be considered
as background more or less “decorative” form the viewpoint of conscience comfort and public image. As it was
mentioned above when noticing the approaches evolution, at the beginning of the formal concerns this emphasis was
obvious under the circumstances when Hirschman, Rostow and Black identified the following prerequisites of the
sustainable development: availability of the long term development capital, stable industrial labour force,
urbanisation, technological capabilities, entrepreneurship and innovation with an affinity for large scale production
units and commercial agriculture (Hirchman 1958), (Rostow 1971), (Black 1966). In collateral studies, Coleman,
Bendix and Huntington added to his list the democratization, bureaucratization and rationalisation of the political
structures (Coleman 1960), (Bendix 1967), (Huntington 1966). According to Clark’s comments, in order to reach
such prerequisites the elites of less developed countries would readjust the national institutions, many of them having
colonial origins, in compliance with the American or European institutions image. Once democratised, these elites,
with considerable help from the developed countries, would restructure their economies so that to meet the
requirements of a self-sustained economic growth. In all this action sequence, the environment is simply the
background for the valuable resources.
A firmer tone, even more accusing, is that of Rosenberg, who joins Clark in the hypothesis according to
which “ as long as sustainable development is not a low-cost proposition, and also as long as the developed countries
[…]are not willing to confront the staggering price tag, diplomatic resources and public and private monies will be
directed toward maximizing the benefits to be derived from trade liberalization […]” (Rosenberg 1994). Rosenberg
goes even further invoking, according to a phrase from the “The Economist”, “the green protectionism“: sustainable
development use not as a purpose itself but as a pretext to impose terms which to serve some selfish economic goals.
The problem that arises is therefore that of reconciling intra- and inter-generational interests. Erlet Carter
noted that “the principles of sustainable development are widely accepted, but, given the conflicts of interests that
occur over time and space, their resolution is likely to be problematic” (Carter 1995). Ted Trainer, for instance, is
among those proclaiming a “healthier” economy, meaning one that is based on principles of sustainability and
implicitly social justice, regarding by opposition the prevailing capitalist method of production as self-destructive
and inherently unjust (Trainer 1966). Trainer shows that, in fact, economic growth has harmed the world through
unemployment, inequality on a large scale, social fragmentation and plundering of the environment. His critique
however distincts itself from the wide current of opinions according to which, through institutional intervention, the
current economic system can provide adequate protection to the environment. In exchange, the author invoques the
need for radical change, rejecting the operations and principles which lye at the basis of both the capitalist economy
and the socialist state model.
There are therefore voices contesting the relevance of considering sustainable development; if we choose
however to take it into discussion (as we have in fact argumented above), we must face the issue of coordinating it to
economic development. Again, there are other voices contesting the fundamentals of the capitalist economic model
currently prevailing in western culture, voices which are strengthened by the distrust which the current crisis has
generated. If we again accept the general principles of this economic model, then it is worth analysing the interaction
between the push for economic development and the preoccupation for sustainable development. Exemples and
experiences have shown the possibility of a lack of coordination, or even an undermining of sustainable development
from the part of that which, at least in theoretical built, wishes to be one of its components, namely economic
development.
In 1997, Debra Straussfogel compared the ranks of 66 countries according to GDP per capita with the
respective ranks according to a composite index comprising four classes of elements: ecological (refering to the
quality of the environment and the diversity of the habitat), human capital (size and structure of the population,
education, health, and characteristics of the workforce), production capital (national income and its allocation, wealth
and some elements of infrastructure), and finally institutional capital (Strausfogel, 1997). Finding itself among the
countries considered for the analysis, Romania, for instance, ranked 44th by GDP per capita in the year 1992, but
31st by the composite index. The correlation index as calculated between the two rankings was of 0,87, indicating a
strong link which leaves some room for sporadic exceptions. It comes as no surprise, for example, that it is precisely
the production capital among the four elements in strongest correlation with the GDP per capita, as actually being a
component of the latter. Once the strong interaction between economic and sustainable development mathematically
fundamented, the debate shifts towards the direction in which the two influence one another. Coming back to
Carter’s study undertaken for the restraint case of tourism, he describes a matrix in which each of the two aspects
15

analyzed – the environmental one, respectively the aspect of human interests, may reach either of two outcomes as a
result of a given activity – loss, respectively gain (win/loose). If by the examples illustrated, the loose/loose situation
is generated by the motivation of misunderstood economic interest, the situation by which some human interest are
satisfied to the detriment of the environment does not support itself beyond a short-term period. On a longer term, the
environmental resource exploited will come to be exhausted or will loose its value, thus transitioning into a
loose/loose situation. The exclusive pursuit of immediate interest, with disregard for perspective vision, therefore
proves an unprofitable investment in the end.
Conclusions
The arguments in the first part of the paper were meant to defend the principles which stood as a base for
the development of the sustainable development concept. Our purely personal opinion is that arguments such as
insufficient understanding of the concept, the risc associated with a complex and large-scale initiative or lack of need
for such an initiative are just as many pretexts for denying an clearly observable reality. By a suggestive metaphore,
Boulding associated humans on Earth with travelors through space, who need to permanently recule their wastes in
order to survive. What’s more, Hanson drew attention upon the nearly invariable tendency of organisms to extend
their populations beyond the limits of the resourses of which they dipsose, at which time a self-consuming effect is
triggered, and communities begin devouring life-sustaining resouces at a suicidal rate. What follows is a natural selfregulatory
process, the dratatic demise of the population in question. Transposing this model into human terms,
industrial technologies for increasing the production of food per capita and the development of medicine allowed an
explosion o population beyond the natural self-regulating systems (such as the self-consuming effect anf the
Malthusian principle). Hanson did nonetheless foretell the reactivation of the self-consuming effect as a result of the
explosion of consumtion and waste.
SoluŃia de compromis general acceptabilă, în acord atât cu interesele cât şi cu nevoile de justificare etică
impuse de conştiinŃă, a fost formulată, în termenii săi cei mai optimişti, de Vernadsky24 în timpul celebrării victoriei
AliaŃilor în 1945: „Idealurile noastre democratice sunt în ton cu procesele elementelor geologice, cu legile naturii şi
cu noosfera. Aşadar putem înfrunta viitorul cu încredere. Este în mâinile noastre. Nu îi vom da drumul”. Discursurile
WCED şi UN propuneau o paradigmă în care eficienŃa şi tehnologia ar produce rezultate sporite cu resurse restrânse,
conştiinŃa culturală şi ecologică ar conserva biodiversitatea, potenŃialele populaŃiei şi ale ecosistemelor ar fi
armonizate, producŃia agricolă ar beneficia de pe urma redefinirii folosirii pământului şi al politicilor naŃionale de
agricultură raŃionale, factorii de mediu ar fi integraŃi integral cu deciziile de dezvoltare economică la toate nivelurile,
echitatea şi democraŃia ar triumfa. Un model la limita utopiei pe care oricine ar fi mândru să şi-l însuşească şi să-l
apere, o cruciadă a dreptăŃii pentru oameni şi natură.
Totuşi, cea mai vehementă critică la adresa uşurinŃei de implementare a dezvoltării durabile, în acord cu cel
mai mare obstacol întâlnit până acum, este conflictul de interese pe termen scurt cu dezvoltarea economică a
anumitor entităŃi. Dincolo la apelul la etică trebuie în acest sens cultivată conştiinŃa, dimpotrivă, a corelaŃiei pozitive
dintre dezvoltare durabilă şi dezvoltare economică pe termen mediu sau lung. Dezvoltarea economică constituie unul
dintre pilonii dezvoltării durabile, dar, prin subminarea celorlalŃi, dezvoltarea economică devine nesustenabilă atât
din punct de vedere etic, cât şi din punct de vedere pragmatic, în sensul în care va sfârşi într-un efect autofag.
Această conştiinŃă trebuie însuşită în primul rând de forurile de decizie şi reglementare de la cel mai înalt nivel,
pentru ca apoi, prin măsuri şi reglementări adecvate, să condiŃioneze dezvoltarea economică a diferitelor entităŃi de o
abordare sustenabilă. Voi concluziona aşadar prin afirmaŃia că dezvoltarea durabilă este o iniŃiativă necesară şi
implementabilă, dar condiŃionată de reglementări şi decizii adoptate prin atenta considerare a unui orizont de timp
mediu şi lung, începând de la forurile cele mai înalte până la responsabilitatea individuală.
This article is a result of the project „Doctoral Program and PhD Students in the education
research and innovation triangle”. This project is co funded by European Social Fund through
The Sectorial Operational Programme for Human Resources Development 2007-2013,
coordinated by The Bucharest Academy of Economic Studies.
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16

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17

USING NEURONAL NETWORKS AND SUPPORT VECTOR
MACHINES FOR ADAPTING COMPANIES’ INSOLVENCY
PREDICTION MODELS TO GLOBAL CRISIS
Stoenescu (Cimpoeru) Smaranda
Faculty of Cybernetics, Statistics and Economic Informatics
ASE, Bucharest, Romania
smarandacimpoeru@yahoo.com
Abstract �¢¡�©¨©§¤��¨��©��¤��©��¢¡��©�����¨¡�����¥����¥¤¢¥¦¤¨¢¤§�¥�¡¡���¥¦¤�©�¥�¤��¤©¢�� ��¤¨���¨¥¡¤©�¥�¤�¢¡�¤©�¤¨¡�¡��¤����¨��§����¡�©��©��¡����¥¦��¥��¤¡���¡�©�¨¢������©��� ¡¢¡£¤¢¥¦¢¤¤§¤¨©§¤�����¡�£¤�¨��¢¤§�¨¥�¡��¡§¤��¦©£¤©¥¥¢©¨¥¤§�¡¥�¡�¢¤�¤©¢¨¦��¥¤¢¤�¥
Keywords: insolvency prediction, neural networks, Support Vector Machines, Credit risk,
Parametric and non-
Parametric\classification techniques, Bankruptcy.
¥¦¤�¤�¨��¤�¥���¦��¦©��¤¨¡�¤©�©������¤���£���¥¦¤�©¨¥¥¦©¥�©��������©�¤§¡�¨¢¤§�¥¡¢ ¥¢��¥��¥¦¤§¤�¥¡¢��©����¥�¥¡�������¦��¡����©¥�¡����¤¨¤�¥�¥�§�¤�¡�¤�¥��©¥����¢¡�©����¥�¡� §¤�©��¥�¡§¤��¦©£¤�¦¡��¥¦©¥¥¦¤�¤�¥�¤¢�¡¢�©�¨¤��©¨¦�¤£¤§���¢¥���¨�©���¥¤����¤�¨¤ �¤¥¦¡§����¤��©¨¦��¤�¤©¢����¥¤¨¦����¤�¥¦©¥©�¥¡�©¥�¨©���¤�¥¢©¨¥��¡��¤§�¤�¢¡�©§©¥©�¤¥ ©�§¨¡��¥¢�¨¥�¡§¤�¢¤�¢¤�¤�¥©¥�¡��¥¡¤���©���¥��¦¤©��¡�¥¦���©�¤¢��¥¡��¥¢¡§�¨¤¥¦¤ �¤¨¦©����¡��¤�¢©��¤¥�¡¢��©�§����¡¢¥£¤¨¥¡¢�©¨¦��¤�©��©¥¥¤¢�¢¤¨¡���¥�¡��¤¥¦¡§�� �©¨¤¥¦¤�¢¡��¤�¡�¥¦¤¨¢¤§�¥�¡¢¥¦��¤��¡�¨��¤�¥���¦¤¥¦¤¢�¥��©�¡�¥¥¦¤¤���¥����¡¢¥¡�¡��¡¡¢
����¥�£©¢�©��¤�¤�¤¨¥�¡����¨¡���¤¨¥�������©�¨�©���¢¡�©�����¥�¨�¨��¤¢�¤¥�¨����©¨���¡�� �¢��¨���¤�©�§��¤�¤�¤�¥���¤�¢¡�¡�¤�©��¡�©§���¥����©��¢��¥¨��¢¤§�¨¥�¡��¡§¤���¡¢��©�� ©�§�¤§���¤�¥¤¢�¢��¤����¡�©��©¥¡¨�¢¢¤�¥¤¨¡�¡��¨¨¡�¥¤�¥� �¢�¥���¥¦��©§���¥���¢¤��¤¢�¥¡ �§¤�¥�����¢¤�¤£©�¥£©¢�©��¤�¥¦©¥�¡¢�������©�¨�©�¨¢����¨¡�§�¥�¡���¥¦¤�¤�¥¢©������©�¤��¤ ¦�����¦¥¥¦¤���¡¢¥©�¨¤¡�¤���¥�¢©¥�¡�©�§�¡��¥�£¤�¡¢����¨©��¥©����¥�¤����©��¡¨¡���§¤¢ ¥¦¤¨¡¢¢¤�©¥�¡���¤¥�¤¤�¨¡��©��¤�©�§¥¦¤�¢©¨¥�£�¥���¤�§� ¥¡�¤¥¦¤¢��¥¦¢¤�©¢�©��¤¢¤���¥�©¨¦�¤£¤§��¥¦¤�¤¥¤¨¦����¤���¡¢¤¡£¤¢��¤©�©���¤�©��¡�
JELClassification:C14,G33
Introduction
Banks rely on credit and confidence in the debtor's ability to pay debts. Face to face with the
pressure from the market and regulations, banks build their confidence on the basis of statistical
tools to constrcut models ]n order to predict firms’ bankruptcy known as Rating and Scoring
Models. Rating a company is defined as an estimate of the financial situation and the likelihood
that a company becomes bankrupt in a certain period of time. "The overall objective of credit
18

ating prediction is to biuld models that can extract knowledge of credit risk evaluation form past
observation and to apply it to evaluate credit risk of companies(...)" (Huang et al., 2003, pg 544).
Applying statistical models in corporate bankruptcy has become popular with the application of
discriminant analysis of Altman in 1968 and the introduction of Logit models with evidence from
Martin and Ohlson in 1977 and 1980. The decision element in these models is the Score linear
function, a hyperplane in multidimensional space that separates the bankrupt firms of the
“surviving” ones. Company's score is a value function. Unlike the discriminant analysis, Probit
and Logit techniques conver the score directly into the probability of default by a mappingThe
disadvantage is the "forced" linearity of the mapping that can distort results. The latest methods
for classifying firms into "solvable" and "insolvable are neural networks and Support Vector
Machines, known as SVM (non-parametric techniques for transforming scoring in probability of
default). Many studies, including that of Kim (1993) compare the approach based on neural
networks with linear regression analysis and discriminant analysis. We obtain that neural
networks give better results than any other method in terms of classification accuracy.
In this paper we propose a brief foray into the classical models based on analysis of discriminant,
then switch to the specific methods of classification based on artificial intelligence techniques,
which we will give a bigger space, since they gave higher accuracy rates than classical statistical
methods (discriminant analysis, logit, probit). In bankruptcy prediction models, two major
problems have raised: the accuracy of prediction and the explanatory power of models.
Regarding the statistical methods it was concluded that simple functions based on historical
values and public, available data can be used as a first, very good approximation for the complex
process of correct classification in the two classes
( solvent and insolvent companies). In brief, we will explain the neural networks algorthm and
that of the SVM (topic that is not sufficient represented in Romanian literature compare to its
many applications). We will present ways of selecting variables, financial ratios that characterize
a company’s situation and that needs to provide a valuable set of information on its future
development.
The subject is of great significance today, given the economic crisis the world economy is
facing. Policy banks in recent years of development was to create money through debt, creating a
"speculative bubble" that eventually broke, leading to a sense of panic among the banks that have
realized the importance of their customers’ creditworthiness. We thus explain the need to find the
most preferment models that can provide banks a "clean" portfolio of customers. �¢���¤�¥
1. Insolvency prediction models
Interest in insolvency prediction has long been confined to academics, with most of the published
material restricted to business and accounting journals specializing in esoteric and complicated
subjects. A possible reason why insolvency prediction models have not gained greater use in the
business community is because it has been difficult to calculate the results
In the last time, these models have gained even more ground, given the global economic crisis
and the importance for lending institutions to predict as correct as possible the trustworthiness
of their clients. We will present very briefly, as a result-form, three of the bankruptcy prediction
models that were most common in the analysis and constituted the starting point of most models.
However, all developers of prediction models warn that the technique should be considered as
19

just another tool of the analyst and that it is not intended to replace experienced and informed
personal evaluation. Perhaps the best use of any of these models is as a "filter" to identify
companies requiring further review or to establish a trend for a company over a number of years.
If, for example, the trend for a company over a number of years is downward then that company
has problems, that if caught in time, could be corrected to allow the company to survive.
Altman model (USA,1968)
Edward Altman is considered the dean of insolvency predictors. He was the first person to
successfully use step-wise multiple discriminate analysis to develop a prediction model with a
high degree of accuracy. 22 financial ratios were tested in developing the Altman Model, that is
the first result was a formula with 22 functions. The function that contributed the least to
discriminating between the failed and successful companies was dropped and the statistical
software was run again. This was repeated over and over each time dropping the ratio which least
contributed to discriminating between the failed and successful companies. In the case of the
Altman model, five functions remained. Using the sample of 66 companies, 33 failed and 33
successful, Altman's model achieved an accuracy rate of 95.0%. Altman's model takes the
following form:
Z = 1.2A +1.4 B +3.3 C +0.6 D 0.999 E
(1)
If Z

81% more than one year prior to bankruptcy.
Blasztck System(Canada, 1984)
This is the only business failure prediction method outlined here that was not developed using
multiple discriminate analysis. This system was developed by William Blasztk in 1984. The
essence of the system is that the financial ratios for the company to be evaluated are calculated,
weighted and then compared with ratios for average companies in that same industry. One of this
method's strengths is that it does compare the company being evaluated with companies in the
same industry
2. Neural Networks
Self-training machines is a separate branch of artificial intelligence. By automatic
learning we analyze systems able to improve their performance with sets of training data.
However, systems with artificial intelligence have limited possibilities for learning or even not at
all. In general, the necessary knowledge is programmed within them, so that if the system
contains an error it will not be able to correct it by itself, no matter how many times you run this
program. Experience does not lead, unfortunately, to improved system performance, the
algorithms are not automatically generated, new solutions can not be generated by analogy with
the old ones or by discovering. Thus, systems with artificial intelligence are deductive systems,
which can draw conclusions from knowledge within them or supplied, but can not themselves
generate or acquire new knowledge. The following paragraphs summarize the key concepts in the
field of artificial intelligence that will help us understand the logic of Neural Networks of
Support Vector Machines.
Learning and knowledge representation
In learning a domain, a system contains many predefined concepts, structures,
knowledge representation, heuristic rules and restrictions. We will review the two basic types of
learning: supervised and unsupervised. In the case of supervised training, the network is
submitted a set of training examples. Training example is a pair consisting of an input-vector and
the desired/correct output. When we apply a network input vector, we calculate the network
output and compare it with the output vector that we want to achieve. The difference between the
latter and what we get is the error. Network weights are amended by an algorithm which tends to
minimize this errors. The training vectors are applied sequentially, adjusting the corresponding
weights until the total error associated with the whole training set reaches an acceptable value.
This is how the network works through supervised learning. However, even if widespread, this
type of training has been criticized as not logical form biological point of view, considering the
idea that it is difficult to conceive the existence of a mechanism in brain that can compare the
outputs desired with the real onea, to then back-propagate throughout the networks’ neurons the
corrections made. The issue that is raised is where do the desired shapes come out from.
However, it was discovered a self-organization form of the brain, from early stages of its
development. This self-organization can not be explained by a supervised learning mechanism.
Unsupervised Learning, on the other hand, provides a more plausible model for learning for
biological systems.
In a model of unsupervised learning the adjustment of weights is not based on
21

comparing responses with predetermined ideal. The training set consists of input vectors. Without
the correct answers being known (which supervised learning was called the "desired output"), the
comparison base to assess the errors, such models lead to the construction of entry groups, forms
similar property that we can call "self-organization”, which in classification theory is equivalent
to clustering. The logic of the network for this type of training is as follows: we applying two
input vectors that are sufficiently similar will generate the same form or output vector. Thus,
when the network is presented a vector from a certain class, it will generate a specific output
vector, with the difference from the type of instruction presented earlier that the answer a class of
input vectors produces can not be determined before the end of training.
In the specific type of network that we will apply in solving the problem of firms’
insolvency prediction we use the supervised learning because we know in advance the two
classes that the firms can be grouped in, ie the type of response which we expect. Of course, the
problem can be treated also in terms of unsupervised learning. By selecting correct entryvariables
variables , we obtain a separation, a self-organizing system of firms, in the two classes
desired.
Neuronal calculus assumes, in addition to learning, another fundamental concept:
knowledge representation, concept that involves the introduction of a method of recording what
was learned. In conexionists patterns, as those reported in the paper, there is not a representation
system separate from the learning one. Knowledge representation consists of a network, the
connection weights and semantic interpretations attached to neurons. Applied in the context in
which we will study the neural networks, we can identify a particular neuron with the bankruptcy
for the firm. Activation 1 of the neuron shows firm bankruptcy , activation -1 shows the absence
of bankruptcy and 0 the lack of information on the presence or absence of bankruptcy.
General principles of neuronal calculus
Neural modeling goal is to develop training systems that can operate in various fields, starting
from a small amount of initial knowledge. These systems are exactly neural networks, systems
with self-organization or, as we saw above, connexionsts systems. In fact, such a system consists
of a network of interconnected elements, neuron like, performing simple logic functions.
Learning is achieved by changing the intensity of connection between elements, by changing the
weights associated with these connections. Initial knowledge is synonymous with the initial
configuration of the system, ie attributes, characteristics of objects. A separate section of the
paper will be devoted to the choice of input variables, ie the attributes, features of objects which
must provide the information about the type of object considered.
2.1 Logic and a general pattern of neural networks
A brief definition of a neural network is that of set of processing elements (neurons, cognitive
units or nodes of the network) highly interconnected. Considering a network with neurons,
interconnected through a lot of weights or synaptic cognitions, each neuron with a number of
inputs and a output, where inputs represent signals coming from other neurons or from the
outside world. Each neuron is characterized by three main elements: inputs - real
numbers, the second element: synaptic weights associated with each input, so the number of all is
also , marked with , also real numbers that weighted the input signal and the third
element is the output, denoted by .
�
22

About the synaptic weights, if , then the synaptic weight is exciter, and if , we have
an inhibitory weight. Given these elements, for each neuron we calculate its activation or product
vector between input vector and the weight vector :
In one of the classical models of neural network, McCulloch-Pitts, each neuron is
characterized by a threshold of excitement, t. Output neuron i, , takes a specific value,
depending on the comparison with the total activation threshold t. For ease of writing , the
threshold may be added, as input value 1 and t share, as a new term representing of the amount
representing total activation. In other words, we complete the weighting vector with the value t
and we add to the input vector a new component, 1. In fact, the output vector is a function value
of the activation, including the threshold t:
where .
Shape function f depends on the model of neural networks studied. It is also called neuronal
function, or output function of neuron activation, and oftenly non-linear neural functions are
choose to work with. The most commonly used functions are: the threshold function associated
with the McCulloch-Pitts model, the Signum function,thethres hold linear function, the sigmoid
function.
Of these, the linear threshold function and the sigmoidal function have a continuous codomenia
interval (0.1), and not just the values 0 and 1. A sigmoidal function is defined in the following
way:
Training the network
We consider the neural network model presented above. Entries are represented as
vectors, and many of these vectors represent the input vectors. The goal of a neural network is to
transform a specific configuration entry in an output configuration. The output may correspond to
an action realised by the network, such as a control problem. In this paper, we study the
application of neural networks in problem of classification. In general, the output can be any
transformation of the input space, so the functioning of the network is the result of a projection, a
transformation of the input vectors space into the output vector space, type of projection seen in
the techniques of multidimensional data analysis.
By training the network we mean a method to built such an application or projection. In essence,
training assumes that the network is provided enough examples of pairs of entry. With these
examples, the network adapts its synaptic weights and thus it is forced to generalize an input
application.
23

In the classification problem, the forms are submitted to the classifier that must classify
them in a preset lot of classes or categories. The learning process is part of the supervised
techniques, ie the network is submitted various forms with their correct classification. In our case,
there are two categories of classification: solvent and insolvent companies. So that the network
works, we need a number of examples, usually it is considered an equal number of firms in each
category. The weights between neurons and between the layers of neurons are then adjusted until
the network is trained and it is able to correctly classify objects (companies), different from those
which were presented during training.
2.2 Perceptron algorithm
Even if with many limitations, the perceptron is a basic network which has aroused much interest
because of its ability to learn to recognize simple shapes. Being representative for a large range of
training algorithms, we decided to show in more detail this algorithm, although it is the most
simple of a very large number of algorithms that have been developed over time, in order to
correct the limits of the earlier ones. In other words, the perceptron model is the bottom from
which arose all other neural networks. It should also be noted that these algorithms are suitable
for problems of classification and are using supervised learning mechanism.
The perceptron with a single layer, although the simplest neural network, is able to decide
if a vector (a shape, an object) input belongs to one of the two training classes, denoted C1 and
C2. We have a single neuron with inputs . As explained above, the total neuron
activation is calculated, taking into account the threshold value, t. The advantage of placing the
threshold, t, as weight in defining neuron elements is very useful: the training algorithm can in
this way shape also the threshold value together with the other weights. Assume that the
perceptron output is given by the rule:
where the vector is weight vector, separation vector or solution vector and the vector
�has
components.
Equation is a hyperplane equation that separates the input vectors into two decision
regions. Input vectors in the positive hyperplane correspond to class C1 (in our case this is the
solvable firms class), and those located in the negative hyperplane correspond to class C2
(insolvent firms). The separation hyperplane is an indetermination region, because we can not tell
in which classes are the vectors belonging to it. ¡ � �
For ease of adnotations, we make a sign normalization of input vectors, with:
So the hyperplane is a separation hyperplane for C1 and C2 if and only if we have the
inequality: . If for two classes such a hyperplane exists, then the two classes
are called linearly separable.
Connection weights and the threshold, component of vector w, are adjusted through a simple
training algorithm, the perceptron algorithm. After applying this algorithm, we obtain a weight
vector that separates the two classes. The procedure of training the perceptron is nothing but an
24

iterative method to optimize a criterion function. The objective function chosen is the sum of
distances form the points erroneously classified to the hyperplane determined by the weight
vector w.
Next, we detail the calculation of the criterion or objective function. The set of training consists
of pairs , where is the correct answer (expected) for the input of the
network. Classification error for a wrong classified vector, , is the distance from this vector to
hyperplane , , given the hyperplane equation. So, the criterion fnction will
be the sum of errors that we want to minimize:
where is the set of points incorrectly classified by the weight vector w. ¡���
To minimize this function we are using a gradient type method. Criterion function value in step k
of the gradient method will be:
� where is the set of wrongly classified points of vector . Let us now refer to the method
of minimization of gradient. This is an iterative method of constructing a set of vectors
,, where the vector is obtained from the vector of step as follows:
In this formula is a positive number representing the size of movement towards of the
weight vector in the direction given by , called direction of descent. In such methods, the
direction of descent is considered the antigradient of the function to be minimized:
¨ For convenience, at every step is more convenient to consider all points of the training set and not
just those wrongly classified. However, the vector is amended only for those items
incorrectly classified by the weight vector . Taking , a positive constant (rate of
training of the network), the rule of correction becomes:
The algorithm itself is conducted as follows: at the first step we initializes the weights and the
threshold value. We then choose the constant c, usually a positive value and less than one. The
perceptron learning algorithm compares the output produced by the network with the class of the
input vector. In case of an incorrect classification, the weight vector is changed. If not, it remains
unchanged. If at a certain number of consecutive steps there is not a change in the weight vector,
then all the input vectors (in essence, examples given to the network) are correctly classified by
the weight vector of the last step of the algorithm. At this time, the network is trained and able to
correctly classify any unknown vector.
25

The multi-layer perceptron
Given the very simple topology of the network, which provides space division in just two
semiplanes, there are many limitations of the single layer perceptron. Even for simple problems is
preferable to use a network with a more complex architecture. A solution in this regard is the
introduction of several layers of neurons between input neurons and output. Layers located
between the first and last level of the network (between the layer containing the input and the
layer containing the outputs) are called hidden layers. If a network can not solve a problem,
sometimes it is sufficient to expand the number of neurons in the network or introduce one or
more hidden layers. Perceptrons with multiple hidden layers can solve different problems: a
perceptron with one layer and one output can only generate decision regions in the form of
semiplane (as we saw above); a two-layer perceptron can form convex areas of decision (possibly
infinite), obtained by the intersection of the semiplanes generated by each neuron in the first
layer. Each neuron in the hidden layer acts as a standard perceptron and generates a separation
hyperplane. A neuron in the second hidden layer generates a more complicated decision region
by using the semiplanes obtained by the neurons in the first layer.
A classical algorithm for training multilayer perceptronului was proposed in 1987 by Widrow.
This algorithm uses the "principle of the lowest disturbance", which involves changing weights
of neurons whose response is less vague. Starting from the input field to the output, we slightly
modify the weights of nodes whose activation is nearest to zero, so that adjustment weights will
cause a small reduction in error output. Changes stop when the minimum error is achieved or an
acceptable value of the error. Often the weights are adjusted using a training scheme based on the
method of back propagation. This kind of procedures back propagated through the entire
network an error representing the difference between desired outputs and observed ones.
3. SVM
Many new techniques / computational methods and machine-learning generalize the idea of
estimating statistical parameters. The method was introduced by Vapnik and is a non-linear
statistical technique that in many applications (optical character recognition, medical diagnosis)
proved to have a high accuracy. The technique is based on a flexible classifying function
controlled only by adjusting some parameters. The solution offered is stable, since it changes
only slightly to changes in the data, for the methodology is based on the convex optimization
problem. Support vectors represent a way of building a classification N-dimensional hyperplane,
which optimally separates the items into two classes. Thus, the separation of solvent firms and
insolvent ones is done so that the distance between the two classes is maximised, while incorrect
classifications are penalized proportional to the distance to the class to which they really belong
to. Models based on support vectors are very similar to neural networks. In fact, SVM using
kernel sigmoidal functions are equivalent to a perceptron neural network with two layers. In
literature specific to SVM models a predictor variable is called an attribute, and a transformed
attribute used to define the hyperplane is called a feature. The process of choosing the most
suggestive representation is called the selection of characteristics. A set of characteristics that
describe an object is called vector. Thus, the purpose of modeling with support vectors is to find
an optimal hyperplane to separate clusters of objects so that objects of a class to be situated on
one side of the hyperplane and the objects in the other class on the other side of the hyperplane.
26

Vectors near the hyperplane, who actually provide the separation condition are the support
vectors. Advantage over other techniques lies in classification by modeling non-linear separating
surfaces. For a better understanding of the method, let’s look at Figure 1.
Margi
n
Support
Vectors
Assume we wish to perform a classification, and our data has a categorical target variable with two categories. Also
assume that there are two predictor variables with continuous values. If we plot the data points using the value of one
predictor on the X axis and the other on the Y axis we might end up with an image such as shown above. One
category of the target variable is represented by rectangles while the other category is represented by ovals. In this
idealized example, the cases with one category are in the lower left corner and the cases with the other category are
in the upper right corner; the cases are completely separated. The SVM analysis attempts to find a 1-dimensional
hyperplane (i.e. a line) that separates the cases based on their target categories. The question is which line is better,
and how do we define the optimal line. The dashed lines drawn parallel to the separating line mark the distance
between the dividing line and the closest vectors to the line. The distance between the dashed lines is called the �©¢�£�. The vectors (points) that constrain the width of the margin are the �§���¢��¤���¢�. Figure 1 illustrates this. If
all analyses consisted of two-category target variables with two predictor variables, and the cluster of points could be
divided by a straight line, life would be easy. Unfortunately, this is not generally the case, so SVM must deal with
more than two predictor variables, separating the points with non-linear curves, handling the cases where clusters
cannot be completely separated, and handling classifications with more than two categories. The simplest way to
divide two groups is with a straight line, flat plane or an N-dimensional hyperplane. But what if the points are
separated by a nonlinear region such as shown below (Figure 2)? In this case we need a nonlinear dividing line.
to
���¢¤¡��¦¤�¤�©¢©¥�¡�¡�¡��¤¨¥���¥¡¥�¡¨�©��¤���¥¦����¡¢¥£¤¨¥¡¢�
Rather than fitting nonlinear curves to the data, SVM handles this by using a £¤¢�¤¨�§���£��
map the data into a
different space where a hyperplane can be used to do the separation. The kernel function may transform the data into
a higher dimensional space to make it possible to perform the separation. Figure 2 illustrates this very well.
27

C1
C2
4. Selection of input variables �¤�©¢©��¤¨�©��¤� �¡����©�¤¢�¤����¨¥�¡��¡¢¥¦¤�¢¡�¤¨¥�¡�¡�¡��¤¨¥���©��©¨¤��¥¦�¡�����¤©¢�� ���¢¤
The conclusion that we draw on the accuracy of the model is based on widely accepted criteria:
the accuracy rate (used as a criterion for model selection), but also alpha and beta errors.
Accuracy rate shows what percent of companies were correctly classified correctly by the
proposed model. The alpha error is the percentage of insolvent companies between the solvent
ones and the Beta error is the percentage of solvent companies between insolvent ones. A method
of classification has a greater power , if for a given alpha error , results a smaller beta error.
Since it is practically impossible to try all combinations of variables to choose one that yields
overall the best AR, we need to apply a selection procedure. We may apply a backward variable
selection procedure (BSP) or a forward selection procedure (FSP) . The BSP starts with the full
model which includes all variables. At the first step one of the variables is consecutively
excluded and the AR of each reduced model is computed. The model that has the highest AR will
be examined at the second step when one more variable is consecutively excluded and ARs are
compared. The procedure continues until a univariate model is selected by reducing a bivariate
model. The FSP starts with the selection of a univariate model and continues until all variables
are included. At each step the variable is kept whose addition to the model produced the highest
AR. In the classification that we propose, the input variables refer to financial ratios,
profitability, liquidity, investments, leverage, growth, etc.
4.1 Suggestions for adapting the models to the new economic situation
In this paragraph we introduce some ideas for adapting the models that we presented to the new
economic context. The biggest problem raised in applying the current models is that they are
based on historical data in order to forecast whether a firm will or will not become bankrupt in a
specific time horizon. Relevance of historical data at this point may be zero, especially in the case
of construction companies where the spectacular growth of the industry, was followed by an
unexpected decline. Therefore, we can not draw relevant conclusions having in mind the financial
Φ
C2
C1
28

statements of a year or two ago. We propose in this case an amendament of profitability ratios
with a certain percentage, depending on the industry in which the firm operates and in line with
results obtained by triggering the economic crisis. This will solve two problems: the nonrelevance
of historical data and incoroporating in the model the trend analysis of the industry.
But not only profitability has to suffer.
Companies with low capital input and the low shareholder contribution may be between the most
affected. Selling an asset that is not used in operational activity may be an elegant solution to
overcome problems of liquidity on the short term. However, when the asset base is very low, big
problems occur. Particular attention should be paid to these ratios: Equity / Total Assets and
Equity + Shareholders Contribution / Total Assets). Always bear in mind the working capital, by
reporting it to the turnover, the total sales. If working capital is negative, there is a sign of an
unbalanced company, an alarm signal is immediately fired because this can lead very quickly to
the company’s insolvency. Debts to banks or to suppliers that exceed a certain number of days
are elements that can trigger firm bankruptcy, given the existing legal framework. We believe
that one should include an indicator that reflects the hang debts over 60 days (over the entities
listed above) in total debts.
Conclusions
In the present paper we tried to present the newest and most advanced techniques for prediction
of insolvency of a company. As support Hardle, Moro and Schäfer (2007, pg 11), SVM technique
has the greatest power to identify the solvent companies, which means that banks will grant loans
with less risk due to better separation of solvent companies and insolvent ones. We have
presented in detail neural network technology as it constitutes the starting point for SVM. A
neural network works by the following principle: there are several layers of nodes (input node
layer, output nodes layer and hidden nodes layer). The network is Enabled from the input layer
through the hidden layer to the output layer. Initially, the network has a set of random weights,
then they are adjusted each time a pair of input-output is processed. Each pair is processed in two
stages: step "forward" and a step backward. The weights are updated to stabilize the network
when the network is considered to be trained and any input vector will be correctly classified.
Techniques based on Artificial Intelligence are those that gave the best results.
However, giving the current economic context, some changed are to be made over this models.
They relate to the input variables (input vectors) that are selected and not to the logic of
classification itself, which remains the same. Suggestions of choosing input variables to better
reflect the impact of the crisis on companies are provided in the last section of the paper.
The subject is of major importance in the economy, credit must be made with caution in any
period, whether of boom or recession. Caution should not mean stopping loan. Economic growth
means investments which are largely supported by credit. Here's a feedback loop that gives us a
perspective on the importance crediting and knowing the creditworthiness of the client and the
adequate forecasts on their activities.
Bibliography
29

1. Altman E., 1968, „Financial ratios, discriminant analysis and the prediction of corporate
bankruptcy”, pg. 589 – 609.
2. Dumitrescu, D., Hariton C., 1996, “ReŃele neuronale: teorie şi aplicaŃii”, Ed. Teora, Bucureşti.
3. Fan., A., Palaniswami M., 2000, „Selecting bankruptcy predictors using a support vector machine
approach”,
4. Hardle W.K., Moro R.A., Schafer D., 2007, „Estimating Probabilities of Default with Support
Vector Machines”, lucrarea trimisa la
5. Huang Z., Chen H., Hsu C.-J., Chen W.-H., Wu S., 2004, „Credit Rating analysis with support
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��¤��§¢�©¨���£�©��¤�
network ��¤����, pg.167-171. ����§��£���¤�¤©¢��, 7. Ohlson, J., 1980, “Financial ratios and the probabilistic prediction of Bankruptcy” ,
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8. Ruxanda, Gh., 2001, „Analiza datelor”, Ed. ASE, Bucureşti
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business, and science”, ��,
�¢��¤¤�£�������¤¦��¤¢�©�£�©¨��£������¤¢¤��¤���¤§¢©¨�¤�¡�¢£��
pg 93 – 105.
10. Wilson R.L, Sharda S.R., 1994,„Bankruptcy prediction using neural networks”, Decision Support
Systems 11, pg. 545-557.
��§¢�©¨�� �¤�£�£���§���¢�� ��¤��§¢�©¨���©�££��©���£�©��¤�
����§�£�©�£�������¤�� systems”����¤¢��
30

DATA MINING, THE PROCESS OF TAKING DECISIONS AND
THE ECONOMIC CRISIS
Ana Maria Mihaela Tudorache
PhD candidate, Academy of Economic Studies, Bucharest, Romania,
tudorache_ana_maria@yahoo.com
Abstract ¤©¢���§�£�¤��¤��©�¤§�¤���¡¤¢�§¨����§�¤¢����£����¢�§����¨§�¤����©�©�§��©� �§�¤¢�©¢£¤���©��¤¢�©�©���¢��§�¤�©¢£¤�¢¤�¤©¢��¢¤��¢���©¨���§��¢¤��¢�£��£��������£�¤¢¤����¤�©�© �£�£��������£�§�§�£����©�£���£�����§�¤¢�¢��¤��£����¡¤¢��£�£���¢©�¤�©����©�£��£�©¨����¡©¢¤©¢¤ ��¢�©�
Key words: data mining, cluster analysis, decision strategy, economic crisis, data analysis, k-means algorithm £���¤����¤����¤�����£��¢£�£�� �¢¤�¤���¤¡©¨��¢£�������©�©�£�£��©����¤£¢§�£¨£� £���¢�©�£���¢��©�©�©�©�¤���£�§��¤¢��©��£���¢��¤���©��¤����¤¡�©�����¨£�©�¤��¦���¤�©�¤¢¦¡£¨¨ �£��¤� £���¨�¤�¤��¢©��£�� �£���©�©�£�£��§�§©¨¨ ©��§�¤�§¨�¤�����©�©©�©¨ £��¢¤©�£����¤©��§¢©� �¢©�©�£�©¨¨
Introduction
Humans have been manually extracting information from data for centuries, but the increasing volume of
data in modern times has called for more automatic approaches. As data sets and the information extracted from
them has grown in size and complexity, direct hands-on data analysis has increasingly been supplemented and
augmented with indirect, automatic data processing using more complex and sophisticated tools, methods and
models. The proliferation, ubiquity and increasing power of computer technology has aided data collection,
processing, management and storage. However, the captured data needs to be converted into information and
knowledge to become useful. Data mining is the process of using computing power to apply methodologies,
including new techniques for knowledge discovery, to data.
Data mining aims to discover so far unknown knowledge in large datasets. The most important step thereby
is the transition from subsymbolic to symbolic knowledge. Data mining can be defined as the inspection of a large
dataset with the aim of knowledge discovery. Knowledge discovery is the discovery a new knowledge. Central issue
of data mining is the transition from data to knowledge. Symbolically represented knowledge, such data mining is
the representation of facts in a formal language such that an interpreter with competence to process symbol can
utilize this knowledge. Then human beings can be able to read, understand and evaluate this knowledge.
31

Data mining can be done in the following
steps (see figure 1):
- inspection of the dataset
- construction of classifiers
- knowledge conversion and
- validation
Most previous studies have concentrated on
showing binary-valued transaction data. However,
transaction data in real-world applications usually
consist of quantitative values, so designing a datamining
algorithm able to deal with quantitative data
presents a challenge to workers in this research field.
The k-means algorithm
The k-means algorithm is a simple iterative method to partition a given dataset into a user specified the
number of clusters, £. In statistics and machine learning, k-means clustering is a method of cluster analysis which
aims to partition n observations into k clusters in which each observation belongs to the cluster with the nearest
mean.
The k-means algorithm is an algorithm to assign K centers to represent the clustering of N points (K

with different starting conditions. It has been shown that there exist certain point sets on which k-means takes super-
2
Ω(
)
polynomial time: to converge, but these point sets do not seem to arise in practice.
The k-means clustering algorithm is commonly used in computer vision as a form of image segmentation.
The results of the segmentation are used to aid border detection and object recognition. In this context, the standard
Euclidean distance is usually insufficient in forming the clusters. Instead, a weighted distance measure utilizing pixel
coordinates, RGB pixel color and/or intensity, and image texture is commonly used.
There are a lot of variations of k-mean algorithm:
- The expectation-maximization algorithm (EM algorithm) maintains probabilistic assignments to clusters,
instead of deterministic assignments.
- k - means++ seeks to choose better starting clusters.
- The filtering algorithm uses kd-trees to speed up each k-means step.
- Some methods attempt to speed up each k-means step using corsets or the triangle inequality.
- Escape local optima by swapping points between clusters.
Process of taking decisions in businesses and the economic crisis
Business knowledge, the extraction of rules and their use in the decision process allow us to move from the
analytical phase to the production of a decision engine. Once the model has been chosen and tested with a data set,
the classification rule can be generalized. For example, we will be able to distinguish which customers will be more
profitable or to calibrate differentiated commercial policies for different target consumer groups, thereby increasing
the profits of the company.
Having seen the benefits we can get from data mining, it is crucial to implement the process correctly in
order to exploit it to its full potential. The inclusion of the data mining process in the company organisation must be
done gradually, setting out realistic aims and looking at the results along the way. The final aim is for data mining to
be fully integrated with the other activities that are used to support company decisions. This process of integration
can be divided into four phases:
• Strategic phase. In this first phase we study the business procedures in order to identify where data mining
could be more beneficial. The results at the end of this phase are the definition of the business objectives for a pilot
data mining project and the definition of criteria to evaluate the project itself.
• Training phase. This phase allows us to evaluate the data mining activity more carefully. A pilot project is
set up and the results are assessed using the objectives and the criteria established in the previous phase. A
fundamental aspect of the implementation of a data mining procedure is the choice of the pilot project. It must be
easy to use but also important enough to create interest.
• Creation phase. If the positive evaluation of the pilot project results in implementing a complete data
mining system it will then be necessary to establish a detailed plan to reorganise the business procedure in order to
include the data mining activity. More specifically, it will be necessary to reorganise the business database with the
possible creation of a data warehouse; to develop the previous data mining prototype until we have an initial
operational version and to allocate personnel and time to follow the project.
• Migration phase. At this stage all we need to do is to prepare the organization appropriately so that the data
mining process can be successfully integrated. This means teaching likely users the potential of the new system and
increasing their trust in the benefits that the system will bring to the company. This means constantly evaluating (and
communicating) the results obtained from the data mining process.
If we want to give a diagnosis of a company we have to calculate a lot of rates between the two positions of
the balance sheet and/or the result account. Theoretical, and practical too, we can compute a lot of rates. For
example:
a. rates of financial structure;
b. rates of liquidity and treasury - are rates of financial structure too but they express the potential of
company for paying depts. on the short term;
c. profitability rates which are computed by using elements from the result account.
In the paper I made a classification of 15 companies, depending of the next economic-financial rates,
computing from balance sheets:
I1: depts./social capital I5:depts./assets
I2: income/assets I6: the growth assets rate
I3: gross profit/assets I7: net profit/income
I4: social capital/income
The algorithm used to analyze and diagnostic firms or company through financial indicators is based on:
33

� Grouping those firms in unitary classes based on seven indicators. For this thing we will use an hierarchical
aggregate algorithm.
a. Eigenvalues that offers informations about fitting quality are represented by specific falues of
correlation matrix.
b. Factor Score Coefficients offers informations about principal axis.
� Grouping of those seven financial indicators in homogeneous classes. The start point is the primary data
matrix, and then we calculate Euclidian distances between matrix columns.
� Based on scores matrix from SPSS output we find two indicators with high scores. With this two indicators
we can catalogue the studied firms based on scoring values we obtain.
Figure 2 The dendogram of sample of 15 companies from electrical sector
From the SPSS output dendogram results that we can form many classes depending on its ‘cut’. If the
‘cut’ is between 15 and 20 we can form 3 classes: (12,15,14); (9,10,3,1,7) and (2,8,4,5,11,13,6). The most convenient
situation is when the ‘cut’ is situated between 20 and 25, when we can form 2 classes: (14,15,12,9,10,3,1,7) and
(2,8,4,5,11,13) because this is the purpose of the analysis.
For analysis we take two indicators: I3 (gross income/total asset) and I4 (registered capital/ turnover). If
a company has a good value for I3 and a bad value for I4 then this firm is has a good profitability, otherwise this firm
is not going to well form financial point of view.
The I4 indicator being aggregated by division of gross income at total assets, shows if a firm has profit.
If this ratio is grater this means that the company is doing very well. The I3 indicator aggregated by division of
registered capital at turnover, shows if a firm has loses or not. If this ratio is smaller the status of the company is
good and if this ratio is grater the firm will enter in bankrupt.
Conclusion
Businesses employing data mining quickly see a return on investment, but also they recognize that the
number of predictive models can quickly become very large. Rather than one model to predict which customers will
churn, a business could build a separate model for each region and customer type. Then instead of sending an offer to
all people that are likely to churn, it may only want to send offers to customers that will likely take to offer. And
finally, it may also want to determine which customers are going to be profitable over a window of time and only
send the offers to those that are likely to be profitable. In order to maintain this quantity of models, they need to
manage model versions and move to automated data mining.
Data mining is the process of sorting through large amounts of data and picking out relevant information. It
is usually used by business intelligence organizations, and financial analysts, but is increasingly being used in the
sciences to extract information from the enormous data sets generated by modern experimental and observational
methods. It has been described as "the nontrivial extraction of implicit, previously unknown, and potentially useful
information from data"and "the science of extracting useful information from large data sets or databases." Data
mining in relation to enterprise resource planning is the statistical and logical analysis of large sets of transaction
data, looking for patterns that can aid decision making.
Acknowledgments
34

This article is a result of the project „Doctoral Program and PhD Students in the education research and innovation
triangle”. This project is co funded by European Social Fund through The Sectorial Operational Programme for
Human Resources Development 2007-2013, coordinated by The Bucharest Academy of Economic Studies.
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35

TREASURY ACCOUNTING – THE KEY IN THE CRISIS
PERIOD
Baban Cristina - Lucia
PhD Student Academy of Economic Studies Bucharest
Adresse: Bucharest , Romania
E-mail: cristina_baban@yahoo.com
Abstract: ��¤�¨��©¨£�©�£���¢��¤��©��¤��¢¤�¤¨ �£�£��¤�¢©�¤�£���¤�¢£�£��£�©��£©¨�¤¢£��� ��¡¡¤©¢¤¡£��¤��¤���©�¤�����£�¢¤�¤��£���¢��¤����©�£�� ���£��¤��¤¨£¤��©��¢����¤�¤�£��£���� ¡¤©¢¤¨£�£��£�©¡�¢¨���£��¤¢�£�§�¤¡�£��£�©��¤��¤��
Key words: accounting, cash, liquidity, crisis, financial situation
��©�¢¤�¤��¨ ¤��¤�����£���¢¤��¤��� ¤©¢��¢����¤�¢¤©��¤�¢¤��£���¢��������©���©¢�¤��¢�� ����¡¢£¤¢¥¢¢¦§¨§©���£��¦�¢��©¥¢�¦�¢¥��¢¢�©§©�¦��¤©�¢¥¥¦¥����¦�����¦�¥¦§�¢§¥¦��¦¥ ¨¦�¢§����¢��£�¢¤¥©�£��¦©§¥��©���¦§�¢¥�¦§¨�¦��©��¤¢£��£¥���¤¢£¥�¤��¦§¥����©�£¦§¥ �¦�¢��£�¦�£��£¤�¢��¤¢£�¢¥�£�¢¨©©�¥£���¦¥¦�¦©§¥�¢���£��¤¢£�¢���¢�¤¢�¦¥¢¥�©¤��¢�¦§£§�¦£� �¢��¦§¢���¦¥�¢�¢§�£�¢¥�£¤�¢��¤©�����¦��£¥£��¢��¦§¨£���©�§�¤¦¢¥©���¢�©¤��£��¦§¨¥©�© ��¢¦¤¢�©§©�¦�£��¤©��¢�¥��¢¤¢¥���¥©���¦¥�¤¢¥¢§��¤¦¥¦¥� ��¤�¤��§¢
�©§�¦�¦©§¥¦¥£§¦��©¤�£§�¤¢��¢¥��©¤£�©��£§�£§�¢�©§©��� ��¦���£�¢¦§�©�©§¥¦�¢¤£�¦©§��¢�©¥¥¦�¦�¦��©�¦§�¤©���¦§¨¥©�¢§¢�£��©�§�¥ �¥�§��¢�¦�£���£§�£§£���¦�£����¦���£�¢��¤¢¥¥��¢¦§���¢§�¢¥©�£��©�¢¤£�¦©§¥��£�¦§�©��¢¥ �£¥��¤£§¥�¢¤��§�£����£�¦¥�©¤£§¦��¤©�¦§¨©���¢�£¥���©���£�¢�¢§��¥��¦�¦��� ��¥©����¨©¦§¨�©�¤¢¥¢§���¢¥¦��£�¦©§©���©�©��£§¦¢¥�¤©��©�£§¦£�¤©��¦��¢¤¢§� �¦§�¥©�£��¦�¦�¦¢¥��¢���£¦§¦§¨��¢�¥¢���§¢¥¥©��£¥�£��©�§�¦§¨£��¢��©��¢£��¤�£�¥©§¢� �¢�£�¥¢¦�¢��¤¢¥¥��¢�¤¢£�¤¦��§¢¥¥�©�£�¦¤�£§�§£�¦©§£�¢�©§©��� ��¦¥£¤�¦��¢¤¢¥¢£¤��¦¥�¤�¦§¨�©�¤¢¥¢§���£��£�¦§¨£¥�¤©§¨�£¥�¥¦��£�¦©§¦§¥���
JEL Classification: M40; N10;
Introduction
Starting with the eighteen century, we passed periodically some economic declines. Once appeared these
moments, were named panic and when those were frequently had appeared other names: depression, economicfinancial
crises or recession.
The Great Depression started in 1929 and end at different times from 1930s to 1940s and it was the most
important economic depression on the last century, now using it as an example of how the world's economy may fall.
The USA economy decline was the main factor that pushed the downturns to other countries, and adding to
the internal weaknesses of each country made conditions worse.
The biggest economic crisis from 1929 had negative consequences also for Europe, South
America, Australia, Africa, or Asia.
36

This period of decline had influenced also the politically aspects all over the world, by
abandoning of classic economic liberal approaches and leading the way to neo-liberalism, or
extremism.
Even if there is similitude that makes it to be compared with that one, we must say that
the present economical conditions in such process of globalization make it not having the
consequences of that time.
One reason is given by the richness of global economy, which allows all countries not to get the
figures of that time: regarding the unemployment, industrial activity, and all sectors.
So, depression is a necessary phase by which the market economy may bloom and liquidates the economic
mistake, and reestablishes some proportions between consumption and investment.
In this context the accounting process doesn’t make any exception. I will start from the
premise that the cash situation must be presented more complex as a solution to express the
continuity of a company’s activity.
So we are proposing that for this statement to base the accounting records. ��¢ £�£§�¢��¢¢�£§�¡¤©�¦�£§�¢©¥¥���©�§�£ ��¦¥¥���¦�¦¢§���£��©¤��¢�£¥���©���£�¢�¢§��©�¥¢¤¢¥¦��£���©§��¦§�©¤�£�¦©§�¤©�
For this issue we suggest an increasing of the Accounting Plan by adding some new
analytics and synthetics. Also, it will be presented this statement for two big companies from
Romania that are developing their activity in different markets, analyzing this aspect in decline
period.
How can be treasury accounting – a key – in a crisis period?
Regarding this economic evolution, the accounting aspect doesn’t make any exception of
according more attention to the financial record. The main request in such conditions is having a
strong cash situation. So, by practicing cash accounting in the meantime with an accrual one is a
backup for depression periods.
In such conditions, there is a determinate period of “waiting” when people are waiting for
see which is the company’s behavior, firms are waiting to see which the governmental solutions
are and the institutional is trying to be in accordance with the international rules as a result of the
globalization process.
Now, we are living another moment of economic decline from October 2008. In the last
few months it is demonstrated that in such moment using just the accrual is not a solution
because cash is that express the financial power of a firm.
Like on the 29’s, now, the main reasons of getting depression were represented by the
capital market stock exchange and real estate that touched mountainous figures, driving to an
inexistent richness of the companies and global economy.
Also, regarding this presentation we mustn’t ignore the accounting aspects.
It is already known that the engagement accounting express only the present incomes and
expenses which are engaged for the moment and not the cash in-outflow, which are paid or
collected.
Because de cash situation is an important issue for a company, I try to purpose another
way of recording the treasury operations.
37

This represents to construct some temporal accounts – like those of incomings and
expenses which could be closed through the permanent treasury account. This solution is almost
the same with the Profit and loss account reasoning.
So the increasing and decreasing of the economic advantages will not appear directly in
the balance sheet account. It will be collected and paid using the seasonal accounts (groups
5.1.xxx and 5.2.xxx). So, these accounts must be classified depending on the nature of activity
(operating, investing and financing). Even if is complicate as profit and loss account (with
incoming and expenses accounts – 6 th and 7 th classes), this general cash account must be closed
by transferring all analytical accounts.
Generally talking it is used a systematic recording because we are interested on the cash
flow nature (paying the providers or dividends etc), and also the nature of element that is
involved (cash in hand, or banking accounts, etc.).
So, all cash in/out - flows should be first of all collected in or paid from those temporal
accounts that will be after that closed by general cash account which going to express a final
value of treasury but also all information regarding the activities that generated it.
So, the 5 th classes that express cash and banking accounts may be divided into 2
synthetics groups: 5.1.xxx - Cash inflows and 5.2.xxx - Cash outflows and those must be split
into 3 activities each of one in following analytics:
5.1.1. / 5.2.1. Operating activities
5.1.2. / 5.2.2. Investing activities and
5.1.3. / 5.2.3. Financing activities
So the accounts of inflows will function as an assets account and will start by debiting it,
and the accounts of outflows will function as a liabilities (passive) account and will start by
crediting it.
Those two synthetics groups will be divided in analytical accounts according to the
activity.
We must mention that these accounts will behavior like the income and expense ones,
that’s will be closed through a general account of cash given by 5.0.x – Cash and banking
accounts – from the assets accounts - on the last day of a determinate period.
Also each of these accounts may be split into treasury in hand – cash inflows and
outflows or banking accounts and other way of expressing cash (in paper form)
For example:
401.1 = 5.2.1.1 (paying the provider/manufacturer) (1)
5.1.1.1 = 411.1 (cash in from a customer) (2)
So, in the end of the period (month), the final value will be:
5.2.1.1 = 501 (3) and 501 = 5.1.1.1 (4)
For a good understanding let’s take a look over the next figure which expresses the
structure of General Cash Account:
Figure 1 – General Cash Account Form
38

Classes 5 th –
Cash and
banking
accounts
Cash Inflows –
Assets
Cash Outflows –
Liabilities
Operating
activities
Financing
activities
Investing
activities
Operating
activities
Financing
activities
Investing
activities
Cash inflows – treasury in hand
Banking inflows/other forms
Cash inflows – treasury in hand
Banking inflows/other forms
Cash inflows – treasury in hand
Banking inflows/other forms
Cash outflows – treasury in hand
Banking outflows/other forms
Cash outflows – treasury in hand
Banking outflows/other forms
Cash outflows – treasury in hand
Banking outflows/other forms
So, the General Cash Account will be just like the Profit and loss account.
The main aspect of this intention is that it makes the cash flow statements to be based on
the accounting records not only on the information from the Balance sheet and Profit and Loss
Account.
The limit of the Cash flow statement (now) is also given by the simplistic form of
exposure, being present just some values without any additional information (that may be use it
by implementing this kind of recording).
According more attention to the cash situation doesn’t mean to ignore the accruals
because it allows us to know which are the future collects and payments from the past and present
revenues and expenses.
In these circumstances (a strong cash situation) it doesn’t mean that a depression will not
appear but its consequences may be decreased.
Now, we may appreciate that the Cash flow Statement it is basing on the information
resulted from the Balance Sheet and Profit and Loss Account without any own recording. So, the
treasury level may be determinate (for the moment) in a residual manner by starting from those
two statements.
Also it is remarkable that this situation has more an economic – financial vision and not
an accounting one.
That’s why a recommendation is that all operations that use cash to be recorded also in
accounting process, even if this will involve an increasing number of accounts with some
39

synthetics and analytical for these three kinds of activities especially in the companies which
have an important and continually cash transfer or have a variable treasury for small periods.
So, the only limit or disadvantage is represented by this increasing of accounting plan and
also of the accounting process in a company by using other some accounts. But this is the only
way of evaluating correctly the cash situation first of all in a crisis period (and not only), when
the true richness is expressed by the treasury situation.
Cash Flow – from the theory and practice
For a good understanding we are going to analyze the Cash Flow Statement of 2 big
companies from Romania which are developing their activity in different areas. We are talking
about: SC Automobile Craiova SA and SC Rompetrol Well Services SA.
The study will be presented for the period 2007 – 2008 following to expose which is the
impact of the crisis for every market in which those companies are active: automobile market and
earth oil market.
SC Automobile Craiova SA is the biggest Romanian auto producer and starting from
September 1999 it is part of the French Renault Group. Its main activity is to produce and
commerce automobile, spare parts, machines and other installations for auto industry.
If we study the financial statements from 2007 – 2008 and analyze only Balance Sheet or
Profit and Loss Account is not sufficient to form a correct image for cash situation. So, we are
going to study the Cash Flow Statement – the net cash flow for each type of activity, by
evidencing the treasury situation utility in the recession time (2008 – year of starting the decline
period).
Let’s take a look over the net cash flow repartition:
Tabel 1 – Cash Flow for types of activity �£��©¤¥¡�����©�©�¦�¢ �¤£¦©�£�� ¢££¤ ¢££¥ �§�¦�£�©¤¥
Cash flow from the operating activities 748.626.911,00 532.177.230,00
-
Cash flow from the investing activities -628.097.340,00 371.960.165,00
Cash flow from the financing activities 281.074.043,00 -31.864.709,00
Cash flow evolution 401.603.614,00 128.352.356,00
Cash - from the start of period 10.992.155,00 412.595.767,00
Cash - in the end of period 412.595.769,00 540.948.123,00
Graphically (Graphic 1) will be:
40

Values
1.000.000.000,00
800.000.000,00
600.000.000,00
400.000.000,00
200.000.000,00
0,00
-200.000.000,00
-400.000.000,00
-600.000.000,00
-800.000.000,00
Cash flow evolution on types of activities
Cash flow from
the operating
activities
Cash flow from
the investing
activities
Cash flow
Cash flow from
the financing
activities
In 2007 we see that, basing on its main activity the company made investments in new
products to assure a strong competitive on a market that is more and more scramble. Also, the
financing activity has increasing. We must remark that 2007 is the year of bloom for the auto
market, so the net treasury recording a value of 412.595.769,00 RON from 10.992.155,00 RON.
Regarding the next year’s values we must mention the national and international context
has record a decline period of recession in all kind of activities. So this market doesn’t make any
exception, after a period of investing in this goods, the population has renounce for moment of it.
We are able to see that all activities had decreased figures. Even thought the operating
activity is enough to cover the investments and financing activity but not like in 2007. This
evolution is basing on the cash inflow from the start of 2008, when the crisis effect doesn’t
feeling, recoding in the end of the year 540.948.123,00 RON.
So, we may see that the presented company is part of a sector with an increased potential but vulnerable of
any changes of the market when the economic conditions generate a decline background.
Regarding the second company Rompetrol Well Services (RWS) is a member company of Rompetrol NV
Group since 2000, specialized in well services for the extraction of crude oil and natural gas. RWS offers specialized
services in oil and natural gas fields at the national and international level.
Let’s take a look over the net cash flow repartition:
SC Rompetrol Well Services - Cash Flow Statement 2007 -2008:
2007
2008
Tabel 2 – Cash Flow for types of activity ¢££¤ ¢££¥ �§�¦�£�©¤¥¡�£��©¤¥
Cash flow from the operating activities 16.970.754,00 6.425.635,00
-
Cash flow from the investing activities -9.400.501,00 12.942.600,00
41

Cash flow from the financing activities -9.457,00 -168.909,00
Cash flow evolution 7.560.796,00 -6.685.874,00
Cash - from the start of period 8.473.147,00 16.033.943,00
Cash - in the end of period 16.033.943,00 9.348.069,00
Graphically (Graphic 2) will be:
Values
20.000.000,00
15.000.000,00
10.000.000,00
5.000.000,00
0,00
-5.000.000,00
-10.000.000,00
-15.000.000,00
Cash flow evolution on types of activities
Cash flow from the
operating activities
Cash flow from the
investing activities
Cash flow
Cash flow from the
financing activities
Also, in this case we may see the influence of the crisis period, represented by a
decreasing of net cash flow. This is the result of the main activity (operating) especially because
being on a market which depends of other firms that are using their products and services. So, the
operating cash flow decreases from 16,970,754.00 RON to 6,425,635.00 RON, adding to that
evolution a strong investments process from -9.400.501,00 RON to -12.942.600,00 RON.
We are able to see that between theory and practice there are some limits regarding the
interpretation of the results for both cases up presented from the cash statements point of view.
There are 2 lists of increasing and decreasing of some elements of balance sheet and profit and
loss account, but we can’t evaluate all operations that generate liquidities transfer.
The correctly evaluation of in-out cash flow may be a base for determinate the economic
and financial stability in crisis conditions, especially for those companies that involve a high
level of cash transfer.
Conclusion
Coming back to the proposal of a new method of preparing Cash Flow Statement, this is
influenced by those two statements presented which are not very detailed being just a simple list
of increasing or decreasing of some elements from balance sheet. This limited aspect of the
2007
2008
42

statement is also sustained by the IAS 7 – Cash Flow Statement and other legal procedures that
present just a list o few examples of operations for those three activities.
So, by studying the Cash Flow Statement for these companies we can’t make a correct
evaluation of all influences that generated operations with cash. We may appreciate that we must
use also other financial statements (balance sheet, profit and loss account informative date or
some explicative notes).
For instance, we recommend for preparing this statement by practicing accounting records
for an objective evaluation of correctness and utility of all cash actions. Also, in our presented
situations we may observe exactly which are the implications for each activity that used cash and
or which was its finality and not the evolution for the total account.
Also, this article research was not proposing to change a financial statement – Cash Flow
Statement – but to offer a solution for improving the information that is offered, basing on
accounting records especially in time of recession, so to evaluate correctly the financial
stabilization of a company.
References
1. Murray N. Rothbard – “Economic Depressions: Their Cause and Cure” - published as a
minibook by the Constitutional Alliance of Lansing, Michigan
2. Randall Parker - “An Overview of the Great Depression”- East Carolina University
3. Great Depression – Wikipedia – disponibil on-line
¥¡�¡�§����������¢¨©¢¦§��§�§©¢�¢¨¡©¨¢�����¡�§§�¨©�¢¡§��¡�§¢¦§©§¢�¢¡¢������¦��¡���¡�§��¦��¢¨�¨¢�
¡¢£¤¥¦§¨©�¡���¢¨¡©��¡�¢¦§�¨©�©�¨���¢�¢§�§©¢��¡��¡¢¦�¡���©¨§�¨�©¡¢�§¢���¨¢¨©��¡�¢¦§�§�����������¢��
43

COST MANAGEMENT IN THE CONDITIONS OF THE ACTUAL
WORLD FINANCIAL CRISIS IN ROMANIA AND AT
EUROPEAN LEVEL
Bana ( Panciu ) Stefania – Eliza, Sgardea Florin
The Academy of Economic Studies, Bucharest Romania
E-mail: elizabana@yahoo.com
Introduction
At European level, in 2009, one can identify three aspects of the world financial crisis: a credit crisis, an
economic system crisis and a psychological crisis related to consumption. In this material we will only deal with the
economic aspect, meaning the crisis impact over the growth and development of the Romanian enterprises in the
actual conditions of the economic environment and also of the changes of logics that are imposed at European level.
In this paper we wanted to show the importance of the costs of providing the necessary information to the
management in order to take the best decisions in crisis conditions. We considered the following objectives that an
enterprise should have in the conditions of an unfavourable economic environment: the importance of the costs with
the wages in the cost structure of the enterprise, the analysis of the hidden costs, the investment policy in crisis
conditions, the expenses with financing on short term, the readjustment of the commercial contracts and limiting the
expenses with external labour conscription, the sales growth policy by diminishing the advertising expenses, the
theme of qualifying the work force by starting national programs of work force reconversion.
Crisis periods have their own characteristics. The first and the most important is the fact that they produce
big changes. These changes don’t appear when an economy works at full speed ahead, when new jobs are available
and wages grow from year to year, because when we are dealing with a positive economical dynamic it is hard to
believe that there is a motivation for important measures. The crisis is more suitable to drastic decisions. These are
the moments when constraints and pressures appear and especially when the most important and tough questions are
raised, questions that require categorical answers. These are tough times and ignoring them and smoothening their
answers - although the crisis demands them - are the mistakes of troubled times. These are trains of big changes that
pass only once through the station.
Under the double-effect of the pressure coming from the competition and the world financial crisis, the
enterprises feel the need to understand better their costs in order to determine with maximum precision the selling
prices and the limits that can be achieved for each product. It’s not only about prevision, there should also be
considered the necessary ways in order to achieve the goals. That’s how we can explain the development of the
today’s managerial control and of its favourite instrument, the analytic accounting of which no enterprise in Romania
or Europe could be spared, and this is because behind the demand and offer of all price-competition there lies,
indirectly, the cost-competition.
��¤�����©¢¤¢¤§�£�¤�� ©�£��§��¢£©¨¨��£�����¢��§�����©��£¤�¤�¤�����§��¤�¤¢� © ���£©¨¡¨��£��
As a consequence, to calculate, monitor and control costs represents only one of the aspects of performance
of which we are going talk about in this study. To manage costs involves organizing a managerial accounting that
should allow the calculation, analysis and reporting of these costs according to the needs of the management.
Managerial accounting should not solve only operative and operational aspects related to costs, but also strategic
aspects related to the mission and vision of the enterprise. Therefore, we believe that it would be necessary to
��¤£���¢�©�£��¢¤�©¢�£����¤�¢��§��£������£�§�¤�£������¤�©¨§©�£��©���¢��£��¢�¡���©����¤ ©¢¤ ��¤¢¤�§¨����©�©��¨¨¤��£��£���¤�©�©�¤¢£©¨©���§��£��� ��¤����¤£���¢�©�£��¢¤�©¢�£����¤�����£��¢��£�¤�� £��¤�¤¢©¨�� ��¤©���§��£��� ��¤��¡�£���¢��¤��¤£��§��£�£¤��£��¤�£�£���©££����¢©�£�£��©¨¨ ���¤¤¨¤�¤�����
44

organize a Strategic Managerial Accounting, mainly due to the need for establishing some viable strategic goals
integrated into the market demands. These goals should take into account the existing and potential competitors.
The calculation of process costs (Activity-Based Costing or ABC ) is one of the last achievements in the cost
calculation domain. Its origin is in U.S.A. Its base is considered to be the „The hidden factory” paper, written and
published by Jeffrey G. Miller and Thomas E. Vollmann. The two authors submitted the sectors and the places of
common costs (indirect) to a critical study, reaching the conclusion that the crucial step in indirect cost control
include the elaboration of a model that details and structures the causes of these costs. The first attempt of achieving
such a new system in costs calculation was made in 1987 by Kaplan, Cooper and Johnoson.
We consider as causes of using the process costs method in the conditions of world economic crisis, the
following:
1) changes of the strategic position of the company;
2) changes in the demand for information for management;
3) deficits of the calculation systems for the existing costs.
1) Changes of the strategic position of the enterprise
The strategic positions of the enterprises have changed a lot because of the economic crisis. This happened
due to the changes occurred in the organization’s environment. These changes were influenced by the necessity of
keeping the enterprise on the market although the purchasing power has decreased. This was done by forgoing shortterm
financing for the consumption needs of the population. Due to the sharpening of the competition on the market,
there is a tendency to reduce costs, improve product’s quality and develop new products and therefore the life of the
products is shortened.
Because of these reasons, the size and the importance of the indirect and common costs sectors grows
compared to that of the production sectors. These modifications of activities contribute to the modifications in the
costs structure, the importance of the individual direct costs decreases in the favour of the common indirect costs,
and this happens in the same time with the growth of the fixed costs.
2) Changes in the demand for information for management
Within the enterprise’s decisions, in the foreground, lie new aspects, like:
- Preparing and providing information about costs, related to a multitude of objects of costs calculation;
- Reducing of the manufacturing batches sizes;
- Determining an optimal number of the types of products;
- Determining the costs for specific orders;
- Controlling the economic effectiveness in the most important sectors of the indirect common costs.
The necessary information refers to the entire value creation chain in an enterprise, including all the production
sectors and auxiliary activity sectors. Also it is essential that managers concentrate on both the internal and external
factors of the organization. We believe that the most important objectives in costs control management are the
following (the objectives were selected after an analysis of the accounting literature):
To provide information for strategic planning - information about competition, strategy, external factors and
internal performance;
To provide information for strategic control and to measure financial and non-financial performance;
To give information for benchmarking;
To provide information about the products and about the lifecycle of the products.
All organizations should prepare a strategic plan based on a modern approach: to analyze the markets, the
competition and the external environment, and after doing this, to set the objectives. The key point of a strategic plan
is the external analysis because the environment (economic, social and cultural) influences the objectives. In our
opinion, the external factors that should be analyzed are: interest rate, exchange rate, socio-cultural factors,
technology, competitive environment, the sustainable development of the frame work etc. It is important for
managers to know how these factors act because they must respond to the environment by:
Introducing quality programs and calculating costs and revenues;
45

Controlling the production process more efficiently, eliminating losses and inventory and reducing different
costs (acquisition, production, total);
Organizing a total quality management (TQM) and calculating the quality cost;
Controlling the product lifecycles and applying a life-cycle costing method;
Introducing a Kaizen Costing Process and managing the cost;
Changing the structure of the business with a more decentralized one and calculating the performance for
each manager so that their activity should be appreciated.
3) Deficits of the calculation systems for the existing costs
The traditional systems of cost calculation are oriented towards the actual production sectors. The common
indirect costs are distributed in the products through some reference sizes. Discounting indirect costs is done by
adding more in some value sizes.
This indirect costs allocation is not complying with the opportunity principle, and this can lead to wrong
strategic decisions.
We will continue with the presentation of a study which compares the traditional costs calculation methods
and the modern costs calculation methods.
The contribution of the ABC method in the management of an enterprise can be represented in the following
figure:
Resources Costs indicators
Activities
Cost objects
Performance
measurement
Activity indicators
Costs and margins
Activity based management (ABM)
- Processes analysis
- Value chain analysis
- Activity budgets analysis
- Planning and activity projects
- Investment choice
- The study of activity levels
- Scoreboard
Cost management (ABC)
- Products cost
- Clients profitability
- Profitability of the life cycle of products
Figure nr. 1. The contribution of ABC method in enterprise management.
In order to present the application of the ABC method, we considered two items: the electrical copper
single-phase switchboard, model 116 (A) and the electrical aluminum three-phase switchboard, model 116 (B), about
which we know the following information:
Table nr.1
Elements U.M. A B Total
Direct expenses Ron 2.000 3.600 5.600
Indirect expenses of production Ron - - 2.200
General administrative expenses Ron - - 500
Selling expenses Ron - - 300
Manufactured quantity piece 400 600 1000
46

- production cost per unit: 5.570,25/600 = 9,284 RON
3) Selling price:
- for product A: 7,574 + 20%X = X; A = 9,468 RON
- for product B: 9,284 + 20%Y = Y; B = 11,605 RON
3) The result is: (9,468 – 7,574) x 400 + (11,605 – 9,284) x 600 = 2.150,2 RON – Profit.
Causal relationship between resources and products
Calculus
Classic Methods ABC Method
Resources: Constant expenses Resources consumed = expenses
( effective expenses ) ( activities consequences )
Auxiliary
Centers
Principal
Centers
Products cost
Induce (involve) the costs
(resource consumers)
Activities
(actions on activities)
Induce (involve activities)
The consumption generates the products cost Products consume activities
48

INDIRECT EXPENSES
DIRECT
EXPENSES
AFFECTING EXPENSES
ON
The scheme for calculating the cost of activities is as
follows:
A1
A2
A3
An-1
An
A1 Center
Regr.
No.1
Regarding this, it can be appreciate that, by destination, the process costs calculation is directed by longterm
decisions and can be considered a support for strategic business issues. The whole functional body of an
enterprise is represented by activities and processes, the processes being positioned under costs report, horizontally
related to the traditional splitting of the places of the costs.
ABC Method is the result of some research supported by:
the need to eliminate waste;
identifying cause-effect relationship between costs and products;
rational allocation of expenditure on products, not using a global and imprecise manner;
integration in the cost calculation of the differences on spending imposed by customizing products.
The basic principle of the ABC method is: activities consume resources and products consume activities. ABC
method determines the cost of the product by considering the activities that take place when it’s manufactured,
offering in this way the advantage of a more real cost. With the help of this cost strategic decisions can be made.
The basic premises of ABC method, in fact the logic behind this method is the following:
Cost objects consume activities;
Activities consume resources;
The consumption of resources is one that generates costs;
Understanding the causal relationships is the basis of a successful management.
A3
An-1 Center
Regr.
m-1
A2 Center
Regr.
An m
Cost of
Prod 1
Cost of
Prod 2
Cost of
Prod 3
49

ABC method focuses over a production cycle, starting from the premise that for the production of a cost object some
activities are executed, activities which in turn are consume resources.
This method recognizes causal relationship between activities and the occurrence of costs.
ABC method is used in cost management and in performance management. Performance means efficiency,
effectiveness and economy. (EEE)
The traditional method involves the following steps:
Determining the production cost = direct expenses + indirect expenses of production
Determining the completely commercial cost = production cost + general administrative expenses + selling expenses
1) The total of direct expenses = 2.000 + 3.600 = 5.600 RON
2) Allocation of indirect expenses:
- calculating the additional coefficient:
Ks =2.200 / 5.600 = 0,39
- calculating the shares of allocation on products:
A: 2.000 x 0,39 = 780 RON
B: 3.600 x 0,39 = 1.420 RON
Total: 2.200 RON
3) Allocation of general administrative expenses:
- calculating the additional coefficient:
Ks =500 / 7.800 = 0,06
- calculating the shares of allocation on products:
A: 2.780 x 0,06 = 166,8 RON
B: 5.020 x 0,06 = 333,2 RON
Total: 500,0 RON
4) Allocation of sales expenses:
- calculating the additional coefficient:
Ks = 300 / 7.800 = 0,04
- calculating the shares of allocation on products:
A: 2.780 x 0,04 = 111,2 RON
B: 5.020 x 0,04 = 188,8 RON
Total: 300,0 RON
5) The complete commercial cost:
Table nr. 4.
Calculation article A B
Direct expenses 2.000 3.600
Indirect expenses of production 780 1.420
Production cost 2.780 5.020
General administrative expenses 166,8 333,2
Sales expenses 111,2 188,8
Complete commercial cost 3.058 5.542
Quantity 400 600
Complete commercial cost per unit 7,645 9,237
50

6) Selling price:
- for product A: 7,645 + 20%X = X; A = 9,556 RON
- for product B: 9,237 + 20%Y = Y; B = 11,546 RON
7) The result is: (9,556 – 7,645) x 400 + (11,546 – 9,237) x 600 = 2.149,8 RON – Profit
CONCLUSIONS:
Started through signals more or less shy 2 years ago, especially within the USA economy, the world
financial crisis, with direct and indirect repercussions upon the world and national economies, is no longer something
new. Small and large companies, players from all areas of activity – from world-class ones (giants/symbols of
national economies of the most developed states in the world) to the small investors, simple citizens – from the
richest to the poorest – began to feel the negative effects caused by the international financial crisis.
Many companies went bankrupt, some have temporarily suspended their activity, others have reduced their
workforce – increasing unemployment, decreasing of the purchasing power and reducing the demand of goods from
luxury to consumer.
At least the next 4-6 months will continue to be characterized by incertitude, but managers will have to
make decisions that will influence both short term results and medium/long-term business development potential.
The price is a market and a reality instrument, which under the requirement of linking the demand and the
offer, obtains a complex character. This character, in the context of the actual world economic crisis, is magnified by
the market characteristics in which it manifests and by the legislative framework that regulates the formation of
prices, itself perfectible.
The price of a good or a resource is an item that shows what you must give in order to obtain that good or
resource.
The reduction of the production cost determines the stability or even the reduction of the prices, the increase
in the products competitiveness in the competition battle on the national market as well as on the external market.
In order to reduce costs, the manufacturer must seek and find the reserves to reduce the consumption of
production factors, to act simultaneously in all the compartments of the enterprise, on all the production factors, in all
the phases of the economical activities and to apply the possible measures to diminish costs in compliance with the
requirements of the competition imposed by the market.
The reduction of the production cost should have place without negative influences over the quality of the
material goods and services, but, on the contrary, it should ensure a growth of quality. Reducing the costs by
reducing the quality is anti-economical. The general trend imposed by the market competition is that the economic
assets to incorporate in their costs less raw materials, high quality work, and to be obtained with the most modern
technology.
The careful choice of the elements and results that the analytical accounting users need is imposed. The
users must always follow two fundamental principles: – several
significant figures are more efficient than a voluminous documentation that can’t be consulted because of lack of
time; – an approximate but sufficiently accurate information, rapidly obtained, is often
more useful than a precise information known later. ��¤�¢£��£�¨¤��¢¤¨¤�©��¤ ��¤�¢£��£�¨¤����¤��¢¤���¨����£��£�£�©�£��
Key Words:
Managerial accounting, internal transfer prices, hidden costs.
References:
1) Briciu Sorin, Burja Vasile, ����©�£¨£�©�¤�¤�¤��£§�¤��©¨�§¨©�£©¥£©�©¨£�©����§¢£¨�¢�Editura Ulise, Alba Iulia,
2004;
2) Dumitru Corina Graziella, Ioanăş Corina, ����©�£¨£�©�¤©�¤�¤��£§�¤¥£¤�©¨§©¢¤©�¤¢��¢�©��¤¨�¢�Editura
Universitară, Bucureşti, 2005;
3) Ebbeken Klaus, Possler Ladislau, Ristea Mihai, �©¨�§¨©�£©¥£�©�©�¤�¤��§¨����§¢£¨�¢�Editura Teora, Bucureşti,
2000;
51

4) Epuran Mihail, BăbăiŃă Valeria, Grosu Corina, ����©�£¨£�©�¤¥£����¢�¨�¤�¤��£§�¤�Editura Economică, Bucureşti,
1999;
5) Ionaşcu Ion, Filip Andrei Tiberiu, Stere Mihai, ����¢�¨�¤�¤��£§�¤, Editura Economică, Bucureşti, 2003.
Articles and studies: ¡�§¢©¢¤©¥£¤�©¨§©¢¤©�¤¢��¢�©��¤£¢��¢¤�¢£��¤¢££�¢£��¤���©����Revista
1) Brăescu Mădălina, Jinga Gabriel,
Contabilitate şi audit, Contabilitate şi Informatică de gestiune, nr. ¡¡¡�¡���¢��¢�;
2)Lucey T., ©�©�¤�¤������§��£���Third Edition, D.P. Publication, London, 1992;
3) Yoram Eden, Boaz Ronen,
�¤FMAC (Financial and Management Accounting Committee ), în
5) Mădălina Brăescu, Gabriel Jinga,
Revista Contabilitate şi audit, Contabilitate şi Informatică de gestiune, nr. 2/2002, pag. 36;
6) Sorin Briciu, Vasile Burja, ����©�£¨£�©�¤�¤�¤��£§�¤��©¨�§¨©�£©¥£©�©¨£�©����§¢£¨�¢�Editura Ulise, Alba Iulia,
2/2002;����
2004, pag. 199;
7) T. Lucey , ©�©�¤�¤������§��£���Third Edition, D.P. Publication, London, 1992, pag. 31;
��articol Yoram Eden, Boaz
���� ¡¡¡�£�©���¢��
Ronen,
���£���¢¤
publicat
�¢��¤��£��©¨����§��©���£��§�£�¤��¡
de
FMAC (Financial and Management Accounting Committee ),
���£�£� �©�¤�����£�������©�����£�£� ¡�§¢©¢¤©¥£¤�©¨§©¢¤©�¤¢��¢�©��¤£¢��¢¤�¢£��¤¢££�¢£��¤���©���� �¢��¤��£��©¨����§��©���£��§�£�¤��� în ���£���¢¤ ¡¡¡�£�©���¢�� ���� ¤¢£������ �¢�£�¨¤��� ��©¢�£��¨�§�¨£�©� ©�©�¤�¤����� �©�¤�
¤¢£������
�¢�£�¨¤��� ©�©�¤�¤����� �©�¤� �©�¤�����£�������©�����£�£� ���£�£�
52

Saving Companies Affected by the Economic Crisis – at hand of
Stakeholders and Accounting Professionals
Claudia-Maria Bobe, Mihaela Mocanu
Academy of Economic Studies, Bucharest, Romania
clau_sunny@yahoo.com
mocanu.miki@gmail.com
Abstract
The current economic environment is characterized by uncertainties related to price volatility, difficulties in the
valuation of financial instruments, as well as of assets and liabilities in general. More and more companies face
liquidity issues that could even threaten their existence. Under these circumstances, saving such companies becomes
a major concern for the ones directly interested, “survival” being the term most used in the current state of the
world’s economy.
In the context of this economic turmoil at international level, the main stakeholders and the accounting professionals
find themselves in the position of revising their procedures, objectives, strategies, but also their behavior, their
attitude in general, in order to limit or even eliminate the negative consequences of the financial crisis. From our
perspectives, the communication among company, stakeholders, and auditors represents the fundament of a
successful business strategy. However, communication difficulties could be encountered, especially under conditions
of uncertainty and crisis.
The present article intends to identify the opportunities and threats generated by the economic crisis and to analyze
the information flows among company, stakeholders and accounting professionals under circumstances in which the
going concern assumption is threatened. Our paper emphasizes the importance of communication among company,
stakeholders, and auditors in saving the firms affected by the economic crisis.
Keywords: economic turmoil, stakeholders, accounting professionals, communication, transparency
JEL Classification: G30
Introduction
The break-out of the world economic crisis, which has initially started with a financial crisis, caused by
unprecedented increases in credits (stimulated by a long period of moderate financial and economic conditions) is
opening the road to changes affecting companies, stakeholders and the relationships between them, as well as to
changes at the level of the whole society. These changes are rather answers, reactions, effects of the adaptation to the
new unfavorable economic background. Usually, change involves multiple, ample, long processes, that are necessary
for survival within new economic coordinates and which use specific tools, whereas one of the most important is
communication.
Our paper presents the current situation and the causes of the economic crisis, aspects related to corporate
governance and the role of the stakeholders in the enterprise’s life and the economic environment, but also the
reaction of the stakeholders to the current economic changes. Last but not least, we presented the role and
importance of communication in times of financial crisis, as main survival factor and even exit from the crisis.
1. Current Situation and Causes of the Economic Crisis
The financial crisis that broke out in the summer of 2007 is striking in its magnitude, its speed of spreading
internationally and in its persistence, since it is far from being over. At present, the financial world is characterized
by risk adversity, reduced liquidity, price volatility, uncertainty regarding the future of financial institutions, doubts
53

elated to the quality of the structured credit products and uncertainty about the macroeconomic prospective in
general. A number of factors contributed to the break out of the current economic crisis, among which: the
expansionary macroeconomic policies of the United States of America to restore the economic growth affected
during the previous crisis from the first half of the century, excessive distribution of credit, the use of complex
financial instruments without having realistic image on the associated risks etc. Some authors also mention lack of
2008,
economic cooperation between major countries (�¤��¢�����¤�£�©��£©¨�¢£�£�
p. 3).
This turmoil in the most advanced financial markets was the consequence of an exceptional growth of credit,
stimulated by a long period characterized by benign financial and economic conditions. During that period, there
were extremely low real interest rates, whereas no liquidity problems existed, which raised the level of risk that
creditors, investors and intermediaries were willing to take on. In conjunction with this, financial innovations
expanded the system’s capacity to generate credit assets and leverage but outpaced its capacity to manage the
2008, ©¢£¤�©��¦���£�§�£��©¨�¤�£¨£¤��¤ ��¢§������©��£��
associated risks. (�¤��¢�����¤�£�©��£©¨��©�£¨£�
p.
5). A sophisticated and apparently stable system was established, which consisted in originating extremely complex
financial instruments that allowed banks to offload risks (especially in the United States of America). These financial
instruments were then distributed and bought – mostly in Europe, without paying proper attention to the underlying
2008,
assets and the real economic fundament of these instruments. (�¤��¢�����¤�£�©��£©¨�¢£�£�
p. 3).
The expansion of complex financial instruments was also encouraged by favorable credit ratings that implied assets
were high-quality and low-risk. Financial guarantors contributed further to the perception that investment
opportunities were unlimited and of high quality. As a consequence, the perceived liquidity of credit instruments
increased. Additionally, several factors led to lowering the standards used in analyzing the eligibility of clients who
wanted to benefit from the products of the financial institutions. Some of these factors were: relatively stable
macroeconomic conditions, increased competitiveness among financial institutions, low interest rates, rising house
prices, weak government oversight. Thus, the products of the financial institutions (in particular credits) were given
much easier, and this lead in some cases to fraudulent practices
2008, p. 7).
2008, �£�©��£©¨��©�£¨£� ��¢§������©��£�� ©¢£¤�©��¦���£�§�£��©¨�¤�£¨£¤��¤ ©¢£¤�©��¦���£�§�£��©¨�¤�£¨£¤��¤ ���©��£�� ��¢§���
(�¤��¢�����¤�£�©��£©¨��©�£¨£�
Despite that, neither investors nor banks, and not even rating agencies correctly assessed the risks associated with
this kind of financial instruments that deterioration in general economic conditions would pose (�¤��¢�����¤
p. 5). Standard risk management ©¢£¤�©�� ��¢§������©��£��
instruments used by financial institutions were not appropriate in estimating the impact of potential losses connected
to structured credit products. The absence of a history of returns, the complexity of many of these products created
2008, ¦���£�§�£��©¨�¤�£¨£¤��¤
uncertainty regarding estimated risks (�¤��¢�����¤�£�©��£©¨��©�£¨£�
p. 7). Market participants underestimated default risks, market risks and liquidity risks.
In some banks, the control over off-balance sheet risks, as well as the communication across business lines and
functions was weak. As a result, when turmoil began, most companies, investors, other stakeholders, as well as the
society as a whole were not able to correctly and rapidly assess risk exposure. The stakeholders’ role is very
important in conjunction with risks, because they have enough instruments for saving the companies and the
economic environment from the imminent “disasters” that could be the consequences of the world’s economic crisis.
2. Corporate governance and the role of stakeholders in the company’s life and in the economic environment
In theory it is considered that the concept of enterprise refers to a single entity which operates harmoniously and
whose main goal is to maximize value and shareholder wealth. Due to the appearance of new elements and complex
needs, other views on the enterprise have been developed. Thus, the definition of the enterprise could be based on the
concept of social interest, with the purpose of generating wealth as a result of the participant’s collaboration in the
company’s life (shareholders, managers, creditors, employees, customers, suppliers, public power). Thus, the
objectives of a company are of social nature, but also relate to maximizing profits. (Feleagă N. 2006, p. 69). The
definition developed under the first theory leads to financial information directed towards investors, while the second
definition is oriented to satisfy the financial needs of all users (Feleagă N. 2006, p. 69).
One of the key factors that influence the efficient use of resources, the increase of the confidence shareholders have
in the enterprise managers, the success in achieving the company’s objectives and the economic efficiency is the
corporate governance system by which a company is controlled. This system promotes fairness and transparency at
company level, and consists in a set of rules of conduct that aims the welfare of the society as a whole, but mostly the
welfare of the shareholders and other stakeholders: managers, creditors, employees, customers, suppliers, public
power, etc. (¡�¢¨��©�£, 1998,7).
54

Shareholders, one of the key elements of the company, bring the funds necessary for the activity, and are in turn
interested that these funds are used and managed well and fairly by the managers appointed for this purpose. The
relationship between owners and managers is controversial, because the two categories of participants may have
different interests, often contradictory. For example, the shareholders have, in general, a greater preference for risk,
because their securities portfolio is diversified, while managers are more risk-adverse, because all financial interests
and of other nature focus on a single enterprise (Feleagă N. 2005, p. 171).
Agency theory, by which the company is seen as "a knot of contracts" (Feleagă N. 2005, p.51), is the one that makes
it possible to solve "the conflict of interests between the shareholders and the managers of an enterprise" (Feleagă N.
2005, p.170). This theory establishes a set of relationships, with mutual benefits, on the one hand, between
shareholders and managers, but also between other parties interested in the smooth running of the company
(employees, creditors, etc.). However, the shareholders-managers relationship is the one that generates the most
complex conflicts of interest and settling them is closely related to the organization of an effective system of
governance which "encourages that the interests of the managers are aligned to the ones of the shareholders"
(Feleagă N. 2005, p. 170).
Stimulating managers so that they fulfill their responsibilities with fairness refers in principle to financial benefits
(salary, implementation of a stock-option plan that creates benefits such as dividends and increases of value
generated by the sale of the company’s shares), but also to benefits in kind (company car, company house, etc.).
Auditors play an important role in the conflicts of interest between shareholders and managers. They make a fair,
impartial, independent evaluation of the financial statements of the enterprise, having the role of showing
shareholders the real situation. Through external audit, shareholders benefit from an important tool to assess the
efforts of managers in achieving the company’s goals, and in maximizing the wealth of owners.
Creditors are third parties who provide loans to companies, and look out for interest and principal. Thus, creditors are
directly interested in that company obtains profit as this will be the source of payment of the related loan interests.
As for the shareholders, the loans can be a viable solution for obtaining new funds, but the associated risk may be
high, because the effective administration of the equity thus obtained depends on the attitude, skills, and especially
on the interest of the manager.
Employees have multiple interests within a company. They represent one of the most important resources available
to a company. The main interests of the employees concern the remuneration level, the benefits in kind (meal and
gift tickets, phone, life insurance, trips, company car, etc.), the security and the work conditions etc. For this purpose,
the employees follow the evolution of profitability and the business continuity of the company.
Customers and suppliers are the trading partners of the company. Customers are interested in the ability of the
company to continue its activity and in its prices, because they are directly interested whether their supplier can
provide to them the goods/services they need for the smooth running of the activity. Suppliers have in view whether
the customer-company has sufficient resources to pay its financial debts (Feleagă N. 2005, p. 57).
The corporate governance system may differ depending on the importance given to the categories of participants, but
the relationship between shareholders and managers occupy the central position, as their relationship has the most
divergent elements.
3. The Impact of the Current Financial Crisis on the Main Stakeholders and Accounting Professionals
3.1. Managers, Investors and Auditors
Managers are the ones who, by using a series of laws, principles, methods etc., as well as their own competences and
abilities, run the company towards achieving its established purposes. They are charged by investors with using the
company’s resources (from equipment to employees’ knowledge and competences) in order to achieve business
success. For investors, who took financial risks, success means, in most of the cases, financial performance, namely
profit. However, the objective of maximizing profit set by investors is not always the objective of the managers, who
are often tempted to follow their own interest, at the expense of the investors. Under financial crisis, managers and
investors focus more on their own interests, sometimes opposite to one another. However, it may happen that the
objectives of the managers and those of the investors are the same, since both are interested in survival and exist
from the crisis.
Since investors do not always have the benefit direct contact to the responsible managers, the ones that act instead of
them and protect their interests are the financial auditors. Financial auditors are independent experts that express
their opinion on the financial statements of the companies, their interest being whether these statements provide a
true and fair view. Under financial crisis, the role of the external auditors has an increased importance, and banks and
55

supervisors rely more and more on the expertise and judgment of external auditors. An audit conducted in
accordance with international audit and ethics standards, under independence, integrity and professional competence,
2008, ©���©�££���§�¤¢�£�£��
can provide a number of benefits to institutions, companies, financial systems and supervisors (���¤¢�©¨©§�£�¢§©¨£�
p. 2).
Audits increase the confidence of market participants by increasing the credibility of the financial statements,
especially under economic turmoil. Although it is not one of their main objective, auditors can help identify
weaknesses in internal control relating to financial reporting and thus can contribute to safe and sound bank systems.
Most of the world’s credit institutions undergo audits, and supervisors rely more and more on high quality bank
audits that complement the supervisory processes. In the context of globalization, most audit companies expanded at
international level, and consequently, their structures are complex and corporate governance within audit companies
is characterized by difficulties in insuring transparency 2008, p. 8).
Therefore, the audit profession faces new challenges within the current financial crisis. ©���©�££���§�¤¢�£�£�� (���¤¢�©¨©§�£�¢§©¨£�
One of these challenges refers to testing the going concern assumption, which is fundamental in preparing financial
statements. Most of the financial statements are prepared based on the assumption that the entity is continuing in
business for the foreseeable future with neither the intention nor the necessity of bankruptcy, liquidation or reducing
activity (ISA 570). The auditor is in charge with verifying the appropriateness of this statement made by
management, as part of its responsibilities to prepare the financial statements of the company. Under economic crisis,
it is expected that more and more companies put question whether they will indeed continue as going concern in the
foreseeable ��£������¤¢�£���¤�§¢¢¤��������£����£¢���¤��2009, future (which usually means over a period of more than 12 months)
p. 5). As a consequence, the auditor will need to pay
particular attention in conducting the specific tests related to this aspect.
Before the financial crisis, auditors had a relatively passive role, because they analyzed the evidence on which the
management made the going concern assumption and investigated the soundness of this evidence. Nowadays,
auditors are challenged to take a more active role, to search in an alert and independent manner the factors that could
dismiss the management’s assumption and that could lead to issuing an adverse opinion. Another challenge for these
accounting professionals is auditing financial statements based on fair value measurement. Both measuring fair value
and verifying this measurement is difficult due to its complexity and involves subjectivity and uncertainty, especially
under crisis. Therefore, the auditor will need to develop his/her competences in order to adapt to the new situation.
3.2. Creditorii
The need for funding of a company can be satisfied through loans from bank lenders, from companies within the
group etc. To determine the ability of reimbursement of the loans, the bank lenders take into account the fair value of
the items, not the historical value. The prudence that they manifest may conduct to an undervaluation of the assets
and an overvaluation of the debts in order to ensure a safety margin (Feleagă N. 2005, p. 56).
(�§�£�����£�¤¢©�£���£��¤��¤����
Creditors assess the liquidity indicators of the companies funded, but also "the personal, technical, moral value of the
managers, the general situation of the activity branch the enterprise is part of, the general situation of the company
(the nature of products, the quality, the price, the customers, the suppliers) and the financial situation of the
enterprise "(Feleagă N. 2005, p.56). Bank creditors document their lending decision according to the company’s size
and closely analyze the evolution of loans reimbursement. However, due to non-compliance with the general
principles related to loans, the imprudence of bank creditors led to the break-out of the global financial crisis in 2007.
As a normal reaction, in times of financial crisis, the attention of bank creditors grows significantly. While in normal
conditions, prudence is the basic principle, during financial crisis, lenders focus on excessive prudence, on business
continuity of companies, on their ability to maintain profits, on the degree of liquidity, but also on the human factor,
especially on managers, on their behavior, the measures taken to survive, and also to exit the crisis.
The refusal of bank creditors to fund a company can lead to a liquidity crisis. The permanent communication
between creditors and managers, the fair description of the company’s situation, the flexibility, the transparency and
the fairness are key factors for establishing a viable relationship between creditors and companies. In crisis
conditions, survival is the main objective of the companies and funds are primary. However, if loans are not
efficiently used, it can lead to bankruptcy.
During difficult economic conditions, the loans from companies within the group represent a reliable alternative. The
conditions for obtaining such loans may be more permissive, the interests – lower, or the reimbursement periods –
longer. However, the funding alternative is available only to larger companies, who are part of a group of enterprises.
3.3. Other stakeholders – employees, customers, suppliers
3.3.1. Employees
56

Survival remains the biggest challenge in times of financial crisis. However, survival is understood in different ways
by the managers and the employees of a company. If managers believe that survival means reducing the number of
staff, for sure, the employees will think exactly the opposite, because the disposal would affect their welfare, as the
unemployment period may be longer than normal. On the other hand, accepting a number of employees too large in
comparison with the necessities of survival or continuation of activity can lead to inefficiency and even bankruptcy.
In crisis conditions, the employees are interested not to lose their job, and to maintain the same financial and other
benefits. Therefore, the permanent communication with their managers, the active participation in the business of the
company, or on the contrary, the more or less violent confrontations between managers and employees are some of
the possible effects related to the reaction of employees during these difficult conditions.
3.3.2. Customers and suppliers
Trading partners demonstrate more prudence when there are going concern issues. Customers are mainly interested
in the company’s going concern assumption, but they also have in mind the possibility of negotiating prices easier.
On the other hand, the suppliers are interested and analyze more strictly the profitability of the companies and their
ability to pay the financial liabilities. However, the monitoring of debits and deadlines is the main objective of
suppliers in times of financial crisis. The improvement of the relationships between the trading partners and the
companies can be achieved through communication and informational transparency.
The financial crisis leads to significant changes in the behavior of stakeholders. The reactions differ depending on
the role of the participants in the company’s life. To avoid bankruptcy and conflicts of interest, managers should
adopt a flexible attitude, adapt to the demands of the stakeholders involved and not at last, insure permanent
communication between company and interested parties.
4. Importance of communication under economic crisis
Most economic crisis lead to rumors, to distorted perceptions regarding the economic environment, to stress, to lack
of control, to panic, to disorientation, to uncertainty, to lack of security and even to major lack of balance in the
whole society. The first affected by the above mentioned facts are companies, their owners and managers, but also
other stakeholders and parties directly involved in the life of a company. They may have reactions such as denial,
avoidance of responsibility, disclaimer of culpability, justification. Finally, the reactions are transformed into
positive ones: acceptance, remediation, corrective actions, optimism and confidence. One of the factors that make the
transition from a negative attitude on the crisis to a survival-oriented behavior, if not to optimism, is the
communication between the company and stakeholders and between the company and the economic environment as
a whole (see figure 1).
Individuals react differently to a given situation. Their personality, temperament, and the environment in which they
have developed and worked, the psychological, social, economic, political factors and the factors of other nature
have led to different, complex, sometimes opposed reactions. Social context involves individual’s interaction, which
can be achieved mainly through communication. The role of communication is important because it can lead to
sustainable and productive relationships between individuals or to the opposite reactions of rejection, conflict, and
indifference. Human relationships influence the creation, the existence and the development of the enterprises, and of
the economic environment. Companies can not exist without individuals, whereas a powerful connection is created:
individuals depend on the existence and the proper functioning of companies, while companies cannot exist in the
absence of individuals.
The strong link that has been created between the different categories of individuals, due to the interactions between
them, had as starting point communication. In times of financial crisis, communication takes magnitude, since
individuals need accurate information on the facts (in order to eliminate rumors and distorted perceptions of the
economic environment). On the other hand, using communication and tools offered by psychology, individuals can
recover their balance (by eliminating stress, lack of control, panic and disorientation). Last but not least, the
uncertainty, and the lack of security and balance can be controlled and removed only when panic and disorientation
in the society are reduced. Thus, individuals can make correct and rational decisions related to the crisis situation,
can identify the causes, clear them off and restore the social and economic balance.
For these reasons, correcting the negative effects triggered by the economic crisis is the first step to getting out of the
crisis. However, the responsibility for these actions is to be taken by individuals (stakeholders) whose main tool is
communication.
57

Managers
Followed short-term objectives and
personal interests
Auditors
Took a passive role in testing the
going concern assumption
Rumours, distorted
perception on the
economic
environment
Financial Institutions
Credit expansion, complex financial
instruments
FINANCIAL CRISIS
Stress, lack of
control, panic,
desorientation
COMMUNICATION
Investitors
Underestimated investment risks
Employees
Rapacity in buying houses and other
goods without appropriate income �£�¦�¦¡£�¦©§
�©¤��§¢
Uncertainties, lack of
security, major lack
of balance within the
entire society
Figure 1: The phenomenon of financial crisis
Conclusions
The effects of the financial crisis that broke out in the summer of 2007 at international level are also felt today. The
uncertainty, the increasing number of cases of bankruptcy, the risk adversity of investors, the reduced liquidity, the
stricter credit conditions, the price volatility are only some of the features of the crisis phenomenon. All participants
in the economic life are affected, directly or indirectly, more or less, by the current crisis. As a consequence, changes
are necessary, both in attitude, but also in the undertaken actions, whereas communication is essential as instrument
of survival and exit from the crisis.
Managers, who are responsible for their company’s well-being, will need to develop survival strategies and powerful
instruments of risk management. Moreover, prudence and conservatism will characterize the attitudes of investors,
who before crisis started, were willing to take risks. Creditor, who proved to be quite tolerant in the period of credit
expansion, will become stricter in analyzing the eligibility of their potential clients. The importance of auditors will
increase, because creditors, investors and the public in general rely on their opinion as independent
��¤�¦�£�£§�¢�¦� �¤©���¢�¤¦¥¦¥ ��¢��¥©� ��¢�¤¦¥¦¥
expert.
58

Employees will become directly interested in the success or failure of the company where they work, due to their
dependency relationship with the employer. The driver for all these changes in attitude will be communication. �§�£�����£�¤¢©�£���£��¤��¤������£������¤¢�£���¤�§¢¢¤��������£����£¢���¤�������International
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triangle”. This project is co funded by European Social Fund through The Sectorial Operational Programme for
Human Resources Development 2007-2013, coordinated by The Bucharest Academy of Economic Studies.
59

CREATING VALUE FOR ROMANIAN COMPANIES
Academy of Economic Studies of Bucharest
IN THE PERIOD 2006-2008
Costin CIORA
Abstract �£�¢£¥�¤¦§�¦�£��¢�¢¤�¦§£§��¦¥�¢¤�©¤�£§�¢�£§�¦�¦¥��¢¤¢¥���©���¢�¤¢£�¦©§�£��¢¥�©¤��¢ ¥�£¤¢�©��¢¤¥���¢�£ ©¤©� ¢��¦�¢©�£�©��£§�¦¥��¢�£�¦�¦¡£�¦©§©���¢�©�£��£��¢���¦���£§ �§��¢¢�©§©�¦��©§�¢���©¤��¡�¦�¢���¢�¢�¢¤�¦§£�¦©§©���¢¥�©���¤¦�¢©�£�©��£§�
KEYWORDS: creating value, overall performance ©§�£��¢�¤¢£�¦©§��¦§£�����¢¤�©¤�¢�£�©��£¤£�¦�¢£§£��¥¦¥©�¤¢¥���¥�
INTRODUCTION
The primary objective of any company is to create value for its shareholders.
Creating value has become extremely important in the financial world as a series of new
indicators were developed for measurement.
Creating value for shareholders tends to become a major criterion of performance analysis at
large companies. The applicability of this type of analysis is very broad, covering companies
listed on the stock exchange and unlisted companies. A company creates value if it earns enough
to cover the cost of financial debt and the opportunity cost of capital.
�©��£§��¥£�¦�¦���©�¤¢£�¢�£��¢�©¤£��¦�¥¦§�¢¤¢¥��©��¢¤¥��¦�¢¥�£¤¢�©��¢¤¥��¤¢�¦�©¤¥� ¢���©�¢¢¥�¥����¦¢¤¥��©�£��©���§¦�����¢�©��£§��¥¥�£¤¢�©��¢¤¥���¦��£¤¢£�¥©��¢©�§¢¤¥� �£�¢�¤¦©¤¦���¡£§£¨¢¤¥£��©¦§�¢�����¢���¥���¤¥�¢�¢¤�£§¢§���¦¥¨©£����¤¢£�¦§¨ �¢¤�£§¢§��£��¢� �¤¢£�¦§¨�£��¢¦���¦¢¥£¤¢��¤§©§�£�¦�£�¨¤¢£�¢¤��£§��¢�©¥�©��¤©��¤¦§¨��¢����¢ £¦�©���¦¥�©¤�¦¥�©�¤¢¥¢§�£�¢¤�©¤�£§�¢£§£��¥¦¥©�£¥£���¢©��©�£§¦£§¢§�¢¤�¤¦¥¢¥�£¥¢� �¢¤¢£��¢�©§�����£��¢�¤¢£�¦§¨���¢©�¢¤£���¢¤�©¤�£§�¢¦¥�¢�¦§¢�£��©¤�¦§¨�©��¢
1. USE OF THE INDICATOR TO CREATE VALUE: ECONOMIC VALUE ADDED
(EVA)
One of the most used indicators for assessing the size of the value created by a company is the
economic value added (EVA). This indicator was developed by the consulting company Ster –
Stewart, with the main role of measuring the financial performance achieved by a company.
EVA is calculated as a difference between operating profit and net total cost of capital used. As
Maria Niculescu (2005, p.194) says, EVA has become in the decade 1990-2000, a total standard
of quality, being an indicator measuring performance of the management team but also a
60

eference to substantiate and assess the effectiveness of decisions. The relationship for
calculating the economic value added , by the consulting company Stern – Stewart is:
EVA = Net operating result – Cost of capital invested
Economic value added measures the wealth created by a company in a financial year. This
indicator is calculated as cost of debt and equity costs. The most innovative aspect of the
economic value added is that it present the level of income to which value is created. This is done
because EVA is calculated after deducting the cost of capital. “Using economic value added as an
instrument for allocating capital to benefit brings benefit not only at micro scale, but even at the
macro level. The indicator produces an assessment of the effectiveness of capital allocation by
considering the relationship between returns and risk. Therefore, the achievement of positive
economic values is a sign of efficient use of capital in terms of risk. "(Valceanu, G., Robu V.,
Georgescu, N., 2005, p.320). A study conducted by Robert Kleineman (1999, pp.80-91) presents
the case of companies in the United States that have adopted EVA in the period 1987-1996,
which exceeded the performance of companies in the same industry. During the four years
experience in the study, companies that used EVA had results that were 28.8% better than those
that have not used the concept. Vernimmen et al. (2005, pp.355-356) presents the point of view
through which the managers are judged on the basis of EVA, they will have a huge incentive to
reduce capital invested. It is very possible that this reduction is purely overvalued, and it doesn't
have a real effect. This reduction of capital investment may lead to abandonment of investment
that can bring important revenues in the future.
The result is achieved through operational activities of the company, representing the result of
operating. From the result of operation used in the calculation of EVA, it is deducted the
depreciation and property tax, achieving the net operating result. The equivalent of the net
operating result in Anglo-Saxon literature is Net Operating Profit After Taxes, abbreviated
NOPAT.
Capital investment required to calculate EVA is composed of equity and financial debts from
participating to the co-financing of the economic activity. The cost of capital (weighted average
cost of capital), according to Maria Niculescu (2005, p.195), is calculated as a weighted average
of equity and financial debts. The term used in Anglo-Saxon literature bears the name of
Weighted Average Cost of Capital (WACC), and is calculated as follows:
Where:
CPR is equity;
Dat is the net financial debt;
is the average cost of capital;
is the average interest.
The average cost of capital can be calculated based on the C.A.P.M. This is a rather widely seen
and practiced model in the companies from countries with developed stock systems. This model
was developed at the end of the years 1950-1960 with the contribution of Harry Markowitz,
William Sharpe, John Lintner and Jack Treynor, and now it is a used and recognized model.
61

The C.A.P.M model is based on the assumption that investors act rationally, and have all the
information available.
The cost of equity is determined as follows:
Where
Rf is the rate of interest without risk;
Rm is the average rate of return of financial stock market;
β is the sensitivity coefficient of the title, compared with the average exchange
(Rm-Rf) is the market risk premium (Rp).
The interest rate risk is not practiced in the securities, while the coefficient β is obtained by
statistical calculations and is between 0.6 and 1.4.
The author Maria Niculescu (2005, p.196), specifies that a positive EVA indicator means creating
wealth for shareholders over remuneration of capital. In contrast, a negative value indicates that
the capital does not cover the cost of operating results achieved. "In other words, it loss money
even if has positive accounting results". The same author presents the point of view of the famous
economist Alfred Marshall in the year 1890: "What remains to a company from his winnings,
after deducting the cost of capital at a rate corresponding can be considered a benefit of the
developer or manager". Through the vision of integrative approach, EVA gives a fair picture of
the efficiency of resource use and effectiveness of global business. As Peter Drucker said in
1995, in an article published in the journal "Harvard Business Review", "measuring the value
added after deducting all costs, including the capital, EVA shows the productivity of production
factors, indicating the products, services, subunits or activities which productivity is considerably
higher and that creates a greater value added." (Niculescu, M, 2005, p.198).
2. STUDY ON ECONOMIC ANALYSIS OF VALUE ADDED FOR 9 companies listed
on the Bucharest Stock Exchange (BVB)
2.1. The description of the methodology and analysis of the implementation of the
study
In carrying out this study, we started with a set of nine of the 10 most liquid companies listed on
the Bucharest Stock Exchange that build the BET index (first index developed by BVB,
representing the reference index of capital market), with significant weights in this index, as the
table below shows.
Table 1�The list of companies
Current
Symbol
Number
Name of the listed company
Share on
BET (%)
1 TLV BANCA TRANSILVANIA S.A. 20.97%
2 SNP PETROM S.A. 19.22%
62

3 BRD BRD - GROUPE SOCIETE GENERALE S.A. 17.66%
4 RRC ROMPETROL RAFINARE S.A. 10.99%
5 TEL C.N.T.E.E. TRANSELECTRICA 7.35%
6 BIO BIOFARM S.A. 5.49%
7 BRK S.S.I.F. BROKER S.A. 1.79%
8 IMP IMPACT DEVELOPER & CONTRACTOR S.A. 1.75%
9 AZO AZOMURES S.A. 0.90%
The study shows the economic value added of companies taking into account the information in
period 2006-2008. The analyzed period is the beginning of the financial crisis, which affected the
financial sector worldwide, producing negative effects on financial markets and the listed
companies. The financial crisis, evidenced by the bankruptcies of companies in banking and
financial sector but also by uncertainty among investors, is a very important moment for the
economic and financial analysts because it is a period in which some theories can be cancelled,
but also new economic-financial models can be confirmed. The current crisis is caused by a
sudden liquidity in global markets and banking systems, caused by the failure of companies that
invested in mortgages with a high degree of risk. The crisis revealed the weaknesses in the global
financial system. During this period of uncertainty, a careful study of indicators of value creation
is very important for taking decisions.
Through information from the financial companies, but also additional information from annual
reports, we have calculated indicators for earning Economic Value Added.
2.2. Analysis based on value creation
Starting from the calculation of EVA, we calculated the net operational result of the 9 companies.
So after deducting depreciation and property tax, we had net operating result. The net operating
result based on the information from 31.12.2008 for the 9 companies are listed in the table below:
Table 2 The net operational result for the 9 companies
Current
number
Symbol
The net operational
result (lei)
1 TLV 119,754,000
2 SNP 1,593,013,703
3 BRD 1,353,000,000
4 RRC 17,159,952
5 TEL 192,607,284
6 BIO 12,111,877
7 BRK -9,627,678
8 IMP 24,084,120
9 AZO 58,404,235
63

We can notice a large net operating result for SNP Petrom with 1593013703 lei, and a negative
net operating result for SSIF Broker with -9627678 lei. The results were obtained by adjusting
the operating result.
To determine the cost of invested capital we have started to determine the capital investment and
the cost of capital.
In the determination of the invested capital we took into account the equity, provision for risks
and charges, deferred taxes, loans from bond issues, long-term loans and short-term loans.
In this sense beginning from the financial year 2008, we obtained the following results presented
in the table below.
Table 3 Invested capital
Current
Number
Symbol
Invested capital
(lei)
1 TLV 17,138,333,000
2 SNP 15,793,126,042
3 BRD 49,240,220,292
4 RRC 4,234,881,759
5 TEL 4,219,299,333
6 BIO 144,812,841
7 BRK 88,456,885
8 IMP 578,072,362
9 AZO 493,997,068
The capital invested is a very important significance in the analysis of EVA, representing the
cash flow for advanced development of the company and for financing economic activities.
In determining the cost of equity and borrowed (weighted average cost of capital) we started from
the model outlined above:
Studying the model, we arriving at the average cost of capital determined on the basis
This model, developed by the C.A.P.M (Capital Assets Price Model) puts the spotlight on the rate
Rf = risk free rate. This rate is identified with the yield of securities, whereas shows a very high
64

security, as saying the authors: Dragota V. and Ciobanu, A. (2002, p.252). Moreover, the same
authors present the coefficient volatility β as being defined as the sensitivity of an asset to
changes in value of the portfolio.
β is a coefficient of elasticity which expresses the sensitivity of a title to market changes. In
other words, he shows how to change the price of a title change to a percentage of the market.
(Michael Alexa, SSIF Broker, 2008, www.ssifbroker.ro)
To determine the coefficient β is determined based on the classical relationship for calculating
the volatility:
β =
Where cov (Ri, Rm) is the co variation between firm profitability and the analyzed market, while
the mean dispersion (variants) presents the yield market.
Starting from these premises β have the following values:
Table 4 β Coefficient (Mihai Alexa, SSIF Broker, 2008, www.ssifbroker.ro)
Current
Number
Symbol β Coeficient
1 TLV 0,86
2 SNP 1,07
3 BRD 1,13
4 RRC 0,94
5 TEL 0,99
6 BIO 0,94
7 BRK 0,89
8 IMP 1
9 AZO 0,79
The coefficient β has different values between 0.79 (Azo) and 1.13% (BRD)., and it corresponds
to the period 1 January 2006-29 August 2008.
The risk free rate of return is 6% yield to securities related to the state in 2008. The return
without risk is between the normal range for this type of efficiency.
The market risk premium is determined based on the profitability of the market. I
considered as a guideline the BET index of the Stock Exchange from Bucharest. In this aspect
65

starting from the daily percentage changes BET index for the period 1 January 2006 - 29 August
2008, we achieved a return of -0.02% of the market. Adjusting the market with the first return of
risk related to country risk (2.03%), and subtracting the rate of return without risk (6%), we came
to a risk premium of -3.99% of the market.
In this aspect the average cost of capital
For the 9 companies analyzed is presented in the following table.
Table 5 The average cost of capital
Current
Number
Symbol
The average cost of
capital
1 TLV 2.57%
2 SNP 1.73%
3 BRD 1.49%
4 RRC 2.25%
5 TEL 2.05%
6 BIO 2.25%
7 BRK 2.45%
8 IMP 2.01%
9 AZO 2.85%
The cost of invested capital (weighted average cost of capital) is determined according to the
model
The interest rate for lending was set at 14.25% and the rate of tax is 16%.
Starting from these data, the cost is fixed cost of equity and debt for each company listed
(weighted average cost of capital), to reach the following results
Table 6 Cost of capital invested
Current
Number
Symbol
Investit
Capital(lei)
Weighted average
cost of capital
Cost of
capital
invested (lei)
1 TLV 17,138,333,000 11.07% 1,896,742,262
2 SNP 15,793,126,042 3.42% 540,383,442
3 BRD 49,240,220,292 11.03% 5,433,248,769
4 RRC 4,234,881,759 8.38% 355,034,224
66

5 TEL 4,219,299,333 6.40% 270,173,487
6 BIO 144,812,841 3.26% 4,725,941
7 BRK 88,456,885 2.66% 2,353,596
8 IMP 578,072,362 6.22% 35,956,930
9 AZO 493,997,068 4.75% 23,456,121
Thus we have obtained capital investment cost required to calculate EVA.
Economic value added was calculated based on the information and calculations made based on
the following:
Table 7 Economic Value Added
Current
Number.
EVA = net operating result - cost of capital invest
Symbol
Net operating
result (lei)
Cost of
invested
Capital(lei)
Economic
Value Added
1 TLV 119,754,000 1,896,742,262 -1,776,988,262
2 SNP 1,593,013,703 540,383,442 1,052,630,261
3 BRD 1,353,000,000 5,433,248,769 -4,080,248,769
4 RRC 17,159,952 355,034,224 -337,874,272
5 TEL 192,607,284 270,173,487 -77,566,203
6 BIO 12,111,877 4,725,941 7,385,936
7 BRK -9,627,678 2,353,596 -11,981,274
8 IMP 24,084,120 35,956,930 -11,872,810
9 AZO 58,404,235 23,456,121 34,948,114
Economic value added can be calculated by the model and analysis:
Where Ki is the capital invested
is the rate of return invested capital (after tax)
is the average cost of capital calculated above rate of return of capital invested.
Rate of return of capital invested is used in Anglo-Saxon literature the term ROCE - Return on
Capital Employed.
is calculated by adjusting the value Rate of return of capital invested after tax model ".
(Niculescu, M, 2005, p.208).
67

or under his Vernimmen (2005, p.232)
This rate is very important in the analysis of several sets of indicators.
To this end we reached the following values of the rate of return invested capital (after tax): �£��¢¥Rate of return of invested capital
Current
Number
Symbol
Net operating
result (lei)
Cost of
invested
capital (lei)
Rate of
return of
capital
invested
1 TLV 119,754,000 1,896,742,262 0.70%
2 SNP 1,593,013,703 540,383,442 10.09%
3 BRD 1,353,000,000 5,433,248,769 2.75%
4 RRC 17,159,952 355,034,224 0.41%
5 TEL 192,607,284 270,173,487 4.56%
6 BIO 12,111,877 4,725,941 8.36%
7 BRK -9,627,678 2,353,596 -10.88%
8 IMP 24,084,120 35,956,930 4.17%
9 AZO 58,404,235 23,456,121 11.82%
Comparing the rate of return of capital invested with the weighted average cost of capital ( ), we
obtain the following results:
�£��¢ Comparison
Current
Number
68
Symbol
Rate of return
of capital
invested
Weighted
average cost
of capital
vs.
Result
Economic
Value Added
1 TLV 0.70% 11.07% < ¡£��¢�¢¥�¤���¦©§-1,776,988,262
2 SNP 10.09% 3.42% > Value creation 1,052,630,261
3 BRD 2.75% 11.03% < ¡£��¢�¢¥�¤���¦©§-4,080,248,769

¡£��¢�¢¥�¤���¦©§ ¡£��¢�¢¥�¤���¦©§ ¡£��¢�¢¥�¤���¦©§ ¡£��¢�¢¥�¤���¦©§ 4 RRC 0.41% 8.38% < -337,874,272
5 TEL 4.56% 6.40% < -77,566,203
6 BIO 8.36% 3.26% > Value creation 7,385,936
7 BRK -10.88% 2.66% < -11,981,274
8 IMP 4.17% 6.22% < -11,872,810
9 AZO 11.82% 4.75% > Value creation 34,948,114
In 6 of the 9 companies analyzed, there is a negative economic value (disposal value) as a result
of achieving a rate of return on invested capital (after taxation) less than the weighted average
cost of capital used by the firm. According to the table above, a comparison between the rate of
return of capital invested and the weighted average cost of capital, leads to a result of creating
value or destroying value.
It notes that the SNP Petrom creates the greatest value added by 1052630261 lei, while BRD
created a negative value. Moreover, Transilvania Bank has obtained a result of -1776988262 lei.
The financial sector is in a period of high instability, therefor are necessary the investments in
developing new lines of business. This can be explained so that this destruction of value in the
two banks is the result of the cost of capital over net operating result as a result of investments
made. The same situation encountered in the case with SSIF Broker with -11981274 lei.
The energy sector represented in this study Transelectrica of SNP Petrom and Rompetrol,
Rafinarie Constanta that presents different situations. Thus if the SNP Petrom create value, both
RRC and TEL created negative value, on the investment fund in 2008.
Biofarm Bucharest has created economic value added amounting to ROL 7385936, following a
rate of return on invested capital (after tax) of 8.36%, higher than the weighted average cost of
capital of 3.26%. Azomures registered a rate of return on invested capital of 11.82%, being the
highest rate of the analyzed portfolio. Weighted average cost of capital was at a size of 4.75%.
CONCLUSIONS
"In recent years, a new reality raises capital providers, the management company and financial
analysts: the need to manage the amount and orientation of the primary strategy to create value
for shareholders." (Valceanu, G., Robu V., Georgescu, N., 2005, p.334)
Under conditions of high instability, the use of many indicators for the performance analyses,
including the use of indicators of value creation may lead to different results from classical
analysis. Thus all the decision makers will have a picture of the value created by business, by
comparison of the operating result and net cost of capital invested. Net operating result shows the
operational activity (operating) and the level of development.
Using the methodology of calculating of the cost of capital invested, we can follow the evolution
of indicators such as capital cost or cost of debt. These indicators can provide detailed
information for analyzing phenomena track. "The economic value added is a strategic and
effective in the measurable financial performance management company that can be used in the
incentives process to increase economic efficiency. (Valceanu, G., Robu V., Georgescu, N.,
2005, p.322). Thus, as the authors stated (Işfănescu A., V. Robu, Anghel I. (2001, p.225) it can
69

eached a conclusion regarding the analysis and positioning a company on the concept of value
created.
REFERENCES §�¤¢�¤¦§�¢¤¦�©¤�2002�Editura Dragotă, V., Ciobanu, A. Economică, Bucureşti §�¤¢�¤¦§�¢¤¦¦�2001, Işfănescu A., Robu V., Anghel I., Editura Tribuna Economică,
Bucureşti, ‚
Kleineman, Robert, 1999, Some new evidence on EVA companies, �¦§£§�¢, Vol.12 (2), pp.80-91
Niculescu, Maria 2005, ¢¦£¨§©¥�¦�¨�©�£�¥�¤£�¢¨¦��¢¦£¨§©¥�¦��¦§£§�¦£¤, Editura Economică,
Bucureşti
Mihai Alexa, 2008, SSIF Broker, Bucureşti, accesat la 10 Apr 2009,
£www.ssifbroker.ro/included/download_file.php?analize=da&id=5247>
Vâlceanu, G., Robu V., Georgescu, N., 2005,
�£��£¤¢£
�©§©�¦�©¡�¦§£§�¦£¤¤�Editura
Economică, Bucureşti
Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y., Salvi, A., 2005, ��¢©¤�£§�¡¤£��¦�¢�John
�£��£¤¢£
Wiley & Sons, West Sussex, England
¡©�¤§£�©�����¦¢��©¤�©¤£�¢
�©¤�©¤£�¢�¦§£§�¢� �§£�¦¡¤
This article is a result of the project „Doctoral Program and PhD Students in the education
research and innovation triangle”. This project is co funded by European Social Fund through
The Sectorial Operational Programme for Human Resources Development 2007-2013,
coordinated by The Bucharest Academy of Economic Studies.
70

CORPORATE GOVERNANCE AND PERFORMANCE
MECHANISMS: INTERNAL AUDIT ENGAGEMENTS PRE AND
POST MERGER
Dobre Maria Mirela, DediŃă Dana Crina
Academy of Economic Studies, Bucharest, Romania,
mirela_dobre@yahoo.com
crina_dedita@yahoo.com
ABSTRACT
This paper presents the financial and economic coordinates of corporate governance models applied in developed
countries and the role of internal audit as a governance mechanism used in mergers and acquisition processes.
Mergers and acquisitions are not performant by chance. Performance is based on financial management principles,
value adding objectives, and advantage and synergy arguments. These can be assessed in view of M&A decisions
through internal control and internal audit evaluations. Internal audit missions can be achieved before and after the
merging process and take into consideration the following: 1.The application of financial management principles
(shareholder’s interest and maximizing the company’s value, two-sided transactions, comparative advantage,
reasonable price, incremental benefits, risk management portfolio diversification, time-value of money); 2)
Estimating the possibility of adding value ( through determining the net advantage of the merger as a difference
between total market value after merger and added market values of companies before merger); 3) Estimating
synergies (more efficient activities, cutting down fixed costs, complementary resources such as managerial
experience and highly trained personnel; 4) Identifying and managing the risks of loosing such resources. The
objective of this research is to underline the importance of internal audit process, as a link in nowadays’ corporate
governance. The notorious accounting failures that led to the passage of the Sarbanes-Oxley Act and Securities and
Exchange Commission (SEC) and stock exchange rulemakings have left directors, executives, their lawyers and
accountants searching during the past two years to implement or improve processes and procedures which comply
with the new mandates regarding disclosure, governance and accounting procedures. The final goal of this evolution
is to reach a high quality level of financial reporting that is so necessary for decision making.
Key-words: corporate governance, mergers, synergic effects, internal audit
JEL G34 - Mergers; Acquisitions; Restructuring; Corporate Governance
I.Introduction
The choice of such a research subject took into account the growing interest of board members and executive
management towards improving governance procedures, internal audit and mergers and aquisitions.. The joint
element is the corporate governance which creates internal control mechanisms and techniques aiming to make
efficient decisions.The merging operations are par excellence corporate decisions of a paramount importance. The
internal control and audit role has increased considerably because of the famous accounting failures in the last few
years.
Adopting the Sarbannes - Oxley Law and the SEC regulations (Securities
Exchange Commission) determined the board of directors and the executive managers to look for improving the
internal audit procedures and processes and implementing some new ones according to the new norms of
governance, accounting and transparency. The internal audit, due to its insurance missions, but especially to those of
counseling, is supposed to contribute to consolidate the corporate decisions and projects. A merger or an acquisition
is a corporate mega-project involving not only a budget, but also a good decision’s consolidation. In this respect, a
company could take over another one only if this fact heads for increasing the ownership’s fortune. As it could be
seen in our research, this motivation is specific only to the Shareholding type governance model and not to the
Stockholding type one which is more generous. This type of corporate operation presupposes the knowledge and
joint application of the corporate law, fiscal and accounting knowledge. We will try to gather our knowledge to
closely study these joint aspects within the large enterprises’ practice.
II. The research methodology and results
71

This documentation and research aims to highlight the internal audit’s importance as a basic bangle in the present
corporate governance. The objectives of this research are to put into practice the internal audit’s work principles and
financial management within the merging transactions. The used methods are putting the principles into practice
through evaluation techniques and comparative analysis. The research result will describe the potential impact of
such merging transactions upon the ownership’s fortune. It will also depict the internal audit role in consolidating
and evaluating post factum the mergers. Supposing that the merging operations are just a false pretense, the internal
audit procedures will be a useful instrument in this field. In conclusion, we would like to present the research result
as an extra argument for organizing and consolidating the internal audit’s position within the Romanian corporations.
2.1. Structures, mechanisms, models and actual trends within the corporate governance (enterprise)
The recent worldwide economy has evolved around USA where the corporate governance is a national phenomenon
which has become international through globalization. After the great financial failures in the early 2000’s, (frauds,
from all points of view!), people start talking a lot about the corporate governance and the internal control
mechanisms as systems meant to protect the financial situations’ credibility through financial informing/reporting
mechanisms which are supposed to be as well controlled as possible. In this respect, in Romania, the technology and
even the related mechanisms have been already “imported”, although the content is not entirely unknown. But what
is the corporate or enterprise governance? What are the present trends, models, mechanisms and structures? This
difficult question has a fully convincing and at the same time, academic answer as Univ. Prof. PhD. N. Feleagă has
proved in a series of articles published in CECCAR magazine in 2008 - Accounting, expertise and business audit.
The enterprise governance covers the set of disposals ensuring that the objectives followed by the managers are
legitimate and the working means are adapted to reach these objectives as Feleagă points out (2007, pg.13). The
theoretical bases of the enterprise governance are as follows: (1) the property rights’ theory (usus - the right of using
an asset, fructus- the right of collecting "the fruit" of the asset, and abusus – the right of selling an asset); (2) the
agency theory in which the enterprise is a node of contracts binding the investors and managers as Jensen and
Meckling (1976) quoted by Feleagă (2007, pg.15) proved. Within the Romanian law, the relation refers to the
juridical mandate relations between the ownership (general meeting) and the enterprise managers (board of directors)
which in its turn could delegate the managers’ skills. The key-element of this theory having a complete practical
application in the companies is lining up the management interest to the investors’ interest which has always been
the enterprise maximized value (in fact, equity - shareholder’s fortune). The internal mechanisms of lining up the
managers to the shareholder’s interest are as follows: the shareholders’ right to vote, the control imposed by the
board of directors, the ways to stimulate and remunerate managers. The external mechanisms of lining up the
managers to the equity owner’s interest are as follows: the financial market, the directors/managers labor market, the
competition on the goods and service market. The agency relation (mandate) between the investors and managers
implies a decision-based delegation task (it presupposes agency costs –managers’ remuneration) and as a result some
inevitable conflicts appear between the parties. The conflict solving is based on three devices and structures: (1) the
financial politics (the politics of distributing dividends, the debt recourse, free cash flow issue), (2) External control
systems (various markets and external audit), (3) Internal control systems (internal control organized by executive
managers and internal audit organized by the board of directors to evaluate the internal control made by the
executive managers). The models of corporate governance used in Europe are: (1) the shareholder type model
used in Anglo-Saxons countries and USA where the financial markets are very well developed, and the major
objective to reach by the enterprise is to maximize the value in the shareholders’ advantage (profit and stock
exchange), (2) the stakeholder type model presented in Japan and most of the European countries (out of which
France and Germany are separated) where the financial markets are not very well developed, and the major objective
to reach by the enterprise is less to maximize the value in the shareholders’ advantage but to defend the interest of all
the parties involved (employees, business partners, banks, shareholders, managers etc). The image of the enterprise
governance system could be proved by grouping its components in structures, procedures and behaviors. The
structures are as follows: internal- General Meeting of Shareholders, Board of Directors and external - regulating
authorities. We mention that the internal audit is a structure placed between General Meeting of Shareholders-
Board of Directors and the executive management. The procedures are explained in corporate governance,
accounting and commercial codes and laws. The behavior is specific to the agents (managers, executive directors)
responsible for administering the shareholders’ fortune. These components’ hierarchy makes us conclude that the
corporate governance is the management of management, as Perez (2003), quoted by Feleagă (2008) emphasizes.
As far as the internal audit’s role is concerned, we can say that it expresses the management quality as long as it
constantly evaluates the management and internal control processes belonging to the executive management. In
terms of the activity pursuing principle, the trust in delivering the counterpart is vital, but this trust is based, from the
formal point of view, on both the internal reports and the external financial communication (N. Feleagă, L. Feleagă,
2008). Here, the preoccupations of this paper’s authors are met: on the level of the financial reports, they represent
72

a source of documentation for those interested in major transactions (mergers and acquisitions) and a contribution to
the published financial data credibility for those interested in internal control systems (internal audit). The actual
public viewpoint related to the ownership’s role within the corporate governance shows that the institutional
investors play a significant role (especially in the capital market) and the institutional or individual shareholders’
general attitude needs to be proactive. It means that they are supposed to vote efficiently in the General Meeting of
Shareholders and not to sell their assets when the enterprise goes through a difficult period. The present trend within
the enterprise governance is the shareholders’ active behavior (N. Feleagă, 2008) which needs to be more and more
encouraged taking into account the actual financial crisis’ effects.
2.2 Capital Mergers and Aquisitions – Specific Financial Techniques and Operation Net Advantage
involves and
An acquisition is like a “mega” capital budgeting project. As such, a company should acquire another company only
if it will increase shareholder wealth. However, a corporate acquisitions involves special legal, tax, and accounting
issues. A a combination of two companies, the the The
absorbs all the assets and liabilities of the and assumes the business. The
loses its independent existence, often becoming a subsidiary of the ©�¢§£¢�¢�This is the American policy
and also of other states where the forming of company groups and corporate governance are encouraged.In a �����¨£�©�£��, two or more companies combine to form an entirely new entity. The distinction between acquiror and
acquiree becomes blurred because shares of each of the consolidating companies are exchanged for shares of the new
company. Both of the consolidating companies lose their independent existence, often becoming subsidiaries of the
new company or, in combination, becoming the new company. These tranzactions are always bilateral because
aquiring a company implies in most cases paying a merger prime, above market value of the company aquired,
substantial enough to convince the aquiree’ shareholders to sell their own stock. Acquisitions attract headlines
because of the drama of the battle of control. Its well known the case when the front page of the
�¤¢�¤¢
carried an article headlined “Bidding War: Offers for RJR Pit KKL and Shearson in a Battle for Turf”, which
announced the bid of Kohlberg Kravis Roberts & Company (KKR) for control of RJR Nabisco. Five days earlier, a
management-led group had announced its intention to develop a proposal, in conjunction with Shearson Lehman
Hutton, to acquire RJR Nabisco in a leveraged by out valued at $75 per common share. A leveraged by out is an
acquisition that is financed mainly, sometimes more than 90%, by borrowing. The KKR bid amounted to $90 per
share. The battle for control unfolded over the ensuing six-week period. It involved three bidding groups, no fewer
then ten of the leading investment banks, and a veritable army of lawyers, information agents, accountants and
commercial banks. KKR finally prevailed when it offered to pay $109 per common share, 45% more than the
management-led group’s original proposal and a staggering aggregate bid of $25 billion. (Douglas R. Emery, John
D. Finnerty, John D. Stowe, 1998 p. 726). In this paper, we’ll show how to analyze corporate
©�¢§£¢¤¢�©�¢§£¢�¢� ©�¢§£¢¤¤� ©�¢§£¢¤¢�©�¢§£¢�¢� ©�¢§£¢¤¤ ©�¢§£¢¤¤
¡©¨¨��¢¤¤���§¢�©¨ ©�¢§£¢¤¤ 1 acquisitions. An
acquisitions is like a “mega” capital budgeting project. As such, a company should acquire another company only if
it will increase shareholder wealth. However, a corporate acquisitions involves special legal, tax, and accounting
issues. We’ll explain how to tailor capital budgeting technique to evaluate a corporate acquisitions. We’ll also
describe other valuation techniques- especially comparative analysis - that are widely used in practice. Agency
problems are important in corporate acquisitions. How will the target respond? Under the Principle of Self-Interested
Behavior, managers could sit by passively when facing a possible acquisition of “their” company. �¤¨��¦��¤¢¤��¤��¤�©�£�¢: Mergers And Acquisitions And The Principles Of Finance
Look for opportunities to make profitable acquisitions. Acquire another company only if
doing so increases shareholder wealth for your company. Acquiring another company
usually requires paying a premium over the prevailing market price large enough to get the acquiree’s shareholders
to sell their shares. Recognize that a merger of companies that have different comparative
advantages might have a positive net present value (NPV). Look to comparable acquisitions
for guidance regarding a reasonable price to pay for an acquisitions. Look for opportunities to
redesign securities or structure of an acquisitions transactions to enhance value. Calculate the
net advantage of an acquisition on the basis of the incremental after-tax cash-flows the acquisitions will provide.
Merging two companies through an exchange of shares benefits the bondholders of both,
because their expected return increases while their risk decreases. Diversifying through a �£�¤¢�£�£�©�£�� �£�£��¤�§¢��¢©�¤���� ¦��¢¤�¤��©¨�¤�¤�£�� ¡©¨§©�¨¤¦�¤©� �¤�©�£�¢©¨�¢£��£�¨¤ ����©¢©�£�¤���©��©�¤ �¡���£�¤��¢©��©��£���
1 The law regarding capital markets no 297/2004 published in MO 571/2004 in Romania imposes the terms take-over and aquisition, therefore we
shall use this term
73

conglomerate merger will benefit shareholders only if they could not achieve such diversification on their own.
Use discounted-cash-flow analysis to measure the net advantage of an acquisition.
Specific Financial Techniques - A corporate acquisition is usually a substantial capital investment for the �¤�©§�¤��£���£�¤, acquiring company. According to Emery, Finnerty and Stowe (1998, p. 726), 1996 was a boom period in this field.
an acquisition can have a great impact on shareholder wealth than other of capital investment.
The analytical tools and basic decision rules of capital budgeting still apply. However, particular care must be taken
in applying these tools because of the enormous size and complexity of the investment.
In Romania, the law reform in finance and economics fields through the articles 233 to 245 in the Company
Law (in force), through the Ministry of Finance Order 1223/1998 (abolished),Ministry of Finance Order 1078/2003
(abolished) and Ministry of Finance Order 1376/2004 (in force) regarding the mergers, splits and winding up of
companies only refers to merger with winding up the absorbed company and consolidation with the winding up of
the combining companies in order to form a new company. Consequently, the national laws lead to the use of
mergers for reorganizing the equity, not for the external development of companies through mergers and
acquisitions. This is the difference between mergers with winding up of the
�£�¤
in Romania, and mergers with
turning the into
¡©¨§¤��
a subsidiary, in United States. Losing the independence doesn’t
��¤
mean
���¢��¢©�¤©�¢§£�£�£���©�
it’s
winding up but can mean only losing the right to take business decisions, which are taken at corporate level. A
merger involves the acquisition of an entire company. Buying a company, with its own portfolio of assets and its
liabilities, is more complicated than buying a new machine or building a new plant. In addition, complex tax issued
must often be resolved. For these reasons, estimating the incremental cash flows is inherently more difficult than the
measurement problems encountered in capital budgeting project. Also, how a company finances an acquisition takes
on added importance. The economics of the investment and how the company finances its tend to interact because,
the acquisition can alter the acquirer’s (acquiror’s) financial structure. Thus, estimating the required return is also
inherently more difficult in the case of corporate acquisitions than in other forms of capital investment. Yet accuracy
is often crucial because of the amount of corporate funds that the acquirer must commit to the transaction.
The shareholders of an acquiring company can benefit from a merger only if the two companies are worth more in
combination than separately. To provide a framework for discussion, suppose that acquirer and acquiree are worth
Va and Vb in total market value (that is, the total market value of their assets), respectively. They would be worth
Vab in total market value in combination. The acquirer must normally offer the acquiree’s shareholders some
premium, Pb above Vb to induce them to sell their shares. The acquirer also incurs various costs and expenses (E).
The net advantage to merging (NAM) to the acquirer’s shareholders equals the difference between:
1. the total market value of the company post-merger net of the cost of completing the transaction and
2. the total market value of the companies before the merger
©�¢§£¢¤¤� �©£¤���¤��¢���¤£��¤¢�¤¢�¤¢�¢©�����¨£�©�£���
of
� ©�¢§£¢¤¤ ©�¢§£¢¤¤
�¤¢�£��£�¤��¤��
NAM=Vab-(Vb+Pb)- E- Va= [ Vab-(Va+Vb)]-Pb-E
If the net advantage to merging is positive, the merger would increase the wealth of the acquirer’s
shareholders. The term in brackets in equation represents what is commonly referred to as the a
merger. The whole is worth more than the sum of the parts when this expression is positive. Under de Principle of
Two-Sided Transactions, the premium Pb represents both a gain to the acquiree’s shareholders and a cost to the
acquirer’s shareholders. Even if the synergistic effect is positive, the acquirer’s shareholders will benefit only if the
premium Pb and the expenses are less than the synergistic benefits. One of the more interesting issues in the area of
mergers and acquisitions is the size of Pb in relations to Vab-(Va+Vb). If Pb is large enough, NAM can be negative.
In that case, the acquirer will have “overpaid” for the acquisition. Example:Company A, with a total market value of
$5 million, is planning to acquire Company B, which has a total market value of $1.5 million. Company A estimates
that the merged company will be worth $7.5 million as a result of operating and other efficiencies. Company’s
investments bankers have advised that company A will have to pay a $0.6 million premium in price to acquire
company B. Merger-related costs and expenses will amount to $0.1 million. Applying equation we find that net
advantage to merging is:
�
NAM=[7.5-(5.0+1.5)]-0.6-0.1=$0.3 million
Synergy creates $1 million of value (=7.5-[5.0+1.5]). Of this amount, $0.6 million is paid to company B’s
shareholders, and $0.1 million covers transaction-related expenses. Company A’s shareholders wind up a net
increase in their wealth of $0.3 million. Thus the merger would benefit both companies’ shareholders.
Evidence suggests that mergers do tend to produce synergy, at least when the two companies are in the same
industry, and the shareholders of acquired companies tend to benefit handsomely. Target stockholders generally
receive takeover premiums averaging between 30% and 50% for their shares. In contrast, the shareholders of
74

acquiring companies tend to realize only very modest gains. This sharing of benefits is probably due to capital
market efficiency, reflecting the impact (actual or potential) of competing acquirers. The Romanian experience and
framework show that mergers and aquisitions (that can also take place after split ups) can generate the so-called
capital primes.This is an additional capital and is the positive difference between book value of shares issued during
merger and their nominal value (merger primes). In the case of aquiring through split-up or division the difference
between the fair value of assets contributed by shareholders and the nominal value of shares is called contribution or
subscription prime. A merger can be economically beneficial only if the sum of parts exceeds the whole. There is at
least one situation in which this can happen: ©��£¤�¤��¤¢©�£��¤��£�£¤��£¤�©��¤�����£¤�����©¨¤.
Two companies may decide to merge in order to achieve ��¤¢©�£��¤��£�£¤��£¤�or to take advantage of
The merged companies can eliminate duplicate facilities, operations, or departments (the
financial staff of the acquiree is usually one of the first redundancies to be eliminated). Consider two airlines with
overlapping routes. By merging their operations, they can better coordinate scheduling and eliminate excess capacity.
Achieving operating efficiencies is more likely to result from horizontal or vertical merger than from a conglomerate
merger. A combines two companies in the same line of business. A involves
integrating forward toward the consumer, or back-ward toward the source supply, in a particular line of business.
The merger of two airlines is a horizontal merger. When a company purchase one of its parts suppliers, that is a
vertical merger. Most mergers in the United States since World War II have been of the conglomerate type.
One means
¢¤��§¢�¤�(management
of achieving operating efficiencies involves combining two companies that have the
expertise, strong sale staff, skilled product engineering staff). But a merger
will be beneficial to both only if it enables each company to obtain what it needs more cheaply than it could have if it
had remained on its own.
Two companies in the same line of business might also merge in order to achieve in
production, distribution,
¤�����£¤�����©¨¤�
or some other phase of their operation. Economies of scale occur when the average unit cost
of goods sold decreases as output expands. For example, a higher volume of production might permit a company to
build larger, more efficient plants than the smaller ones it must build now. Achieving economies of scale in
production is the key motive underlying most horizontal mergers.
Operating efficiencies and economies of scale are the main sources of any synergy. A conglomerate merger
has the least potential for generating them. In any case, one must be careful in assessing potential operating
efficiencies and potential economies of scale. They may never be realized. For example, merging an insurance broker
and a securities broker to achieve economies of distribution may fail to yield the anticipated benefits if the brokers
cannot (or simply will not) sell each other’s products.
¤�����£¤�����©¨¤ �¤¢�£�©¨�¤¢�¤¢ ��¢£����©¨�¤¢�¤¢ ����¨¤�¤��©¢
2.3 The internal audit and its position in enterprises
According to the definition given by the Internal Auditors Institute (the global body in this field having its
headquarters in SUA, Florida state), the internal audit is an objective and independent activity of insurance and
counseling/ guidance referring to the control level on operations as it guides enterprises in order to improve
its operations and contributes to create added-value. The corporations whose annual financial situations are
subject to the financial audit, according to the law or the shareholders’ option, organize the activity of internal
audit within a separate department belonging to the organizational structure. Optionally, this activity can be
externalized on a contractual basis. The main characteristics of this activity are:
1)It is an objective and independent activity providing an insurance to the entity that it benefits by a control
level on the operations and that means the following: a mental attitude of independence and not necessarily a
surveillance of those who make mistakes, a participative approach and not a post factum correction of the operations,
a constructive approach of the dysfunctions and not a confrontation with those responsible for the mental attitude of
independence, it depends on the competence and not on the position within the entity. The internal audit is an
objective and independent activity of insurance and counseling and that means that it is supposed to measure not
only the size of the deficiencies, but also to suggest how these could be corrected and prevented. The top priority is
to design and put into practice an internal control system;
2)It guides the entity to improve its operations and contributes to add an extra value namely it helps the
entity to reach its objectives by evaluating the processes of risk management, control and governance through a
systematical and methodical approach and making propositions to consolidate their efficacy. Improving the activity
takes into account the internal audit preoccupation to come into line with the operations in order to protect the
entity’s assets and to increase their efficacy and efficiency. The internal audit HELPS, ASSISTS, COUNCELING,
but does not replace the management responsibility. Its principle is to pass from the post factum criticism to the
construction of a new organizational culture.
75

3)The insurance services aim to evaluate the proofs to provide an independent opinion or conclusion related to a
process, a system or other subjects. The insurance represents the objective assessment of the proof in order to
provide an independent assessment or opinion on risk management, internal control or governance/managing
processes. The internal audit provides the entity with the insurance that it has a control level on the operations.
The insurance services improve the DECISIONS’ QUALITY by improving the INFORMATION QUALITY AND
AVAILABILITY;
4) The counseling services (it appears the term of counseling in the public internal audit in our country) are formal
recommendations generally given at a client’s specific mission request. The counseling stands for internal audit
services except for the insurance services of the internal audit by which the management is assisted
(guided/counseled) to reach its objectives. The counseling’s applying area and nature are established together with
the client.
5) The internal audit helps the organization to reach its objectives due to a systematical and methodical
approach (the professional method makes the whole difference), to evaluate and improve (we can improve even
what is already satisfactory), the processes of risk management (if it is well managed, a risk is no longer seen as a
danger which must be immediately eliminated, but as a financial, commercial, organizational and technical
opportunity etc.). What is the internal auditor’s role? He identifies and evaluate the organization’s risks in order to
establish the control level/ degree and take the necessary measures), the control processes (the internal audit
evaluates the internal control system taking into account its efficiency and adequacy to the organization’s objectives-
the internal control models: COSO, COCO, CADBURY-TURNBULL, KING,VIENOT), corporate governance
processes (the internal audit assists the board of directors and evaluates the corporate governance from the
efficiency, efficacy, transparency and integrity point of view – the internal control is the corporate governance’s base
as it a matter of transparency. From the above mentioned remarks it derives that the internal audit is entitled to
evaluate the QUALITY OF MANAGEMENT carried out by the executive managers.
2.4 Possible internal audit missions and procedures before and after the merger in a Romanian
enterprise
The mergers and acquisitions represent a dynamical process of strategy and corporate-organizational culture.
The empirical evidence shows a high rate in failures in creating an extra value for the shareholders as a result of
these transactions. In this respect, the corporate internal audit has changed its traditional role based on subsequent
control and taken over a guidance/counseling role based on risk analysis.
The internal audit can contribute to the consolidation of some correct decisions referring to the merger. It can also
interfere in some other different stages of it. Moreover, the internal auditors will be able to evaluate the operation’s
success or failure through subsequent procedures and missions. We consider worth studying the internal audit
possible position in a Romanian enterprise involved in a merging transaction. In Romania, the merger is defined by
the Corporation Law as an operation in which two or more corporations decide separately to transfer assets or
liabilities to one of these corporations or to establish a new one to carry out a joint activity. The division takes place
by the complete sharing of the assets and liabilities of one corporation ceasing its existence, between two or more
existing corporations (to which the operation is an acquisition) or which comes into existence in this way. By
merging and division there is an exchange of notes (assets) between the participating enterprises. The exchange ratio
can be calculated within the procedures of establishing the economic output of the enterprises prone to merge. The
share’s absolute value is less important than their "economic weight" as Malciu (2000, p. 63) underlines. As a result
the evaluation of the merger intake is inferior to the shares’ exchange parity. The merger prime is calculated as the
difference between the book net value of the latest shares and there nominal cost. There is a tight competition in
which not only the share’s absolute value matters but also its value in comparison with other shares and especially
with the net asset of the absorbing enterprise. The merger’s prime expresses a bigger output of the absorbing
enterprise given by a value of the share which is bigger than the absorbed enterprise’s shares. The merging or
devising date represents the exact date when the assets or liabilities are transferred and registered in the commerce
registry. This date when the enterprise’s assets and debts are effectively transferred, from the juridical point of view,
marks the property transfer, and this fact is also mentioned in the commerce registry. The more numerous and
complicated
these adjustments are, the longer the period from "the accounting reference date" to the date of merging or effective
division. As Dobre (2005, p. 186) points out, practice unfortunately proves the lack of understanding of the
difference between the accounting reference date and the operation date by the real delivery of the patrimonial
76

elements. 2 The accounting procedures and stages regulated in Romania meant to be followed during the merger by
absorption are: 1. approving by General Meeting of Shareholders the merging operations. 2. Inventorying and
evaluating the assets and liabilities of the corporations prone to merge. 3. Drawing up financial situations by all the
enterprises involved in the merger. 4. Establishing the private equity (the net asset) on the basis of each involved
enterprise’ merging balance sheet. 5. Establishing the asset exchange ratio. 6. Establishing the exchange parity of the
assets or social parties. 7. Elaboration of the merging project which will be published by the absorbing.
From the internal audit and evaluation of the management’s quality point of view, in case of a merger
transaction, in the following table we shall present the coherence between the way and the moment in which the
internal auditors interfer in the assessment of the decision, in progressing with the stages of the transaction and in
monitoring the merger’s effects:
Table 1
Decisions’ background
evaluation before merger
Ante factum internal audit
engagements and procedures
for assessing potential
opportunities and economic
benefits (synergic effects of
creating added-value).
Internal audit
recommendations on
supporting the merger
decision
Examples of opportunities
identified:
Improving the
economic
profitability
Production
rationalization
Protection against
competition
Assets transfers
whose settlement is
made through the
book value(shares)
and not by
liquidities
Evaluation of the effectiveness of operations
by concomitant evaluation of legal and
commercial procedures regarding mergers
Internal audit engagements and procedures for
assessing the non-compliance risks and
operation failure risks , concomitant to merger
stages:
Tests
Questionnaires
Interviews
Sheets for identifying and analyzing
risks
Internal audit recommendations on the
validation for performed procedures or in
stopping or improving them.
Examples of recommendations through the
stages of legal procedures regarding a
merger:
The feasibility study of the draft merger phase can
not substitute for inventory and valuation required
by law and do not create economic changes, that is,
not recorded in accounting;
The merger prime expresses the higher potential of
the acquirer due to the higher value of its shares;
Preventing publication of the merger draft due to
the difference between accounting reference date
and effective date of the merger as the date of
transmission of property items.
There are several criteria for valuation such as
book adjusted net asset value, value of yield,
forecasted results, exchange value, but the
provided adjustments should be recorded in the
accounts before preparing the merger balance
sheet.
The exchange ratio may be the result of
negotiations between the parties or only a
mathematical calculation based on the financial
statements. However, the starting point is the
comparison made on the basis of homogeneous and
Evaluation of efficiency by valuation of the
added-value created after the merger
Post factum internal audit engagements and
procedures for assessing the failure risks in
creating added-value: Estimating economic
benefits and synergies of the mergers.
Internal audit recommendations on the
failure risks to add value or identification of
new opportunities.
Examples of post-merger risks: decrease
or loss of potential economic resources.
Examples of new opportunities:
More effective economic activities
Savings on fixed costs
Complementary resources
Managerial experience
Technical staff better trained
In the post-merger period should take place
the validation of the expectations which the
company involved took into consideration
when decided the merger. The period of
validation can not be default, but it considers
to be reasonable to the size of the companies
involved, the stakes envisaged or the parallel
developments that join the operation.
2 For example, the merger project published in MO no 2124/11.09.2003 part 4 regarding the companies EFORIE SA, VENUS SA, CARMEN
SILVA SA, SATURN SA, MIORITA ESTIVAL SA shows the reference date as 30.09.2002 and the date accomplishment date is 04.08.2003
without taking into account the equity movements registered with the Commerce Register Office during this period.
77

significant evaluation criteria such as turnover, net
fixed assets, exchange value, net profits, cash flow,
the market. The problem that rises in the case of
choosing a criterion is the materiality.
Table 2
Internal auditors’ work in all 3 stages (phases) of operation: (1) background of the decisions, (2) the progress of steps and
procedures for the merger, (3) monitoring the effects of synergy and added value estimate, includes procedures and specific
activities, presented in the following summary:
The procedure for collecting and processing
information
Purpose: collection of information regarding the
audited structure / activity so that the auditor should be
familiar with the area to be audited and identify
successful factors for the audit mission.
Objective: the premise of the procedure is the division
of audited processes or activities in elementary tasks,
identifying the risks of each burden and evaluating
them.
The procedure for collecting information involves:
Identifying the main elements of the economic
context in which the audited entity or activity
operates;
Knowledge of the legislative and regulatory
framework in governing the business of the
audited entity or activity.
Identification of control systems for a prior
assessment of the strengths and weaknesses;
Taking into account significant findings and
recommendations of the permanent file and
previous internal audit reports, relevant for
setting objectives for the internal audit
mission;
Identifying and evaluating significant risks;
Identifying potential sources of information
that could be used as audit evidence.
Internal auditors evolve specific activities:
1. Identify laws, regulations and rules applicable
to the audited structure/ activity;
2. Appreciate the factors of success for the
audited mission;
3. Obtain for analysis: organization chart,
operational regulations, job descriptions,
written proceedings of the audited structure or
activity;
4. Identifies the responsibilities of the
employees;
5. Studying the flow of the information within
the audited structure;
6. Perform analytical procedures on the
performance of the audited structure or
activity with a view to analysis the risks and
quality of management (if it is one of the
objectives).
The procedure for identification and analyzing of risks
Purpose: identify specific structure or audited area risks and
evaluating the audited activity’s internal control.
Objective: the risk assessment is based on: the nature and
specific of the audited function or activity, the quality of internal
control, the gravity of direct or indirect consequences of the
risks, the risk probability.
Internal auditors evolve specific activities:
1. Achieving based on the information collected the
auditory list of activities;
2. For each audited activity are established basic tasks;
3. Identify risks for each elementary task;
4. Specify criteria for risk assessment;
5. Assess the identified risks;
6. Setting the audited objectives as a result of the risks
identified;
7. Specify the specific devices of each task (objectives,
means, information systems);
8. Elaborate the Risk Analysis Panel.
The Risk Analysis Panel contain:
Risk
Risk classification
Risk probability
The consequences and the patrimony impact, image
impact
Description of the consequences
Existing strategy
Residual risk classification
Necessary strategies.
78

III. Research-based conclusions and professional and legal arguments meant to consolidate the internal
audit’s position within the Romanian corporations
The performance of the acquisition and merging processes is not an accident. It is based on financial management
principles, generating added-value judgments, arguments related to advantages and economic synergies. These can
be considered when making merging decisions through internal controls and internal audit’s evaluations. The internal
audit missions carried out before and after the mergers take into account: Applying financial management principles
(shareholders’ interest and maximizing the company’s value, bilateral transactions, the comparative advantage, an
affordable price, increasing the company’s value, the added benefits, handling the risks and diversifying the
participants, and money time-value terms); Estimating the possibilities of generating an added-value (by calculating
the merger’s net advantage as a difference between the company’s total market value after the merger and the two
companies’ total market value before the merger); Assessing the economic advantages and the company’s synergies
after the merger (more productive exploitations, savings on the fixed costs, complementary resources such as
managing experience, highly qualified technical staff); Identifying the risks of lowering or losing these economic
output resources. The making of acquisition and merging decisions are based on the financial situations’ credibility.
The corporations’ experience in our country could be also developed more and more due to professional accountants
and internal auditors. Although it has been recently regulated, the corporate (private) internal audit is not well
organized in all the enterprises. In this respect the arguments are legal and professional: Legal arguments:
provisions of Art. 160, alin.(2) in Corporation Law no. 31/1990, modified and completed by Law no. 441/2006 3 ;
Professional arguments: the Internal Audit International Standards are available on the site belonging to USA
Florida Internal Auditors Institute (www.theia.org), and to Romanian Internal Auditors Association (RIAA- branch
IIA-SUA www. aair. ro) and through the National Norms on the internal audit issued by CAFR and available on
CAFR’s site (www.cafr.ro). The standards’ objectives are: to delimitate the basic principles representing the
internal audit practice, to provide a proper framework for realizing and promoting a wide range of activities meant to
add an extra value through quality and quantity, to establish the evaluation background for the internal audit
performance, to improve the organizational operations and processes (referring to the organization’s total quality).
The internal audit’s professional standards are: Attribute Standards – applying to all internal audit services;
Performance Standards - applying to all internal audit services; Implementation Standards- applying to the
specific types of missions: insurance and counseling, and is applied together with the other standards. Taking into
account the present economic and liquidity crisis, the corporate internal control system’s role in which the internal
audit is an integrant part has substantially increased due to the famous accounting failures in the last years. After
adopting the Sarbannes-Oxley Law and SEC (Securities Exchange Comission) provisions, the boards of directors
and executive managers have constantly aimed at improving the internal audit procedures and processes and
implementing new ones according to the new norms of governance, accounting and transparency. These
normalization evolutions’ final goal is to reach a high quality level of financial reporting as it is of paramount
importance within the decision making process, including the acquisition and merging field.
This article is a result of the project „Doctoral Program and PhD Students in the education research and
innovation triangle”. This project is co funded by European Social Fund through The Sectorial Operational
3
The companies whose annual reports are subject to financial audit, according to law or shareholder’s decision, shall organise internal audit
according to the Romanian Audit Chamber’s regulations
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1810-1825 §��§�©�©���¡��¡��¢¨�£¤���¨�¨���§��¡�£�¨§¨���¨¡©��¨�¡���§�¡�¢¨©���¨©¢§�©¦¨�¡��©¨���§��¨©�©�¨��£,
-N. Feleagă, L. Feleagă,
Contabilitatea, ��¢¨�¨����¨©�§�¢¨¢¡�¨�¡�¦¨���§�©�©���¡��¡��¢¨�£, Expertiza şi Auditul Afacerilor no. 5, may, 2008 ISSN 1454 9263
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9263
-N. Feleagă, �����§�©�©���¡��¡��¢¨�£, Contabilitatea, Expertiza şi Auditul Afacerilor no. 12 dec. 2007 ISSN 1454 9263 ¥¦§¡��¡�¢¦§¡¨��¤¢�©��§�¨���§¦��¨¡����§©��¥¡�¢��©���©§��¦¨��¢���¢��§, - M.C. Jensen, W.H. Meckling, Journal of Financial
Economics, vol. 3, 1976
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79 ¢¨�§�§��¢§�¨¨¤©¢�§�§¨���§�¡©���¤©¢�§��¨©�§�§�¦¨�§¨���§¡�¨©�©�§��£¤���§¢§¡�§¢¨�§�������¡©�§�¢���¦¨�¡�§�§�§�§�¨¢¡��§

Programme for Human Resources Development 2007-2013, coordinated by The Bucharest Academy of Economic
Studies.
80

SUSTAINABLE REPORTING FRAMEWORK
Elena-Roxana ILCU
The Academy of Economic Studies of Bucharest, Romania
E-mail: ilcu_roxana@yahoo.com
ABSTRACT ¦§�©��¢¥�¢�£¥�¢��¥©�¢�©§©�¦��¥©�¦£�£§�¢§�¦¤©§�¢§�£��¢�¢�©��¢§����¥�£¦§£�¦�¦�� �¢�¢�©��¢§��£�¢¥¦§�©£��©�§�£§¢��¦�¦¢§���¦�¦¥£�¦©§�¤©�¢¥¥©���¢§£��¤£�¤¢¥©�¤�¢¥ ��¥�£¦§£�¦�¦��¤¢�¤¢¥¢§�¥£§¦��©¤�£§��¤©��¢�©���¢��¢§��¡�¦¤¥��¢§��¤��¢�£�¥¢¦�
KEYWORDS
Sustainability, sustainability development, Sustainability Framework, sustainability
disclosure
INTRODUCTION
This paper investigates the regulatory transformations that have shaped the sustainability
disclosure starting with the emergence of sustainability development concept until present.
One of the most quoted definitions of sustainable development is that proposed by the
World Commission on Environment and Development (WCED) chaired by Gro Harlem
Brundtland, prime minister of Norway in 1987. According to the Brutland Report ("Our common
future") sustainable development means "to ensure that development meets the needs of the
present without compromising the ability of future generations to meet their own needs”. The
commission was created to address growing concern "about the accelerating deterioration of the
human environment and natural resources and the consequences of that deterioration for
economic and social development." United Nations (UN) convened WCED in 1983. In
establishing the commission, the UN General Assembly recognized that environmental problems
were global in nature and determined that it was in the common interest of all nations to establish
policies for sustainable development.
£�£���£�£��©�¥��¢¥£�¦¥�£��¦©§©���¢¥¢���£§§¢¢�¥§©�©§��¦§��¢�¤¢¥¢§����£�¥©¦§��¢ ����¤¢���¦¥�£�¢¤¦§�¢¥�¦¨£�¢¥��¢¤¢¨��£�©¤��¤£§¥�©¤�£�¦©§¥��£��£�¢¥�£�¢���¢¥�¥�£¦§£�¦�¦�� �¦¥��©¥�¤¢¥�£¤�¦§¨�¦����¢¢�¢¤¨¢§�¢©�¥�¥�£¦§£�¦�¦���¢�¢�©��¢§��©§�¢���§�¦��¤¢¥¢§���§��¢ ¢§����¢��¢¥�¦©§��£�¢�¢¤¨¢¥¦¥� ©��©��¢�©��£§¦¢¥¤¢£��¦§��¢�©§�¦�¦©§©�¥�¥�£¦§£�¦�¦�� �¦¥��©¥�¤¢£� �©§¥¦�¢¤¦§¨��¢¥£�¦¥�£��¦©§©����£§§¢¢�¥�§�¢¤��¢�©§�¦�¦©§©�¢§�¦¤©§�¢§�£��©§¥¢¤�£�¦©§¦§
81

The sustainable development is the way in which the developing and in full process of
industrialisation countries will avoid to become as the present industrialised countries based on
intense carbon emissions.
The three pillars of sustainable development are: economic, social and environmental
development, pillars that are correlated. At the intersection of these pillars lays the sustainability
concept.
three pillars of sustainable development
Adams, ��©�¤�¢�
W.M., 2006: 2)
The
SUSTAINABLE DEVELOPMENT – A REGULATORY TIMELINE ¡ �¦¨�
The idea of sustainability dates back more than 40 years to the new mandate adopted by
The World Conservation Union (IUCN). It was a key theme of the United Nations Conference on
the Human Environment in Stockholm in 1972. The concept was coined explicitly to suggest that
it was possible to achieve economic growth and industrialisation without environmental damage.
In the ensuing decades, mainstream sustainable development thinking was progressively
developed through the World Conservation Strategy (1980) developed by IUCN, the Brundtland
Report (1987), and the national government planning and business organisations of all kinds.
The Global Reporting Initiative (GRI) has pioneered the development of the world’s most
widely used sustainability reporting framework and is committed to its continuous improvement
and application worldwide. GRI is a large multi-stakeholder network of thousands of experts, in
dozens of countries worldwide, who participate in GRI’s working groups and governance bodies,
use the GRI Guidelines to report, access information in GRI-based reports, or contribute to
develop the Reporting Framework in other ways – both formally and informally.
The Intergovernmental Working Group of Experts on International Standards of
Accounting and Reporting (ISAR) working group is hosted by the United Nations Conference on
Trade and Development (UNCTAD). ISAR was created in 1982 by the United Nations Economic
and Social Council (ECOSOC). [ISAR assists developing countries and economies in transition
to implement best practices in corporate transparency and accounting in order to facilitate
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investment flows and economic development. ISAR achieves this through an integrated process
of research, intergovernmental consensus building, information dissemination and technical
cooperation. ISAR has a number of areas of work, including: IFRS implementation, accounting
by SMEs, corporate governance disclosure, corporate responsibility reporting, and environmental
reporting.
THE SUSTAINABLE DEVELOPMENT AS GRI
Sustainability reporting is the practice of measuring, and being accountable to internal and
external stakeholders for organisational performance towards the goal of sustainable
development. A sustainability report should provide a balanced and reasonable representation of
the sustainability performance of a reporting organisation, including both positive and negative
contributions.
Sustainability reports based on the GRI Reporting Framework disclose outcomes and
results that occurred within the reporting period in the context of the organization’s
commitments, strategy, and management approach.
Reports can be used for the following purposes, among others:
o Benchmarking and assessing sustainability performance with respect to laws,
norms, codes, performance standards, and voluntary initiatives;
o Demonstrating how the organization influences and is influenced by expectations
about sustainable development;
o Comparing performance within an organization and between different
organizations over time.
All GRI Reporting Framework documents are developed using a process that seeks
consensus through dialogue between stakeholders from business, the investor community, labour,
civil society, accounting, academia, and others. All Reporting Framework documents are subject
to testing and continuous improvement.
All GRI reporting documents include: The GRI Reporting Framework, The Sustainability
Reporting Guidelines and some protocols that are clearing the specific and technical aspects of
disclosing.
The GRI Reporting Framework
The GRI Reporting Framework is intended to serve as a generally accepted framework for
reporting on an organisation’s economic, environmental, and social performance. It is designed
for use by organisations of any size, sector, or location. It takes into account the practical
considerations faced by a diverse range of organisations. The GRI Reporting Framework contains
general and sector-specific content that has been agreed by a wide range of stakeholders around
the world.
83

The Sustainability Reporting Guidelines
The Sustainability Reporting Guidelines Consists of Principles for defining report content
and ensuring the quality of reported information. It also includes Standard Disclosures made up
of Performance Indicators and other technical topics in reporting.
The specific and technical protocols
o Indicator Protocols exist for each of the Performance Indicators contained in the
Guidelines. These Protocols provide definitions, compilation guidance, and other
information to assist report preparers and to ensure consistency in the
interpretation of the Performance Indicators.
o Sector Supplements complement the Guidelines with interpretations and
guidance on how to apply the Guidelines in a given sector, and include sectorspecific
Performance Indicators.
o Technical Protocols are created to provide guidance on issues in reporting, such
as setting the report boundary. They are designed to be used in conjunction with
the Guidelines and Sector Supplements and cover issues that face most
organizations during the reporting process.
Sustainable development framework according to GRI
Sustainable ��©�¤�¢� �¦¨�¢¡
development framework, 2006:3)
The Sustainability Reporting Guidelines consist of Reporting Principles, Reporting
Guidance, and Standard Disclosures (including Performance Indicators). These elements are
considered to be of equal in weight and importance.
o Reporting principles
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o Reporting guidelines
o Standard disclosure
Reporting principles and Guidelines
This section covers the area of what should be reported by an organisation, considering
the following principles:
o The materiality principle;
o The stakeholder inclusiveness principle;
o The sustainability context principle;
o The completeness principle.
The above principles must be followed by the following principles to help achieve the
appropriate quality of the reported information.
Standard disclosure
o Principle of balance;
o Principle of comparability;
o Principle of accuracy;
o Principle of timeliness;
o Principle of reliability;
o Principle of clarity.
This section identifies information that is relevant and material to most organisations and
of interest to most stakeholders considering: strategy and profile of organisation, management
approach, and performance indicators.
The main objective of the above principles is the accountability of the reporting
organisation, aim that subscribes all the aspects of sustainable reporting.
According Sustainable Reporting Guidelines issued by GRI, the accountability can be
defined as: „the complete disclosure of the information regarding the aspects and indicators that
reflect the organisation's impact in a way that allows to the stakeholders to make decisions, and
all the processes, procedures and estimation made in the disclosure reporting process”.
For every principle mentioned above, a definition was made, an explanation and series of
tests also, in order to allow and to guide their utilisation.
o Materiality principle – The information in a report should cover topics and
Indicators that reflect the organization’s significant economic, environmental, and
social impacts, or that would substantively influence the assessments and
decisions of stakeholders.
85

o Stakeholder inclusiveness’ principle – The reporting organization should
identify its stakeholders and explain in the report how it has responded to their
reasonable expectations and interests.
o Sustainability context principle – The report should present the organization’s
performance in the wider context of sustainability.
o Completeness principle – Coverage of the material topics and Indicators and
definition of the report boundary should be sufficient to reflect significant
economic, environmental, and social impacts and enable stakeholders to assess the
reporting organization’s performance in the reporting period.
o Principle of balance – The report should reflect positive and negative aspects of
the organization’s performance to enable a reasoned assessment of overall
performance.
o Principle of comparability – Reported information should be presented in a
manner that enables stakeholders to analyze changes in the organization’s
performance over time, and could support analysis relative to other organizations.
o Principle of accuracy – The reported information should be sufficiently accurate
and detailed for stakeholders to assess the reporting organization’s performance.
o Principle of timeliness – Reporting occurs on a regular schedule and information
is available in time for stakeholders to make informed decisions.
o Principle of clarity – Information should be made available in a manner that is
understandable and accessible to stakeholders using the report.
o Principle of reliability – Information and processes used in the preparation of a
report should be gathered, recorded, compiled, analyzed, and disclosed in a way
that could be subject to examination and that establishes the quality and
materiality of the information.
Sustainable accounting
In this manner there is a case to be made that sustainable accounting is an emancipatory
form of accounting in that it provides both a critique of existing practices and develops
alternative accounting practices.
A number of questions should be raised in these conditions: „On what end or object is
economical accounting focused?”, „What means do we use to seek this goals?”
In seeking for an answer regarding this issue, it can be considered that, in a particular
case, sustainable accounting is a normative product of the academics in a certain social context.
In order to draw certain conclusions is necessary to establish the position and the relationships
between accounting research, accounting practice and educational function of accounting.
The critiques of environmental accounting derive from two sources: critiques have
emerged from a Marxist (or Marxian) perspective (Puxty, 1986), a Feminist perspective (Cooper,
1992) and a deep green perspective (Maunders and Burritt, 1991). The insights from each provide
different lenses through which to see and judge the enabling potential of environmental
accounting. In these conditions, Puxty cautions that to extend social reporting is "itself no
86

challenge to the powerful... since it leaves the basic structures in place, and can even lead to their
legitimisation". Under the feminist critique Cooper asserts that the "introduction of 'green
accounting', however well thought out, will, under the present system of accounting do nothing to
avert today's environmental crisis”. In a similar vein, Maunders and Burritt, employing a deep
green perspective, conclude that the "light green approach [to environmental accounting] is
irredeemably contaminated by its hidden (ideological) assumptions".
Even the critics have doubted the ability of sustainable accounting to manage the actual
environmental crisis, GRI has designed a number of economic indicators that measures the
sustainable performance of the reporting organisation.
GRI considers the following classification:
o Economic performance
o Direct economic value generated and distributed, including revenues,
operating costs, employee compensation, donations and other community
investments, retained earnings, and payments to capital providers and
governments.
o Financial implications and other risks and opportunities for the
organization’s activities due to climate change.
o Coverage of the organization’s defined benefit plan obligations.
o Significant financial assistance received from government.
o Market presence
o Range of ratios of standard entry level wage compared to local minimum
wage at significant locations of operation.
o Policy, practices, and proportion of spending on locally-based suppliers at
significant locations of operation.
o Procedures for local hiring and proportion of senior management hired
from the local community at significant locations of operation.
o Indirect economic impacts
o Development and impact of infrastructure investments and services
provided primarily for public benefit through commercial, in-kind, or pro
bono engagement.
o Understanding and describing significant indirect economic impacts,
including the extent of impacts.
The assurance level of the sustainable reports
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Every reporting organisation that uses the sustainable reporting framework issued by GRI
should realise an auto evaluation of their sustainable report. Organisation can choose to disclose
information on three reporting levels C, B, A as they appear in GRI sustainable reporting
framework. Every level reflects a certain amount of information about the reporting organisation.
If the sustainable reports are checked by other external parties, the level indicator gets a „plus”
(„+”) sign, generating the following codification: C+, B+, A+.
In the same time, the reporting organisation should announce GRI of the issuing of the
sustainable report and provide GRI a copy of this report.
CONCLUSIONS
At the present moment, sustainable reporting is a relative new area and a challenge both
for regulators, in order to create norms and regulations, but for practitioners, on their way for
applying these methodologies. Still, the sustainable reporting normalisation has both a theoretical
and practical aspect if we take into account the large multi-stakeholder network that creates the
GRI organisation. In plus, we consider the continuous process of improving for the regulations.
This things being said and considering the critique perspective of environmental
accounting, we consider that sustainable reporting covers the area of sustainability, offering a fair
image of the behaviour and the organisational impact of the sustainable development of the
reporting organisation.
The emerging issue in these conditions is represented by the necessity of auditing for the
sustainable reports considering the fact that no standardised methodology is available for
validation of the reported information. In these conditions organisations respond by generating
sustainable reports issued according GRI sustainable reporting framework, according to own
sustainable policies and according to other regulator bodies (e.g. Human Rights Declaration
issued by United Nation).
88

BIBLIOGRAPHY
Adams, W.M. (2006), ¦§��¢��¢§��¡�¦¤¥��¢§��¤��, Report of the IUCN Renowned Thinkers Meeting, 29-31
January 2006;
Bebbington, J. (1997) Engagement, education and sustainability A review essay on
environmental accounting, Accounting, Auditing & Accountability Journal, Vol. 10, No.
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Cooper, C. (1992), "��¢§©§£§�§©�©�£��©�§�¦§¨�©¤�¡�©��¢¤¡£��¤¢", Accounting, Auditing
& Accountability Journal, Vol. 5 No. 3, pp. 16-39; ��¥�£¦§£�¦�¦���¢�©¤�¦§¨¢�¦�¢�¦§¢¥�¡¢¤¥¦©§£�£, Global Reporting Initiative (GRI), (2006);
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Global Reporting Initiative (GRI),
��¡¢¤¥¦©§£�£�(2006);
Maunders, K.T. and Burritt, R.L. (1991), "���©�§�¦§¨£§�¢�©�©¨¦�£��¤¦¥¦¥", Accounting,
Auditing & Accountability Journal, Vol. 4 No. 3, pp. 9-26;
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Puxty, A.G. (1986), ¦�¢©�©¨�", Advances in Public Interest Accounting, Vol. 1, pp. 95-111;
United Nations (1983)
General Assembly Resolution 38/161, 19 December 1983. Retrieved:
2007-04-11;
�§�¦�£�©¤¥¡¤©�©�©�¥�¢��
§�¦¤©§�¢§�£§�¢¢�¢�©��¢§��¤ ¢�©§��¤ §�¦¤©§�¢§�£�¡¢¤¥�¢��¦�¢�©��¢¥¢£¤ ¤¡¤©�¢¥¥©��¤¢�£¤£�¦©§©���¢ "�©�¦£�£��©�§�¦§¨£¥¦��£§¢§��¢¨¦�¦�£�¦©§�£�¤¦�¦��¢©�£�¢��§¦�¦¥� ¢££££§�
United Nations (1987)
General Assembly Resolution 42/187, 11 December 1987. Retrieved: 2007-04-12.
"�¢�©¤�©���¢¡©¤���©��¦¥¥¦©§©§
89

THE CREATION OF THE EUROPEAN SYSTEM FOR
FINANCIAL SUPERVISION AND THE REVIEW OF MARK-TO
MARKET PRINCIPLE – EUROPEAN UNION’S MAIN
DIRECTIONS TOWARDS FINANCIAL STABILITY
PhD candidate
Academy of Economic Studies
Bucharest
Romania
octavian.i.ionescu@gmail.com
Ionescu Iancu Octavian
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Introduction
From July 2007 the world faces the most serious financial crisis since the 1929 Great Depression. As the
international financial crisis unfolded, it was clear to all that the global financial system was in need of significant
reform. What has not been clear is exactly what changes are needed. In the last few months, three reports by the
working group on Financial Reform have started the process to chart a way forward. These reports are led by the
former Chairman of the US Federal Reserve, Mr. Paul Volcker, Lord Turner from the UK’s Financial Services
Authority and the former governor of the Banque de France Mr. de Larosiere. There is a high degree of consensus
� ��¤�£��¢��� �¨£�©¨£� ¡£���£�©��¢�§�����¤¢§¤��¤����§��¤��£��£��¢¤�¤��¤� ��¤�£��¤¢¤��£©�¤�©��¨£�©�£������¤ �©¢£�����©¢£¤�©���§��£��¢§¨¤�¤�¤��£������¤�¨©����©��¤��©��¨£©�£¨£�£¤�� ¤ ¡�¢�� �©¢��£¤¢¤�¤��¢���§¢��¤©�� ��¤���¢�£�©��£©¨�§�¤¢�£�£����£�¢��¢§�¤��£©¨�§�¤¢�£�£����¢��
90

etween the three reports which is an encouraging start but one would not underestimate the difficulty of forging an
international consensus across such a broad range of complicated issues. In this article I will discuss about the
Larosiere report and the recommendations it proposes to stabilize and enhance the financial system. I will focus on
main recommendations: the creation of the European System for Financial Supervision and the review of the markto-market
accounting principle. These two coordinates will reform, enhance and stabilize the financial system in the
European Union. The Larosière Group's mandate covered the issues of how to organize the supervision of financial
institutions and markets in the European Union, early warning and crisis mechanisms, how to strengthen European
cooperation on financial stability and how European Union supervisors should cooperate globally. The strength of
the report lays in the ambitious plan to set up two main institutions of macro and microprudential supervision of the
European financial system: the European Systemic Risk Council at macroprudential level and the European System
for Financial Supervision at microprudential level. The Larosiere report identifies a number of causes that triggered
the present financial crisis. The Report identifies a number of the causes of the financial crisis such as the existence
of excess liquidity, which led to rising asset prices and growth in credit volume. This in turn led to a housing bubble
which was exacerbated by increased mortgage lending and poor lending practices. The use of structured financial
products to manage such credit exposure and their lack of transparency meant that the extent of the risk being taken
on by financial entities was unknown or unquantifiable. The Report also identifies a failure on the part of regulators
to identify systemic issues, rather than those related to a particular firm or industry, as contributing significantly to
the crisis. A failure to react to the crisis, caused by inadequate information exchange and a marked lack of collective
decision making between national supervisors, is also blamed for the failure to mitigate the impacts of the crisis as it
developed. As a consequence, the Larosiere report underlines the necessity for the European Union to adopt
measures to improve the process of systemic problems identification as well as measures to improve the exchange of
information between national supervisory authorities.
The creation of the European System for Financial Supervision
The Lamfalussy process
In order to understand the changes that will take place by the creation of the European System for Financial
Supervision, it is important to present the present processes of European financial system regulation and supervision.
The present approach to the development and adoption of financial services legislation in the European Union is the
Lamfalussy process, named after the chair of the European Union advisory committee that created it, Baron
Lamfalussy. It comprises a four-level procedure that speeds up the legislative process. The parts of the Lamfalussy
framework which are of most direct relevance to regulators are the committees on which they are represented,
notably the Committee of European Banking Supervisors (CEBS), the Committee of European Insurance and
Occupational Pensions Supervisors (CEIOPS) and the Committee of European Securities Regulators (CESR). These
are sometimes called the „Level 3 committees” because they are at level three of the four levels of the Lamfalussy
process. Under the Lamfalussy arrangements, the Commission proposes framework legislation and it is adopted
under the 'co-decision' procedure that involves both the European Council and the European Parliament. This is
Level 1. It is supplemented at Level 2 by more detailed implementation measures, adopted by the Commission and
endorsed by a qualified majority of Member States. The detailed Level 2 legislation is prepared by the Commission
on the basis of advice provided by representatives of national supervisory authorities, acting through the 'Level 3'
committees (CEBS, CEIOPS and CESR). In finalising their advice, the Level 3 committees consult extensively with
providers and users of financial services. The Level 3 committees also aim to foster supervisory convergence and
best practice, principally through the creation of guidance. Finally, at Level 4, the Commission ensures that Member
States are complying with applicable legislation and it pursues enforcement action where required. Analyzing
Lamfalussy process, it clearly results that, at present, the most important supervisory structures for the European
financial system are the level 3 committees. The level 3 committees are examined in depth by the Larosiere group
and based on their structure, improvements in the financial supervisory system are proposed.
From Lamfalussy process to a European System for Financial Supervision
After having examined the present arrangements and in particular the cooperation within the level 3 committees, the
Larosiere group considers that the structure and the role of the existing committees are not sufficient to ensure
91

financial stability in the European Union and all its Member States. Although the level 3 committees have
contributed significantly to the process of European financial integration, there are a number of inefficiencies which
can no longer be dealt with within their present legal structure. This is why the Group proposes the establishment of
a European System of Financial Supervision. The European System for Financial Supervision should constitute an
integrated network of European financial supervisors that will work based on the level 3 committeees, improved and
transformed into three European Authorities. In the Larosiere group’s opinion, the Commission, the Council and the
Parliament should immediately start the necessary legislative work to transform the level 3 committees into three
European Authorities: a European Banking Authority, a European Insurance Authority and a European Securities
Authority. The new European Authorities will replace the present level 3 committees: CEBS, CEIOPS and CESR.
The European System for Financial Supervision will be a largely decentralised structure because existing national
supervisors, who are closest to the markets and institutions they supervise, would continue to carry-out day-to-day
supervision and preserve the majority of their present competences. But in order to be in a position to effectively
supervise an increasingly integrated and consolidated European financial market, the Authorities will carry-out a
defined number of tasks that are better performed at supranational level. Particular attention will be paid to large
cross-border institutions which pose systemic risks which were not detected by the present supervisory structures.
The European System for Financial Supervision must be independent from possible political and industry influences,
at both European and national level. The Authorities should have sufficient resources and powers. But in order to
strengthen legitimacy, proper accountability to the political authorities at the European and national levels should be
ensured. In short, the European Authorities must be independent from the political authorities, but fully accountable
to them. The European System for Financial Supervision must work with a common set of core harmonized rules and
rely on high quality and consistent information. To realise this ambitious objective, the Larosiere group proposes a
two stage process that will lead to the strengthening of the European supervisory system, will raise the stability of the
financial system and will restore trust in the financial markets.
Stage 1 (2009-2010): Preparing for a European System of Financial Supervision
In the first stage, national supervisory authorities should be strengthened with a view to upgrading the quality of
supervision in the European Union. Member States should give consideration to the following reforms:
- aligning supervisors' competences and powers on the most comprehensive system in the European Union,
- increasing supervisors' remuneration,
- facilitating exchanges of personnel between the private sector and supervisory authorities,
- ensuring that all supervisory authorities implement a modern and attractive personnel policy.
The Larosiere group recommends that, in the process of change, the level 3 committees should:
- intensify their efforts in the areas of training and personnel exchanges as well as work towards the creation
of a strong European supervisory culture,
- benefit from, under the Community budget, a significant reinforcement of their resources,
- upgrade the quality and impact of their mediation processes,
- prepare the ground for the setting-up of supervisory colleges for all major cross-border financial firms in the
European Union.
The European Commission should carry-out, in cooperation with the level 3 committees, an analysis of the degree of
independence of all national supervisors. In this first stage, the European Commission should immediately begin the
work to prepare legal proposals to set up the new Authorities. The European Institutions and the level 3 committees
should initiate a determined effort to equip the European Union with a far more consistent set of rules by the
beginning of 2013. Key differences in national legislation stemming from exceptions, derogations, additions made at
national level or ambiguities contained in current directives should be identified and removed, so a harmonized core
set of standards is defined and applied throughout the European Union.
Stage 2 (2011-2012): Establishing the European System of Financial Supervision
After the preparation in Stage 1, the establishment of the European System of Financial Supervision is planned for
Stage 2. The establishment will take place through the transformation of the level 3 committees into three new
European Authorities: the European Banking Authority, the European Insurance Authority and the European
Securities Authority. These Authorities should have their own autonomous budget, commensurate with their
92

esponsibilities. In addition to the competences currently exercised by the level 3 committees, the newly created
Authorities should have the following key-competences:
- legally binding mediation between national supervisors,
- adoption of binding supervisory standards,
- adoption of binding technical decisions applicable to individual financial institutions,
- coordination of colleges of supervisors,
- designation, where needed, of group supervisors,
- licensing and supervision of specific European Union-wide institutions (like Credit Rating Agencies),
- binding cooperation with the ESRC to ensure adequate macro-prudential supervision.
In this second stage, national supervisory authorities should continue to be fully responsible for the day-to-day
supervision of firms. The Group recommends that planning for the 2 stages of the new system be started
immediately. To this effect, a group of high-level representatives of the Finance Ministries, the European Parliament,
the Level 3 Committees, and the European Central Bank to be chaired by the European Commission, should come
forward before the end of 2009 with a detailed implementation plan.
The following diagram illustrates the future interaction between the European Systemic Risk Council at
macroprudential level and the European System for Financial Supervision at microprudential level:
93

Figure 1. The new institutional framework for financial stability in the European Union
(from the Larosiere Report, 2009)
The review of mark-to-market accounting principle
The mark-to-market accounting principle – one of the main causes of the financial crisis
With respect to the accounting rules, the Larosiere report underlines the importance of a wider reflection on the
mark-to-market accounting principle. An in-depth analysis of the mark-to-market accounting leads to an alarming
conclusion: mark-to-market accounting was one of the main causes that triggered and fuelled the current global
fiancial crisis. Mark-to-market accounting means that companies must value the assets on their balance sheets based
on the latest market indicators of the price that those assets could be sold for immediately. The market with the
greatest impact in the current financial crisis was the housing market. Excess liquidity and lax mortgage procedures
led to the accelerated raise in housing prices. Many firms in the financial sector had securities and complex financial
94

instruments guaranteed by mortgages. But when the risks taken by these firms have emerged at the same time with
the beginning of the subprime crisis in the United States in mid 2007, housing prices all over the world began to
drop. Under mark-to-market accounting, declining housing prices don't just reduce the value of defaulting
mortgages. They reduce the value of all mortgages and all mortgage-related securities and financial instruments held
by the firms in the financial sector because the housing collateral protecting them is worth less. Moreover, when a
company in financial distress begins fire sales of its assets to raise capital to meet regulatory requirements, the
market-bottom prices it sells out for become the new standard for the valuation of all similar securities held by other
companies under mark-to-market. This prompts the beginning of a downward vicious spiral that makes more and
more firms to have a balance sheet that indicates insolvency.
The end result for the company is stock prices driven toward zero and bankruptcy or government takeover.
The review of mark to market accounting principle – the way towards financial stability
The crisis has brought into relief the difficulty to apply the mark-to-market principle in certain market conditions as
well as the strong pro-cyclical impact that this principle can have. The Larosiere group considers that a wide
reflection is needed on the mark-to-market principle by the accounting standard setters. Whilst in general this
principle makes sense, there may be specific conditions where this principle should not apply because it can mislead
investors and distort managers' policies. Long-term economic value should be central to any valuation method. The
European Union decision from October 2008 to modify IAS-39, thereby introducing more flexibility as well as
convergence with US Generally Accepted Accounting Principles, is to be appreciated. Accounting standards should
be developed so that they do not bias business models, promote pro-cyclical behaviour or discourage long-term
investment. The International Accounting Standards Board and other accounting standard setters should clarify and
agree on a common, transparent methodology for the valuation of assets in illiquid markets where mark-to market
accounting principle cannot be applied. The International Accounting Standards Board should further open its
standard-setting process to the regulatory, supervisory and business communities. The oversight and governance
structure of the International Accounting Standards Board should be strengthened to face new challenges.
Suggestions
In order to support the successful implementation of the Larosiere report recommendations, I shall present a few
suggestions. The first suggestion is about the cross sector cooperation and communication enhancement between the
three new European Authorities. Supervising large complex financial institutions requires an ability to distil an
enormous amount of detailed and highly technical information into a coherent picture of individual firms’ risk
positions, to assess that picture against global market developments and to judge the viability of firms in various
market scenarios. In this activity, communication plays a critical role. To avoid a possible isolation tendency in the
sector of which each Authority is responsible and in order to have a better information flow within the European
System of Financial Supervision, I suggest the setup in parallel with the three Authorities of a Committee for Crosssector
Cooperation. The Committee for Cross-sector Cooperation can have members from each Authority,
designated by rotation, and its main role would be to facilitate the exchange of information and best practice
procedures between Authorities, as well as to centralize aspects regarding microprudential supervision within the
European System of Financial Supervision.
The second suggestion refers to the necessity to have a fiscal power, alongside the supervisory power, within the
European System of Financial Supervision. Any structure for financial supervision and stability needs a fiscal backup.
Although this aspect has been ommitted by the Larosiere report, the financial crisis has made that abundantly
clear. The current national structures are backed by the national Treasuries. A European financial supervisory
structure needs a European fiscal arrangement at institutional level. Without such a European fiscal arrangement,
crisis management has to remain at national levels, leading to financial protectionism. Moreover, leaving expensive
crisis management at national level, while shifting supervisory powers towards the supra-national level, could be
described as national taxation without proper control and national representation. Afiscal power would strengthen the
authority and efficiency of the European System of Financial Supervision in times of economic effervescence but
especially in times of crisis.
The third suggestion refers to the differentiated application of the mark-to-market accounting principle on classes of
assets and liabilities. Because the mark-to-market accounting principle can be applied in stable economic conditions
but not in a crisis due to its pro-cyclical effect, its differentiated application could eliminate the inconvenient. More
95

precisely, the application of the mark-to-market accounting principle could be done only for those asset classes for
which the market is not in crisis or the activities in that market are not turbulent. In this way, the distortions that the
mark-to-market accounting principle creates when applied in crisis situations could be avoided and the firms’
balance sheet strengthened.
Conclusions
The aspect of the supervisory changes for the financial system in the European Union presented in the Larosiere
report is conceptually clear and with sufficient implementation details. Overall, its general structure is attractive. It
makes it clear that the key is to coordinate not to centralise all activities in one institution. The review of the mark-tomarket
accounting principle is necessary for a better evaluation of the firms’ assets as well as to avoid the systemic
risks generated by pro-cyclicality. Alongside the review of the mark-to-market accounting principle, the creation of
the European System of Financial Supervision are the two main directions towards financial stability in the European
Union. The change of the present financial supervisory structures by its transformation into an institution with
significant powers and resources is a definitive step towards a systemic approach to financial markets’ regulation and
supervision at the European Union level. Risks will be better detected and managed. The stability of the financial
system in the European Union will depend on these changes.
This article is a result of the project „Doctoral Program and PhD Students in the education research and innovation
triangle”. This project is co funded by European Social Fund through The Sectorial Operational Programme for
Human Resources Development 2007-2013, coordinated by The Bucharest Academy of Economic Studies.
Bibliography
Sheridan, Brendan, 2009, �£�©��£©¨�¢£�£���©¨¨��¢����§��£����©��¤, Finance-Magazine.com, April 2009,
available in electronic format at: http://www.finance-magazine.com/display_article.php?i=9031 ��¤¢£����¤�¤¨�¢�§����£�©��£©¨�§�¤¢�£�£��£���¤����¤��¢�, 2009, published by the European Commission
on 25th of February 2009, available in electronic format at:
http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf �¤�����¤����¤�¨��©¨�©�££���¢£�£�, 2009, published by the UK Financial
Services Authority in March 2009, available in electronic format at:
http://www.fsa.gov.uk/pubs/other/turner_review.pdf
Wicks, Nigel, 2009, ��¤�, article read at the conference
organized by the International Monetary Fund and the National Bank of Belgium, Brussels, March 2009, available in
electronic format at: http://www.imf.org/external/np/seminars/eng/2009/eurfin/pdf/wicks.pdf
��£�©��£©¨� ��¤�§�§¢¤�©�¤���§¢��¤ ���¤¢��¤���¢� ��¤�§¢�¤¢�¤�£¤¡���¤�§¨©��¢
96

ACCOUNTING IN HISTORICAL COSTS OR ACCOUNTING IN
CURRENT VALUES?
Academy of Economic Studies of Bucharest
Bucharest, Romania, ionel_j@yahoo.com
Ionel JIANU
Abstract ¤¨¤�¤������£�©��£©¨�£�§©�£�������©�£���§¨��¤�¢��£�¤��¢¤�£�£¨£� ©��¢¤¨¤�©��¤��¢��¤�¢��£�¤�£���¢�©�£���¦� ��¤��¤�¢ ©���¢©��£�¤����¤¢¤¡¤¢¤�¢����¤��©� ¤�©¨§©�£����¢£��©����¡�£��¡¤�¤��£�� �£���¢£�©¨����� �§¢¢¤�������¢¤©¨£�©�¨¤�©¨§¤��¢¤�¤���©¨§¤��©£¢�©¨§¤�¦�¨©��¤�§�¤¢©�¤���¢¤��¨§�£���¢£��¢¤�¢¤�¤��©��§©¨ ��¤����¤��������¨£�©�¤�£��§¤���©���§��£��£�¨£�£¤�����¤�¤��¨¤�¤������¤¤�©¨§©�£���¢£���¢��¤������¤��
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Keywords: evaluation, historical cost, actual value, economic crisis �¤©¨�¡£����¤ ©§���¢ ���£�£��¢¤�©¢�£����¤¤�©¨§©�£���¢£���©����§¨��¤©��¢�©��¤�£�©���§��£���£�����£�£�����¤�����£� �¢£�£��¡¤����£�¤¢��©���£�¤�©¨§©�£���¢£�£���¤�£���¢£�©¨�����¤�©§�¤£�©¨¨�¡���¤¢¤�©££������¤©��¤���©¨§¤ ����¤£¢£�£�£©¨�©¨§¤©����¤�©£��¤�©��¤����¤�¢��§��£���©�©�£� �� �����¢��£�£���£��£�¤�£�£�¤���� �����¤�©�¤�£�¤���£���§� ¢¤�§¨��¡£���£¢¤������¤¢§¤��¤�§�����¤�¤�©�£�©¨£�©�£����¤��£� ©���§��£��£��£���¢£�©¨�����©��£����¤£��¢¤©�¤���¢£�¤�©�©�¢��£���©����©�¨¤©������¤�¢¤�¤��©�£����©�©¨�¤ ¡�¤���¤ ©��©��©�¤�©���£�©��©��©�¤����¢¤©�£����¤�§¢¢¤���©¨§¤���¢��¨¤��©¢£�¤£�©�£��¨©�£��¤����� �¢¤�¤�����¤ ���£�¤�¤�¤���¢¤��¤§�¤����¤©��§©¨£���¤¤�©¨§©�£����¤¨¤�¤���£��£�©��£©¨�£�§©�£������£���§� £��¢¤¨£©�£¨£� ��§¢¢¤����©¨§¤���¤�£���¢£�©¨�����©��¤¤���¢©¨����£�¤���¤�©£�¤�©¨§©�£���¢£�§�¤�£�©���§��£����©�£���
Classification JEL: M21, M40, M41
REVIEW OF THE SPECIALTY LITERATURE
Accounting is a technique, or in its contemporary dynamics, a techno science where permanently developed. The
method of double games is a basic method of the accounting technique, and it has its origins still in the Middle Ages.
However, about the double game approved in the year 1340 and it belongs to Massari from Genoa (Riahi-Belkaoui
A. 2004), preceding with approximately 150 years Luca Pacioli. But Luca Pacioli is associated with the introduction
of the double game method, in 1494 publishing the book Summa de Arithmetica Geometria Proportioni et
Proportionalita which includes two chapters in which it is presented the double game method. As the accounting
technique was described approximately 700 years ago, also the problems issues of evaluation in accounting have
existed for ages. The reason is that one of the most complicated issues the accounting faced was lanced to the
component elements of the financial situations, and that it could be provided (offered) credibility and relevance for
the accounting theory and practice there were proposed many evaluation grids among which we mention: historical
cost, present value, correct (proper) value. It is asked the question which of these evaluation grids will be chosen,
taking into consideration the advantages and disadvantages of each of them.
Eventually, the accounting experts reached the conclusion that, b measuring and presenting the accounting
information, the most suitable would be the historical cost, thanks to the advantage offered by its reliability, the
defining clarity coherence, the verifiable character. The historical cost is the cost of origin evaluated, measured and
registered at the appearance of assets and the creation of debits. The general framework of the International
Normalising Body/Institution – International Accounting Standards Board (IASB) defines the historical cost as: “In
case of assets, the historical cost delimits the amount in cash of equivalents of cash paid at while buying them the
moment of their buying or the proper (correct) value of the paid amount while buying. In case of the debits , the
97

historical cost represents the value of equivalents got by the exchange of obligation or in certain circumstances (for
instance , in case of taxes and profit ) , the value it is expected to be paid in cash or equivalents of cash in order to put
eliminate the debits , while doing business accordingly . The historical cost is the consequence of this fundamental
principle: the principle of the nominal monetary and the principle of prudence (Feleaga L. & Feleaga N, 2007).
The principle of monetary nominalism ignores value fluctuations of the monetary standard and requires evaluation of
goods acquisitioned in onerous title at cost of purchase, of goods obtained through own production means at
production cost, of claims and duties at nominal value. Once assessed, the historical cost remains constant as long as
the good remains in possession of the manufacturer. Precautionary principle mandates accounting of any potential
devaluation and prohibits accounting latent gains of value afferent to assets. Such, assets remain recorded at
historical cost if they undergo an accrual of value or are otherwise appraised at inventory value, according to
Romanian regulations pertaining or the recoverable amount, for most items, under International Financial Reporting
Standards (IFRS).
Historical cost accounting first developed in the nineteenth century, following the industrial revolution, but has its
origins in the XV century, when first used in textile mills. Gradually, the precautionary principle began to be
instituted in accounting so that now you cannot talk about historical cost accounting without calling into question
this principle of prudence. J. Savary is among the first authors inducting aspects of the application precautionary
principle into accounting. Thus, in his book, �¤�©¢�©£��¡���£©��, released in 1675, Savary J. recommended for
entities the performing of annual inventory appraisement and suggests that stocks should not be assessed at a higher
value than their real value. Likewise recommended is that entities take into consideration all costs undertaken and all
that is owed (B. Colas, 2005).
To be able to rely on information provided by manufacturers, internal and external users should ensure that the
information is verifiable and objective. In as such, it is specifically utilization of the historical cost, as measuring
base that allows entrepreneurs to provide verifiable and objective information in financial statements. (Feleagă N.
1996). Historical cost is past-oriented, but unlike other bases of evaluation, affords a great advantage: it is clearly
defined and verifiable; once established, it remains fixed in as long as the property is in possession of the
manufacturer. Based on these advantages it seemed that nothing could happen to historical cost. Well, what then is
the great disadvantage making the historical cost value obsolete? The answer: inflation. If market price rises, the
information provided in compliance with the historical cost is not real. In this respect Ristea M. (2004) states "to
circumvent this reality means that fictitious results will consigned to financial records because historical costs
inscribed prior sale are expressed in account units of different value than the value achieved based on sale price."
Without adequately dealing with the result the situation arises when a firm is recording imposable profit while
actually accumulating loss. In fact, international accounting standards (IAS) number 1 'Presentation of financial
statements' states as follows: "the financial statements based on the historical cost model are useful only if expressed
in relation to the unit of measurement current to the balance sheet at the time of inscription. Another disadvantage
about historical cost accounting is the lack of pertinence regarding inflation to the information provided (D.
Solomons, 1948; B Barlev & Haddad JR, 2003, IK Khurana MS & Kim, 2003; D Herrman et al, 2006).
Thus, following criticism of accounting historical cost, current value assessment began to coalesce. In the year 1886,
german writer Simon H.V., for the first time in accounting, introduced the concept of usage value (present value)
through applying the principle of prudence in evaluating fixed assets, deigning that these must be valued at the
minimum between cost and value of use (B. Colas, 2005). Thus Simon H.V. is more than a century prior to the IASB �¤�¢¤�©�£�������¤��, which, by issuing of IAS 36 uses the present value to determine whether an asset is
deprecated or not. The german Schmild F., published in 1908-1922 a series of articles promoting the use of present
value in accounting evaluation, justified by the fact that, in a market based economy, there are fluctuations in price
making it impossible to obtain a correct accounting result through a historic cost valuation.
Following the Second World War during the period of reconstruction of national economies, in the '50s and '60s,
inflation was manifest in many countries. Traditional accounting, based on the stable monetary hypothesis and the
application of the precautionary principle, proved unable to faithfully reflecting the picture accounts painted. Models
were proposed as to allow accounting practice to show the impact of inflation has on the financial situation and the
performance of entity, information that is relevant from an economic and financial viewpoint. It was therefore
necessary to apply measures resulting in the restoration of confidence in financial statements by maintaining the
98

purchasing power of money. This concept of maintaining the purchasing power of money had become particularly
important in the world of business because of it highly influencing decision-making. Thus emerged accounting for
inflation. Gradually, globally, various accounting practices that adapted for inflation were instituted, including:
methods based on conversion (indexed), methods based on assessment (current cost), mixed methods (Tugui A.,
2000). The consequences of inflation for the balance sheet items in general and on capital and reserves, in particular,
have led to legislation, national and international, adopting norms to regulate them.
On the backdrop of discussions at the European level concerning the reliability vis a vis the relevance of historical
cost accounting, as a first step forward, the Fourth Directive of the European Economic Community allowed the use
of other bases of evaluation as well "Member States may declare that they reserve the right, through derogation from
historical cost assessment, to authorize or to require of all or certain categories of companies the following:
� Assessment based on replacement value for tangible assets whose use is limited in time, and for stocks;
� Evaluation of records inscribed in financial statements, including equity, on the basis of methods, other than
those referred to in paragraph a), that account for inflation;
� Reevaluation of corporeal fixed assets as well as financial fixed assets.
Based upon these regulations, countries like Britain, Holland, France and Germany have passed laws that match
minimum requirements of these rules. UK is the pioneer in using the current (present value) assessment being among
the first countries that permitted revaluation of assets' current value. Under general framework in the UK there are
two bases of evaluation: historic cost and the present value, and the actual, present value can be determined as
follows: min = current value (current cost, recoverable value), where the recoverable value = max (net value
realizable; usage value). From how it is ascertained it follows that the present value reflects more the dispossession
value of assets (A. Haller et al, 1997).
The United States have, for many years, been the champions of the use of historical cost in accounting (Zeff, 2007).
Despite this, however, in September 2006 the U.S. regulating body the Financial Accounting Standards Board
(FASB) published standard SFAS 157 which defines fair value, establishes a conceptual
framework for assessing the fair value and specifies the information to be presented on the fair value.This regulation
allows and encourages entities to evaluate assets and liabilities at fair value. What was the reason for this radical
change? FASB argued that such a change thusly "... with the passage of time, the historical cost becomes irrelevant
to revealing the current financial situation of an entity ... financial statements should provide users with information
relevant to investment decisions, credit or other types of decisions. " Under this regulation, fair value is defined as
such: "fair value is the price that could be derived from an asset sale or payment in the case of debt transfer in a
normal transaction between market participants at date of valuation." ¤©�§¢¤�¤��� �©£¢¡©¨§¤
At international level, the present value is used more frequently in assessing the financial position and performance
of an entity. Ionascu I. affirmed in 2003 that "At least for the near future, we will witness the abandonment of
historical cost, but instead a joint assessment model, characterized by the cohabitation between the historical and
current value. It is possible that the preparation of consolidated accounts should be based more on fair value than just
the drawing up of individual accounts, since consolidated accounts almost exclusively serve shareholders and
managers.
At the level of financial entities, historical cost will subsist also because it is and will continue to be required in order
to determine tax base pending tax according to regulations. Jianu I (2009) following study conducted on the impact
of using fair value accounting, in the assessment of asset elements, under IFRS framework, noted that "the majority
of asset elements must be assessed at fair value (financial assets available for sale and assets held for trading that are
assessed at fair value, fixed assets held for sale, biological assets and agricultural production valued at fair value less
transaction costs) or may be measured at fair value if the entity should choose this accounting treatment (considered
basic treatment in the case of real-estate investment, alternative treatment in case of operating assets and evaluation
and alternative treatment for tangible and intangible assets).
RESEARCH METHOD
Evaluation is the process of determining the value at which financial structures that will be recognized in the balance
sheet and the profit and loss account. This involves choosing a basis of evaluation. In accounting theory and practice
99

several bases of evaluation have been suggested, among which the most commonly used are historical cost, current
cost, feasible value, present value and fair value. Last 4 bases of evaluation show present values.
The durability of historical cost accounting, brought again into discussion by the present trend of utilizing present
values in accounting evaluation, was the starting point in undertaking the present study, which includes the
advantages and disadvantages of assessing the historical cost vis a vis the evaluation of current value in a
comparative manner.
To execute the comparison we identified 11 positive characteristics depending on which we analyzed to what extent
each of the two types of assessment - historical cost or current value - is advantageous or disadvantageous.
Subsequently, we extended the study to reflect how the accounting information users are benefited by the assessment
used in the accounts. Finally, as a consequence of the present situation facing the global economy, we've have
expressed a personal view regarding the type of assessment that should be used in accounting, during an economic
downtrend.
RESULTS
§©¨£�©�£�¤�¢©£����©���§��£��£���¢�©�£��
Positive characteristics Historic cost Current value
Intelligible
Reliable
Relevant
Comparable
Yes
Partial
Partial
No
Objective Yes No
Prudent Yes No
Simple Yes No
Less/Least costly Yes No
No
Partial
Yes
Yes
Exhaustive Yes Partial
Lacking volatility Yes No
Renders the market value of the entities No Partial
Main
Secondary
Tertiary ��¤¢���©���§��£��£���¢�©�£��
No
Yes
No
Appropriate during an economic crisis Yes No
DISCUSSION
reflects ¦��¤¨¨£�£�£¨£�
Qualitative characteristics of accounting information
that quality of accounting information of being easily understood by users. Historical cost
being calculated at the date of entry of the asset into the entity is a concept easily grasped thus meeting the
qualitative characteristic of accounting information regarding intelligibility. The actual value, as concept, reflects the
present value of a balance-sheet item, but may take any one of the following forms of assessment: the development
Yes
No
No
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cost, current cost, current value or fair value. The multitude of forms of assessment that can be substituted for the
current value make this concept difficult to understand for users. In addition, complex methods of calculation for
such assessment bases make their use in accounting prohibitive.
requires �¤¨£©�£¨£�
that accounting information may not contain significant errors and may not be biased so that
users may be confident it correctly illustrates what it is supposed to denote. Generally, it is an accepted statement that
accounting in historical cost is reliable. However, before accepting this claim one should analyze characteristics
which must be met for accounting information to be considered reliable: accurate representation, prevalence of the
economic over the juridical, neutrality, prudence and integrality. Historical cost is veracious in inflationary
economies, historical cost accounting is a specific to economies where the legal has precedence over the economic,
the information presented is incomplete because it only considers data relating to the transaction carried out, without
enacting a comparative study. In contrast, historical cost is neutral because, being registered on certified documents
cannot be manipulated. Also historical cost accounting is prudent as it imposes the principle of prudence. Therefore
historic cost only partially meets the characteristics necessary to allow that the information provided by this basic
assessment is to be relied upon. Actual value is opposite historical cost in as far as compliance with features required
to ensure information reliability is concerned. Assessing the current values faithfully represents reality even in
inflationary conditions, compelling an accurate reflection of economic reality through recognition of items at current
value. However, actual value is not neutral because it is easy to manipulate, for example by presenting some current
values higher than in reality for the purpose of painting a favorable image of the entity to financial institutions.
In addition, accounting in current values is not prudent because it allows the recognition, not just of declines in the
values of assets, but also of gains. Thus, although it is recognized that assessing in current values unreliable, through
analysis performed, we can appreciate that the reliability, although only partially observed, adapts better to current
value evaluation than assessment in historical costs.
reflects �¤¨¤�©��¤
the usefulness of accounting information, and assists users in assessing the events past, present
and future. Assessing the historical cost is pertinent only to a stable economy. Instead, in an inflationary economy,
the information submitted by historical cost accounting is false because it registers profit as prices increase,
potentially leading to the decapitalization of the entity. Historical cost accounting being relevant only to a stable
economy we believe that it only partially fulfills the qualitative characteristic of accounting information regarding
relevance. In contrast, current value assessment reflects the current economic reality of present transactions, aiding
users in effecting predictions on the financial position and future performance of the entity, thus allowing us to state
that the present value provides relevant accounting information for users.
of ����©¢©�£¨£�
accounting information involves issuing predictions both in time, from one year to another, as well
as space, from one economic entity to another. Evaluating in historical costs does not allow for accurate comparisons
because the comparison involves of historical values recognized introduced in accounting on differing dates. For
example, if an entity has three identical lands, each acquired at different dates, they will be registered at instatement
in the financial records at values of, for example, 50 monetary units, 150 mu and 300 mu, respectively. In a historical
cost accounting, the value presented in the balance sheet for these lands will be a total 500 um. It is as if we add 50
apples to 150 pears and 300 oranges. However, current value assessment allows proper comparisons, both in time
and space. Thus, if in our example the actual value of one lot of land would be 300 mu, then the lands would be
figure in the balance sheet at their present value of 900 mu.
Objectivity
A sought quality of historical cost accounting is its objectivity, based on verifiable facts, conscribed in certified
documents which thus satisfies one of the primary purposes of accounting, namely, to serve as evidence among
traders. Objectivity is enhanced by the trust lawyer’s grant to historical cost accounting. The objectivity of historical
cost accounting renders it easier to control. However, historical cost accounting is not fully objective in the situation
of accounting drops in the value of assets or hikes in the value of liabilities and, as such, balance sheet items must be
recognized at estimated values that are largely subjective. Instead, assessing actual values is considered subjective
because it is based on continuous estimates of current values, estimates that are often based on different methods of
calculation for current values. In addition, the manager can "juggle" the estimates performed to influence current
values for the purpose of submitting a favorable situation of the entity and the desired and expected outcomes.
Prudence
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Even since the early nineteenth century, historical cost assessment abides by the principle of prudence. In the case of
assets, for example, the precautionary principle necessitates accounting potential value drops while precluding the
accounting of latent value gains of assets. Such, assets are recorded at historical cost if there is a growing value or are
otherwise valued at current value that is lowest. According to the principle of prudence only benefits acquired on the
balance sheet date may be recognized. Therefore historic cost is conducive to a negative view of the entity as abiding
by the principle of prudence only allows recognition of potential losses for assets and never of gains. So historical
cost accounting does not foresee all the entity's profits, but anticipates all losses. However, lately, more and more
situations have lead to the failure of the principle of prudence. Example of this is the revaluation of fixed assets
which requires recognition in equity of the gains of revalued assets. There is also the case of real-estate investments,
which implies recognition in the profit and loss account of the gains in value of real-estate investments if it is opted
for evaluating them at fair value. Currently, even as pertains to debt, the application of the precautionary principle
has been constrained in the sense that only likely liabilities are recognized through admitting of provisioning for the
most accurate estimate possible. In case of debts , the prudence principle, demands however to be taken into account
all the foreseeable risks and possible loss, even if these are admitted between the end of the financial transaction and
the date on which the financial situations are being authorized . This demand is still respected only in the accounting
from Germany, a system of accounting where the prudence is applied extremely and, by respecting the principle of
imparity demands that all the foreseeable losses be accounted, as well as all the possible debts, not only the possible
ones. (Imparitatsprinzip)
The use, to an even smaller extent, of the prudence principle, reveals the present trend of accounting towards an
evaluation in current values. The evaluation at the current value enforces the recognition in accounting, both of the
achieved incomes and the non achieved incomes. In this respect, at present, the accounting equipped with an
instrument adequate to the measurement in accounting of both the achieved results and the non achieved results,
meaning the global result. Although the concept of global result appeared for the first time in 1980 in the American
accounting �¢¤�¤��©�£������¤�£�©��£©¨�£�§©�£���. regulations, there were needed 27 years to be accepted at an international level, by adopting the concept
in IAS 1 Thus, starting with financial practice 2009, all the entities that apply
IFRS must compulsorily make the situation of the global result, as a main situation of reporting the financial
performance of an entity. The transition from the accounting result to the global result can be considered a transition
from the evaluation in historical costs to the evaluation in current values.
Simplicity
The accounting in historical costs is being characterized through the simplicity of measuring this value. In case of
purchasing assets, the historical cost is represented by the purchasing cost, made up of the buying price and all the
accessory expenditures to get the asset workable. If the buying price is easy to be identified because it is on the
justified documents relevant to the input of the asset in the entity, it cannot be told the same thing in case of the
accesory expenditures. Contabilitatea în costuri istorice se caracterizează prin simplitatea măsurării acestei valori.
For instance, it is being dealt with the problem of allotting the expenses with the transportation for the two products,
in case the company purchases two important products at the same transportation. However, the accounting benefits
of urgent methods to allot the indirect expenses, as well as the method of supplementing, ABC method, all these
make this aspect not to be an obstacle anymore. When producing assets, the historical cost is represented by the
production cost which contains the totality of direct and indirect expenses of production made by the entity to obtain
a certain asset. The allotting of the indirect expenses for the products is relatively complex, but the complexity
resides, not so much in the calculus method but the way of adapting the organizational chart of the entity to an
efficient and easy system to calculate the costs.
When evaluating in current values it cannot be spoken about simplicity because the calculus of this value requires
advanced knowledge of evaluation. For instance, when establishing the current cost/ the acceptable value it must be
identified the markets on which the asset could be bought/sold the prices it could be transactioned, the expenses
estimated to be bearded by the entity after the sale when establishing the feasibility value, the criteria of selecting the
most reliable values when more alternatives are being offered etc. The problems are even more complex when
calculating the present value, which supposes estimations of the future cash flows, of the updating rate which must
be taken into consideration when updating the cash flows, the period of time for which the cash flows must be
estimated.
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Less costly
The costly character of an evaluation basis refers to the financial effort undergone by entity in order to determine the
value at which the elements must be admitted and presented in the financial situations. The calculation of the
historical cost do not rise great difficulties because it deals with the identification of the value which is on the
justified documents of input or its calculation, resorting to specific methods of allotting the expenses for the purchase
or the production of assets. Time has demonstrated that the accounting practitioners are able to calculate the
historical cost. The same thing cannot be said about the calculation of the current value. Either we talk about the
current cost, acceptable value, present value or fair value, the difficulties imposed by the calculation of these values
surpasses the capacity and the training of many accounting practitioners. This is the reason for which, other
specialized persons, as evaluators, will be engaged in the calculation of the current values. This thing, certainly,
generate additional costs for an entity, by all means neglected, reason for which we could say the evaluation at
current value is costly.
Exhaustivity
Often it is reproached to the historical cost that it does not allow the evaluation of all the assets as the fixed assets
generated internally, the competences of the personnel. Still we consider that the reproach should be made not in the
manner of measuring these elements but the conditions that should be achieved for their acceptance, admission in
accounting. It is known that an element, in order to be accepted it must be evaluated in a reliable manner. As the
enumerated elements above are difficult to be quantified and their values vary very much, the accounting information
is no longer reliable, although the real value of such elements is significant. Furthermore, there is a series of elements
which at their initial acceptance do not have a value, as the case of the covering instruments which practically should
not be admitted although afterwards their initial admission they are able to register great variations of value. That is
why it is considered that the evaluation at current value would not be pertinent, because it allows the evaluation of
these elements. Still the lack of an active market makes it difficult for a series of elements to calculate the current
values such as the current cost and the acceptable value. The calculation is more complex in case of establishing the
present value. The difficulties in establishing the current value for a series of elements belonging to the balance
makes the exhaustively of evaluation be only partial.
Lack of volatility
Volatility reflects the variation of result settled by the use of a certain evaluation basis. According to the accounting
in historical costs only the achieved incomes can be accepted, their presentation being made in the account of profit
and loss. The variation of the value of assets and debts does not influence the result of the exercise because the non
achieved incomes cannot be admitted only in the moment of selling. Thus the volatility of the result as a
consequence of the evaluation in historical costs, doubled, at international level, by the current politics of
diminishing the number of accounting measures, made the volatility of the result is minimal. In exchange, by
evaluating the assets and debts at the current value, volatility increases because the incomes and the non achieved
losses, resulting from the variation of the elements value belonging to the balance sheet, must be accepted, admitted
in accounting. The current experience, regarding the authorized accounting treatments IFRS, Show that not few are
the situations which create confusions regarding the way of admitting in accounting the incomes/non achieved
losses. For instance, in the case of real estate’s investments, the plus of value is admitted in the loss and profit
account, if the entity chooses the method of evaluation at fair value, or at own capitals, if the entity chooses the
reevaluation method. In case of the financial instruments, the problems are even complex because everything
depends on the intention of the entity. Thus, if the shares are classified as financial assets owned for transaction, the
plus of value is admitted in the loss and profit account, instead, if the shares are classified as available assets for the
sale, the plus is admitted at own capitals. Examples can continue in this respect.
Being aware of the multitude of situations which require the presentation of the incomes and non achieved losses,
either in the profit and loss account or in the balance sheet, IASB enforced that, starting with the 1-st of January
2009, all the entities applying IFRS should draft the situation of the global result. Thus the incomes or none achieved
losses, regardless they are admitted in the profit and loss account or in the own capitals, they will influence the
global result. The volatility of the net is sent to the global result avoiding thus the creative accounting of influencing
the net result by choosing a certain accounting policy.
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Representing the stock exchange value of the entity
The evaluation at historical costs maintains the assets and the debts of the entity at their origin value. When the
prices on the market fluctuate, most of the times increasing, the variations of value are not considered, having a
double influence: on the one hand, upon the balance sheet, because the assets are not presented at their real value but
at their historical value, on the other hand upon the profit and loss account, which shows a result inferior to the real
performances of the entity. The calculation of a decreased result has as a consequence the presentation of the own
capitals at a smaller value than the real value of the entity. Normally, the own capitals should reflect the value of the
entity, but through an accounting in historical values, the own capitals give an accounting value of the entity – which
reflects a sum of historical values admitted at different times but not at all a real value. This disadvantage of the
accounting in historical costs, by none registering all the incomes in accounting (not only achieved but also none
achieved) is emphasized by the non admission of other significant elements whose greatness cannot be estimated
professionally. It is the case of the fixed assets generated internally (The most relevant example being the
commercial fund), the competences of the staff, the managerial team of the entity. A part from the disadvantages
reminded above is eliminated through an evaluation at current values. We used the word „part” because the
evaluation at current values allows the calculation of the real value of an entity, calculated as an amount of the real
values of the assets and debts of the entity, established individually, but not as a whole. The entity, as a unitary
whole, contains other assets and debts, omitted in an evaluation element by element. It is the case, as I already
mentioned above, of the commercial fund generated internally, of the competences of the personnel, the managerial
team etc. Still, so far, it has not been found a consensus to accept a certain method of evaluation these elements
analyzed individually, being able to be taken in consideration only through an evaluation of the entity as a whole.
Users of the accounting information
The users of the accounting information can be classified as follows: primary users (the shareholders) which are the
owners of the entity and who, thus, have a direct interest in the entity , either by taking control if they have a
preferential position, or by cashing dividends which should allow the recovery of the entity ; the secondary users that
have a financial interest in the entity ( potential investors, creditors, the state, the employees); the tertiary users (
population that could be affected, either negatively by the pollution generated by the entity , or positively by the
possibility of creating new jobs) which have a direct financial interest in the entity but, which are affected, or I
believe it could be affected by the way the entity administers the activity. The financial situations of the companies
quoted are mainly addressed to the shareholders and the potential investors, but they could be used by other users of
the accounting information such as creditors, the state, employees, suppliers, clients and other users. £��¤���¢�demand pertinent ��¤�¢£�©¢
information on which they could take decisions�whether to sell or keep the
shares. An evaluation in actual values offers pertinent information because it represents a value close to the real
value of the entity. The accounting in historical costs, although provides reliable information they do not give the
real value of the entity. In order to compensate this disadvantage, the financial analysts used a series of evaluation
methods most of them calculating the value of a company from the current value of the elements analyzed
individually to which it is added the goodwill and the badwill created by the entity. At present, maybe more than the
result established by the accounting in historical costs, the shareholder is interested in the calculation of another
indicator: EVA (economic value added) which shows if the entity is able to create value for the shareholder, too. £��¤���¢�demand a ��¤�¤����©¢
prudent accounting because they provide the safety of the financial resources with
which they financed the entity. The evaluation at current costs leads to the diminishing of the producing capacity of
the entity, when the plus of value are estimated at higher values than the real ones, or when they are not achieved in a
short period of time. Thus the integration plus the potential values in advantage could have as a consequence the
distributing of dividends which do not correspond to the achieved results and the availabilities available of the entity
that could lead to the financial unbalance and the diminishing of the cofinancing capacity. In this context, the
prudence principle, specific to the accounting in historical costs, seems to meet the requirements of the secondary
investors. Thus, respecting this principle, on the one hand, protects the creditors and keeps their trust and, on the
other hand, it eliminates the risk of distributing fictitious dividends, prone to affect the financial balance of the entity
and its development, with direct consequences upon the employees. Furthermore, the result calculated by the
accounting in historical costs represents the support for the calculation of the tax owed to the state.
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£��¤���¢�©¢¤interested, not in the financial information presented by the financial situations, but special
reports through which there are presented non financial information regarding, on the one hand, information about
the entity politics upon the natural environment, the obtained results and the commitments regarding the protection
of environment, the way the entity activity affects the natural environment and, on the other hand, social information
such as: remuneration, training, working conditions, social climate etc. �¤¢�£©¢
Pertinence in economic crisis situations
There are some definitions of the crisis concept, but all have some common characteristics: represents a critical
moment, it releases suddenly, through a sudden and brutal changing of a state, represents a dangerous moment, a
weighty situation, inducing a tension period. Macroeconomic speaking, economic crisis, that manifests by production
diminution and unemployment growing, has as a direct effect price diminution on the market. This last fact
influences accountancy evaluation. If in inflation conditions evaluation at actual values offers pertinent, in pertinent
conditions, accountancy in historical costs, with prudence principle, is in the same pertinence manner.
In decreasing price conditions, accountancy in historical prices delivers a result that represents the difference
between the possible income from the transaction made in a period (lower, effect of prices’ diminution) and the
expense evaluated in historic prices corresponding to those incomes (bigger because they are due to the former
periods, when the values at which were evaluated the elements at the entry date were bigger). So the result is
minimum, which allows conserving the production entity capacity by distribution of a lower sum as dividends and by
value entry reconstruction of the active at their historic costs.
The presentation of the pertinent information, in crisis conditions, is reflected over the balance sheet. We say this
because by respecting the prudence principle, all value decreasing are taken in consideration, so the actives are
reflected at their real value, decreased because the crisis.
CONCLUSIONS
The historical cost reflects the right value of the elements at the initial recognition moments, being a just value for
that date. But once the time passes by, he takes a really big historical aspect. In a stable economy, most of the
accountancy information users consider accounting pertinence in historical costs. But the economic parameters, the
general ones (power of buying, interest rate) and the specific ones (the firm profitability) don’t stop developing.
Thus, in a perennial existence in accounts, the historical cost of an element can’t return, after a specific period, the
devoted image of the value that should be reflected. This fact becomes invisible in inflation conditions, when the
calculated result by accountancy in historical conditions doesn’t reflect reality. It’s the reason for, in an inflation
conditions must gave up at historical accountancy and accept accountancy in these times. In exchange, in economical
crisis time, accountancy in historical costs is properly because it doesn’t allow distribution of fictive dividends and
prudence accounting which imposed is adapted to the decisions which should be taken in a situation like this. But, in
present, internationally speaking, it is tended to an evaluation in actual values that probably in some years will take
place to the accounting in historical prices. It remains to see in what measure accounting in recent values will be
durable as accounting in historical costs.
This study analyses, thoroughly, the advantages and disadvantages of accounting in historical costs towards
accounting in current values. A more detailed study, through the analyses of many characteristics, can be the purpose
of future approaches on this topic. Future researches could be enriched through the study of the evaluation bases in
the context of concepts in order to maintain the capital.
THANKS
This article was elaborated as a part of the project “Doctoral School and doctoral students in the triangle
education-research-innovation (DOC-ECI) “, project cofinanced from The European Social Fund through the
Operational Sectorial Human Resource Program 2007-2013 and coordinated by the Academy of Economic Studies
of Bucharest.
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www.iasb.org;
Feleaga L. & Feleaga N. (2007) Contabilitate financiară – O abordare europeana si internationala, Ed. Economică,
Bucureşti;
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Ionaşcu I. (2003) Dinamica doctrinelor contabilităŃii contemporane – Studii privind paradigmele şi practicile
contabilităŃii, Ed. Economică, Bucureşti;
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�©£¢¡©¨§¤
106

dmedintu@yahoo.com
iuliastroe@gmail.com
WHAT IS AT THE BACK OF THE WAGE COSTS?
Daniela Nicoleta Medintu, Iulia Ana Stroe
In the context of profound changes of our time relating to the introduction and use of new methods,
principles and technologies, accompanied by new forms of work organization, the human factor has become a
valuable and strategic factor for any organization. Success in any field of socio-economic activity can be ensured
only through rational and efficient use of human resources. In the contemporary economy, audit of the information
existing in the financial statements plays a crucial part in increasing the users confidence. Under crisis conditions,
correct and complete record of human wage raise questions. Thus, our objectives were to audit the wage costs, an
important element in the overall audit. The methodology approach consisted of checking the accounting documents
where these expenses are recorded, as well as their compliance with the amounts included in work agreement. We
had in view determining an as fair and proper size of the expenditure of labor as possible influencing the profit or
loss resulting from operating. At present, economic and financial performance of the companies is influenced by the
performance of human resources and so of the expenditures with them in comparison with the previous century,
when the focus was on the technological progress and less on human resources. In conclusion, the continuation of the
business of an enterprise depends on the faithful mirroring of the wage recorded in the accounting.
Keywords: audit, wage costs, payroll, contributions to state budget, wage fraud
JEL Classifications: / / M4: Accounting
1. Introduction
Today, the human factor is launching on decisive positions in the issues critical in making efficient firms.
Thus it becomes necessary to research in detail the factors that influence the individual performance of the employee,
determining the optimum size of the expense with labor and social protection compared to his performance leading
eventually to increasing the performance of the organization.
The specialty literature in management brings to the fore front the most important resource for business and
for achieving the performance, namely the man. At the same time, in the accounting efforts are made to frame the
knowledge held by employees under the heading of intangible assets.
Evaluation of human capital through the prism each of us was knowledge represented and represents one of
the major challenges the researchers and even business people are facing today. Is it fair the appreciation of human
capita through the wage only?
Research in the field of accounting concerning recording and evaluation of human capital is in progress. In
order to be recognized in the accounting, human capital should be assessed as reliable. Most of those who have
studied the issue believe that the added value brought by a new employee is not reduced to the size of salary only.
However, there were no rules developed in this field, the value of human capital being further equivalent to the
amount of the salary. Under these circumstances what is at the back of the salary, so that it is considered as
sufficient the appreciation of human capital at this value?
The human factor requires that organization pays increased attention to the way the employees may be
motivated. Motivation can be done particularly using the best methods of remuneration (incentives, rewards, etc.).
Although motivation is a complex process, the people having different needs, different objectives, most
organizations consider remuneration the only way to motivate employees.
2. Basics on wage costs
The pay system may be approached from 3 viewpoints:
1. Financial balance:
Ability to pay >=Wage fund
Wage fund means all the expenses related to remuneration of labor
2. External coherence:
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It must take into account the average level of remuneration in the business sector where the company
operates and the minimum wage level guaranteed by the state.
3. Internal Equity:
Even if the concept of pay equity is a concept difficult to establish, it is clear that the sense of injustice
expressed or experienced by the employee is bearer of potential conflict or is a motivation factor. This concept
covers two aspects: wage-related to qualifications and performance related to pay.
The salary fund correlated with labor productivity represents the main expenditure influencing the total cost
recorded by the company.
Expenses with the salary fund structured as follows:
- Management allowances as fixed amount or included in the salary;
- Wage rate;
- Seniority increases, night hours, special conditions, dangerous conditions;
- Rewards - bonuses, table tickets;
- Contributions, social security paid by the employer.
The wage rate called the basic salary represents the benchmark for a specific job and is expressed in annual
or weekly amounts. The wage will increase depending on labor productivity achieved. Forms of pay applied in
companies are: on cost, direct individual or collective agreement, by quota percentage. The basic salary multiplied by
the number of employees makes up the salary fund. Wage fund is increased with the percentage shares in the
agreement achieved, to which are added all the salary increases applied, resulting the gross total.
Compensation is one of the main elements of an employment agreement that is the monetary counterpart of
the services provided )on the one hand and one of the means the company has to retain the best employees and to
attract candidates to join the current staff, on the other hand. For most employees this is the only source of income,
but also for many companies it is a major element of cost.
Compensation occurs most often in the form of money, the record for the organization is a wage expense
influencing company performance.
Wage costs are included in both direct and indirect form.
Wage costs represent all direct costs related to the labor force used, which can easily be attributed to
economic and specific unit of product (e.g. wages and their associated elements, generated by the employment
contract and the law relating to workers whose activity is directly linked to the production process). Expenditure with
the labor force used in production related activities, which cannot easily be attributed to economic and specific units
of the product are highlighted in the accounts as indirect expenses (e.g. managers or guard salaries). These indirect
costs concerning labor force represents a component of indirect costs of production.
Regardless the forms it takes, be it a direct or indirect, wage costs represent costs for the company.
3. Audit of wage costs-argument in solving of problem researched
The overall objective of the wage costs audit consisted of checking the correct and complete record of wage
costs and of their related contributions as well as their faithful mirroring in accordance with the law in force.
In most audit missions the risk of the existence of significant errors is minimum, despite the fact that wages
account for a significant percentage of the total expenditure. There may be three causes explaining minimizing the
risk as concerns wage costs, namely:
• in case of irregularities, employees will complain to their superiors they were not paid enough;
• operations related to salaries are usually uniform and simple;
• operations related to salaries are rigorously checked by the fiscal bodies in respect of their contributions to
the state budget.The method of wages calculation is not variant during time, in content and value. Due to the
similarity of the calculation method, of the salary in various fields of activity, high quality software is available
quality, by which its record can be kept. Its use reduces the risk of significant errors occurrence.
At this stage we have showed the objectives to be pursued in the audit of the wage costs and the tests
needed to be applied.
The auditor outlines and conducts the inspections program in accordance with the objective and purpose of
audit engagement and conducts the audit procedures to be applied.
In applying these procedures, the auditor may use techniques such as: inquiry and analysis, assessment / reassessment,
comparison, other verification of accuracy, observations, inspections of records and documents,
evaluations and inspections of obtaining confirmations. Procedures application allows the auditor to obtain sufficient
information for the report.
The auditor checks the accuracy of the registration and if these wage costs were accurately recorded in the
accounting system and if they are supported by appropriate evidence and documents.
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The auditor exercises professional judgment to obtain sufficient checking evidence appropriate to determine
if these expenditures were made (the reality and quality of the costs).
3.1. Accounts involved in the wage payment process
Within the wage payment process the company observes certain steps in the calculation and recording of
salaries and their related contributions as well as their payment.
The first step is the registration of the wage costs due to employees. The second step is to record employee
contributions to the state budget as well as of the respective tax due. Further, the company records its debts to the
state budget related to the salary fund simultaneously with the debit of their related expenses accounts. At the end,
the amounts due to employees and the state budget, are paid, the debts previously recorded being annulled thus.
Employment, liquidation, authorization and payment are the four elements of expenditure relating to wage
costs.
For a better understanding of correlations between accounts we achieved the figure below to underline
them:
421 WAGES DUE TO
EMPLOYEES”
512 “CURRENT ACCOUNTS IN
BANKS”
EMPLOYER’S CONTRIBUTIONS
431 “Social Insurance”
437 “Unemployment Pay”
447 “Special Funds –Fees and
assimilates payments”
Recoding
Payment of
employee
contributions
Recoding
Expenses
Figure 1 The inter-dependence in the process of salary accounting
The above mentioned figure presents as a matter of principle 2 stages:
- recording the salary expenses and the related contributions;
- their payments.
641 “Expenses with employees
wages”
EMPLOYEE’S CONTRIBUTIONS
431 “Social Insurance”
437 “Unemployment Pay”
444 “Tax on incomes of salary”
EXPENSES WITH EMPLOYER’S
CONTRIBUTIONS
645 “Expenses with insurance and
social protection”
635 – “Expenses with other taxes and
pays”
3.2. Documents concerning salaries book-keeping and the relation between them
The stages concerning the wage costs outlined above should be performed based on justifying documents
containing all the information needed for the registration, calculation and evidence of salary structure elements.
When employed, the future employee sign the employment agreement and acknowledges the provisions in the
collective labor agreement specific to the company where he will further work. He is informed about the duties and
obligations to be met within the job he is charge up and also is acknowledges the labor standard. The employee shall
109

e recorded in the attendance sheet. The company prepares the payroll and based on the calculations resulted, the
statements, which are submitted to the state institutions which collect contributions for the state budget, are filled in.
The link between the documents discussed in the paper is highlighted in the following figure.
JOB DESCRIPTION
- Tasks
- competence
- responsabilites
PRESENCE SHEET
- hours effectively worked
- Vacation
- medical leave
- night hours
- overtime
health statement
social
contribution
statement
INDIVIDUAL LABOR
AGREEMENT
- basic salary
- number of hours which
they can work
Unemployment
statement
PAYROLL
Territorial labor
inspection
statement
Figure 2 The documents concerning salary records and the relation between them
WORKSMAN’S PASS
- basic salary
- position
- duration
- labor standard
LABOR STANDARD
- Percentage of the labor
standard achieved
100
STATEMENT
Public Finance
Administration
STATEMENT
102
STATEMENT
3.3. Carrying out wage costs audit
In order to understand what is in the back of the wage costs, we have resorted to carrying out missions of
audit with the special purpose, namely auditing wage costs.
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� Objective: Correct classification of salary operations.
Tests applied:
o Classifications of operations related to salaries are compared with the chart of accounts or to the
accounting procedures manual.
� Objective: the evidence of the human resources , working time and a wages (criterion of reality).
Tests applied:
o Checking documents related to this record: individual employment contracts, collective labor
contract;
o Checking human resources policies;
o Checking presence sheet;
o Checking payrolls to identify new employees or employees which left the company and the
compliance with employment agreements respectively with the decision of cancellation of the employment
agreement changes of basic salary, of the position and facing with the addendum attached to the employment
agreement;
o Checking working time actually worked with the presence sheet and the compliance with working
time in the employment agreement (full time 8 hours per day or part-time minimum 1 hour / day);
o Checking if night hours in the presence sheet are recorded in the payrolls, if they are properly
calculated and
for those who have at least 3 hours of night / day, benefit either of working program reduced by 1 hour compared to
the normal duration of the work day, without resulting in lower base salary or in a 15% and 25% salary growth, of
the basic salary. We checked if those working in night shift are minimum 18 years old (those under 18 years may
notwork in night shifts), and pregnant or confinement women may not be required to work in night shifts, therefore if
they are registered in night shifts in their personal file, their agreement must exist in that file;
o Checking if overtime is provided with the written consent of the employee, which is found in the
salary but not more than 32 hours per month. Overtime is compensated by hours paid in the following 30 days after
carrying it out or by granting a 75% growth for the overtime carried out from Monday to Friday and 100% for the
overtime carried out on Saturdays, on Sundays or on holidays. It is checked if those who have rendered overtime are
least 18 years old (those under 18 years may not provide overtime);
o Verifying the calculation and payment of medical leave making the ratio between the gross
salaries amount and the working days amount with the presence sheet, the medical certificate and the payroll, for the
last 6 months on the gross amount of wages. Checking the signatures on the payment sheet and timekeeping sheets;
o Checking the existence of payrolls copies in the archive.
� Objective: Accurate and complete registration of wages and payment obligations related to salaries
(exhaustiveness criterion).
Tests applied:
o Checking payrolls from the due money calculation viewpoint;
o The gross and net wages are calculated again, considering the personal deductions from the payroll
with the documents in the staff file of the employee (birth certificate, labor certificate for spouse according to which
the child / children are not taking into account in the deduction) and amounts legally established;
o Checking the method of calculating payment obligations related to salaries and whether they
correspond to the records concerning payments of the staff;
o Checking the correspondence between accounts.
� Objective: Analysis of account balances 431 "Social security" 437 "Unemployment pay" and 444
"Tax on salary income" in terms of correctness of accounting recording of their value and of their
payment (their accuracy).
Tests applied:
o Checking if the amounts included in the tax returns are in accordance with the balance of
accounts;
o It is checked if the company emphasized correctly the debts to the state budget in the established
quantum, as follows:
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Table 1. Contributions related to the state budget concerning the salaries
Crt No Contribution Employee (%) Employer (%)
1 Social security Contribution 10,50 20,80
2 Social security and health 5,50 5,20
3 Contribution unemployment 0,50 0,50
4 Commission for the Territory Inspection for labor 0,75
5 Contribution to the Fund for guaranteeing salary receivables 0,25
6 Contribution for labor accidents and professional diseases [0,15 – 0,85] *
7 Contribution for vacations and leaves and employer pays 0,85
8 Tax on income 16
TOTAL 32,50 [28,5-29,2]
*It is established depending on the object of activity.
� Objective: Checking balances of expenditure accounts
Tests applied:
o Checking if amounts related to salary are recorded in the expenditure accounts;
o Checking if there is an analytical classification of expenditure by sections, compartments,
departments;
o Checking if the bonuses and other allowances granted have been recorded in the accounts of wage
costs.
� Objective: checking the transfer in due time of the salary payments and of the related contributions.
Tests applied:
o Checking the statement amounts with the amounts in the orders of payment to the State Treasury;
o Checking the payroll amounts with transfers related to payment obligations;
o Checking if the total amounts paid to management members are corresponding with the amounts
approved by the Board of Administrators.
4. Methods of fraud related to wages
As a result of the fact the auditor bears significant responsibility for detecting fraud and error, he must
assure that these do not exist. Since most operations related to salary involve a transfer of money means there is an
inherent risk of wage fraud.
Wage fraud is among the greatest encountered fraud committed. Often an employee is set in the fictitious
system of wage and salary payments are made automatically (meets in the payment of salaries through bank cards).
Another common fraud is possible if the employee no longer works in the company, but he still appears on the
payroll as paid in another bank account.
There are several ways in which employees can fraud a company in the wage field.
The most common methods of fraud are non existing employees and no fraud concerning hours worked.
Payment of wages on behalf of persons not working in the organization can be achieved by continuing to
pay an employee after the employment has been terminated. Usually the person who commits this type of diversion
of assets is an employee responsible for recording the wages or who deals with descriptions of timekeeping sheets.
One way to test payments to fictitious employees is to confront the information recorded in the records of
wages with the human resources department to determine whether those employees were actually employed during
the period of payment of wages.
Continuing the payment of salaries to employees who are no longer working in the company can be tested
by examining the pay period following termination of employment, to confirm that the employee's salary may be
paid in the future.
Frauds on the number of hours worked occur when an employee reported more hours than actually worked.
The discovery of the fraud of this type by the auditor is generally very difficult due to the lack of evidence. One way
would be to compare signatures on various timekeeping sheets to see if an employee has signed on behalf of one or
more persons.
Employees are not only inventive in terms of wage fraud.
Companies also develop different ways of circumventing the contributions applied wages.
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Motivating employees is increasingly difficult, they desiring higher net wages. Although the income tax of
individuals and certain social contributions have diminished, however each worker costs actually over 60% in
addition to his net salary.
Therefore the total cost of an employee is 1.6 * net salary, which is actually the value of the work of the
employee. Any benefit brought directly to any employee, means 60% in addition of that amount to the state budget,
amounts that employees do not find included in their daily life.
Because such levies, taxes, fees and other forms of taxation, the employee will reach over 60% less of the
value of their work.
If we take into account the application of the value added tax, the taxes increase. For example as shown at
the beginning of the paper, wage costs are included in calculating the cost of the product or the provision of services.
At the value of the product or services the value added tax related to the sale is applied. Therefore companies pay
value added tax and wage costs.
In conclusion, some companies seek to reduce these taxes in various forms Within the audit mission of
salary expenditures, these must be identified to avoid tax.
Among the ways to avoid or minimize taxes, contributions and taxes related to the payroll include:
• Wage class the employee within a minimum working time and then the conclude a cooperation agreement with the
employee as an authorized natural person;
• Setting minimum wages for the employee and then "pay on the black" it;
• Replacement of a part of salary by gift tickets;
• Replacement of the bonus with rewards in kind as tours, training, expenses that the company will not pay as salary,
so no taxation will be applied on them.
5. Conclusions
Human capital is an essential element of market value of companies, this being also the motivation of our
research.
This paper is set up as a very important basis of information for any auditor who is in an audit mission
related to salary expenses or mission of financial audit, where the audit of such expenses represents an integral part.
The auditor has to plan and perform the audit having regard that fraud may exist at the level of wages as showed in
the paper.
Recognizing the wage costs and keeping records in accordance with the reality represents a key process in
all the costs of a company.
Wage costs influence all the accounts based on which accounting information users make economic
decisions. They are included in the balance sheet as liabilities related to employees and the state budget in the profit
and loss account, and they are emphasized in the treasury cash flow by payments related to them.
Therefore, the correctness of these expenditures is obvious their influence on the financial statements and
implicitly on the result, which leads to a long-term influence on the company business continuity, the basic
principle in a contemporary economy.
This article is a result of the project „Doctoral Program and PhD Students in the education research and
innovation triangle”. This project is co funded by European Social Fund through The Sectorial Operational
Programme for Human Resources Development 2007-2013, coordinated by The Bucharest Academy of Economic
Studies.
Bibliography: �§�£���©��¢�©¢¤£��¤�¢©�¡, -Arens Alvin, Lobebbecke James, 2006, Arc, Chişinău
- Armstrong Michael, 2003, ©�©�¤�¤��§¨¢¤�§¢�¤¨�¢§�©�¤, Codecs, Bucureşti ¢¤��¢�£��, -Boynton William, Johnson Raymond, 2006,
John Wiley&Sons �¤�¨¤�¤��¡¢££��¤¢�©�£��©¨¤�¤©§�£��©�£�§¢©¢¤¥£¤�£�¡, - FederaŃia InternaŃională a Contabililor, 2008, Irecson
Bucureşti
- Legea 53/2003 Codul Muncii
- Feleagă Niculae, Liliana Malciu, 2004,
Economică, Bucureşti
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���£�©��£©¨
113 ��¤¨¤

THE HUMAN FACE OF GLOBALIZATION – A POSSIBLE
SOLUTION FOR THE CURRENT FINANCIAL CRISIS
Ghitiu-Bratescu Alexandru
PhD Candidate, Bucharest, Academy of Economic Studies, Romania, alexghitiu@yahoo.com ©��¢�£������¤�¢�¡�����§��§���¤¢�£�¤�©��¤��©�£��£�©¨¨ ¤��¨©£�¤�� ��©��¤�£���¤¢§©��£� �� ��¨
Abstract � ��©��¤�£���¤¢§©¨£� ����¤ ¨©��§¢��¢�¤���©�£��� ��¤�¤�¤¨���¤�����§�©�¢¤��§¢�¤����¤�¤¡¨ �¤�¤¨��¤���§��¢£¤���¨��©�©�©£��¤©�§¢¤� ��¤¤���©�£���¤ �§�����¤£¢�§�©�¢¤��§¢�¤��¤�¤¨���¤��� ����¤��£��©¨�©���¢����¢��§��£�����¤¢¤�£�§©¨�¢�¡���§���¤¤��¨©£�¤�¨©¢�¤¨
Keywords: Globalization, human capital, development �§��©���¤�¤��¢�§��£��¤��£��£��§�©�¢¤��§¢�¤�©��£��¤¨¨¤��§©¨�©�£�©¨�
JEL Classification: A12/A13, F01/F02, J24
Introduction
Globalization, although it is often talked about as the reason of much turbulence and change, is in fact the
term used for the collective effect, the change that happens as a result of global implication. Globalization is caused
by four major forms of capital movement throughout the global economy meaning: Human Capital, Financial
Capital, Resource Capital and Power Capital.
Globalization can be seen as a worldwide phenomenon of technological, economic, political, behavioural
and cultural exchanges brought and made possible by modern communications, transportation and legal
infrastructures although we have to admit that phenomenon’s like globalization have been spotted way before in
history .So we can conclude that it is a term used to describe how human beings are becoming more intertwined with
each other around the world economically, politically and culturally.
Impacts of globalization can be seen at every step in every field, because of the global village effect we can
see improvements in economy, politics, medicine, learning, trade and commerce, transportation and many others.
Some impacts are also two-sided because of the ever growing interdependencies between countries in a series of
fields because of the increasing volume and variety of cross-border transactions of services and goods, the fast
diffusion of technology and increasing less strict legislations.
Globalization should be seen through a human perspective. Many recognize the opportunities for a better
life that globalization offers. I believe their “hopes are realizable, but only if globalization is subjected to better
governance at all levels. More people than ever before do not want to be left behind by the globalization train; but
they want to be sure where it is heading, and that it is travelling at survivable speed.” (World Commission on the
Social Dimension of Globalization, 2004)
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114

Globalization – an overview
There are several subdivisions of globalization and the most important are globalization of politics, of
investments, globalization of trade, globalization of culture and technology. The globalization of trade refers to the
existing fact that people have wider and greater access to a huge number of products and services than ever seen
before. When we speak of international rules and laws made by governments to protect issues such as investment,
trade, human rights and many others, than we are referring to the globalization of politics. “The globalization of
investment takes place through Foreign Direct Investment, where multinational companies directly invest assets in a
foreign country, or by indirect investment where individuals and institutions purchase and sell financial assets of
other countries.” (Oduroye, 2007)
Because of the very fast speed that information travels these days through media, trade and, of course, travel
and of the trends that are launched and ideas we also have to deal with a globalization of culture like for example a
consumer in Romania can enjoy the same pair of Nike shoes as a consumer in China.
The other aspect of globalization is the revolutionary changes in technology, especially in transport and
communications, which has made the world a global village. Transportation costs have come down as a result of
technological advances that make foreign markets more accessible to trade. Without the electronic means, billions of
dollars in assets and currencies could not be exchanged daily around the globe.
One thing we really have to consider is that globalization is in my point of view a very popular subject
nowadays. If we take into consideration “the unlimited freedom of capital movement and the almost total freedom of
migration, the world by 1914 was maybe even more globalized than today.” (Della Posta, Uvalic, 2008)
Globalization is also unfair and not uniform because while advanced economic countries raise barriers
against imports from less developed countries and in the same time they sustain the idea of free trade concerning
their own exports.
It should be obvious for us that globalization has “different effects for different countries and different
groups of people it would be impossible to bring the same opportunities or challenges to all countries at the same
time. “ (Della Posta, Uvalic, 2008)
Because of the different perceptions and opinions on globalization let’s try and see some of the
opportunities and threats of this phenomenon. Some opportunities we can specify are the change in the division of
labour meaning in terms of production, aggregate demand and lower rates of unemployment; market unification in
improving and making more efficient the markets and the price mechanism by liberalization of trade between
countries and also investment. Another opportunity is that it can produce a lower inflation because it favours a higher
penetration of imports from low-cost producers’ countries.
There are also possible negative aspects of globalization like fragmentation of structural conditions, reduced
autonomy of national economies, instability brought by the plurality of economic models and problems in the
governance of the global economy.
The driving spirit has been to make globalization a positive force for all people and countries. There are no
panaceas or simple solutions; instead a new perspective on globalization should be adopted. In my opinion the
dominant perspective on globalization must shift more from a narrow preoccupation with markets to a broader
preoccupation with people.
The great value of human capital
Companies are recognizing the importance of investing in their employees now more than ever before.
Companies are beginning to understand that to stay on top in the global economy; they need to place more
and more emphasis on developing and retaining their people.
Derek Stockley, defines human capital as “recognition that people in organizations and businesses are an
important and essential asset who contribute to development and growth, in a similar way to physical assets such as
machines and money. The collective attitudes, skills and abilities of people contribute to organizational performance
and productivity. Any expenditure in training, development, health and support is an investment, not just an
expense.” He continues to say, “Competition is so fierce and change is so fast, that any competitive edge gained by
the introduction of new processes or technology can be short-lived if competitors adopt the same technology. But to
implement change, their people must have the same or better skills and abilities.” (Stockley) It is noticeable a change
in clients' strategic values from the tangibles to the intangibles.
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Nobel Prize-winning economist Gary S. Becker says that “the basic resource in any company is the people.
The most successful companies and the most successful countries will be those that manage human capital in the
most effective and efficient manner.”
Human capital is a valuable concept because it recognizes that people should be treated as assets, rather
than as an expense.
Economists regard expenditures on education, training, medical care, and so on as investments in human
capital. They are called human capital because people cannot be separated from their knowledge, skills, health, or
values in the way they can be separated from their financial and physical assets.
From the globalization human capital focuses on the economic behaviour of individuals, especially on the
way their accumulation of knowledge and skills enables them to increase their productivity and their earnings and
implicit to increase the productivity and wealth of the societies they live in. The underlying implication of a human
capital perspective is that investment in knowledge and skills brings economic returns, individually and therefore
collectively.
If we leverage the importance of human capital inside an organization, then we will also raise the
importance of human capital globally. Human capital is increasingly recognized as a key competitive advantage for
companies, as well as a key indicator of a company’s success. This is partially the result of the move from a
manufacturing to a service economy. In conclusion it is important for organizations to measure and report on HC
management if they want to control, monitor and better invest in their ‘most valuable asset’. This has become even
more imperative with the growing body of evidence that effective HC management is directly correlated to
performance, competitiveness and ultimately, shareholder value.
Designing the measures to evaluate HC management is the first step and requires linking the indicator to a
key performance driver that will be in line with the business strategy. Measuring and reporting is a second step that
can demand management commitment and resources yet will produce invaluable insight to both external and internal
audiences. The objective is to assist these different stakeholders to make better decisions that will benefit the
company. As shown by Figure nr. 1, the risk of human capital is the most significant from an organization‘s point of
view.
Human Development Reporting
Fig. nr. 1 The Risks for a Companyy in Case of a Threat
Source: Economist Intelligence Unit survey, February 2007
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Human development is about putting people at the centre of development. It is about people realizing their
potential making the best of their capabilities, increasing their power of choice and enjoying the freedom to lead lives
they value. Since 1990, annual Human Development Reports have confronted several challenges including poverty,
gender, democracy, human rights, cultural liberty, globalization, water scarcity and climate change.
The Human development Report starting from the one which is going to be complete this year and going
back to the one in 1999 has taken a very important stand in explaining how important is to have see the human face
of globalization.
Migration inside frontiers and also outside them, has become an increasingly important theme in domestic
and international debates, and is the topic of the 2009 Human Development Report (Human Development Report
2009). “The starting point is that the global distribution of capabilities is extraordinarily unequal, and that this is a
major driver for movement of people. Migration can expand their choices– in terms of incomes, accessing services
and participation, for example -- but the opportunities open to people vary from those who are best endowed to those
with limited skills and assets. These underlying inequalities, which can be compounded by policy distortions, will be
a theme of the report. “(Human Development Report 2009)
There are a series of facts that draw our attention to the positive impacts of migration on human
development, through such facts as increased household incomes and improved access to education and health
services. Also migration can empower traditionally disadvantaged groups, in particular women. And at the same
time, risks to human development are also present where migration is a reaction to threats and denial of choice, and
where regular opportunities for movement are constrained.
National and local policies inside countries play a critical role in permitting better human development
outcomes for both those who choose to move in order to improve their state of living, and those forced to relocate
due to conflict, environmental degradation, or other reasons. “Host country restrictions can raise both the costs and
the risks of migration. Similarly, negative outcomes can arise at the country levels where basic civic rights, like
voting, schooling and health care are denied to those who have moved across provincial lines to work and live. The
HDR09 will show how a human development approach can be a means to redress some of the underlying issues that
erode the potential benefits of mobility and/or force migration.” (Human Development Report 2009)
Human development indices calculated for progress as shown in Figure nr. 2 and Figure nr.3 show a great
discrepancy between countries. There are three categories in which the analyzed countries fall: high, medium and
law human development and than they are classified according to their progress on long, medium or short term.
Fig. nr. 2. Human Development Index Trends – Developed Countries
Source: http://hdr.undp.org/en/statistics/Human Development Indices A statistical update 2008
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g. nr. 3. Human Development Index Trends – Less Developed Countries
Source: http://hdr.undp.org/en/statistics/Human Development Indices A statistical update 2008
Global markets, global technology, global ideas and global solidarity can leverage the lives of people
everywhere. The challenge is to ensure that the benefits and effects are shared equitably and justified and that this
increasing interdependence works for people not just for the profit of some collectives or countries.
Of course if we think about it globalization is not new, but the present era of globalization, driven by
competitive global markets, is outpacing the governance of markets and the repercussions on people. Characterized
by “shrinking space, shrinking time and disappearing borders, globalization has open the door to opportunities.”
(Human Development Report 1999)
“Breakthroughs in communications technologies and biotechnology, if directed for the needs of people, can
bring advances for all of humankind. But markets can go too far and squeeze the non-market activities so vital for
human development. Fiscal squeezes are constraining the provision of social services. A time squeeze is reducing the
supply and quality of caring labour. And an incentive squeeze is harming the environment. Globalization is also
increasing human insecurity as the spread of global crime, disease and financial volatility outpaces actions to tackle
them.” (Human Development Report 1999)
Fig. nr.4. The unequal outcomes of the Human Development Index globally, for the 20 countries with the higher
levels of the HDI and the 20 countries with the lowest HDI
Fi
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Source: http://hdr.undp.org/en/statistics/Human Development Indices A statistical update 2008
Globalization we can argue that it needs leadership because people in all the corners of the world are
becoming connected and affected by phenomenon’s and events in the opposite part of the globe, the poor segment of
countries and people risk being pushed to the margin, because having a stronger governance we can preserve the
opportunities that a competitive market has to offer regulated by specific rules and limits and stronger accent can be
put on human development. Leadership is also needed in order to implement as a global goal to decrease as much as
possible the gap between rich and poor countries as we can observe in Figure nr.4 and to increasing the right of
choice and also have a higher degree of equity.
The human face of globalization
We have to look at globalization through the eyes of the people, rising above our setbacks and capturing
faithfully the hopes and fears of our humanity.
Globalization must be brought from the cold corporate board rooms and cabinet government, to meet the
needs of people in the communities in which they live. The social dimension of globalization is about jobs, health
and education – but it goes way far above these “in their daily life and work: the totality of their aspirations for
democratic participation and material prosperity. A better globalization is the key to a better and secure life for
people everywhere in the 21st century. (World Commission on the Social Dimension of Globalization, 2004)
A process by which such a perspective can be realized is one that can be implemented at all levels,
beginning with empowered local communities and improved and more accountable national governance; fair global
rules applied fairly; and global institutions that are more pro-people.
The current trend of globalization must change, too few share in its benefits. Too many have no voice in its
configuration no influence on its causes and effects.
“The results of globalization are what we all make of it, they depend on the policies, rules and institutions which
govern its course; the values which inspire its actors; and their capacity to influence the process.” (World
Commission on the Social Dimension of Globalization, 2004)
The governance of globalization must be based on universally shared values and respect for human rights
and morality. The moral and ethical lack of globalization is, where market success and failure have tended to become
the ultimate standard of behaviour, and where the one who is on top and has the higher degree of power takes
everything and weakens the structure of communities and societies. We are dealing with a some what desire by
people to reaffirm basic ethical values in public life, as seen, for example, in calls for a more ethical globalization.
Values are also the driving force behind the many public campaigns for universal causes, ranging from the
abolition of child labour to the banning of landmines.
The human factor intervenes, where economic crisis is attributed to purely behavioural factors such as lack of
motivation, lack of discipline, and lack of social responsibility. “Greater direct experience of economic crisis was
consistently associated with more endorsement of all three factors, a finding that is broadly consistent with recent
HD initiatives in Thailand and elsewhere in the region, towards greater inclusion, in development policy initiatives,
for managing economic crisis, of the human factor” (Carr et al., 2002)
Human nature is part of the blame for the current economic crisis; we have actually lost our balance we
should even consider according 10% of 700 billion dollars to keeping low income people in their homes.
Those at the top who made bad decisions are actually still getting rich in consequence, those at the bottom
of economic standard who didn’t made the bad decisions and who participated the least, are the ones who are
suffering the most .Some might argue that self interest and higher goals are a good perspective but the biggest
challenge in my opinion is to keep that self interest from harming others.
The way you make a lot of money and you create wealth for your self is by providing goods and services
which are not morally sustainable to your fellow people. A lot concern of the common good can actually create the
problem not be the solution , the challenge is to put back responsibility which is part of human nature , the idea of
being prudent , dreaming but not with other people’s money , and if it doesn’t work out you should bear full
responsibility.
Fraud and dishonesty and also pressure from higher level on the lenders are part of what happened globally,
the solution is to change the incentive there are trade-offs between trade and spirituality. People were allowed more
than they should to spend other people’s money but the problem is that your just not as prudent and responsible if
they are not your own.
Conclusions
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We should consider that if businesses keep globalizing, we are going to gradually lose interest in developing
and investing locally, we are going to sleep locally but think globally. A very strong humanity crisis has got us were
we are, greed is involved here .Gandhi had a very true statement universally valid, that the earth has enough
resources to satisfy any need possible but one and this is human greed.
We are taking part of a over consumption of morality , of humanity and a immoral sub consumption of
survival and those two are doing nothing but strengthening the crisis , an organic economical growth meaning a
healthy growth should be adopted because we should think of the economy as a living breathing organism .
Globalization can not be escaped, because the revolution of means has made possible for all production
components and services to travel to fast, what some say is that the economy is heading to a revolution of
expectations .We should learn to change, you can change your way of life and in consequence the results and the
way we are making our existence but we can only achieve this by changing the way we think .If people don’t have
the capacity to change , to innovate than companies and also societies will fail.
References
Becker, Gary S. 1993, „��¤¦���¢�©��¤��¢§�©��©�£�©¨¡�quoted on http://www.altaassociates.com/pdf/06-
AUG-CC.pdf>, accessed 1 May 2009
C. Carr (Massey University in New Zealand/Aotearoa), Gillian Long (Commonwealth Government Agency), Floyd ���£¤�£¤�¡, H. Bolitho (Business and Arts at the Northern Territory University, in Australia) 2002,
„Managing Economic Crisis: A Human Factors Approach” Aus-Thai Project, Vol. 14, No. 2, pp. 277-309
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Amy Verdun (ed.), Published by Palgrave Macmillan, pp. 97, pp. 105
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Human Face”, published online at , accessed 30 April 2009
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„��
��¢�¨¨¡�(First
���¨��
published February 2004, Reprinted April 2004), pp. 7-8, pp. 24
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120

PROPOSALS OF MEASURING THE EFFIENCY OF THE
ECONOMIC AGENTS REFERENCE TO THE EUROPEAN
COMPETITION POLICY
Nela Ramona Ichim
Romanian- American University
Bucharest, Romania
nela_ramona@yahoo.com
Abstract
Changes in the institutional, technological and economic environment and also the deepening of market integration
raise new challenges for European competition policy. This context requires designing a modern version of the
competition policy which is able to promote not just a new competitive spirit as a way to an efficient allocation of
resources, but more than that, a new institutional and legal competition system which makes markets work better.
This new vision should be embraced both by public and private actors. This paper focuses on the meaning of
efficiency for the competition policy from the authorities and the companies’ point of view using quantitative and
qualitative analyses. I will also make some proposals of testing if the new designed competition policy produce the
desired outcome and that requires measuring its performance as a proof of its efficiency.
Keywords: competition environment, efficiency, public and private actors
JEL Classification: F15- Economic Integration, K21- Antitrust law
Introduction
It is impossible to know whether objectives of the competition policy are correctly set, whether the institutional
structure and process are well defined and ultimately whether the actions of a competition authority produce the
desired outcome if the performance of the institutions is not measured in one way ore another. In some cases
measuring these aspect turned out to be a difficult activity.
Changes in the institutional, technological and economic environment and also the deepening of market integration
raise new challenges for European competition policy. This context requires designing a modern version of the
competition policy which is able to promote not just a new competitive spirit as a way to an efficient allocation of
resources, but more than that, a new institutional and legal competition system which makes markets work better.
This new vision should be embraced both by public and private actors. This paper focuses on the meaning of
efficiency for the competition policy from the authorities and the companies’ point of view using quantitative and
qualitative analyses. I will also make some proposals of testing if the new designed competition policy produce the
desired outcome and that requires measuring its performance as a proof of its efficiency.
Measuring objectives
Competition policy is not solely an economic policy; it has social as well as political implications (Motta, Massimo
2004). Socially it means greater welfare for individuals. Politically it supports democracy by preventing concentrated
economic power able to distort popular impulses. Today the main objectives of completion policy as enforced by the
EC are most probably economic efficiency and European market integration.
European competition policy has recently come to acknowledge that besides market integration the enhancement of
consumer welfare is the ultimate goal of the enforcement of competition rules. This recognition has taken place
parallel to the decentralization of European competition law enforcement and the introduction of a more economics
and effects based approach.
Economic welfare is the standard concept used in economics to measure how well an industry performs(Motta,
Massimo 2004). It is a measure witch aggregates the welfare (or surplus) of different groups in the economy. In each
giving industry, welfare is given by total surplus that is the sum of consumer surplus and producer surplus.
Consumer welfare is the aggregate measure of the surplus of all consumers. This concept of welfare should not only
be interpreted in a static sense but also in its dynamic component. In other words, future welfare matters as well as
current welfare.
Competition authorities all around the world are becoming more conscious of the impact that competition policy and
law enforcement has on consumers. They seem to be ever more anxious to declare and demonstrate the significant
role they play as enforcers of competition law in consumers’ economic life. The European Commission is no
exception. Neelie Kroes formulated the competition policy message of her cabinet as the following, ‘Our aim is
121

simple: to protect competition in the market as a means of enhancing consumer welfare and ensuring an efficient
allocation of resources’. Director General of DG Competition, Philip Lowe emphasized that, ‘competition is not an
end in itself, but an instrument designed to achieve a certain public interest objective, consumer welfare’.
It is difficult to say whether competition authorities and courts favor in practice a consumer welfare or total welfare
objective. In the EU, Article 81(3) allows any agreement, decision or concerted practice which contributes to
improving the production or distribution of goods or to promoting technical or economic progress, while allowing
consumers a fair share of the resulting benefit. Furthermore, Article 2.1 of the Merger Regulation accepts in principal
an efficiency defense provided that it is to consumer’s advantages.
The concept of consumer welfare should also be interpreted dynamically in the sense of the effects of any structure
or conduct on price, choice, quality and innovation in the short and long term. Sometimes these effects are immediate
and measurable but often the effects are difficult to quantify and the only way to protect consumer welfare in the
longer term is by safeguarding the process or dynamic of competition on the market.
Competition policy also has other goals than improving final consumers’ welfare and therefore final consumers
cannot and should not become the sole focus of competition laws.
The defense of small firms has often been one of the main reasons behind the adoption of competition laws. The
favorable treatment of small firms is not necessarily in contrast with the objective of economic welfare if it is limited
to protect in such firms from the abuse of larger enterprises, or giving them a small advantage to balance the
financial and economic power of larger rivals. Artificially helping small firms to survive when they are not operating
at an efficient scale of production is in contrast with economic welfare objectives. This would encourage inefficient
allocation of resources and would contribute to keep high prices in the economy. The European Commission seems
to have taken the view that small and medium size enterprises (SME) are more dynamic, more likely to innovate and
more likely to create employment than large firms. This would be an additional argument to promote SMEs.
However, the empirical evidence is quite ambiguous. It would seem difficult to state that small firms make a larger
contribution to growth and innovation than large firms.
As a conclusion, it makes sense that the authorities do not use their scarce resources to monitor agreements and
mergers which involve smaller firms, but there is little rationale behind a systematic use of competition policy
towards helping SMEs. Smaller firms are often heart by the lake of proper infrastructure and imperfect markets. Such
difficulties had better be dealt with by government interventions at the root of the problem, rather than instruments
such as completion policy, whose purpose lies elsewhere. There is a risk of creating additional distortions in the
competition sphere, while giving only a very imperfect answer to the source of the problems.
Promotion of market integration is one of the key objectives of the EU completion policy. This is a political
objective which is not necessarily consistent with economic welfare. EU competition law de facto forbids price
discrimination across national borders. There is no economic rationale for such a different treatment. A priori, it is
difficult to say whether price discrimination has a positive or negative impact over welfare.
Competition laws might also incorporate objectives such as fairness and equity, forcing firms to behave in a certain
way both with respect to costumers and to rivals. In some cases a particular interpretation of the concept of fairness
might collide with an economic welfare criterion. For example the politically sensitive issue of small shopkeepers
versus large supermarket chains. In many countries, concern is often voiced that the supermarket chains exploit their
bigger volumes so as to have bargaining power and buy from manufacturers much more cheaply than small shops.
This allows the former to sell at lower prices than the latter. As a result, small shops have economic difficulties and
could be forced to close down. Some people would argue that this is unfair and that small shops should accordingly
be protected. This claim might be justified just from the point of view of fairness. Certainly, such reasoning would be
at odds with basic efficiency principles. Whenever there exist economies of scale in a market, larger firms will have
lower costs and will be more competitive. Small firms which fail to reach the minimum efficient scale of production
or distribution will have to either content themselves with lower profits or exit the market. This process of
rationalization whereby only the most efficient firms will stay in the market is beneficial for a community as a
whole, as it will bring market prices down to the benefit of consumers. Interfering in this process by limiting the
ability to charge lower prices would damage welfare. However, that fairness and efficiency are not always in
contradiction.
Since market power decreased with the number of firms in the industry, one might be tempted to conclude that the
larger the number of firms the higher the welfare. The trade-off between allocative and productive efficiency (a
larger number of firms increases competition and drives prices downward but at the same time involves a loss in
economies of scale) implies that a policy aimed at maximizing the number of firms in any given industry would be
unsound. If an authority tried not just to guarantee that entry is possible in an industry and that all firms compete on
equal grounds, but also tried to use subsidies or other industrial policy instruments to actively promote entry in an
industry or to artificially prevent firms from existing, this would conflict with an economic welfare criterion.
122

These considerations should act as a warning that competition policy should be about defending competition and not
about defending competitors, which are less efficient.
While it is widely agreed that the purpose of competition policy is to protect competition, not competitors, there is
less agreement on how to go about doing that. To determine whether dominant firms are harming competition,
agencies in many countries use a primarily effects-based approach, focusing on the economic impact that conduct
has on consumers and competition. Agencies in a number of other countries, such as Germany and Korea, use a more
form-based approach that focuses on how conduct can be categorized (Dube, Cornelius 2008). Economic analysis
still plays an important role in those jurisdictions, and the form-based approach may provide greater legal certainty
and faster resolutions than effects-based methods. Some commentators believe, however, that a significant problem
with form-based approaches is that the same type of conduct often can be either “normal competition” or “abusive
competition”, depending on the circumstances. Focusing on the conduct’s economic effect, they argue, is essential to
making an accurate determination of its true nature, and thus it is worthwhile even if it requires more time than a
form-based approach. Otherwise, competition law enforcement might not be consistently aligned with competition
policy’s economic purpose.
“Best Practice” toward competition policy
There is a convergence in the views of economists, lawyers and various practitioners regarding the principal
elements of the “best practice” toward maintaining and encouraging competition in an economy.
Objectives. The principal objective of competition law should be to maintain and encourage competition in order to
promote economic efficiency and consumer welfare. Making economic efficiency the principal objective of
competition law supports consistent application of policies and is more likely to limit lobbying by vested interests.
In some countries, however, competition law has multiple goals under the rubric of “public interest,” including
fairness, regional development or employment, and pluralism or diffusion of economic power through promotion of
small and medium-size businesses. Multiple objectives invite lobbying by different stakeholders in the economy and
can lead to inconsistent application of competition law, so that governments end up protecting some firms from
competition. (Shyam Khemani, R. 1997)
Measuring the impact of the competition policy It is important for the competition policy also to know if the
process created the desired effects and evaluate them in order to adapt the policy to the new economic environment
and prepare it to face new challenges.
Instruments All competition policy and enforcement system consist of essentially two components: the legal
instrument and the administrative structure and process through which the legal instrument are implemented.( Lowe,
Philip 2008) These two components should be analyzed and designed interdependently in order to maximize their
efficiency. Creating these instruments requires economic analysis and market knowledge.
Developing a competition culture It refers to awareness among both the public at large and economic actors of the
rules of competition. One of the main roles of a competition authority is to inform the public of these rules, and this
can be accomplished through advocacy efforts and an effective communications strategy. Competition refers
specially to the “ability of the competition office to provide advice, influence and participate in government
economic and regulatory policies in order to promote more competitive industry structure, firm behavior and market
performance” (World Bank)
Some proposals for Romania
Few months before the EU accession a research on the Romanian business environment regarding the role of the
Competition Policy and the role played by the Competition Council in regulating the mechanism on the free market
by protecting honest competition pointed out that these issues were ignored by the companies in their making
decision process.(Dima A, 2007) More than that, the research showed that most of the companies included in the
sample weren’t aware of the anti competitive practices and about the importance of avoiding them.
Now, after two years from our EU accession is maybe appropriate to analyze whether the situation is chanced and
whether the Romanian economic agents take in consideration the rules of fare competition enforced by the European
legislation. This process would help to evaluate the impact of the European integration on the competitive behavior
of the economic agent from Romania. Measuring performance and impact of the competition policy in Romania is as
important as it is this issue at the EU level. Making markets work better for the benefit of consumers and business is
the main objective of the competition policy that should be evaluated.
This performance measurement should be made following three dimensions. (Lowe, Philip 2008) The first one is
productivity, for measuring the efficiency of the Competition Council. It indicates whether this institution acts
properly to accomplish the main objectives of the competition policy and this dimension requires comparing on a
regular basis on the one hand workload and inputs with, on the other hand, outputs. The second dimension is the
quality of the entire process of enforcement which influences the companies and citizens perception on the
123

importance of the competition policy as an instrument to make markets work better. The last dimension is the impact
of the decisions related to the competition policy on different economic agents (consumer, companies and public
institution). All this actions are important for all economic agents in order to understand the capacity of the
competition policy to improve the economic environment functioning. These objectives will be achieved by
indentifying the actual perception of the economic agents on the competitive environment and on the role that the state
is expected to have in regulating and interfering in this field and the relevant factors that influence the Romanian
companies’ competitive behaviour.
Conclusions
The principal objective of competition policy should be to maintain and encourage competition in order to promote
economic efficiency. Achieving this purpose requires a periodically measurement of its performance although in
some cases this turned out to be difficult, especially when the objectives are ambiguously set without any instrument
created for their evaluation. There is a clear lack of empirical and theoretical investigation, which could provide
some guidance to policymakers in the design of competition policy.
In this context the economic agents’ perception on the competition policy becomes very important in order to
evaluate how this policy influences their competitive behavior. For that it is necessary to develop a competition
culture in the society which can guarantee the competitiveness of an economy. This involves persuading
stakeholders, including politicians, officials, business groups, labour groups, regulators, academics and the press, of
the merits of competition. Also we have to be fully aware of deepening of market integration which will bring new
challenges which call for both external and internal reforms of European competition policy.
This article is a result of the project „Doctoral Program and PhD Students in the education research and
innovation triangle”. This project is co funded by European Social Fund through The Sectorial Operational
Programme for Human Resources Development 2007-2013, coordinated by The Bucharest Academy of Economic
Studies.
The ��¤����¢��¤¢�£¤�����¤����§�¤¢¡¤¨�©¢¤��©��©¢��
References
1. Cseres, Competition Law Review,
Volume 3 Issue 2 pp 121-17
2. Dima Alina Mihaela, Prejmerean Mihaela ,Vasilache Simona 2007,
Conferinta Internationala de Comunicari Stiintifice, Volumul 7,
Oradea, pp 172-175
3. Dube, Cornelius 2008, ©��������£��¢�¡���¦���¤¢¤©�©§�©¨�©���¢¤�CUTS
Centre for Competition, Investment & Economic Regulation, No. 4/2008
4. Lowe, Philip 2008, Competition Policy
Newsletter, No.3, 2008, pp.1-11
5. Motta, Massimo 2004, ©���¢©��£�¤, Cambridge University Press, Oxford
6.
������
Shyam Khemani, R. 1997, Policy Options, October 1997,
pp.23-27
7. ¤¢£�������Policy Brief,
��¤¦��©������£��¤�¢©�£���� ���©�£©�����¤�£�£��¤��£¢���¤���
OECD
©��������£��¤�¤¨���¤��� ���¤�¢ � £���£�§�£�����¢��¤�����¤��§¢ ��¤�¤�£��������¤�£�£����¨£� ����¤�£�£����¨£�
¡�©�£�����¤�£�£������¤ ����¤�£�£����¨£� ����¤�£�£����¨£�
124

ROMANIA’S NOMINAL AND REAL CONVERGENCE TO THE
EURO AREA – PROGRESS AND PERSPECTIVES
Alexandra Elena Putinelu
The Academy of Economic Studies Bucharest, Romania
aputinelu@yahoo.co.uk
Abstract �©��¤��£������¤�§¢��¤©���£�����¤¢§¤��£��©¢£�¤�¢¤�©¢�£����¤��§��¢ ��¤¢��¤��£�¤��� ¡�£���¤�§¢��¢¤©�¦���£�¢¤��¤������©�£©�©����§¨�£¨¨��¤���£�©¨����¤¢�¤��¤�¢£�¤¢£©�£��¡�©���¤ ©©��¢£��� ��¨¨�¡£�����©�£©
����¤��. ��¤¢��¢�©��¤©�©£�����¤�¤�¢£�¤¢£©©��©��¤��¤���¤�§�§¢¤�¤¢��¤��£�¤��� ����©¢£���¡£����§��¢£¤�£���¤¢¤�£����¨���§��¢¤©¨����¤¢�¤��¤��¤����¢¤�¢¤�¤��©�¢£�¤¢£��£�£��¤¨��©��¤��� ¢¤¨©�¤���£�©¢¤���¢¤©�£���¢�©��¤��¢��¤¤��¢©��¤£���¤�§¢� ��¤���¤�©�¤¢�£��§��¤���¤��¤�¢¤�£�©¨�£¤¡��� ¢¤©¨����¤¢�¤��¤©���¤¢��¢��©�©�©¨ �£������©�£© �¤����� ¢¤©¨����¤¢�¤��¤����¤�§¢��¢¤©��©�¤��� ����¤¢�©�£�©���¤¢¤©¨����¤¢�¤��¤¢¤¨©�¤������©�£©£�©¨������©¢¤�¡£����¤����¤¢�¤��¤����¤��§��¢£¤�£� ��¤¢¤�£����£�©¨¨ ���¤�¤¢��¤��£�¤�����¤��§��¢ ��¡�£���¤�§¢��¢¤©©¢¤¤�©¨§©�¤�����¤�©�£�����¤ �¤¢��¢�©��¤����¤¤����� £��¤¢�������£�©¨©��¢¤©¨����¤¢�¤��¤��©££��©¨��£���©���§����¤�§¢¢¤���¨��©¨ �¤���¤��§��¢ �¢£�¤¢£©���¤�©�¤¢©�©¨
Key words: nominal convergence, real convergence, optimum currency area, Economic and Monetary Union
JEL Classification: F15, E63
Introduction
The economic integration represents one of the concepts that lay at the basis of the European construction. The
theoretical background for the economic and monetary integration is represented by the theory of optimum currency
areas (OCA), which is based on Robert Mundell’s contribution (1961) and on the subsequent contributions of Mc
Kinnon (1963), Kennen (1969) and others. The theory analyses the costs and benefits of the adoption of a single
currency, emphasizing the conditions that must be fulfilled by the participant economies in order to minimize these
costs.
According to the integration stages defined by Balassa (1961), the concept of economic integration corresponds to
the economic union stage, which becomes practically functional starting with January 1 st 1999, under the name of
Economic and Monetary Union (EMU). The Maastricht Treaty, which mentions EMU as a major objective and
which lays down the conditions for its launch and implementation, states that only the countries which prove the
fulfillment of a sustainable convergence can participate in the final stage of the Economic and Monetary Union. The
treaty defines convergence through a series of criteria, known as the Maastricht Criteria.
The economic literature in the last years has made an important distinction between the nominal convergence,
assimilated with the fulfillment of the Maastricht criteria and the real convergence, a term with multiple senses,
which defines the may in which the characteristics of the optimum currency area are fulfilled, or the convergence of
real variables, such as GDP per capita, salaries, prices. The real convergence does not represent a criteria in itself for
the entrance in the euro zone, however, it has a great importance for the evolution of an economy towards fulfilling
the nominal convergence, as well as for the good functioning of the economy as part of the euro area.
The present paper details the nominal convergence criteria and determines the extent to which Romania fulfills them
at present. In order to better present Romania’s performances against these criteria, a comparative approach is used,
by including the performance of other countries in the region.
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In order to complete the image of Romania’s performance towards the convergence to the euro area, the paper also
presents the analysis of the real convergence, measured by the GDP per capita, from the same comparative
perspective with the countries in the region.
1. Theoretical aspects
The OCA theory has shown if and in what circumstances it is beneficial for two or more countries to adopt a
common currency. The optimum currency area, according to Mundell (1961) represents a “set of regions where the
migration tendency is big enough to ensure full employment when one of the regions experiences a shock”. Mc
Kinnon (1963) added the degree of openness of the economy to the characteristics of an OCA, while Kenen (1969)
has shown that production and consumption diversification can also represent a characteristic of an optimum
currency area. More recently, Pelkmans (2003) has defined the optimum currency area in a simpler way, as “that area
for which the cost of giving up flexible exchange rates or the realignment option is lower than the benefits of a
single currency”. All authors define OCA as an area which exhibits certain conditions or criteria which make
possible to handle asymmetric shocks without resorting to the use of the exchange rate or to monetary policy
instruments.
Although it was the foundation for EMU and it has foreseen many of the challenges EMU had to face over time,
several criticisms were brought to OCA theory. Among the main criticisms is the one referring to the fact that the
theory does not consider the dynamic and endogenous nature of the criteria for the creation of an OCA and the fact
that it ignores their subsequent positive evolutions and effects. Therefore, from this perspective, EMU can be created
without the fulfillment of all conditions; these conditions can be fulfilled at a later stage. This approach emphasizes
the long term benefits and it is the approached which determined the EU policies regarding EMU.
This way, the Maastricht Treaty defines the nominal convergence criteria, related to price stability, the convergence
of long term interest rates, sound fiscal policy – budget deficit and public debt, and the stability of the exchange rate.
The entrance of a new economy in EMU is formally evaluated on the basis of these criteria. However, the subsequent
evolution of the euro area and of the new entered economies reflects the degree of real convergence between these
economies. Therefore, indirectly, one country’s performance in the euro area depends on the real convergence,
although it does not represent an entrance criterion in itself. On the other hand, reflecting the approach that long term
benefits are essential, EU has developed a special policy with the purpose of increasing real convergence, the
cohesion policy, which intends to reduce economic gaps between countries and regions.
The OCA theory evolved, under the impact of the theoretical contributions and of the EMU evolution, such that
today it is considered that EMU, although not an OCA according to the criteria from the classic theory, represents a
functional monetary area.
The nominal convergence criteria, as defined by the Maastricht Treaty, are presented below.
Price stability: The inflation from the member countries must not exceed with more than 1.5 percentage points the
average inflation rate from the three countries with the smallest inflation. The calculation methodology is based on
the annual average inflation rate.
Convergence of interest rates: The long term interest rates must not exceed with more than 2 percentage points the
average interest rates of the same three countries as those from the previous criterion. The indicator used for each
county is the interest rate for ten years maturity bonds, according to the transactions from a liquid and functional
market.
The solid fiscal position refers to the budget deficit of each country, which must not exceed 3% from that country’s
GDP, and to the public debt, which must not exceed 60% of the GDP.
.
The exchange rate stability refers to the fulfillment of the normal fluctuation band of 15% represented by the
exchange rate mechanism (ERM) for a period of at least two years before the entrance in the euro area, without the
depreciation of the currency with respect to the currency of another member state.
The literature regarding real convergence is based on the hypothesis that poor countries or regions have a faster and
more accelerated growth than the developed ones, in order to achieve their income and productivity levels (Vohra,
126

1997). Most of the studies are concerned with the analysis of the GDP per capita gaps between the old member
countries of the EU and the newly entered, with results which support the hypothesis mentioned above (Lein –
Rupprecht, Leon Ledesma, Carolin Nerlich, 2007).
The economic and monetary union became functional starting with January 1 st 1999, and the first euro coins were
effectively in circulation starting with January 1 st 2002. The euro zone initially had 11 member countries, to which
Greece joined din 2001. The EU enlargement from 2004 with other ten member countries led to the enlargement of
the euro area a few years later, through the adoption of euro by Slovenia in 2007 and by Malta and Cyprus in 2008,
such that today the euro area has 15 countries. Among the remaining countries from 2004, the most advanced in
terms of euro adoption are the Baltic countries and Slovakia, who have already entered ERM: Estonia and Lithuania
starting with 2004, and Latvia and Slovakia starting with 2005. Romania, as well as Czech Republic, Poland,
Bulgaria and Hungary are, from a formal point of view, further from this road, since they have not expressed their
intention to join the exchange rate mechanism. For Romania, the only significant official position is the opinion of
the National Bank of Romania, according to which the country could adopt the euro in 2014. This opinion however,
was expressed in 2005 when economic conditions were very different from those today.
For the purpose of this paper, the countries already in ERM II will be named Group I, while the others will be named
Group II. These countries will serve as a comparison for Romania’s performance, being the closest possible in terms
of economic conditions and structure of the economy.
2. Nominal convergence analysis
The paper evaluates the fulfillment of the nominal convergence criteria based on Eurostat data for 1997 – 2008.
Romania performance are compared with the two groups of countries defined above (Group I and Group II), which
contain the countries entered in EU in 2004 and 2007 and which have not adopted the single currency yet. The
definition of the two groups takes into account the entrance in the exchange rate mechanism. As such, Group I
contains Slovakia, Estonia, Latvia and Lithuania, countries which are part of ERM from 2004 -2005, while Group II
contains Bulgaria, Czech Republic, Hungary and Poland, countries not part of ERM. The analysis of the fulfillment
of the nominal criteria does not takes into account the exchange rate stability, since the entrance in ERM depends on
the decision from the authorities.
Inflation rate criterion
The reference value was calculated according to the definition in chapter 1, as sum of the average inflation rate from
the three countries with the lowest inflation and the additional value of 1.5 percentage points. It can be seen from
tables 1 and 2 that Romania has an inflation rate with 2.1%, respectively 3.8% higher than the reference value. Year
2008, in which the effects of the economic crisis were felt, lead to the increase in both the reference value and the
inflation rate in Romania and the countries from Group I, the highest increases being registered by the Baltic states.
Table 1: Inflation rate criterion Table 2: Inflation rate criterion - comparison -
comparison against countries from Group I against countries from Group I (2008)
Country
Inflation Rate
2007 (%)
Slovakia 1.9
Reference Value 2.8
Romania 4.9
Lithuania 5.8
Estonia 6.7
Latvia 10.1
Country
Inflation Rate
2008 (%)
Slovakia 3.9
Reference Value 4.1
Romania 7.9
Estonia 10.6
Lithuania 11.1
Latvia 15.3
The comparison with countries fro Group II (tables 3 and 4) shows that, under the influence of the effects of the
economic crisis, the hierarchies, as well as the performances regarding the inflation arte were changed in this group.
Although in 2007 there was one country, Poland that met the inflation rate criterion, in 2008, all countries are
situated under the reference value. Romania end up from the 3 rd place to the 4 th one in this group in 2008.
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Also, it can be noticed that Romania’s position in Group I reflects a rather good performance in terms of inflation, as
compared with the countries already in ERM II, which should be closer to the reference value, taking into account
that the entrance in the mechanism precedes the adoption of euro.
Table 3: Inflation rate criterion - comparison Table 4: Inflation rate criterion - comparison
comparison against countries from Group II (2007) against countries from Group II (2008)
Country
Inflation Rate
2007 (%)
Poland 2.6
Reference Value 2.8
Czech Republic 3.0
Romania 4.9
Bulgaria 7.6
Hungary 7.9
Interest rate criterion
The reference value is calculated according to the definition in chapter 1, as sum of the additional 2% and the
average interest rate from the three European countries with the best performance in terms of inflation.
For the long term interest rate, it can be seen that the countries from Group I have a very good performance in 2007,
all of them meeting the criterion (Table 5). Romania is situated at a quite big distance from the reference value and
from the performances of the countries in Group I. In 2008, however (Table 6), despite a slight decrease of the
reference value, the long term interest rate in Romania increases, the same evolution being observed for Group I
countries.
Table 5: Interest rate criterion – comparison Table 6: Interest rate criterion – comparison
against countries from Group I (2007) countries from Group I (2008)
Country
Interest Rate
2007 (%)
Slovakia 4.49
Lithuania 4.55
Latvia 5.28
Estonia 6.09
Reference Value 6.44
Romania 7.13
Country
Inflation Rate
2008 (%)
Reference Value 4.1
Poland 4.2
Hungary 6.0
Czech Republic 6.3
Romania 7.9
Bulgaria 12.0
Country
Interest Rate
2008 (%)
Slovakia 4.72
Lithuania 5.61
Reference Value 6.24
Latvia 6.43
Romania 7.70
Estonia 8.16
As compared with the countries in Group II (tables 7 and 8), Romania is either on the last or before the last place;
there are three countries meeting the criteria – Czech Republic, Poland and Bulgaria, in 2007 as well as in 2008.
Table 7: Interest rate criterion – comparison Table 8: Interest rate criterion - comparison
against countries from Group II (2007) against countries from Group II (2008)
Poland Czech Republic Interest Rate 6.07 4.63
Reference Country Bulgaria Value 2008 (%) 6.24
5.38
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Country
Interest Rate
2007 (%)
Czech Republic 4.30
Bulgaria 4.54
Poland 5.48
Reference Value 6.44
Hungary 6.74
Romania 7.13
Budget Deficit Criterion
The budget deficit criteria is approached from a longer time perspective, in order to show the evolution during the
period 1997 – 2008. It can be observed from Graph 1 that Romania had a deficit lower than 3% of GDP during 2002
– 2—7, but this positive evolution was stopped in 2008, when the budget policies were not able to avoid the
deepening of the deficit from 2.5% of GDP to 5.4% of GDP. The increasing tendency of the budget deficit over the
limit of the convergence criteria is seen also for the other countries in Group I, with the exception of Slovakia, who
managed to keep a budget deficit of approximately 2%.
Graph 1: Budget deficit – comparative evolution against countries in Group I (1997 – 2007)
Budget deficit (% GDP)
4.00
2.00
0.00
-2.00
-4.00
-6.00
-8.00
-10.00
-12.00
-14.00
1997
1999
2001
2003
Time
2005
2007
Estonia
Latvia
Lithuania
Romania
Slovakia
The evolution of the countries in Group II is more heterogeneous. While Bulgaria has a budget surplus, Hungary
manages to record a smaller deficit in 2008, although over the limit of 3% of GDP. In 2008, the only countries in this
Group which fulfill the criteria are Bulgaria and Czech Republic. Romania has the biggest increase of the deficit in
2008, as compared to the countries in this Group. It can be therefore stated that, although the economic crisis has
affected all countries analyzed, the big increase in Romania’s deficit may be also a result of the bad administration of
the fiscal policy.
Graph 2: Budget deficit – comparative evolution against countries in Group II (1997 – 2007)
Romania 7.70
Hungary 8.24
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Budget Deficit (% GDP)
4.00
2.00
0.00
-2.00
-4.00
-6.00
-8.00
-10.00
1997
1999
2001
2003
Time
2005
2007
Bulgaria
Czech Republic
Hungary
Poland
Romania
Public Debt Criterion
Graph 3 presents the evolution of the public debt in all countries analyzed, for the period 1997 – 2008. This is the
only criteria that Romania meets. It can be observed that the countries in Group I have very small values of this
indicator, around 20-30% of GDP, while Hungary registers very high values, eing the only countries that exceeds the
60% benchmark.
Graph 3: Budget debt – comparative evolution against countries in Group I and II (1997 – 2007)
Public Debt (% GDP)
120.00
100.00
80.00
60.00
40.00
20.00
0.00
1997
1999
2001
2003
Time
2005
2007
Estonia
Latvia
Lithuania
Romania
Slovakia
Bulgaria
Czech Republic
Hungary
Poland
3. Real convergence analysis
The real convergence is analyzed using the most often used measure for the analysis of economic disparities between
countries, GDP per capita. Data is taken also from the Eurostat Database. The paper takes into consideration the
evolution of the countries analyzed in comparison with the EU 27 average. Therefore, 100% represents the EU 27
average. Graph 4 shows that, in real convergence terms, Romania has either the last or before the last place, together
with Bulgaria. Over the period of time analyzed (1999-2008). Starting with 2005, Romania has higher values than
Bulgaria.
It is important to mention that all countries analyzed evolved in the same way, towards a greater real convergence to
the EU average. The best performing countries are Czech Republic, Hungary, Poland and Estonia.
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Graph 4: Evolution of GDP per capita as compared with the EU 27 average in countries from Group I and II (1999 -
2008)
GDP per capita
(%of EU 27 average)
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
1999
2000
2001
2002
2003
2004
Time
2005
2006
2007
2008
Bulgaria
Czech Republic
Hungary
Poland
Romania
Estonia
Latvia
Lithuania
Slovakia
It is therefore easy to see that, if in the case of the nominal criteria the evolutions are heterogeneous and the
performance of countries entered later in EU, like Romania and Bulgaria can get close or even exceed the
performance of the countries entered in 2004, in the case of real convergence, the development differences are
significant. While Czech Republic reached in 2008 a GDP per capita of 80% of the EU average, Romania is still well
below, at a level of 45%.
Conclusions
The analysis of the fulfillment of the nominal convergence criteria shows that in 2007, Romania respected the fiscal
criteria, but did not respect the inflation rate criteria and the stability of the long term interest rate. In 2008, however,
due to the effects of the global economic crisis, but also to bad fiscal policies, Romania respects only one of the 4
criteria analyzed, the public debt. The inflation evolution is increasing in all countries analyzed, including the
developed countries which compose the reference value, but the increase in Romanian inflation is significant and
makes the county get closer to the situation of the Baltic countries, which were strongly affected by the global crisis.
For the interest rate, the changes are not extremely high, but the distance to the reference value is significant. The
most important evolution, however, is the increase in the budget deficit to 5.4% of GDP, especially since the deficit
was within the limits of the convergence criteria for a long period of time, from 2002 to 2007. According to the
nominal criteria, Romania’s performance was lower in 2008. For the future strict budget policies are necessary, as
well as efforts to decrease inflation, in order for Romania to be able to get closer to the nominal convergence criteria.
In what the real convergence is concerned, Romania has a long way ahead, being a lot behind the economies in the
region. The comparison of GDP per capita with the EU 27 average reveals the fact that Romania is less than halfway
to the European average in terms of real convergence. This may mean that, although in the short run efforts can be
made to get closer to the reference values for the nominal criteria, the real economy is still the one in need of solid
reforms in order to be able to cope with the pressures and eventual shocks that may appear as an EMU member.
The choice of the moment to enter in the euro area has to take into account the correlation between the nominal and
real convergence, such that Romania will be able to benefit from the advantages of the statute of euro area member
and to minimize the associated costs.
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132

THE ADJUSTMENT OF PRUDENTIAL SUPERVISION
INSTRUMENTS IN TIMES OF ECONOMIC CRISIS
Marinescu Adriana
PhD candidate, Academy of Economic Studies, Bucharest, Romania
adrianagiba@yahoo.com
Research funded by European Structural Funds,
project no. 7832, “Doctoral and PhD in the triangle Education-Research-Innovation, DOC-ECI” ©¢¤¢¤�¤�£��¤�� ��¤ ��¤�©�¤¢�¢¤�¤�����¤�©£��¢§�¤��£©¨�§�¤¢�£�£�����¨�©����¤�©��¤¢£�¡�£����¤
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JEL classification: E58, G01
Introduction
The address of this theme is motivated by the important role of the prudential supervision in ensuring financial
stability in Romania, considering the dominant role of banks in the entire national economy.At the same time,
current economic conditions represents challenges that supervisors must respond through a continuous adaptation
and improvement of the supervision activities
In literature, prudential supravegerea is defined as a process by which the supervisory authority (often the Central
Bank) ensures financial stability using a wide range of instruments, of which the most used are presented below.
Thus, regulated indications and limits represent banking prudential requirements established by the supervisory
authority through acts and which concern the solvency, liquidity, maximum exposure to a single borrower and the
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maximum aggregate exposure, exposure to persons in special relations with the bank, currency risk, classification of
assets, establishment and use of risk provisions.
Rating systems are more complex instruments, used to assess credit institutions in order to identify, at an early stage,
those institutions that are inefficient or show adverse trends and requests from the supervisory authority, increased
attention.
Advantages of these systems in prudential supervision is related to the delimitation of the effective institutions from
those in difficulty and to the reporting of the need to take action by the supervisory authority, and their disadvantages
refers to their inability to generate forecasts on the future evolution of a credit institution.
Early warning systems are complementary instruments of rating systems, using econometric models and attempting
to provide clues about the credit institutions’ future problems, based on their current financial situations.
They are sophisticated mathematical models that predicts the downgrading of the institution’s rating or its
insolvency, using, most often functions of logit / probit (..).
Although these instruments are considered extremely objective and useful in supervision activity, complex early
warning systems currently exists only in the U.S. and France, the difficulty of their elaboration coming from the
absence of a sufficient number of “witness cases” (Bogza, Mihai, 2007, p. 68), on the basis of which to performe
statistical analysis. However, these systems have shown weaknesses in the current economic crisis, failing to indicate
the potential bankruptcies of credit institutions.
Public and private credit registries are indirect instruments, whose role in prudential supervision refers to the
possibility of monitoring and analysis of necessary capital and provisions, the possibility to review developments in
the credit market, in the quality of bank assets, also to the possibility of assisting the validation of internal rating
models, developed in order to implement the requirements of Basel II, and also to the possibility of developing and
refining the banking regulations (Dardac and Moinescu, 2007, p. 30-31).
Prudential supervision in crisis conditions
Compared to the supervision tools described above and enshrined in literature and in the practice of supervisors, în
condiŃiile crizei economice actuale, one can see the emergence of mechanisms designed to increase the
effectiveness of prudential supervision.
The strengthening of cooperation
Thus, besides the emphasis on the need to respect the basic principles formulated by the Basel II(Wellink Nout,
2009, p. 4), we witness a strengthening of cooperation between supervisors in the supervisory boards of the second
(EBC) and third (CEBS) level.
In this context, CEBS recommends that the authorities responsible for supervising cross-border groups to coordinate
their activities closely, by improving information exchange, and particularly in the colleges of supervisors, to better
understand the liquidity risk profiles of groups and to avoid unnecessary duplication of requirements. (European
Central Bank Opinion on 5 March 2009, EU Official Journal of 22.04.2009, p. 7).
Regarding participation in the colleges of supervisors for cross-border supervision of banking groups, the ECB
considers that the use of these colleges would improve cooperation, risk assessment on financial stability and
coordination of crisis management.
Also, the ECB supports the clarification of obligations on the exchange of information between supervisory
authorities, especially in emergency situations, including negative developments in financial markets (idem, p. 7 -8).
In parallel with this cooperation in the colleges of supervisors CEBS supports the granting, in conditions of crisis, of
an increased role for the supervisory authorities of the host country, which are currently monitoring only the liquidity
of the foreign branches.
Given the above, one can see that the efficiency of cooperation was confirmed by the current economic crisis and,
moreover, is supported the need to strengthen it.
Harmonization of reporting systems and supervisory practices
Due to the financial markets growing dependencies, in Europe there was, even before the emergence of turbulence in
financial markets, a consensus on the need to harmonize regulation and banking supervision.
In the current economic conditions, there is more emphasis on the need for harmonization of reporting systems and
supervisory practices.
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Thus, it is considered that regulatory differences may destabilize financial markets and may increase risks involved
in activities carried abroad. There is also a risk that institutions operating across national borders may avoid
prudential supervision.
Given these issues at EU level have been standardized frameworks for prudential and financial reporting:
- COREP is a standardized framework for prudential reporting, developed by the Commitee of European Banking
Supervisors, which systematises reporting requirements for own funds, capital requirements for credit risk,
operational risk and market risk. The advantages of introducing this instrument refers to the facilitation of
information exchange between supervisors and to the reduction of regulatory costs for reporting institutions. In
Romania it has been adopted since 2008 as the supervisory reporting system at the individual and consolidated level.
- FINREP is a standardized framework for financial reporting which ensures comparability of financial information
reported. It contains a set of basic information (balance sheet, the profit and loss) and other information, depending
on the decision of the supervisory authority. In Romania it is applied at the consolidated level, starting with the
financial statements for 31.12.2006, and for the individual level since 2008 for credit institutions applying Basel II.
Moreover, during the unfolding economic crisis, CEBS has guided the national authorities to harmonize supervisory
practices(CEBS Work Programme 2009, www.c-ebs.org), "Guidelines on the implementation of the supervisory
process", în cadrul pilonului 2 al Acordului Basel II, developed by CEBS, being used as a main reference in
prudential supervision.
Under these guidelines, supervisors put an increased emphasis on the implementation, by credit institutions, of sound
standards regarding assumed risks (especially the credit risk and liquidity risk), according to Basel II.
The emphasis on liquidity risk management
According to CEBS Interim Report on Liquidity Buffers & Survival Periods(CEBS, 2009, www. c-ebs.org),it is
clearly evident, from the recent financial turmoil, that banks need to hold a liquidity buffer. The more liquidity risk a
bank runs, the larger its buffer should be.
CEBS thinks that the liquidity buffer is dependant on three dimensions, the severity and characteristics of the stress
scenarios, the time horizon fixed as the survival period and the characteristics of the assets in the buffer.
At the same time, it is shown that liquidity buffers are of utmost importance in time of stress, when an institution has
an urgent need to raise liquidity within a short timeframe and normal funding sources are no longer available or do
not provide enough liquidity. These buffers, composed of cash and other highly liquid unencumbered assets, should
be sufficient to enable an institution to weather liquidity stress without requiring adjustments to its business model.
All-encompassing solutions for managing liquidity risk does not exist, but there is more work addressing this
problem and the importance of liquidity management is more often stressed.
Mechanisms for early intervention
To avoid an increase in past-due claims of the banks, due to credit risk materialization in crisis conditions,
supervisors took into account the adoption of measures to limit the granting of loans.
In some cases, the intervention was to restrict certain lending institutions or only certain lending products, and also to
impose capital increase.
Measures to limit lending are applied by authorities, depending on the degree of vulnerability of each credit
institution.
Thus, when trends in past-due debts of borrowers are worrying, supervisors require institutions to change lending
rules or even prohibit the granting of new credits.
Moreover, the new supervisory structure predicted by the Lamfalussy report proposes the establishment at EU level,
of an early warning system and a mechanism for early intervention for those entities that have problems or go
bankrupt.
According to the report, such a mechanism should be defined precisely, clearly and should be able to intervene
quickly and to respect the rules on state aid in the EU.
Until the creation of this mechanism, classic interventions of authorities, aimed at limiting loan, have proven
effectiveness whereas they avoided the collapse of credit institutions.
Increased transparency
Basel Comitee respresentatives show that the current market turmoil require for increased transparency and suggests
that reliable, clear financial information supported by quality audits are key elements in enhancing market
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confidence (Basel Committee on Banking Supervision, External audit quality and banking supervision, dec. 2008,
www.bis.org)
Although the legislative framework and regulations of the European Union in the field of prudential supervision
include guidelines with explicit requirements of transparency provided by the two directives(Directive 2006/48/EC
and Directive 2006/49/EC) and details regarding the implementation and compliance with legal provisions, CEBS
insists, in response to economic crisis, to increase transparency of the financial statements of credit institutions, the
risks incurred and of the prudential supervision (Jochnick, 2009, p. 13)
Risk assessment
In assessing the risk profile of credit institutions, supervisors:
1. follow the compliance with the principles of corporate governance;
2. evaluate the stability, accuracy and efficiency of risk managemenet;
3. follow the existence and effective functioning of specialized management support committees;
4. follow the operation of an appropriate system of internal control and of a management reporting system
transparent and efficient.
The risk assessment based approach is a comprehensive and detailed evaluation of a banking institution's risk profile,
which involves the sharing of bank or banking group in units of activity and units of support and then each unit is
risk assessed.
In the risk assessment, supervisors go beyond verification of the conditions and financial performance, assessing the
effectiveness of written policies and procedures of the bank, planning and preparation of budgets, internal controls,
information management systems and risk management systems. When these systems are inadequate, supervisors
provide guidance to help the bank improve its systems and to improve thus the ability of risk measurement,
management and control.
Under conditions of economic crisis, the periodicity of these assessments of risk profiles should be increased, in
order to allow the identification of problems at an early stage and to take appropriate measures.
Evaluation of illiquid assets
In response to the situation of instability, the European Union authorities also stressed the importance of improving
standards of evaluation, especially for illiquid assets (The Brussels European Council - Presidency Conclusions,
www.consilium.eu.in, 2009).
Estimated fair value in inactive markets conditions is complex and subject to uncertainties, whereas the lack of liquid
and active markets makes fair value subjective.
Also, on a lowered market, fair value valuation may result in failure to meet the capital criteria and can have
procyclical effects, in that it may accelerate the decrease in market by encouraging sales to meet the capital criteria
(Gîrbină Maria Mădălina, 2009, p. 10).
Given the difficulty of determining the fair value of assets on a market which is facing major problems, and effects
that it can generate, the establishment of evaluation standards is a priority for CEBS, whereas the existence of
uniform assessment practices will facilitate effective supervision of the quality of bank assets.
Widening databases of credit registries and establishing bodies of guarantee
Recent studies showed, even before the economic crisis event, that the role of credit registries, as instruments of
prudential supervision, should increase (Dardac şi Moinescu, 2007, p. 30-31). These can become a reference for
validation and the control of internal ratings models of credit institutions, the main problem identified relating to the
lack of access to borrowers solvency data (economic soundness, financial performance, the general characteristics of
commercial morality and management capacity).
Although many public and private records still do not include this information, after the the economic crisis event,
supervisors have supported broadening the database of credit registries, by including as reporting institutions other
financial institutions than banks (in Romania, according to the provisions of Law no. 93/2009 on non-bank financial
institutions, these entities will be reporting to CRB).
However, with the aim of restoring confidence in supervised institutions, it was supported the establishment of
abody for banking assets guarantee (RGF).
Although these actions can not be regarded as direct instruments of prudential supervision, they help maintaining
financial stability in periods of crisis, facilitating the mission of prudential supervisors.
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Remuneration policies
Excessive and imprudent risk-taking in the banking sector has led to the failure of individual financial institutions
and systemic problems in Member States and globally. While the causes of such risk-taking are many and complex,
there is agreement by supervisors and regulatory bodies, that inappropriate remuneration structures have been a
contributory factor. Poorly designed remuneration policies that reward short-term profit and give incentives to take
risks that exceed the general level of risk tolerated by the institution can undermine sound and effective risk
management and exacerbate excessive risk-taking behaviour.
Because poorly designed remuneration policies and incentive schemes are capable of increasing the risks to which
credit institutions are exposed, competent authorities should impose measures regarding these policies. The European
Commission thinks that those measures should include a requirement to hold additional own funds in appropriate
cases (Public Consultation regarding possible changes to the Capital Requirements Directive, 2009,
http://ec.europa.eu). Competent authorities should also be able to impose financial or non-financial penalties on
credit institutions and investment firms that have remuneration policies that are not consistent with sound and
effective risk management.
These problemes are now discussed and may constitute amendments to Directive 2006/48/EC.
Basel Committee's initiatives on crisis conditions
Basel Committee's initiatives reffering to present crisis conditions are aimed at creating a more robust regulatory and
supervisory framework and include:
- better coverage of banks' risk exposures, including for trading book, securitisation, and derivative activities;
- more and higher quality capital to back these exposures;
- countercyclical capital buffers and provisions that can be built up in good times and drawn down in stress;
- higher liquidity buffers;
- stronger risk management and governance standards;
- greater transparency about the risk in banks' portfolios.
Also, in response to economic crisis, the Basel Committee emphasised the need to focus supervision not just at the
micropudential level, on the soundness of individual banks, but towards a macroprudential approach, on broader
financial stability objectives (Nout Wellink: Basel Committee initiatives in response to the financial crisis,
30.03.2009, www.bis.org).
Thus, the current economic crisis has revealed, besides the need for a strong individual supervision ok banks, the
need to allocate more resources for the purpose of understanding interactions between banks and those between
banking and others financial sectors, this macro-prudential approach reducing systemic risk.
Conclusion
Current instability highlighted the need to further strengthen the framework for financial stability by increasing
prudential supervision and improving the tools used to manage to financial crisis.
At the same time, supervisors have been severely tested by this financial crisis and the above shows that they have
reacted quickly to new economic conditions, they quickly adapted their instruments and developed new forms of
cooperation to protect financial stability.
In this context, we should emphasize the importance of supervisors’ independence and freedom in the choice of
instruments.
Bibliography £����©�£©, Bogza, Mihai, 2007, PhD Thesis,
Academy of Economic Studies, Bucharest
Dardac Nicolae; Moinescu Bogdan, , Economie teoretică si aplicată,
no.10/2006, vol.505, p. 30-31
¦��£¢¤��¦���¢§�¤�����¢�¢§�¤��£©¨�§�¤¢�£�£�� �©�££���§�¤¢�£�£��©��£��¢�¨¤£�¤��§¢£���£�©��£©¨��©�£¨£�
137

Gîrbină Maria Mădălina, 2009, ����¤©���§��£�����¤¨, 3th CECCAR Sesion,
Bucharest, p. 10
Jochnick, af Kerstin 2009, ‘�§¢��¤©��©�££���§�¤¢�£�£��, The Euopean Compliance Conference TECC, Vienna, p.
12
Wellink Nout, 2009, �§�§¢¤�§�¤¢�£�£��, FSI Seminar, Cape Towm, p.1-3
Wellink Nout, 2008, , at the High Level Meeting ”The
role of banking and Banking Supervision in Financial Stability”, Beijing, p.4-5 ���£�£�����©¢���������, 2009, 2009, The Oficial Journal of the European Union of
22.04.2009, p. 7, accesat la 01.05.2009 ©���©�££���§�¤¢�£�£��,
�£�©��£©¨�¢£�£�©����¤�¢¤�£�£¨£�
2008, Basel Committee on Banking Supervision, accessed at
01.05.209, www.bis.org ����¨§�£���, 2009, EU Council web site, accessed at
01.05.2009, www.consilium.eu.in, ��¤�©�¤¨����£��¤¤,
��¤£���¢�©��¤���©�££���§�¤¢�£�£��£��£�©��£©¨��©�£¨£�
2009, BIS web site, accessed at 04.05.2009, www.bis.org
�¢§�¤¨¨¤���§��£¨����¤�§¢��¤©���£����¢¤�£�¤�� ���¤¢�©¨©§�£�¢§©¨£� ¦�£�£©�£�¤�£�¢¤�����¤����¤�¢£�£�� �§¢��¤©��¤��¢©¨�©�£
138

STRUCTURAL REFORMS IN THE EUROPEAN UNION NON-
EURO MEMBER STATES...ARE THESE ECONOMIES STILL
ON THE RIGHT TRACK?
Alexandru Leonte
Academy of Economic Studies, Bucharest, Romania
alexandruleonte@yahoo.com
¦��¤��£� ��¤�©�¤����¢§��§¢©¨¢¤��¢��£�©�¤��¢¤��£��¡�£��£����¤�§�¤�£�©��£��¢ ���¤���£���£�§�£���¨£¤��¤ ¦ ��¢��¤�§¢��¤©�����£��¤¤�¤��¤�£©¨¨ £���¤£¢�£©¨��¡£��¤�¤¢�£��©���¢©��£�£��¤�����£¤����¤�©¡�¢£� �� ��£¤��£�£�¡�¢£��£�¤©¢�§�¤���©���¢�£����¡�£����¤��¢§��§¢©¨¤�����£�¢¤��¢��¨© ©��¨£��©�¤��¢¨����¤¢� ¤�����£��¤�¤¨���¤��©�����£��¤�����£��©¨©��¤� ��£���§� ©£�����¤¢��¢�©�©�©¨ �£�����¤� �©�£�����¢§��§¢©¨¢¤��¢��£���¤�§¢��¤©���£����§��¢£¤�¡�£�� ©¢¤����¤��¤¢�����¤�§¢����¤��§��©�¤��¤��¡¤��£�¤��¤§¢�©����£����¢¤�£�§�¡�¢£��¡©��©££�£����������� �©�¤���¡��©���¤¤§¢�©¢¤©��§��¢£¤��©��¤¢�©�£��©�£��¢¤��¢��©�¤�¤��¢¤��¤¤§¢�©����£����¡£���¤���© ����¢©��
�©£��©£�©�£��¢¤��¢��©�¤©��¤¢��¤£��¤�¢©�£����©£�¨ �§¤����¤£¢��¡¤��£�¤��¡�£�£����¤�§¢��¤©� ��¤�©¢ ��£����¢��¤ ¢¤¨©�¤���¤£¢¢¤��¢�£��� �©�£���¤�©§�¤����¤���£©¨���������¤�¢��¤��� ��¤�¢ �©��§���¢������©�¤�¢¤©�¤©��©�£��¢¤©�¤����¤��¢§��§¢©¨¢¤��¢��©��¤¢�¤���£��©�¤��¤¢����¤��� ��¤¨¤�¤¨����¤¢¤��¢��£��¤©�§¢¤�§�£����¤¦��¤���������£��¢¤¤�������§�¤�� ��¤�¢©�¤¢¦���£�§�¤���¤ ����¤��£����¤�¡¤¤���¤�©�¤����¤���£©¨¢¤��¢��©����¤�©�¢�¤�����£��£�§©�£��©¢¤��§�£¤��¡£��©�£��¨¤ ¢¤�¢¤��£�����¤¨�¡�£��£��£�©�¤�£����¤�©�¤�©���£�£�¤©����©�£��£�©¨¨ �£��£�£�©����¢¢¤¨©�£���¤�¡¤¤���¤�¡� ¨�¡¤¢�©�¤©��¤¢¡©¢���¦���£��©�¤¢£�£��¤¢£�£¤���©���¤����¤§¢���©�¤�����¤���©�¤�¤¤����£�©�¤�¤��§����
Key – words: Structural reforms, European Union, Index of Economic Freedom, macroeconomic results �©¢£©�¨¤��
JEL Classification: F15, F36, F43
139

Introduction
Intensify the pace of structural reforms in an expression which is often used in advisory notes of institutions like the
IMF or the European Committee, especially in their dialog with emerging and transition economies. The majority of
scientific works give arguments according to which the structural economic reforms lay a solid base for long term
economic development and socio-economic balance.
Dăianu (2000, p. 132) notices that the postcommunist countries are faced with three great challenges in their
transformation process:
� Institutional establishment and modernization
� Obtaining fast economic growth to catch – up with the developed countries
� Ensuring social and political stability.
These elements are tied with the level and dynamic of structural reforms, these reforms influence the economic
situation (for example, the same author says that “the structural causes of inflation are tied to the insufficient
restructuring of the economy” (Dăianu, 2002, p. 34)) and also the social, political and institutional context of a
country.
This paper analyses the dynamic of structural reforms in the EU countries which have not adopted the euro, before
and after they became members.
To measure the level of structural reforms, the Index of Economic Freedom provided by the Fraser Institute (2009,
www.freetheworld.com) was used.
The structure of this index is briefly shown in annex 1.
Regrettably, the values of the index are only available between 2000 and 2006 (annual series), so the impact of
becoming a member of the EU on structural reforms can be observed for only a brief period, only for the countries
that joined the EU in 2005.
At the same time, the impact of becoming a member of the EU on the economic context is analysed, with the help of
indicators such as economic growth, inflation, the exchange rate, the government balance, the current account and
the public debt.
Finally, a simple regression model is built, to study the connections between the level of reforms and the economic
results of a country. The model indicates, most of the times, a strong and positive connection between the two
variables.
Preliminary observations
In most of the countries that joined the EU in 2005, the index had a positive dynamic in the year they became
members with reference to the previous year, some countries having important positive evolutions from this point of
view (for example, Latvia improved it’s index by over 5,4% and reached the 42 nd place in the world ranking of the
index at the end of 2005, after being the 50 th at the end of 2004, and Lithuania went from 42 nd to 27 th place, with an
index increase of 6,45%.). The only exceptions are Hungary and Cyprus.
The component analysis indicates that the sub-indexes with positive dynamics in 2005 with reference to 2004 were
for most of the countries: �£����and�¤�§¨©�£�����¢¤�£���©��¢©���§�£�¤��, while the sub-indexes
somewhat surprisingly negative dynamics. The results are
presented in Table 1.
Access����§�� ���¢��¤¢� �¤�§¢£� �£�¤�����¤¢��¤��
Table 1: The Dynamic of Structural Reforms 2004 – 2005
had
140 ©���¢¤¤������¢©�¤¦��¤¢�©�£��©¨¨ ��¤ ���¤��£�§¢¤���©�¤�©�����¤¢�¢£�¤���¤�©¨��¢§��§¢¤©����¤

Country Sub-index 1 Sub-index 2 Sub-index 3 Sub-index 4 Sub-index 5 Index
Estonia 0.27 1.19 -0.38 -0.38 0.08 0.21
Latvia 0.32 1.26 -0.06 -0.06 0.51 0.37
Lithuania 0.19 1.84 -0.05 -0.05 0.65 0.45
Czech Rep. 0.05 0.23 -0.30 -0.30 0.30 0.07
Hungary -0.42 0.29 -0.50 -0.50 -0.09 -0.11
Poland 0.06 0.01 -0.35 -0.35 0.61 0.09
Cyprus 0.43 0.37 -0.45 -0.45 -0.43 -0.06
Malta 0.09 0.64 -0.01 -0.01 0.10 0.25
Slovenia -0.14 -0.26 -0.16 -0.16 0.55 0.01
Slovakia 0.06 0.88 -0.63 -0.63 0.41 0.22
(Source: Fraser Institute web page (2008, www.freetheworld.com, my own calculations)
A series of observations on the impact of becoming a member of the EU on the economic situation of the new
members, based on six economic indicators, namely real economic growth, inflation rate (year average), volatility
coefficient of the exchange rate, public debt, government balance and current account. The results are shown in table
nr. 2.
Table 2: The Dynamic of the Economic Indicators after becoming a member of the EU
Country Econ. growth Inflation rate Exch. Rate vol. Curr. account Gov. bal. Public debt
Estonia 2.44 2.07 --- -1.85 0.50 -0.90
Letonia 3.48 1.97 --- -6.95 0.85 -3.20
Lituania -0.98 3.18 --- -1.60 0.95 -2.05
Cehia 2.51 0.75 -1.07 3.80 1.65 -0.55
Ungaria -0.49 -1.99 -0.41 0.75 -1.70 4.95
Polonia 0.32 -0.57 -2.19 1.10 1.90 1.00
Cipru 0.99 -0.79 -0.12 -2.75 3.48 -2.80
Malta 2.98 0.22 -0.57 -4.45 4.74 -4.20
Slovenia 1.57 -2.12 -0.57 -0.40 0.39 -0.25
Slovacia 2.58 -4.42 0.76 -6.20 -0.19 -5.50
Bulgaria -0.17 0.15 --- -4.00 -2.90 -4.50
România -1.72 -1.71 1.71 1.20 -0.30 0.30
(Source: EUROSTAT web page (2009, http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/ ), IMF
web page (2009, www.imf.org,), Central Bank of Malta web page, (2009, http://www.centralbankmalta.org/,), my
own calculations).
(The calculations were performed in the following manner: for the countries that joined in 2005, the difference
between the average of the values of an indicator in the two years after becoming a member, namely 2005 and 2006,
and the average of the values of the indicator in the two years before becoming a member, namely 2003 and 2004
was computed; for the countries that joined in 2007, the difference between the 2007 and the 2006 values of the
index was computed.
For the countries that adopted a certain form of targeting the exchange rate before or after becoming a member, no
exchange rate volatility dynamic was computed).
Generally speaking, the behavior of the new members is not the same. Still, a decrease in the exchange rate volatility
can be seen, for all countries except Slovakia and Romania, and also an increased fiscal discipline, on the part of the
central authorities. The government deficits decreased in all countries except Hungary, Slovakia and Romania, and
Estonia and Bulgaria continued to have a government surplus.
141

���¢©�£�, Most of the countries had a decrease of the except Hungary, Poland and Romania, still,
only the first two have values of the ratio which come close (in the case of Hungary, they go over) the limit imposed
by the Maastricht Criteria.
(The values I referred to which are not in the tables were not included in the text for lack of space and are available
upon request, or they can be found by consulting the indicated sources). �§�¨£��¤��
The simple regression model
To verify the existence of a connection between the economic situation and structural reforms, a simple regression
model is presented, with the following equation: �¢
β + β ⋅ + ε �
1 (1)
where:
= 1 2
I1 is the Macroeconomic Index computed as shown in annex 2.
ILE is the Index of Economic Freedom.
The model was estimated for the countries that joined the EU in 2005 and 2007, and also for two candidates, Croatia
and Turkey, between 2000 and 2006 (the period for which values for the Index exist). Results are shown in table no.
3
Table no. 3: Indicators of the simple regression model:
Country Determination coefficient (%) Slope level of significance (%)
Estonia 5 (-1) ---
Latvia 63 (56) 94
Lithuania 6 (-1) ---
Czech Rep. 75 (70) 98
Hungary 5 (-1) ---
Poland 54 (44) 93
Cyprus 1 (-2) ---
Malta 61 (52) 93
Slovenia 18 (2) ---
Slovakia 65 (58) 97
Bulgaria 86 (83) 99
Romania 78 (73) 99
Croatia 18 (1) ---
Turkey 84 (80) 99
(Computations carried out in Excel)
It can be seen that in 8 cases out of 14, there is a positive connection (the values of the slope coefficients are positive
and statistically significant) between the Index of Economic Freedom, considered a proxy for the level of structural
reforms, and the I1 indicator, which describes the economic situation referring to economic growth, inflation and
interest rate volatility.
The limited number of observations indicates that one should be careful when interpreting the results of the model,
still the regression hypothesis verification tests give values that do not indicate the rejection of the model for being
non – valid, as can be observed form table no. 4.
Table no 4: The regression hypothesis verification indicators:
142

Country Determination coefficient (%) Slope level of significance (%) DW test indicator White test indicator (F)
Latvia 63 (56) 94 2,41 0,46
Czech Rep. 75 (70) 98 2,02 0,53
Poland 54 (44) 93 2,18 0,79
Malta 61 (52) 93 2,14 2,16
Slovakia 65 (58) 97 1,65 0,61
Bulgaria 86 (83) 99 1,78 0,59
Romania 78 (73) 99 2,81 0,71
Turkey 84 (80) 99 2,23 0,1
(Computations carried out using ��£¤¡��
Conclusions
For most of the new members, the achievement of the objective of becoming a EU member did not trigger, at an
overall level, a relaxation of the pace of the structural reforms, a possible reason being their intent to adopt the euro.
Still, the sub-indexes which correspond to the and areas
have had, somewhat surprisingly, negative dynamics.
As the short term impact of becoming a member on the main economic indicators is concerned, arguments for a
similar behavior of the new members cannot be supported, except when it comes to fiscal discipline and exchange
rate volatility, which is to be expected, given the European laws which state a government deficit below 3% of the
GDP, and the Maastricht Nominal Convergence Criteria. Economic growth, the current account and inflation have
different dynamics in the analyzed countries.
The economic evolutions can be considered positive in the majority of the new members.
With the help of a simple regression model, the existence of a connection between the value of the ������£��¢¤¤����computed by the Fraser Institute, considered a proxy for the structural reform level, and a
composite index, based on the economic growth, average annual inflation rate and exchange rate volatility
indicators. In spite of a very small number of observations (7, with 6 degrees of freedom), for 8 economies out of 14,
statistically significant slope coefficient values were obtained. All the coefficients are positive, and this indicates a
positive correlation between the structural reform level of an economy, and the macroeconomic situation, as is
described by economic growth, inflation and exchange rate evolution. ¦��¤��� �¢¤¤������¢©�¤¦��¤¢�©�£��©¨¨ ��¤ ���¤������§��
Annexes
Annex 1: The Structure of the Index of Economic Freedom
1. Size of Government: Expenditures, Taxes, and Enterprises
� General Government consumption spending as a percentage of total consumption
� Transfers and subsidies as a percentage of the GDP
� Government Enterprises and Investment
� Top marginal tax rate
2. Legal structure and Security of Property Rights
� Judicial independence
� Impartial courts
� Protection of property rights
� Military interference in the rule of law and the political process
� Integrity of the legal system
� Legal enforcement of contracts
� Regulatory restrictions on the sale of real property
3. Access to Sound Money
143

� Money growth
� Standard deviation of inflation
� Inflation: most recent year
� Freedom to own foreign currency bank accounts
4. Freedom to trade Internationally
� Taxes on international trade
� Regulatory trade barriers
� Size of the trade sector relative to expected
� Black market exchange rate
� International capital market controls
5. Regulation of Credit, Labor and Business
� Credit market regulations
� Labor market regulations
� Business regulations
The methodology of computing the index is shown in full on the web site of the Fraser Institute.
Annex 2: The methodology for computing the I1 Macroeconomic Index
The macroeconomic Index I1 reflects the situation of an economy from the point of view of the benefits experienced
by the firms and the households, and is based on three indicators, economic real growth, exchange rate volatility and
annual average inflation rate.
Computation steps:
Step 1: A grade between 0 and 5 is given to each indicator, as follows:
Economic growth:
Interval 8%
Grade 0 1 2 3 4 5
Inflation rate
Interval 30%
Grade 3 5 4 3 2 1 0
Modified coefficient of exchange rate volatility:
Interval 0 0 - 1 1 - 2 2 - 3 3 - 4 4 - 5
Grade 5 4 3 2 1 0
The modified coefficient of exchange rate volatility was computed like this:
a) The volatility of the exchange rate, expressed as n units of national currency / 1 unit euro, where the volatility =
( − )
∑ � =§�
2
=¡
square mean deviationσ
=
1
−1
, where n is the number of observations. ¢£¤¥σ
b) The modified coefficient of exchange rate volatility is computed, using: ⋅100
144

The modified coefficient was necessary because the square mean deviation is influenced by the size order of a series.
Step 2: The index is computed, using: �£ ¡� ¦¡�
1 = 0,
4 ⋅
+ 0,
4 ⋅ + 0,
2 ⋅
_
_ ¥¦ ¡§¨ ©� ¦ ¡¨¦ ¦¨¦ � � � � £¤ ¡¢
inf
_
Observation: The weights of the three indicators are not rigorously founded, which makes the index more intuitive
and less scientific and rigorous. Still, it is considered that the usefulness of building this index is justified, because of
the characteristics of the analysis performed in this paper.
Bibliography
Central Bank of Malta, 2009, http://www.centralbankmalta.org/, accessed on May 3, 2009
Dăianu, D. 2000, �����¢��¤¢��¢¤©��¡�¡¢£¨¤�������§�£��¤¤�Polirom, 2000. �����£©¥£��£§�¤©�§¢��¤©�¡�¦��¨©�£¤��©¨©��¡�¤�¨¡�£��¢¤¥�¤¢¤¤�����£�¡�Polirom, Dăianu, D 2002, 2002
EUROSTAT, 2009, http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home, accessed on May 3, 2009
Institutul Fraser, 2008, www.freetheworld.com, accessed on May 3, 2009
IMF, 2009, http://www.imf.org, accessed on May 3, 2009
Vamvakidis, A. 2008, ‘Is there a „reform fatigue” in the euro area?’, ��¤¨¨£�� ������£�
Acknowledgement
This article is a result of the project „Doctoral Program and PhD Students in the education research and innovation triangle”.
This project is co funded by European Social Fund through The Sectorial Operational Programme for Human Resources Development
2007-2013, coordinated by The Bucharest Academy of Economic Studies.
145

The role of financial reporting mechanism for corporate governance
Şerban IonuŃ
PhD in economics, AES, Bucharest, Romania, ionujs@yahoo.com £���¢�©�����¤�£�©��£©¨��©�¤�¤���©¢¤��¤ �£�©¨�¢��§����©¨���©������¨£�©�¤��¢��¤����¢¤��¢�£����¤¢©�£����£�©��¤©��£��¤���¤�����¢©����©� ���¤ �£�©��£©¨��©�¤�¤�����¢§��§¢¤¢¤�¨¤�����¤�¢�©�£�©�£��©¨� ��¤�£��£�¤��¤����©� �¦��¢�¤¢���¤£���¢�¤��©� ��¤�¤��©�£�����£�©��£©¨¢¤��¢�£����¢��¤�¢�§�����©�£¤�£��¤¢
Key words
Corporate governance
Financial reporting
Finance
Accounting reporting
Group companies
Clasificare JEL: G300
��¤�§¢���¤���£�©��£©¨��©�¤�¤���§�¤¢�£������©£�©�¢§¤©���©£¢�£¤¡���¢�©�£�©�£�����¤£��¤¢�©¨§�¤¢��§�� �¤£���¢�£��¢�¤¢���©£¤��¤¢©�£���¤�£�£���£��£�¤��¤�¢�©�£�©�£�����¤¤��¤¢�©¨§�¤¢������¤���¤¢�£�¤��§���¤ £���¢�£��¢�¤¢���©£¤�¤�£�£���¢¤�©¢�£���¢¤�£�£����£�©��£�����©¢¤��¢�����©�¢§£�£�£����©£¤�§�£�¤���¢©� ���¤¢¢¤©����� ¦��¢�¤¢���¢��¤��¤��¤¢�©¨§�¤¢���©� ��§��¢£¤��©���¨£�¤�����©�£¤����¤©§�£�©�¤�� £��¤�¤��¤��¤��¤¢�©¨ ©§�£�����©� �¡£����¤��¨£�©�£������©��¤��¤¤��¤¢�©¨©§�£�����©� ©�©�¤¢�©£� ¤©¢��� ¦��©� �©�¤���¤¤��¤¢�©¨§�¤¢����£�©��£©¨��©�¤�¤����©�§�¤¡§����¤�£�©¨�£�©��£©¨£���¢�©�£����¨¨��¤ £��¤¢�¤�£©¢ �©�©��©¨©��¤��¤¤�©���§�����£�©��£©¨���£�£�������¤�©¨©��¤��¤¤�£�¤��©¢¤©�©£¨©�¨¤¡§����¢ �£�©��£©¨��©�¤�¤���§�¤¢�§��£��¡��¤©���§��£���¢£��£�¨¤��
� ¤��©�¨£��£����¤��¢�©�©����¤£���¢�©�£��£��¨§�¤�£���¤�£�©��£©¨��©�¤�¤���� £��¤¢�©¨§�¤¢����£�©��£©¨£���¢�©�£�����¤£��¤¢�©�£��©¨©���§��£����©��©¢���¤¨���¤£��¤¢�©¨©��¤��¤¢�©¨§�¤¢�
Forewords
The consolidation of the annual accounts for group organisations is requested by the international accounting
standards – IAS 27 “Financial statements consolidated and not consolidated”. The purpose of the consolidation is to
provide a true and fair view on the financial statements for group organisations.
In order to be able to make a correct capital and dept analyses for an organisation, an analyst must collect a huge
amount of information. The nature of this information depends by the analyst goal, but, generally speaking, those
must includes information regarding the economy, activity domain but also the financial information for the
company but also for the similar companies. Most of the used information are available outside the company –
economic statistics, different analyses of the company activity sector, mass-media, data bases with information about
the company and about similar companies. We must not avoid the fact that the company provide also major
information used in analyse, information available in the financial reports, press conference, internet official web
sites etc.
Body work
The mechanics for financial reporting in case of group companies is very important. The financial statements
are the final product of a long and complicated process of operations, finances and investments accounting recording.
The financial statements structures reflect the organisational system for a company. In order to be informed, any
financial statements user must know the principles of their establishments.
The company activities can be spited into operational, investments and financing. ��¤��¤¢©�£��©¨activities are those that are related to the current activities. For example, the food sales in case of a
restaurant, services sales for a consulting companies, deposits taken and loans to the clients for a bank ��¤£��¤���¤��activities are those which are associated with the long assets buying. For example, purchase and sale
of equipment by a restaurant, purchase and sale of an office building for a bank etc.
146

�£�©��¤activities are those related to the acquisition or reimbursement of financial resources. The main fund source
for this kind of operations is: chare holders and creditors. For example, issuing of new shares, engaging a loan or
bond issue.
Not every transactions are classified a priori into one categories For example, the interest receive by a bank is a part
of operational activities, because the main bank activities is deposits taken and loans to the clients. Opposite, the
interest received by a restaurant for the bond that they hold (due to the temporary liquidity investments) is an
investments operation.
Activities of an organization are reflected in various elements: assets, liabilities, equity, income and expenses. Assets
are economic resources of the company's debts are the creditors' financial claims on an organization, the equity claim
is "residual" of the company, revenue is put economic resources for a company, means expenditure outflows of
economic resources .
The accounts include the accounts of the accounting records increases or decreases the items listed above. The
financial statements are constructed using these accounts. Financial situation of the organization is "drawn" on
accounting accounts. The registration in the accounts is very important to provide an accurate picture of the
organization's financial position. The user’s purpose of financial statements is to take a picture more faithful to the
"state" organization. Internal users are interested in this to take appropriate decisions on the operation of the
organization. External users, on the other hand are interested to take a decision vis-à-vis the credit, financing,
acquisition of shares, bonds, entering into business relations or various other reasons.
To protect the external users in most countries there are regulations that oblige organizations to be audited by a firm
of independent external audit (the obligation to change at a number of years the external audit firm).
Moreover, OECD (Organization for Economic Cooperation and Development) issued principles of corporate
governance that came to protect shareholders - particularly small shareholders, the meaning of the correct
information.
Internal users are also protected in the sense that they may be deliberately wrong information on the financial
statements of organization. The external auditors provide a safe (but not absolute) that the financial statements are
prepared in accordance with international accounting standards, or according to national accounting standards in
force.
To support internal users, come and internal auditors who audit powers over certain areas within the organization. An
important role is also different rules for the protection of emerging information and management standards such as
Sarbanes-Oxley.
For a large-sized organization, the proper recording and accounting management accounts is given by the equipment
used and quality of experts who manage them. In large organizations, operations manuals are limited due to the
number of operations that are managed. In the case of group, this situation is more complicated because of the huge
volume of data to be processed in the accounting.
In conclusion, the available information in the accounts are processed so that the final amounts to get reflected in the
financial statements described above. Often, external users of financial information have only the final information.
Information intermediate balances of certain accounts, the financial position of certain balance sheet items are
available only to users of internal financial information. International accounting standards come to needs of internal
and external users by setting the format and information contained in the financial statements.
As noted above, corporate governance in the opinion of Diane K. Denis and John J. McConnell (Source: The Journal
of Financial and Quantitative Analysis, Vol 38, No. 1 (Mar. 2003), pp 1 - 36 published at the University of
Washington School of Business Administration) has two transmission mechanisms, one internal and one external.
Regarding the internal mechanism of transmission, the main engine of transmission is represented by the Board of
Directors. This is usually the interests of shareholders. The Management Board is to monitor and compensate
management in order to maximize shareholder value. While in theory, the Board role is clear, in practice things are
less clear. Often the Board of Directors includes some of the executives, but are cases when the Board of Directors is
composed mainly of executives (which in theory should monitor them). Often the process by which members are
appointed Board is such that management is often an important word to say.
Shareholders is rarely not directly involved in the management of organizations and is rarely completely separate
company. Typically, management has a few percent of the company. In this situation, the shareholders is an
important element in terms of corporate governance. It is assumed that shareholders who are not involved in
management, can influence the actions taken by management.
In many countries, the government has many organizations. If you look at government as a single entity, state
corporations have a very concentrated shareholding. In recent years there has been a tendency to dispose of
properties taken over by the state. Transfer of ownership from state to private supplies imported items that can be
examined about the effect of ownership on firm performance.
147

External mechanisms of corporate governance occurs in many forms. When the actual value of the company is very
small compared to its potential value, there will be many parties interested in taking control of it. In this situation, it
is most likely a change of ownership.
Legal system is of particular importance in terms of external mechanisms of corporate governance. Jensen (1993)
suggests that the legal system is an external mechanism of corporate governance but emphasize that it has certain
limits in solving issues that arise between managers and shareholders. La Porta, Lopez-de-Silanes, Shleifer and
Vishny (1998) argue that the legal system has a fundamental mechanism in corporate governance. In particular, it
stresses that the legal system in a country protects the rights of investors, so that it becomes the determining factor in
the link between corporate finance and corporate governance in that country. Extend their research on various legal
systems in several states. Comparing different systems of corporate governance is born but the question is the ideal?
One is defined as the ideal? If any, are his characteristics? If there is one ideal that should be its characteristics?
In principle, as stated Andrei Shleifer and Robert W. Vishny (A Survey of Corporate Governance, Andrei Shleifer
and Robert W. Vishny, The Journal of Finance, Vol 52, No. 2, 1997, p. 737-783), corporate governance in managing
the corporate donors to ensure that the value received in exchange for financing. How to ensure that shareholders but
are rewarded? How to ensure that these managers do not "steal" the capital invested by shareholders? How do
shareholders control managers?
At first is not clear that shareholders receive in exchange for funding made by them (if they still receive something).
Managers are remunerated by wages received. There have been cases in which managers of companies have "loot"
companies. In Romania, the banking sector is eloquent in 90 years, when the rifle was more banks. Advanced market
economies have solved this problem.
Regardless of time and economy, issues of corporate governance râne an issue of major importance. As mentioned
above, even in developed economies have a high disagreement on how good or bad corporate governance
mechanisms are. There is an agreement between English models, Japanese, German or American. These mechanisms
are very good, but there were few differences between them. Although not differ greatly from each other, from
corporate governance systems in other states, there is a significant difference. Literature refers to the italian system
of corporate governance, which is considered insufficiently developed. In underdeveloped countries, including some
in developing corporate governance mechanisms are missing entirely. In Russia, the lack of corporate governance
mechanisms has led to a series of problems in many privatized companies.
Long-term market mechanisms helps corporate governance mechanism. The existence of market competition
between companies will lead to minimizing costs, increasing efficiency and competitiveness, because otherwise
would not be possible to survive in a competitive environment. There are still some skepticism as to leave only to
regulate the market and to support corporate governance mechanisms. The market can not provide certainty to
shareholders and will recover the capital invested in the company. The existence of competition in the market make
use of resources to be more effective and, available funds to be higher. Due to separation of duties, shareholders do
not always have control over the company.
Many authors, including Andrei Shleifer and Robert W. Vishny (A Survey of Corporate Governance, Andrei Shleifer
and Robert W. Vishny, The Journal of Finance, Vol 52, No. 2, 1997, p. 748) raises the following question related of
corporate governance: why shareholders put their money to the leadership, management, knowing that he has a great
power of decision on how to use, until you lose one of them? The answer is somewhat obvious: shareholders expect
to increase capital investment, to increase investment, high opportunity cost. Hopes that shareholders will have cashflow
links future higher initial investment. These cash-flow sites most often takes the form of dividends, but not
only. The residual value, or value of sales is also very important and sought by shareholders. In the case of Romania,
developments since 1989 have created the proper climate for starting and very rapid growth of many businesses,
which were then resold or be associated with larger international companies. If investors do not consider that the
residual value or resale along with cash flow can not cover future investment, they will not invest at the outset.
Management, rewards often to show shareholders that their investment is profitable, attracting new funding sources
from the various investors and financial markets.
Another reason is that investors have when investing in a company without receiving any kind of control is that they
are extremely optimistic. Investors are sometimes so enthusiastic that without investing too much to stand on and no
thoughts to think about how they will recover their investment, only mizând evolution of the actions. An extreme
version of such behavior are Ponzi schemes, in which investors are attracted to repeatedly enter the last pay the
original investors, thus creating the illusion of a high yield. These pyramid schemes are studied in the literature,
providing important information related to investor behavior and its information. These investors have no protection,
just hope that they will recover the initial amounts and the yields expected. These pyramid schemes are very
common in developing countries (Romania experienced several such schemes in the 90 - Caritas, Philadelphia, etc.).
In Russia was famous MMM pyramid scheme in which millions of people have bought shares.
148

In this context described above, it tried to limit the exaggerated optimism of investors, at least in some markets. For
example, Kaplan and Stein in 1993 showed that high yields in government bonds were used to finance the take over
in the United States in 80 years. Ritter (1991), Loughran, Ritter, and Rydqvist (1994), Pagano, Panetta, and Zingales
(1995), Teoh, Welch, and Wong (1995) provide evidence which demonstrates that the initial and subsequent issue of
shares are overvalued. It was noted that when the scholarship is very high have many issues of new shares, while the
scholarship is reduced issuance of new shares are almost nonexistent. Similarly, when profitability is high companies
held most issues new shares as opposed to periods of low profitability, they have very few issues of shares.
The link between corporate governance mechanisms and mechanisms of financial reporting is very close. Financial
reporting, especially in the group of companies is very important that shareholders interrnediul by taking "the pulse"
of investment.
There is a category of investors to finance the company in exchange for a certain control over the decisions that
companies and assets. These funding agreements are based on legal grounds, so if managers violate these
agreements, donors can address justice
The most important as they have shareholders, is entitled to vote, which is particularly important especially when
deciding mergers, acquisitions, and the election board of directors (the board of directors), which can be controlled to
some extent management (Mann (1965), Easterbrook and Fischel (1983)). Often, the right to vote is difficult to
overview. In many countries can not vote by mail or fax, shareholders are required to be present at the appointed
time and place to exercise their right to vote. In these circumstances, the right to vote by small shareholders becomes
virtually impossible which assures major shareholders of non small shareholders vote.
In Russia, there are organizations in which management threatened with firing employees shareholders, if not vote in
a certain direction. It is more practical and neanunŃarea small annual meetings of shareholders, not to be present and
to exercise such right to vote. Stalin said "it is not important how people vote, it is important who counts votes and
generally include managers shareholder votes.
Even if shareholders elect board of directors, this is not a guarantee that they represent their interests.
An important role in terms of corporate governance has and Organization for Economic Cooperation and
Development (OECD). Organization for Economic Cooperation and Development (OECD) is an international
organization of those developed nations that accept the principles of representative democracy and free market
economy. The organization has its origins in 1948, as the Organization for European Economic Co-operation
(OEEC), the Organization for European Economic Cooperation to help manage the Marshall Plan reconstruction of
Europe after the Second World War. Later the membership was extended to the outside of Europe, and was reformed
in 1961 after the Organization for Economic Co-operation and Development (OECD), in French: Organization of
Coopération et de Développement Economiques.
Organization for Economic Cooperation and Development is a unique forum where the governments of 30
democracies work together to meet the challenges of economic, social, those related to globalization and exploitation
of the opportunities of globalization.
The organization provides a framework within which governments can compare their political experiences, seek
answers to common problems, identify good practices and to coordinate domestic and international policies. This is a
forum where the pressure can also act as a powerful incentive to improve policy and implementation tools that
independent occasionally can lead to the signing of treaties.
Exchanges of information and analysis of OECD governments are provided with a secretariat in Paris. The
secretariat collects data, monitors trends and analysis and forecast economic developments. This research and social
changes and business models developed, the environment, agriculture, technology, taxes and other areas.
OECD helps governments to increase prosperity and fight poverty through economic growth, economic stability,
trade and investment, technology, innovation, anteprenoriat and cooperation for development. There must be
assurance that economic growth, social development and environmental protection are achieved together. Other
goals include creating jobs for everyone, social equity, clean and effective governance.
OECD works to understand and to help governments respond to new developments and concerns. These include
trade and structural adjustment, online and security challenges of reducing poverty in the developed world. For more
than 40 years, the OECD is one of the largest and most reliable sources of comparable statistical, economic statistics
and social data. OECD databases include a wide and varied range, such as national accounts, economic indicators,
labor, trade, occupation, migration, education, energy, health, industry, charges and taxes, and the environment. Most
of the studies and analysis are published.
For over the last decade, the OECD has resolved a number of social, economic and environmental, and deep
connection with business, trade unions and other civil society representatives. Negotiations at the OECD in respect
of taxes and transfer pricing have opened the way of bilateral treaties around the world (source:
http://ro.wikipedia.org).
149

Conclusions
There is a generally accepted view (Andrei Shleifer and Robert W. Vishny (A Survey of Corporate Governance,
Andrei Shleifer and Robert W. Vishny, The Journal of Finance, Vol 52, No. 2, 1997, p. 753), that when shareholders
have odds are very small and many in number, their rights may be violated more easily by participating companies.
When shareholders are few in number and have significant shares, usually, they exercise greater control over the
organization.
Whatever the case, the role of corporate governance is increased when there are effective financial reporting, able to
provide an overview of the organization.
However, when we are dealing with group companies, the situation is very much complicated. Various risk
concealing information related to one or more companies within the group is very high and it is extremely difficult to
ensure a correct picture to the whole group. Consolidation process, seen as part of the financial reporting becomes a
major role. Existence of different tax rules in different countries working members of the group companies, further
complicating the process of consolidation.
Shareholders, financiers, investors and existing potential users of financial information in general and group
companies in particular must be helped in the sense of protecting their "misinformation" coming from the
management.
Bibliography
Journal of finance
150

COLLABORATIVE BANKING SYSTEMS
Cristian CIUREA
PhD candidate
Academy of Economic Studies, Bucharest, România
cristian.ciurea@ie.ase.ro ����¤�������¨¨©��¢©�£�¤� ��¤��©����¤¢¤©¢¤�¢¤�¤��¤��©£�
Abstract:��£��©�¤¢�¤��¢£�¤�£¤
JEL Classification: P49
1. Collaborative systems
Collaborative systems represent an interdisciplinary field at the intersection of economy, science,
management, and sociology. Collaboration involves organizations that have a common mission and join together to
form a new structure. (Arba 2005)
A collaborative system is the system in which many users or agents are engaged in a shared activity, often in
distanced locations. In the large family of distributed applications, collaborative systems are distinguished by the
fact that the agents work together to achieve a common goal and have a great need to interact with each other in
the sense that they share information, change requests, etc. (Dobrican 2005)
��©¢©��¤¢£��£����¢��¤��¨¨©��¢©�£�¤�©�££��� ��¤�����¢¤©��¢§©¨£� ��©¢©��¤¢£��£��¨£¤ ¢¤¨£©�£¨£� ���¢�©�£¨£� �����¨¤�£� �£��¤�¢£� ©���©£��©£�©�£¨£� �©¢¤�¢¤�¤��¤��£��¤¢¤��� �¤���£��£�©��¢���¢© �©�££��� ��¤����¤©¢�£�¨¤©�©¨ �¤��£��¤¢¤��¡© ���£��¢¤©�¤��¤¤��£�£¤�� ©����¤�¤¢��¢�©��¤¨¤�¤¨£� ��¨¨©��¢©�£�¤�©�££��� ��¤���
Keywords:��¨¨©��¢©�£�¤� ��¤����©�££��� ��¤��¢§©¨£� ��©¢©��¤¢£��£����¤�¢£�� �¢��¤¢�£¤�©��¢§©¨£�
After criterion type of application, collaborative systems are classified into:
they ��¤��£�¤�§�©�£��
- ��¨¨©��¢©�£�¤�
- ��¨¨©��¢©�£�¤�
- �¢��§��£�¤��¨¨©��¢©�£�¤�
- ��¨¨©��¢©�£�¤�©�££���
-
are applied in the educational field and aimed at evaluating and
enhancing the educational process performance;
they are encountered in the military field and are characterized by strict
rules of organization and functioning;
designed to increase production capacity and product quality in different
units producing goods and services;
they are analyzed to determine factors affecting the banking system and its
components.
The banking system, seen as a collaborative system, consists of 3 subsystems: ��¤�:
• Consist of bank branches, ATMs, headquarters, money and last but not least, people;
• There is a very good communication and cooperation between these elements, provided by the staff
from bank branches and headquarter;
• The staff from headquarter develop rules, procedures, circulars, on which employees from bank
branches operate their activity;
• From the customers’ perspective, each branch is a separate unit of the bank, but from the bank
�§�� �£�©¨¨ ��¤�� ��¤�� ��¤�� ��¤�����¤�¤��¤
151

-
-
employees, all operating subsidiaries works as a whole.
Figure 1. The physically subsystem of a collaborative banking system (Ivan et all 2007) ��¤�, consisting of all software and hardware resources available to the bank to
conduct its business. This subsystem is the most important in the banking system, because he controls the
physical flow of money in the sense that it works with scriptural money. ��¤£���¢�©�£���§��
Figure 2. The informatics subsystem of a collaborative banking system (Ivan et all 2007) ��¤�, consisting of the flow of electricity, Internet and intranet connections, alternative
channels of communication. If temporary fall part of this subsystem, the bank activity is compromised,
since it is providing communication between branches and headquarter. Most banks have taken security
measures to prevent this situation, meaning that computers and servers on which are the databases are
equipped with UPS, which allows them to operate in case of a fall in electricity and the telecommunications
is ensured in parallel by fixed and mobile phones. �§�� ��¤¤�¤¢�
Table 1. Comparison between a classic banking system and a collaborative banking system
Classic banking system Collaborative banking system ��¤�
��¤�©�££���
152

- There are fewer rules, procedures
and less red tape;
- The operating costs are lower. ���©��©�¤�
- Reduced transparency;
- Low quality;
- Slow progress. �£�©��©��©�¤�
- Full transparency;
- Perfect communication between ���©��©�¤�
employees;
- Fostering teamwork;
- High quality of services;
- Rapidly progress.
- The operating costs are higher. �£�©��©��©�¤�
When collaborative systems are used voluntarily, one of the key drivers to success is the manner in which
users feel their experience with the system: if they like, if the system offers them what they expect from him, if they
are able to communicate freely and naturally with other participants, if they wish to recommend it to others. (Ivan et
all 2007)
2. Quality characteristics of collaborative banking systems
The most important quality characteristics of collaborative banking systems are as follows: ¡ ¡
-
-
-
-
-
In the banking system, the reliability of a bank, seen as a complex collaborative system, refers to the confidence � �©£��©£�©�£¨£� ¡ £��¤�¢£� ¡ ����¨¤�£� ��¢�©�£¨£� ¢¤¨£©�£¨£�
that the customers have in the bank ability to work properly and normally in all conditions before established. A
bank is reliable if it is sustainable over time. The reliability of a collaborative banking system assumes strict
compliance with those principles, rules, standards and operating procedures of a bank to ensure the profits
maximization for a long period of time.
refers ��¢�©�£¨£�
to the ability of a collaborative system to be transferred from one work environment to another.
Portability for collaborative banking system aims:
- ���¢£��¤����§�¤���, refers to the degree of standardization and recognition at international
level of models for each printed document: external payment disposition, payment order, payment sheet,
etc.;
- involves the transfer of a management model from a geographic area to
another. Applying a different model of management at baseline performs restructuring of banks. This
model can be new or adopted from other similar collaborative systems;
- ���¢��¤�§¢¤�, involves measuring the generality degree of the procedures developed in a bank
and applying them in other banks or collaborative systems, depending on circumstances;
- refers to employees transferring from one branch to another and from one geographical
area to another area. This portability is the movement of staff where the bank is opening new branches;
-
��¢�©�£¨£�
���¢��¤��¤�, refers to the possibility of carrying out operations in various other conditions of
work than usual and by others;
- is
��¢�©�£¨£�
the
���©�©�¤�¤���
translation of various software components of the information system from a
workstation to another.
����©�� ��¢�©�£¨£� ��¢�©�£¨£� ������¡©¢¤ ��¢�©�£¨£� ��¢�©�£¨£�
153

A bank and the opens branches in different counties or cities in the country do an example of portable
collaborative system.
Figure 3. Portable collaborative system
If the bank has its headquarters in the county of X, then opening a branch in the county of Y provides its presence
in this county. This ensures portability of collaborative banking system. It considers the following variables:
- = the total number of bank equipment;
- ��= = the number of equipment that are portable;
- the total number of bank employees;
- = the number of bank employees which may move or be moved to other locations;
- = the multitude of bank software which build the information system of it;
- = all portable bank software;
- = the team management of the bank ;
- = the portable bank’s management. ���, It defines the portability degree of a bank, as follows:
+ + +
=
+ +
��
+ . (1)
���
¤¢£ ¤¤ ¤¥ ¦¤ ¤¡ ¥ ¤ �� � ���¦ ��¦ ��� ¢£ ¡
The collaborative banking system is a system with high complexity, with a large number of components and a
large variety of links between them. The complexity of the banking system is given by the operations they carry
out, but also by the collaboration between different banks from different countries and by the alignment to
standards imposed by the regulations in this worldwide field. The collaborative banking system has components
that can be represented by using a graph, the nodes being represented by these components, and the arcs by the
links between components. The aggregated complexity of the collaborative banking system, ��, is given by the
complexity of the subsystems that form it, ���, and by the complexity of linkages between subsystems, ���, as
follows: ��§¨©�����©���, ¨��§�and¨��������are where importance coefficients; (2)
The characteristic of collaborative systems is well evidenced in the banking system, specifically in
the case of commercial banks and its branches. Branches of banks are collaborative systems that fulfill a single
£��¤�¢£�
154

function, namely, managing client accounts and transactions conducted by them. By integrating these branches result
the large collaborative system, represented by the bank itself, which in this case fulfills many functions.
The integration capacity of a collaborative system is given by the ratio between the value of integrated system
and the expenditure, which is made to ensure the integration: ¤¢= , where: (3)
¦is the integration capacity of a collaborative system; �¦�is the expenditure made to ensure the system integration;
is the value of integrated system.
If two banks merge by absorption, the absorbed bank must be integrated into the one who bought it, by
determining it to function exactly as the parent bank. Because a subsidiary bank purchased to work after the ¡�¦ £¢¡ ¡¢
parent bank rules, are made expenses for operators’ trainings, equipment, furniture, software and support,
business changing and others.
In this case, the integrity degree can be determined as follows:
−
= �¦�is , where: (4)
the integrity degree;
���represent the acquisition cost of the bank;
represent the costs incurred to ensure integration.
In the case of a commercial bank, regarded as a collaborative system, the refers �©£��©£�©�£¨£� �¢� ©�§
¥¦§ ¥¦§¥¨§
primarily to
maintain its information system. The banks information system is very complex and very clever, because it must
manage client accounts. The bank existence to the market is limited in functionality and maintainability of its
information system.
3. Increasing the efficiency and the performance level in collaborative banking systems
In the collaborative banking systems are the following components:
- ��¤�©�¤¢£©¨, which includes buildings, equipment and other property;
-
, consists of flow of electricity, Internet and intranet connections, alternative channels of
communication;
- ��¤£���¢�©�£��, comprising all software and hardware resources available to the bank to conduct its
business;
- ��¤�§�©�, including the bank human resources, the categories of personnel and the qualification
levels of them.
��¤¤�¤¢�
155

Bank's financial results depend largely on the quality of staff and the efforts of each employee separately. For
each position of the bank, the department of human resources is seeking people with a degree of training higher
than required by the job in question. The goal of this recruitment is the elimination of cases in which an employee
fails to meet certain requirements or to resolve certain issues related to its activity. Training of employees at work
must be done at least every five years. During this period, an employee of the bank carries out one or more
trainings.
Regarding the collaborative banking system, an indicator for increasing the efficiency is the level of staff
training. Considering the qualifications period of five years, the minimum number of qualifications that get an
employee is one in five years and the maximum number is one per year or five qualifications over five years. The
maximum number of training sessions that the bank will finance, over a period of five years, is calculated according
to the relationship: ��§�©��, where: (5)
is the total number of training or qualifications supported by the bank;
is the numbers of people employed in the bank and which are eligible for training.
The degree of increasing the level of staff training, GP, is determined according to the relationship: �� ��
©¢= is ��
, where: (6)
the degree of increasing the level of staff training;
is the number of persons qualified in the five years;
is the total number of training or qualifications supported by the bank. �� ��
If we take into account the duration of trainings, in the formulas for calculation of the indicators will appear
another two variables:
= minimum duration of training, expressed in calendaristic months;
= maximum duration of training, expressed in calendaristic months.
In this case, the total number of training sessions supported by the bank within five years, expressed in
calendaristic months, is given by the relationship: ��§�©��©��©��(7)
The degree of increasing the level of staff training will be determined with the same formula, with the
difference that the number of persons qualified in five years is weighted with the duration of qualifications for each
person. This indicator shows the situation in which is the collaborative banking system in terms of level of staff
training and the quality of human resources.
Collaborative systems should work better than other types of systems. This is achieved by: �¤�§�£����¤�£�¤¡©£�£��£�¨£�¤, - to settle and resolve a specific problem: this proposal applies to
collaborative systems involving a large interaction with customers such as banks or stores. Sizes that
characterize the process of waiting are: the average number of people waiting in line, the average holding
time for a person, the average number of people served and the average serving time for a person. In the
case of the collaborative banking system is added also the volume of money traded per unit time.
For a bank were obtained the following experimental values of the mentioned indicators for a number of 10
��©� ��£�
¡
¥
served clients:
156

Table 2. The values of waiting in line indicators for a collaborative banking system
The
average
serving
time for a
person
(thousands)
The
average
holding
time for a
person
(min)
The
average
number of
people
waiting in
line
The
volume of
money
traded per
unit time
(thousands
of RON)
Person Person Person Person Person Person Person Person Person Person
1 2 3 4 5 6 7 8 9 10
10 9 8,5 9,5 11 10,5 10 7,5 11,5 9,5
5 6 5,5 3,5 4 6,5 3 5 4,5 5,5
50 48 55 52 46 59 37 47 45 54
105 103 110 114 98 93 126 108 99 101
For the collaborative banking system is defined the indicator average amount of money traded by a person per
unit time, according to the relationship: £¦¤¥¡= , where: (8)
VMBTP is the average amount of money traded by a person per unit time;
VBT is the total volume of money traded per unit time;
NPS is the average number of people served.
Depending on the values obtained for the indicators in table 2 is achieved the ranking of bank staff, according to
performance achieved. For example, the ranking of broker acting on the exchange market is made after the
annual amount of profit made by each broker individually.
Is calculated an global indicator for the assessment of a bank officer based on the indicators in table 2, as follows:
¡¢
©�¤¢����¤¢§�£��£�¤�©��,
£¤¥
where: (9)
• p1, p2, p3 şi p4 are weights with p1 + p2 + p3 + p4 = 1;
157 �¢©�¤�� ¡©£�£��£�¨£�¤�©�©����¤©�¤¢©�¤©��§�������¤ ¦��§���¤©�¤¢©�¤�¤¢�£���£�¤�©�§����¤©�¤¢©�¤��¨�£���£�¤�©�¨����¤©�¤¢©�¤�§��¤¢���¤��¨¤

• IGA is the global indicator for the assessment.
performed
- ¦��¢¤©�£����¤��¨§�¤����¤¢©�£���
- �¤�§�£��¤��¨�
- ¦��¢¤©�£��©�©��©�£¨£�
on the mobile, Internet Banking and other alternative
channels of communication, in the case of the banking system. These operations involve a lesser interaction
with bank staff, leading to a higher speed of performing transactions. Thus increase the number of people
served by the collaborative system, and the number of people waiting in line tends to zero. The
implementation of alternative channels of communication is costly for a bank, but the growth rate of profits
obtained by the use of these services is upward; �¤���¨§��§©�£���, in order to increase the stability of collaborative system. A person in a
certain position in an institution has accumulated experience that gives a certain stability and safety in the
workplace. The staff fluctuation in a bank leads to a decrease in system efficiency and reducing
productivity. To reduce this fluctuation, the department of human resources within the bank has a very
important role, it can contribute by stimulating and motivating employees; ����©������¤¡�¢£¤��£¢���¤��, in order to increase efficiency and reliability of the
collaborative system.
4. Conclusions
The development of collaborative systems conduct to increase their complexity and the global character of
the economy is designed to determine, also a global character for many of the collaborative systems. From the
information point of view, to these global collaborative systems must correspond global performance indicators,
procurement systems scratchy and data conversion procedures, to transform heterogeneous information into
homogeneous entries for aggregate indicators, defined in the metrics of collaborative systems. Based on these
aggregated indicators should decide appropriate to the global level, intermediate level and the execution level of any
collaborative system organized into hierarchical levels.
A collaborative system creates a environment where people can work better together, can share information
without the constraints of time and space, being characterized by three fundamental aspects: joint activities,
sharing environment and way of interaction.
This article is a result of the project „Doctoral Program and PhD Students in the education research
and innovation triangle”. This project is co funded by European Social Fund through The Sectorial Operational
Programme for Human Resources Development 2007-2013, coordinated by The Bucharest Academy of Economic
Studies (project no. 7832, “Doctoral Program and PhD Students in the education research and innovation triangle,
DOC-ECI”).
References �§�£�¤��©����§�©�£��, Arba, R. 2005, `Collaborative Electronic Marketplace`, in
Cluj-Napoca, pp. 11.
Dobrican, O. 2005, `An Example of Collaborative System`, in ��¤��£��§�£�¤��©����§�©�£��, Cluj-Napoca, pp. 48.
Ivan, I., Boja, C. and Ciurea, C. 2007, -�¤�¢£¤�£�¢©��£�©, Editura ASE,
Bucureşti.
¤�¢£�£©¨¤�£��¤�¤¨�¢��¨©��¢©�£�¤ � ¦��¤¢�©�£��©¨¡�¢£������¨¨©��¢©�£�¤�§���¢� ¦��¤¢�©�£��©¨¡�¢£������¨¨©��¢©�£�¤�§���¢��
��¤��£�
158

A Service Oriented Architecture for Public Transport Optimization
Liviu Adrian Cotfas, Popescu Sabina
Academy of Economic Studies, Bucharest, Romania
liviu.cotfas@ase.ro, sabina.popescu.monica@gmail.com
Abstract
Car traffic is one of the most important sources of global pollution. An easy solution for the authorities to
reduce the number of cars in big cities would be to convince as many people as possible to use public transportation.
Besides numerous advantages, public transport has as a major disadvantage the difficulty of selecting an
optimum transport route, determined by the complexity of the network. Taking into consideration this aspect, the
present paper suggests a solution for route generating within multi-modal public transport networks. Taking into
account the fact that different users consider different routes as optimum, this paper proposes the utilization of
flexible restrictions alongside the classical options (number of transfers, number of public transport means, walking
distance, costs and total duration). Thus generating a route which reflects much better the users’ preferences will be
possible.
In order to allow a greater flexibility, the proposed solution relies on a service-oriented architecture.
Structuring the application in independent web services allows the implementation of the user interface, either under
the form of a web application accessible from the browser, or under the form of a desktop application or under the
form of an application for mobile terminals. The open implementation allows taking the information from external
sources via web services, of the XML standard (Extensible Markup Language) or of the RSS standard (Really
Simple Syndication). Thus besides the information strictly connected to public transport, users can be presented
information about the air pollution in different areas of the city, the weather forecast as well as geo-referenced
information from sources such as Wikipedia and Flickr. The system can also be easily utilized as a geo- referenced
advertising platform by displaying location based advertisements.
Keywords: Service Oriented Architecture, Public Transport, Geographic Information System, Location Based
Advertising
JEL Classification: F00-General
Introduction:
A frequent problem in the big cities is the very busy car traffic which hardens the flow and generates great
amounts of polluting gases which accelerate the global warming process and irremediably affects both men’s health
and the environment. Thus passenger transport is estimated to generate approximately 15% out of the whole amount
of carbon dioxide annual emissions [1]. Besides noxious gases, phonic pollution caused by traffic also represents an
important issue.
A possible solution for the authorities to reduce the number of means of transport in big cities would be to
convince as many people as possible to use public transportation. On the average, for one single person who gives up
using his personal car and chooses public transport there is a cutting down of 9 grams per day in the carbon dioxide
emissions, respectively an approximate of 2177 grams annually [2]. Furthermore, other advantages include the
decrease in phonic pollution, ease of traffic, the reduction of the necessary number of parking places, the reduction of
the investments necessary for the construction of passages and tunnels destined to ease traffic, the cutting down of
expenses on passenger transport.
Alongside these benefits, the utilization of public transport also presents drawbacks such as the very
complicated structure of the transport network which makes the choice of an optimum route difficult. The selection
of the best route is more difficult when the exact location of the final destination (museum, restaurant, park, etc) is
not known.
159

Therefore, it is more than necessary to implement a system which would not only allow the generation of
routes in multi-modal transport networks (subway, bus, tram, etc) but will also benefit from a base of objectives as
large as possible which could allow passengers the possibility of generating routes without previously knowing the
location of the aimed objective. Moreover, taking into account the fact that the same route is not generally
considered as optimum by different passengers, the system must include the users’ preferences as accurately as
possible.
The majority of the existing systems do not have one or more of these conditions, which drastically limits their
utility.
The model of system proposed in this paper takes into account the elimination of all the drawbacks present in
the current applications by utilizing an open architecture which allows acquiring information from multiple sources
via web services, the XML standard (Extensible Markup Language) or of the RSS standard (Really Simple
Syndication). Thus, the proposed system is an open one which can display geo-referenced information from a
multitude of sources (information about the air pollution, the weather, from Wikipedia, etc). The system also offers
support for multi-modal transport networks. The service oriented architecture makes the system accessible from a
wide range of platforms and devices. Great care has been taken to display results and information in a convenient
and suggestive manner. In order to include the users’ preferences as accurately as possible, the implementation of a
flexible restrictions mechanism has been opted for, besides the usual fixed restrictions.
The open architecture also allows an easy implementation of additional geo-referenced services including for
example a location based advertising service.
2. Existing applications
2.1. Transport for London
The Transport for London application [3] is one of the most complex applications developed in order to
generate routes in public transport networks. It offers a wide range of options inexistent in other applications of this
type such as the options for persons with disabilities (the impossibility of using staircases, elevators, moving stairs).
Among the disadvantages, there can be mentioned the relatively small number of objectives and the impossibility of
using the application on mobile devices.
2.2. Google Transit
The Google Transit application [4] launched at the end of 2005 aims at offering the possibility of generating
routes by using public transport means in several cities from the United States of America as well as some cities in
Europe and Japan. Among the applications under analysis, this is the poorest in options, the latter being almost
inexistent. It allows the route generation both by selecting from the map the departure-arrival points and by directly
indicating the public transport stops.
2.3. RATB
The application made available for the users of RATB [5] offers the possibility of generating routes having the
option of selecting the type of public transport means which we might wish to use. The route generation is possible
only by indicating the departure and the arrival station. The utilization is difficult because the departure and arrival
points cannot be selected directly from the map. The application does not offer support for the generation of routes in
multi-modal transport networks, the database used not being integrated with the Metrorex database. Another
drawback is the impossibility of using this application on mobile terminals. Furthermore, it is not offered the
possibility of selecting an objective as the final destination point.
3. Service Oriented Architecture
The proposed solution is based on a multi-level architecture (Fig. 1 Service Oriented Architecture) integrated
with the usage of web services. A web service is defined [6] as being a software system designed to assure the hostto-host
interaction described via WSDL (Web Services Description Language) which uses standardized network
protocols like SOAP and HTTP. A web service is based on a collection of protocols and standards used for data
exchange between applications and systems. The software applications written in different programming languages
160

which run on different platforms can use the web services in order to exchange data via a network mainly
represented by the Internet, in a manner somehow similar to interprocess communication on a single computer. The
interoperability is due to the usage of adequate public standards.
Such architecture combines the advantages of multilevel architectures with the advantages offered by the web
services: interoperability, RESTful, loosely coupled. Given the fact that the system will have to cope with a high
number of independent requirements from users, it is recommended to use a RESTful [7] working manner which
may eliminate the necessity of keeping a permanent connection between clients and server, thus decreasing the use
of resources per server. The use of web services allows a good system scalability and the components can be
installed on different servers.
Within the architecture, the greatest part of the system functionality is concentrated in the web service “Main
Web Service” which includes the route generating algorithm, as well as the connections to the external data sources.
The external data sources can be web services or XML or RSS processed data. The proposed system overtakes the
maps used for route display by using the Microsoft Virtual Earth [8] web service, whereas information concerning
the weather or the level of air pollution is taken via XML and RSS.
The main web service is directly appealed to by the web component, by the web service for the mobile devices
and by the module which manages the requests/responses via SMS (Short Message Service).
The mobile devices service is destined to prepare data for transmitting and displaying on devices with lower
displaying and processing capacities. This service achieves the compression of maps and other information conveyed
in order to reduce as much as possible the data volume which has to be transmitted to the mobile device. SMS
Gateway is destined to interpret the SMS messages which contain route generation requests originating from clients
and to transform the response sent by the main web service in SMS messages which can be transmitted via the
mobile phones network.
The use of service oriented architecture thus allows the modular implementation of the system concentrating
the functionality in distinct web services which can be independently altered or used within other applications. The
system can be easily extended with new components or can easily overtake data from additional sources.
The flexibility offered by such a system is large, the clients being able to use the system via the website, the
application for mobile terminals or the SMS messages.
Fig. 1 Service Oriented Architecture
The main web service can communicate with the geo-referenced advertising system in order to display
advertisements to the users depending on their current locations. For example, the advertising service can use as
parameters the client’s GPS coordinates, the desired advertising layout (text, image and text) and the maximum
distance to the objective for which the advertisement would be displayed. The display of advertisements for
objectives close to the user’s location increases the efficiency of the advertisement. At the same time, the
advertisement becomes less annoying and even useful for the user of the application.
The data related to routes, stations and objectives are stored via the spatial database
which allows the easy calculation of distances as well as the determination of stations
and objectives which exist in a certain area.
4. Interface
Considering the service oriented architecture, the implementation of applications
which use the functionality exposed by the services can be easily achieved in multiple
Fig. 2 Mobile device version
161

programming languages, as well as for multiple platforms or operating systems. In order to demonstrate these
aspects, an implementation of the application has been achieved under the form of a website (Fig. 3), a desktop
application and a mobile devices application (Fig. 2).
The implementation as a website has the advantage that the clients can use the application without having to
install it previously. The implementation for mobile terminals allows its clients to generate routes whenever
necessary, even if they do not have access to the computer. The identification of the client’s location in order to be
used in the route generating process or for the display of close objectives can be achieved either via the GPS module
if this one is incorporated or, if not, via the mobile phone network. In order to facilitate the usage, it is recommended
to use a similar interface in all the implementations.
No matter the chosen variant, the users can visualize
the public transport routes, with the possibility of selecting
only a certain type of public transport, can visualize the
categorized objectives as well as information taken from
external sources via RSS or XML such as weather or the air
pollution level. On the map, there can be displayed
information related to objectives overtaken from Wikipedia
[9] or other geo-referenced sources.
In order to improve the performance, only the data
related to the objectives or stations visible on the map at the
respective moment are included in the client application. This
is achieved by determining the geographical coordinates
corresponding to the corners of the displayed map and by
comparing them with the geographical coordinates of the
objectives and stations by using the specific functionalities of
the spatial databases.
The route generation can be achieved by selecting the
departure and arrival points directly from the map or by
typing the name of a station or objective. The user can
Fig. 3 Web Version
flexibly express his preference for one or several restrictions.
The implementation of the flexible restrictions mechanism at
the interface level was done using sliders which allow the user to give a smaller or larger importance to a certain
preference (Fig. 4). Alongside the flexible options, there are also available the classical limitations to restrict the
generation of routes to a single type of means of transport or to impose the obligation of the existence of facilities for
disabled persons on the generated route.
The generated route is displayed both on the map and under the form of a list of stations. Besides the station
names, there are also displayed the means of
transport that can be used, as well as the type
of transport means. If the journey implies
station transfer, this is also displayed.
5. Conclusions
Fig. 4 Route generating options
The present paper proposes a way of implementing a system for facilitating the public transport by using a
service oriented architecture which enables the realization of an open system which can be easily extended and
improved with additional functionalities. Such a system provides multi-level advantages. Thus for the city
inhabitants, the implementation of such a system will mean a faster and cheaper transport. For the local
administration the system will offer the advantage of reducing the car traffic and the costs related to the development
of the route network. The environmental-friendly aspects include the reduction of the air pollution, of the emissions
which contribute to the global warming and the cutting down of the consumption of non-regenerating energetic
resources.
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Possible later developments include the implementation of a collaborative model which allows its users to
propose, alter or add information for the objectives displayed on the map, as well as the implementation of a system
of notifying the users, should traffic jams appear on the chosen route.
This article is a result of the project „Doctoral Program and PhD Students in the education research and innovation
triangle”. This project is co funded by European Social Fund through The Sectorial Operational Programme for
Human Resources Development 2007-2013, coordinated by The Bucharest Academy of Economic Studies.
Bibliography
[1] Schafer Andreas 2000, ‘Carbon dioxide emissions from world passenger transport: Reduction options’, �¢©����¢�©�£��¢¤�¤©¢��¢¤��¢�, Annual Meeting of the Transportation Research Board, pp 20-29
[2] Public Transportation’s Contribution to U.S. Greenhouse Gas Reduction, 2007, accessed on 3 May 2009
http://www.apta.com/research/info/online/documents/climate_change.pdf
[3] Transport for London, The Town Hall of London, London, accessed on 3 May 2009,
http://journeyplanner.tfl.gov.uk/
[4] Google Transit, Google, Mountain View, accessed on 3 May 2009, http://www.google.com/transit
[5] RATB, RATB, Bucharest, accessed on 3 May 2009, http://www.ratb.ro/index.php?page=plan_drum
[6] Glossary for the OASIS Web Service Interactive Applications, Organization for the Advancement of Structured
Information Standards, accessed on 3 May 2009, http://www.oasis-open.org/committees/wsia/glossary/wsia-draftglossary-03.htm
[7] Roy Thomas Fielding 2000, ‘Architectural Styles and the Design of Network-based Software Architectures’,
accessed on 3 May 2009, http://www.ics.uci.edu/~fielding/pubs/dissertation/top.htm
[8] Microsoft Virtual Earth, Microsoft Corporation, Redmond, accessed on 3 May 2009,
http://www.microsoft.com/virtualearth/
[9] Wikipedia Api, Wikimedia Foundation, accessed on 3 May 2009, http://wikipedialab.org/en/index.php/Wikipedia_API
163

EFFECTIVE COMPETENCES MANAGEMENT USING E-
LEARNING SERVICES
Maria-Iuliana Dascălu
Academy of Economic Studies, Bucharest, Romania, cosmicondina@yahoo.com �§�£�¤�� �¢�©�£�©�£���©�©£¤ �©���¢��¢����¤�£�£�¤�¤����©££��£���©���§����¤�¨��©¨£�©�£����¤���¤������¤ ��§��¢£¤�©���
Abstract. £���¢�©�£���¤����¨�� ¢¤��¨§�£��©����¤¡�¢¨�¤�����£��¢£�£���¤��¨¤�¤¤���¤��¨�¤¢§£�£¨ ���¢©��£¤�£�� �§��©£�©�¨¤�¢�¡����¢©�£�¡© ��¤��¨�£��£���¢�§��¨¤©¢�£����¤����¨��£�©¨�����¨©�¤�¤�¨¤©¢�£��£�©� £���¢�©�����£�£��©�������© ¤�§�©�£��©¨¤¨¤�¤���� ¦���¤�§¢¢¤������¨¤�¤�����£�¤��£¢���¤����§�©��©�£�©¨£��¤¤��
Keywords: competences management, e-learning, knowledge base, semantic networks, concept space graphs, etesting
JEL Classification: I210 Health, Education, and Welfare – Education and Research Institutions – Analysis of
Education, O300 Economic Development, Technological Change, and Growth – Technological Change;
1. Introduction
In the present context, in which the sustainable growth has to be achieved in conditions of globalization,
technological revolution, the shift to knowledge-based economy and the global economic crisis, people need to
evolve rapidly. This can be achieved only if every individual has the necessary competences to live and work in this
new society: according to the European Council, every citizen has to be equipped with IT skills, foreign languages,
technological culture, entrepreneurship and social skills. Since 2000, it is widely recognized that people are the most
valuable resource for development and economic revival. Knowledge, skills and personal attitude of all those
involved in work process have major impact on innovation, productivity growth and competitiveness, but also
contribute to motivation, increased satisfaction and quality of work of those engaged in economic activities. A list of
competences needed to live and work in today’s Europe was developed: communication in the mother tongue,
communication in the foreign languages, mathematical competence and basic competences in science and
technology, digital competence, interpersonal, intercultural and social competences and civic competence,
entrepreneurship, cultural expression, learning to practice life-long learning. However, these basic competences must
be supplemented by more specific ones, according to each field of activity. This paper supports the general idea that
learning is the only way to develop necessary competences for the present society and even identifies a strategic tool
to do this: e-learning.
¡© £�¡�£����¤�¤����¤�¤��¤�©¢¤�¤¢�¤�¤��£�£¤��¨ ¡�¤���¤¤�¨¤©¢�£��� ��¤�£��§£¨���©¢¤¨£©�¨¤£��¡¨¤��¤ �©�¤��¤�©��£��¤��©������¤����©�¤�¢©����¨© ©�£���¢�©��¢�¨¤£����¤¨�¤�£����¢�§��©£��¡¨¤��¤�©�¤� ���¨£�©�£¨£� ��£��¡¨¤��¤�©�¤�����¢§��£��£�£��¤�£©�¤£��££¨¨��©�©�¤�¤��� ��¤���£��¡¨¤��¤ � ��¤���¢�¤¢�£�£�©�£��� ��¤���¡�¤�� �©¢£�§��¢��¤��£��©¨£���£�§�£������¤�©�¤¢¤���©�£�¤���¤§�¤�§¨�¤���� �§��©�©�¤¡£��£�©����©� ¤��¨� ¤¤� ����¤�¤��¤©¢¤��¤�£¤�¡£���¤��£���¢§�¤����¢��¤�¨¤©¢�£�� ¤��£¢���¤����©����¤��©��¤�£���©�¤�©��£��¤�¡�¢£���©�£����¤�©��£�����§�©�£¨£� �¢��¤¢�£¤����§��© �¤�¡�¢£���¤©��§����©�©£¨©�¨¤£��¤¨¨¤��§©¨�©�£�©¨�©��¤¢§£�£¨ �©¨�§¨©�¤���¢¤©���¢�¡¤���¤�¤¨��¤�� ��¤ �£¢����¨£�¤�¤����¢��¤�¨¤©¢�£���¨©���¢��¢¤��¤����¤����¤��§©¨��¢§��§¢¤�����©£�£��¡¨¤��¤�©�¤�©�©���� ��£��©�¤¢§��¤¢¨£�¤���¤£���¢�©��¤��¤�¨¤©¢�£��£��¢��¤��£��©¨����¤�¤��¤��¤�¤¨���¤�����¢¤���£����¤
¤¤ ��¢��£¨¤©����¤��¨� ¤¢ ��¤�¤��£�£¤�©¨�����¤�©�¤¢£�¤��£�£¤�©�¤��¤��£�¤¡© ���©�©�£�� �¢��¤��£��©¨�££¨¨�©������¤�¤��¤��©��£¤�£����¤�¤�£¢¤�����¤�£�£�¤©��©��©�¤� ¤��¨�
2. E-learning, as a Strategic Tool for Competences Development Process
Many European voices concluded that the development of key competences to obtain the economic welfare
and growth is possible only through systematic and continuous learning: lifelong learning. The emphasis on
education in current society is essential (Alvin Toffler said that “the illiterate of the 21st century will not be those
who cannot read and write, but those who cannot learn, unlearn, and relearn”): there is an “unprecedented
dissemination of knowledge to all citizens through new resources using the Internet and e-books and using the
164

methods of learning through electronic devices (e-learning)” (Draganescu, 2001, pp.25). Technological boom placed
e-learning in an important position among today educational elements. It has flexibility, mobility and it offers much
more information: all these makes it the perfect candidate to be used in the educational processes by the individuals
who already employed and who must divide their time between the self-development and the application of what
they have already known.
3. Modern Methods of Knowledge Representation for Competences Oriented E-learning Services
There isn’t a challenge anymore to build an e-learning system, but there is a big challenge to build an
efficient e-learning system, which has to be adapted to a certain activity domain. This thing is possible only knowing
the features which define that domain and having access to what knowledge means in that domain. Assimilation of
knowledge leads to the acquisition of competences related to the domain. Competency is "... a fundamental
characteristic of a person, which may include features, ability, intention, a set of knowledge, an aspect of self image
or of a social role ..." (Boyatzis, 1982, pp. 43) Professional skills are distinct dimensions of behavior relevant to
professional performance. The performance is affected by how easily and efficiently a person supports his/her own
necessary behaviors. Competencies can be described as a set of observable behaviors, knowledge, skills, interests
and personality issues. In a professional environment (business or institution), employees competences have to be
measured, evaluated, paid. These competences can be developed only by an e-learning system build on a
competences related framework.
A competences oriented e-learning system uses a database which stocks the domain knowledge. This
database can be easily mapped to the domain ontology. For knowledge modeling in a more efficient way, it is
recommended to map the knowledge to semantic networks, where each node represents a concept (a set of
knowledge) from a specific domain. The concepts can be grouped according to their semantic meaning in other
concept nodes or competence nodes. All nodes from the first level of the domain ontology are competences nodes.
Between concepts, there are two types of relations (Fig. 1): hierarchical relationships and logical constraints defining
the mandatory learning order of the concepts. Some examples are provided below:
• between A-C, B-C concepts, there are hierarchical relations: if a person knows concept A and concept
B, then he knows concept C also; if a person knows concept A, but he doesn’t know concept B, then,
for sure, he doesn’t know C either;
• between A-B concepts, there is a logical constraint relation, if concept B can’t be learnt unless concept
A is known;
Figure 1. Relations in Competences Oriented Semantic Networks
For quantifying the concepts relations or indicating that a competence node can have a variable number of
child nodes, according to certain well-established rules, the semantic net has to be converted to a concept space
graph. As an example, current paper describes the modeling of project management concepts which are needed to
start a project. According to SinPers platform (Bodea, 2007, pp. 1), 7 concepts are needed (Tabel 1).
Table 1. Concepts related to C1.19 - „Start-up“ element of competence
Concept ID Concept Description
DDI Decision of making the investment
DIP Document for initiating the project
PRO Project proposal
CPR Project charter
DDP Decision to start the project
EEP Pre-evaluation of the project
ATP Assigning the project
165

SinPers system considers 46 elements of competence according to the International Competence Baseline,
ICB v3.0, the Competence Standard of the International Project Management Association (IPMA) (ICB, 2008, pp.
7): �¤���£�©¨����¤�¤��£¤�of • delivering projects in a structured way, including the project management
process;
• ����¤��§©¨����¤�¤��£¤�in managing relations with projects within organisations, programmes and
portfolios, based on the knowledge of project characteristics, projects in the organizational context, and
project environment;
• �¤�©�£�§¢©¨����¤�¤��£¤�for a positive, collective, and dynamic thrust in nurturing project
management professionalism such as leadership, communication, results-orientation, ethics,
negotiation, and so forth;
Each of these competences has a set of concepts. There are 200 concepts as a whole. IPMA chose to define
four levels of competences : ��¤�¤¨�¡At • this level, the individual has to have demonstrated successful use of the competence
elements in the coordination of programmes and/or portfolios; guided programme and/or project
managers in their development and in the use of the competence elements; been involved in
implementing the competence elements or relevant methodology, techniques or tools in projects or
programmes; and contributed to the development of the project manager’s profession by publishing
articles or presenting papers on his experiences or by outlining new concepts; ��¤�¤¨�¡At • this level, the individual has to have demonstrated successful use of the competence
elements in complex project situations. He/She has also guide (sub) project managers in their
application and implementation of the competence;
¦�
��¤�¤¨�¡At • this level, the individual has to have demonstrated successful use of the competence
element in project situations with limited complexity. He/she might need to be guided in the further
development of the competence element; ��¤�¤¨�¡At • this level, only knowledge related to the competence element is assessed by written
examination;
The levels are progressive: for example, the knowledge of an individual having a certificate of B type must
exceed the one of an individual having a certificate of type C. That’s why IPMA levels provide a suitable framework
for developing career paths and organizational maturity models as well as for personnel development programmes of
individuals, companies and other organizations. An e-learning system should provide news both to an A certificated
person and to a person with a lower level of certification. Considering a single semantic network for the project
management domain, something or someone should indicate to the e-learning system what should be the common
knowledge in interaction with each type of user. The only solution is parameterization of difficulty level or
information coverage level. When modeling this solution, concept space graphs have to be used (Bodea şi Trandafir,
2008). The semantic network for each competence can be easily extracted from the domain ontology. Then, this is
transformed to a concept space graph, by asigning weights to all nodes and vertices. For all nodes, the semantic node
weight is calculated taking into account the path weights from the graph (Hardas, 2006, pp.37). Formula (1) is used:
¦� ¦� ¦�
¤ ¤ ¦ ¤ ¥ ¤ ¤ ¥ ¤ £
Nodes 0 and ¡
η (
�represents the semantics that concept
relative importance of learning for � � � � � (�
,
)
,
) =
0 ∏ =
connected to a path given by the set
learning
are
is is
represents the relative semantic importance of the root topic itself with respect to all other prerequisites (white
� � �� ¡
(
)
1
(
−1
,
) *
is a prerequisite for learning
given by the link weight.
¡ ¢ ¡ ¡ ¡
(
−1
) .
(1)
[ ,..., 1,...,
]
. The notation
, +
�, where � � � � � � © ¨¨
§
( �∈ , ) and the
the self-weight, which
166

numbers from nodes in Fig. 2).
is the prerequisite-weight value, which represents the cumulative, relative
semantic importance of the prerequisite topics to the root node prerequisites (black numbers from nodes in Fig. 2). ¡
Figura 2. Concept Space Graph for C1.19 - „Start-up“competence
The e-learning system will create proper content for each certificated person, according to the sub-graph
having all nodes with higher semantic weight than the difficulty threshold parameter (λ). Each distinct competencelevel
pair has a threshold parameter. For example, applying formula (1) for “Start-up” competence element - level
D, only ARP, DDP, DIP, DDO, PRO concepts have to be taught to the examinee. Applying the same formula, for
“Start-up” competence element - level C, all the concepts related to the current competences have to be taught
(ARP, DDP, DIP, DDO, PRO, CPR, EEP). (Table 2)
Table 2. Concept Space Graph Analysis for C1.19-“Start-up” competence, level C and D
Concept ŋ ŋ>=λ (λ=0.01) – level ŋ>=λ(λ=0.04) – level
C
D
ARP 0.15 TRUE TRUE
DDP 0.125 TRUE TRUE
DIP 0.1 TRUE TRUE
DDI 0.06 TRUE TRUE
PRO 0.045 TRUE TRUE
CPR 0.03 TRUE FALSE
EEP 0.03 TRUE FALSE
Representing knowledge with concept space graphs allows e-learning system to provide personalized
service, targeted to user needs. E-learning services aren’t oriented only to teaching, but also to testing, analyzing
results, creating profiles and so on and so forth. Users may have different roles, depending on the service. For
example, in a testing service, they can be either the examinees or the examiners.
4. Approach to Competences Management Model
Applicability of knowledge base construction is immediate in skills management systems, knowledge
systems or certification systems owned by various professional institutions. If all of these systems query a knowledge
base that is refined through the use of semantic networks and concept space graphs, that will increase the competitive
advantage of individuals / organizations who use this knowledge base.
Any organization that wishes to maximize the collective competences should use a system or a
methodology to manage individual professional competence. The paper further describes a model for managing the
professional competences used in an IT company. The main actors (Fig. 3) of the process are:
167

• knowledge base (KB), which reflects both the representation of project management knowledge
ontology and the IT knowledge ontology (here, there is a mixed domain); the knowledge is seen,
finally, using a database;
• employees whose professional competences are stored in the knowledge base (EM);
• employers (or those who take the decision of people distribution on projects), based on the proven
competences(EMR);
• the competences management system itself (CompMS), which is an IT application that queries, edits,
adds, deletes competences in competences base, but also has functions for working with semantic
networks;
• the e - testing application (eTestTool) used periodically to update the theoretical competences of
employees or for inserting in the competences base of a new employee; it is a tool to improve the firm
collective competences and it is a quick indicator of the available individual competences;
• the e - learning (eLearnTool) used by employees to develop necessary competences;
Figura 3. Competences Management Process
There are two e-learning services in competences management process: the e-testing application, which
identifies the knowledge gaps and the eLearnTool component. The second one is charged by competences
management system with the necessary information needed to be taught to a particular employee. The employer is
the one who takes the decisions in this process.
A typical flow of activities in the competences management model from Fig. 3 is described below: the
employer (EMR) aims to test the competences of a certain employee, so he configures the eTestTool (e-testing
application). The employee (EM) interacts with the eTestTool, which gives him the results of the tests. The same
results go to the employer, too. The employer verifies the results and determines whether the employee needs the
take a training course provided by the eLearnTool. If the employer decides for training, he sends this request to the
CompMS, which prepares the proper content for the eLearnTool and fires up the training. After taking the courses
offered by eLearnTool, the employee will be better prepared and will have a higher level of competence. Another
request that can be launched by an employer is when he wants to find out all the available employees, who have a
certain set of competences, suitable for a new project. CompMS is the one which can solve the employer request, by
creating a semantic network for the newly required competences and then overlapping this new network with the
domain semantic network. Algorithms for semantic computability are used in this case.
5. Conclusions
168

Competences development is a topic of major interest in the present context, being considered among the
main factors of economic progress. Present paper identifies an effective way of managing the professional
competences. In the current context, management means creation, improvement and use of competences.
Competences management is conditioned by the development of a knowledge base. The base can be easily modeled
with semantic networks and concept space graphs. The competences management process described in the paper can
be optimized through the introduction of additional competences when identifying the available employees for a new
project: employers should take into account the tacit competences, too. These competences can not be verified
theoretically, but can be intuited from the employees’ experience, from their psychological profile or work behavior.
This article is a result of the project „Doctoral Program and PhD Students in the education research and
innovation triangle”. This project is co funded by European Social Fund through The Sectorial Operational
Programme for Human Resources Development 2007-2013, coordinated by The Bucharest Academy of Economic
Studies.
References
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IEEE International
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3. Boyatzis, R. 1982, John Wiley and Sons, New
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Computer Science Department, Kent State University, Ohio, USA, accessed on March 15
Management’��¢��¤¤�£����� �¢��¤¤�£�������¤����¦� �¡�¢¨�����¢¤�����¢�¡¤�� ��¤����¤�¤���©�©�¤¢ ����¤¨���¢�©����¢�¤���¢��¨¤����¤���¤��§�£����§¢�¤����¨�� th 2009,
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Bucharest, Romania, accessed on April 27 ¦���¦��¤¢�©�£��©¨����¤�¤��¤�©�¤¨£�¤ th 2009, < http://www.pm.org.ro/ICB-V-3-0/ICB-V-3-0.pdf>
6. Draganescu, Mihai 2001,���£¤�©�¤©£���¢�©�£��©¨¡¥£©�§��©¥�¤¢££�¡¤���¢££���£¤�¡�££�§��©¥�¤¢££, Romanian
Academy, Research Institute for Artificial Intelligence, Bucharest, Romania, accesed on September 2nd 2008,
169

VERY-LARGE-DATASETS ORIENTED SOFTWARE
ARCHITECTURE
Sorin Lucian PAVEL
doctorand, A.S.E. Bucureşti, România, pavelsorin@gmail.com ��¤£��¢¤©�£���¤�¤¨���¤����¨©¢�¤��©�©�¤���¢£¤��¤�����¡©¢¤¢¤¢§£¢¤���¨£���¤�¢¤�£�©¨��§��©�£����¤�©§�¤
Abstract: ����¤¢�¨©¢�¤�§��¤¢��§�¤¢��� ¨©¢�¤��©�©�¤��¡�¡¤�¤©��©�©���¤¢ �£���¢�¤¢� �� ¡��§¢�¤��� ��¤�©�¤¢��£����§�©��¡§��£�£¤���¤�©¢�£�§¨©¢£�£¤����¤¢ ¨©¢�¤�©�©�¤���¢£¤��¤�����¡©¢¤��§��©� �©�© ��¤
•
• ��¤�©�¤¢�¤��£�����¤¢£�£�����¤�¤©��¨£�©�£���©��©¨���¤��¢£�¤�£��§¤����§£¨�£���¤¢ �¨©¢�¤��©�©�¤�� �¢£¤��¤�����¡©¢¤©¢��£�¤��§¢¤���¤�¢£�¤¢£©��¢�£��¤¢¤��£©�£���¤¢ ¨©¢�¤�©�©�¤���¢£¤��¤�����¡©¢¤©¢��£�¤��§¢¤� ©¢¤�¤�£�¤��¨£¤ �©�©�¤���©�§¢¤�©��¨£�©�£����¡¤��£�¤���§���£��©¨©��§�©�¤¤��£¢���¤���¢����¡©¢¤ �©¢�¡©¢¤ �¤�¤¨���¤������¤��� ��¤�©�¤¢���¤¢�©�£��¢£�§�¤�©¢��£�¤��§¢¤����£�££����©��¨£�©�£�����©�£��¨§�¤� ��¤��¨¨¤��£�����©�©�¤��£��¤¨��¢��¤�¤¢ ¨©¢�¤�©�©�©�¤¡ ��¤�£©¨£�¤����§¨¤� §�£����¢ �©�©©�¢§£�£�£����©�©�¤�������¤�£�£����©�©�¤���¨©��£�£�©�£����©�©�¤�� ©�¢§£�£�£��©���©�©�¤������¢§��£����©�©�¤����©¢�£����©�©�¤��¢§©¨£� ¢¤¢§£¢¤�¤���©���©�©�¤���¤¨¤��£��©�� ©��£�£��¢©�£���
��¤�¢�©�£�©�£��©¨©������§�£�©�£��©¨©¢¢©��¤�¤��£�¤��¨©£�¤�©���£��§¢¤���¢�§��¨��£�©���§���£��©¨ �¤¨¤��£����©�©�¤����¢�£����©�©�¤���¨§��¤¢£�£����©�©�¤��¤���¢��
Keywords: �£©�¢©���
JEL Classification: C69 ����¡©¢¤©¢��£�¤��§¢¤��©�©�¤����£��¢£�§�¤�©��¨£�©�£����¢§©¨£�
1. Introduction
The national and international software applications and services development triggered a
large diversity – in both quantity and quality – of input data. Having so many datasets, their
characteristics require special approaching, regarding their organization and handling. Catay and
Diri analyzed the consequence of datasets dimension upon software errors (2009, pp.1040), while
Cipollini and Kapetanios (2008, pp.130-134) explored a stochastic model of large datasets
variance. Xie et al. (2008 pp.117-123) and Zhang and Bajaj (2009, pp.39-53) treated the issue of
large datasets visualization, whereas Li and Jacob (2008, pp.910-924) studied the adaptive
reduction of data. The approaching manner of large datasets and of their applications becomes a
forefront problem, requiring a deepen research.
The paper intends to offer a theoretical basis in founding very large datasets oriented software
development and propose architecture for this sort of applications. The paper also explains each
component and justifies the modular approach.
2. Very Large Datasets
High-technology development in current society, citizen oriented software proliferation,
along with new IT laws issuance, lead to production of software that works with very large scale
datasets:
- telecommunication operators records data about each call or message sent or received through the network,
and keeps the information for a six-months period;
170

- internet and e-mail providers record data for each IP address in their own administration, about visited web
pages, along with exact time of access, and also about every electronic message sent;
- public administration keeps payment history for millions of citizens;
- national providers of gas and electricity operate millions of bills annually;
- on-line search engines integrate content management of billions of websites.
These cases presume lots of users that wield very large numbers of data – 10 7 ~10 10 datasets –
along with software applications that structure, control and operate the data.
Due to the large quantities of datasets that has to be processed, the applications get specific
properties and functions. The characteristics of applications working with very large datasets aim
at:
• datasets acquisition and building, depending on their input method: keyboard, scanning, photo/video/audio
capture, sensor capture, satellite capture;
• quality requirements for datasets; the very large scale increase the probability to register structural and/or
functional incoherent data; acquisition and processing systems cause a low level of homogenization and
aggregation, so an improved, optimum management of the data quality it’s necessary, to ensure data
transparency and security;
• data storage and protection, that ensure data integrity during processes;
• datasets administration operations – which implies data creation, actualization and deletion – along with
maintenance operations – archiving, refreshing – have to be improved, in order to be able to process large
inhomogeneous data in real time; the scanning, classification and extraction of the data is executed by
implementing specific algorithms, such as the reduction algorithm, studied by Li and Jacob (2008, pp.910-
924);
• using flexible search keys, along with multi-criteria filters for easy selection;
• statistic processing of data that increases operation efficiency.
Working with very large datasets also presumes a large variety of risks:
• security risks – due to the big volume of input data in time unit, the multiple sources of data and different
ways and standards of acquisition;
• integrity risks – due to different data quality levels, datasets heterogeneity and different usage purposes;
• administration risks – due to multiple classification possibilities, large hardware/software resources needed
for effective handling of datasets.
The quality requirements of very large datasets – homogeneousness, completeness – as well
as quality of the large datasets oriented software are fulfilled through structural approaching of
software development and solid architecture deployment.
3. Software Architecture
Software architecture definitions emerged during the first stages of the complex software
applications development, which required analysis and design. The large variety of approaching
the software architecture concept led to the necessity of its standardization. The IEEE Standard
cited in The Architecture Discipline website (2009, http://www.bredemeyer.com/definiti.htm)
defines it as “the organizational structure of a system”. The UML 1.3 standard cited in the same
source (2009, http://www.bredemeyer.com/definiti.htm) goes deeper by saying that the
architecture “can be recursively decomposed into parts that interact through interfaces,
relationships that connect parts, and constraints for assembling parts”. Bass, Clements and
Kazman offers a conclusive definition (2003, pp.21): ”The software architecture of a program or
computing system is the structure or structures of the system, which comprise software elements,
the externally visible properties of those elements, and the relationships among them.”
According to the same source (2003, pp.26) the importance of the architecture is given by the
following implications:
• it represents a mean of communication between stakeholders; software architecture represents a common
abstraction of a system, which everyone interested in the project uses as a ground of understanding,
negotiation, agreement and communication;
171

• it represents the first design decisions; usually, this are the critical ones and are very important for
development, use and maintenance; it also sets the system quality level by emphasizing the performance,
security, scalability, usability and the other quality metrics; it allows costs and planning estimation in the
development process;
• it represents a transferable and reusable abstraction of a system; software production imparts common
architectures, which allow finding elements that should be kept or that are working together.
In the process of software architecture production, three main aspects pointed by The
Architecture Discipline website need to be pursued (2009,
http://www.bredemeyer.com/whatis.htm):
• system decomposition in components, which can be both structural or architectural elements or subsystems
or parts; the decomposition has to strive for performance development, flexibility, extensibility and
allowing future functionalities at reasonable changing costs;
• the analysis of inner elements; once the system is decomposed, we have to answer the following questions:
o do we have all the required components? The system structure must ensure the required
functionality and services; in the process of architecture designing we must keep an eye on the
dynamic character of the system and on the hardware and software infrastructure;
o do the parts fit together? The problems concerning interfaces and relations between parts must be
solved from the very beginning; a good match resides in the specific attributes of the systems;
• cross-cutting concerns; the elements must meet both the functional and non-functional requirements; in
conflict circumstances, the parts must be adjusted according with the final objectives of the system.
4. Very Large Datasets Oriented Software Architecture Characteristics
The very large datasets oriented software (VLDOS) – along with their specifications and
requirements – requires a well-structured architecture, both physically and logically. The risks in
adopting an architecture that is incompatible with the datasets dimensions and particularities are
represented by failure in achieving the expected functionality, jeopardizing the datasets integrity
and authenticity, or getting inadequate results.
In the process of building the VLDOS architecture, the following issues have to be taken into
account:
• distance operating is prevailing, the architecture must designed to support distributed (client-server)
computing;
• datasets are either centralized (databases, data warehouses), or scattered in different network places;
• the quality of the datasets must be assured from the very acquisition; however, separated modules/units for
testing the datasets quality and for their completion, are recommended;
• the datasets management, for easy selection and processing, includes analysis, sorting and clusterizing
algorithms;
• the size of datasets and their large number endanger the quantity and the quality of the network traffic; this
issue becomes a priority, due to the high importance of the communication between network points;
• the computation speed must be optimized, because large scale datasets – up to 10 9 – processing usually
takes hours or even days;
• the availability of application functionalities must be ensured in every network point.
According to Catal and Diri (2009, pp. 1040-1058), the structure of a VLDOS is affected by the datasets
dimensions, the chosen quality metrics and the selections techniques. Additionally, software components of the
application differ on:
• datasets nature: databases with records, specific object sets, multimedia file sets, document databases;
• the aim of application – acquisition, storage, administration, homogenization, scanning/reading, use of the
datasets;
• functional and usage medium of the application – open, protected, closed medium;
• software/hardware development framework.
Considering the huge traffic of gathered and processed information, the architecture must allow the usage of the
information for modeling and applying decisions at any level in an organization. The client-server approach helps
fulfilling this aim, by:
172

• assuring quick analysis; the preparation and analysis of the large datasets takes hours and even days on a
desktop computer; by using enterprise-level, server-grade hardware and software, the processes are
distributed to the local users, dramatically downsizing the time and freeing desktop and network resources;
• reducing the network traffic; individual users can severely disturb the performances of the whole network,
considering the large datasets carried along the network, even if the demand broadband is limited; using the
analytical servers – with consecrated wider databases connections – leads to better, optimum performances,
delivering only the results to the client;
• centralizing the monitoring and control; sharing power of processing with users is done by the monitoring
(or element, as an interface for the client computers which manage the user interface, and
displays the results;
element, as software server which organizes the data access, the computation, analysis and export
processes.
and control facilities specific to the server products.
The approach of the client/server architecture for VLDOS implies structuring them in two
components:
• ¨��©¨) element £¡¢-¤¡£ �¢����¤��
• �©�£�¤��
The does not directly use data, reducing the network traffic between the
two elements and using the calculation server. This way, the application can run in two different
ways: local (fig.nr.1) and server (or distributed) (fig.nr.2). ¥
SCRIPT
SINTAX
SCRIPT �£�������©¨¡����
VLDOS
DATA
RESULTS
RESULTS
173

SINTAX
VLDOS client VLDOS Server
DATA
The communication between VLDOS client and server is made using the industry-standard TCP/IP protocol;
when the client is connecting to the server, the user must mention the server name (or the IP address), the port
number to which is connecting, the user name whose account must already exist on server, and the password
associated with the user name. �£��¢£�§�¤�¡���� �£�����¤¢�¤¢
5. A Possible Architecture
The framed Server VLDOS architecture includes two main components:
- the data collection itself or the very large database
- specialized modules/units for:
o data acquisition;
o datasets homogenization;
o datasets classification;
o datasets selection;
o datasets sorting;
o datasets clusterization;
o datasets export;
The communication and data-flow diagrams are illustrated in fig.nr.3:
174

Acquisition
Homogenization
Sorting
Clasiffication & Clusterization
Selection
Export
User
Interface
Collection
Interface
Datasets
Collections
USERS
The data collection refers but does not resume to: database, text/xml/multimedia files
collection, data warehouse or any combinations of these. The collection administration requires
specialized tools which unifies the software and hardware solutions for this type of data.
The processing units are responsible for datasets manipulation and refer to:
- data acquisition; execution is done depending on the input data that might be:
o single text files;
o xml files;
o database records;
o entire databases;
The acquisition unit takes the data transmission demand from the client and asks for the
input data format. After specifying the format, the unit suggests a standard template for
data structure. The template can be modified first and then accepted and applied for each
dataset. In order to minimize network traffic between server and clients, data acquisition
should be centralized and executed directly on the application server. Before sending the
data to its proper collection, the homogenization unit takes over.
- data homogenization; while gathering the data, despite the nature of the data, its structure or even its manner
of acquisition, it will always exist a percent of qualitative improper datasets: incomplete record
attributes/fields, wrong tags, abnormal values or information impossible to render; the causes for these
incoherencies can be:
o input human errors;
¡¢£¤¥¦¤¡¤
o incomplete data transmission;
§¨§ �©¡¢¤�¢� ¤£¥�¤ �¤ �����
o natural disasters/accidents;
o broken sensors;
In order to apply data clusterization algorithms for speeding selection processes, the data need to be
structural and functional homogenized. The first step is completed by the data acquisition module/unit
175

which ensures the same structure for all input datasets. Before entering the collection, the validation
executes:
o filling incomplete fields with:
� default values;
� last records average – in proper cases;
o framing numerical values in pre-set ranges;
o verifying fields/attributes with pre-set format – e.g. e-mail address, PIN;
o parsing multimedia files and signaling errors;
o handling files depending on their extension;
o adding VLDOS special fields/attributes/tags for later interpretation;
The application integrates automated methods of handling errors. If a certain error
persists, the user is instantly asked about the problem value or warned about the
incoherent dataset.
- dataset sorting and clusterization; in order to optimize the selection process, sorting and clusterization
algorithms are implemented over the entire data collection; the objective of clusterization is forming
physical or/and logical zones called clusters in which the datasets are structurally or functionally similar; the
degree of similarity is given by the distance between datasets, which can be interpreted in many ways and
can be computed in different forms; the applied clusterization algorithm depends on the data format and
functionality:
o K-means algorithm;
o fuzzy algorithm;
o QT algorithm;
o graphs algorithm;
Sorting is run within a cluster having a certain pre-set or given criterion. The sorting unit is automated for
optimizing selecting time.
- dataset selection; the unit/module takes the client/user data demand and searches within collection; the
effects of all the other processing units are clearly visible at this level, when every set is:
o structural and functional complete;
o attached to a proper data collection;
o assembled in a well defined cluster;
o positioned within the cluster depending on its values;
In these circumstances, selection means running through the structural layers step by step and not covering
the entire collection.
- dataset export; once found, the datasets are exported to the user for display or firstly operated on the server;
the export process needs to take into account:
o the original data demand;
o the desired return format;
o the transmission security;
- user interface; the details of the user interface depends on the application objectives, but it needs to fulfill
two main functionalities:
o datasets input;
o dataset selection and return;
The interface calls all the other units/components and transmits the proper processing parameters.
- collection interface; in the bidirectional way of data circulation the collection interface ensures on one hand
datasets hoarding and on the other hand datasets access as explicit dataset demand from the user;
Communication between units is done on the software level – by calling code,
transmitting parameters and handling demands – as well as on the hardware – the existing
network, using proper protocols.
176

6. Conclusions
Appearance and proliferation of the large-datasets oriented software demands a new
approach based on their unique proprieties. Software architecture in this case needs to be
distributed and divided into units/modules so that data dimension would not impact the
processing time, but keeping correct output. The proposed architecture defines the general
level, representing a frame, not more than a starting point, other details having to be specified
depending on the specific objectives of the application that implements the processed model.
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§�¢¡�¤,
££¡¢¡£¡, Addison-Wesley
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Vol. 179, pag. 1040-1058
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¤¡¡¡ §
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Methods
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and Programs
¢©�
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¥¤§¢�
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¤�¤¨¤�¢¡£¡¢¤�©¡¡§�¤�£¡�£¥¢
pag.
§
39-53
¤¥§�¨¢¡
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©£§¡¢¡�¤£§¢§ ¨§ �¤§¨�¢¡¦¤�¡��§¨¡¤§¢¡£¡£¥¨§ ¢¤�£¨�¦¤£§¢§�¤¢�£¡ ¤£��¢¡£¡¥£ ¤£¡�¢¡£¡¡
£�¢©§ £ § ¡§¡�¤¥§�¢£ ¥§�¤�¡��§¨¡¤§¢¡£¡£¥¦§��¡�¤ ©�¢£�©§�¢¡��§ �¢§¡£§ ¦££¤¨¥£ §¡�§�¢¡£¡ ¢¤���§¨¤¢ ¢¤£§¢§�¤¢� ¨§
£§¢§�¤¢�£¡�£¦¦££¡¢�£¥¥�¢©¤��©¤¨¥�¨��¢¤ ��§¨§¨¨¤¡�£�� th 2009,
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177

THE DESIGN OF A SEMANTIC WEB AND ONTOLOGY BASED
APPLICATION FOR CREDIT RISK MODELING
Popescu Laura, Dioşteanu Andreea
Academy of Economic Studies, Bucharest, Romania, laura85ro@yahoo.com
Academy of Economic Studies, Bucharest, Romania, andreea.diosteanu@yahoo.com
Abstract ���¤¢¤��¢¤��¢¤�£� £���£§�£����¤¤�©����¡©¢¤©��¨£�©�£����©�£�©�¨¤���©�£¨£�©�¤��£��¢��¤��©����£��¢¤©�¤£���§��¤��¢©�¤� ��£��©�¤¢�¢¤�¤���©��¤���¢¤¨©�¤�����¤�¤�¤¨���¤����©���¤����§¢�¤����¡©¢¤¡�£��£��¢��§�¤�©�¢¤�£� �§¢£��¤�����£�¢¤�¤��£�����¤¢£�£©����£©�¤�¡£���¢¤�£����¢£��£��£��¤¢��©�§�§©¨¨
Cuvinte cheie: credit, risk evaluation, web semantics, ontologies
JEL Classification: C3, C8, E5
Introduction
�¢¤�£�£���£�§�£���©�����§£¨���¤ §�¤¢ ��¢��£¨¤��§¢��¤¢��¢¤���¤©§���¢�£��¤�������¤¨©¨¨��¤£���¢�©��������¤�������¤�¤�£��£���©££�� �¢��¤�� ©���¢��¢¤¨©�£����£���¢¤��¢£��£���©��¨©¡�©�����£�§¨©�¤��¤�§�©���£�££���¢��¤��� ��¤�¤¢�£�¤�¢£¤��¤��¢��£�¤��§¢¤¢¤�¢¤�¤���©����¤�����¢¤©�£��¤¢¤��¡�¤��©¨££��©��§�����¡©¢¤ ©��¨£�©�£��©¢��£�¤��§¢¤���¤�©§�¤£��©�£¨£�©�¤�£��¤¢��¤¢©�£¨£� � £��¤�¢©�£���¤¢�£�¤�¡£��¡¤��¤����¨��£¤����£� � �¤��©¢��£�¤��§¢¤¢¤�¢¤�¤�����¤�©�£���¢�¤�¤¨��£���¤�©��£��¤¢�£�¤���©�§�¤����¨��£¤�£�©�¤¢�©£����©£��� £��¤¢¤���©�£���¢�©��¢¤�¤©¢�����£�©�£��¤¢�©�£��©¨��©¨¤������¨��£¤�©¢¤£¤ �¤����¨��£¤���¢�¤�©��£�¡¤���� ����¨�� ¢¤�¢¤�¤���©�¤�������¤����¢��©�¤¢�©£����©£�©����¤¢¤¨©�£����£��©������¤�¤�¤¢�����¢�©�£¨£�©�£�� ��¤�¤�¤¨���¤�������¤¨�©��§�¤¢��¤�£�£�£���¢�©�£��¢¤�¢£¤�©¨� §�£���¤�©��£�¢§¤¢£¤�©���¢�£������¤�£¤¨��� ¢£�£¤�©¨§©�£�����¤¨��©�§�¤�¡¤��¤�©��£�����¤��¢£�¤��¤£���¢�©�£��§�¤��
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During the present economic context, banks are becoming more and more precautious regarding their activity
of granting credits. The credit requesting client’s profile analisys is more and more riguros and is time consuming.
These facts were proved by an analisys realized by the Romanian National Bank.
An evaluation of the indicators concerning credit institutions computed by the National Bank of Romania
(BNR) brings to attention the fact that the percentage of defaulted credits as part of the total amount of existing
credits at national level has clearly increased during the last quarter of 2008. If the percentage of “bad” credits was
0.24 in September 2008 (at the end of the third quarter in 2008 when the effects of the economic crisis were not
perceived yet), the percentage increased at 0.35 at the end of 2008. This increase of 0.11 percentage points is a big
increase if we take into account the relative stability of this indicator’s values during the previous 4 quarters (0.22,
0.21, 0.30 and 0.24). �©�¨¤���¤¤��¨§�£�����¤�©§¨�¤��¢¤�£�����¢¤�£�£���£�§�£�����¤¢����
Indicators concerning credit
institutions
Defaulted credits/Total net
value of granted credits
UM Dec/2007 Mar/2008 Jun/2008 Sep/2008 Dec/2008
% 0.22 0.21 0.30 0.24 0.35
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*) Indicators are computed based on the provisions data reported by credit institutions
NB: Indicators refer to all the credit institutions in Romania, including commercial banks, foreign banks branches,
Creditcoop.Starting from January 1, 2008, indicators are computed based on the financial reports FINREP and
COREP of credit institutions. Source: National Bank of Romania (Banca NaŃională a României)
These results confirm the general expectations that the repayment ability of credit customers would decrease
during recession. This feature is one of the first indicators of the economic recession.
Another observation that has to be taken into account when predictions referring to the economic evolution
are being made, refers to the gross value of granted credits. This value is still higher than the total value of deposits
as the percentage of credits related to deposits is 122% (we can notice a small decrease in comparison to the third
quarter of 2008: 124.71%).
Many analysts talk about the need of increasing the amount of liquidities of every financial institution during
the crisis. As a result of this need, banks and credit institutions offer a series of offers for deposits and they reduced
the level o credits.
By taking into account these observations, we can depict the importance of implementing risk evaluation
applications in the credit activity. Starting from this assumption, it is very important for a client to evaluate his
chances of obtaining a credit by taking into account bank’s requirements and his characteristics. Moreover, this
application is important for the fact that it reduces the useless time spent for analyzing various banks’ offers and their
evaluation forms. Furthermore the client is provided with guidance for obtaining a credit.
The purpose of this product should be that of identifying the similarities between the different banks’
solvability requirements and to guide the client towards the most suitable credit program. The application should also
provide a general model based on an extended analysis of different credit risk evaluation models. Banks have
developed sophisticated systems in an attempt to model the credit risk arising from important aspects of their
business lines. Such models are intended to aid banks in quantifying, aggregating and managing risk across
geographical and product lines ��¤¨£���§¢¢¤���¢©��£�¤�©�����¨£�©�£���” by Basel, 1999, p. 8).
The outputs of these models also play increasingly important roles in banks’ risk management and performance
measurement processes, including performance-based compensation, customer profitability analysis, risk based
pricing and, to a lesser (but growing) degree, active portfolio management and capital structure decisions.
The Romanian banking sector is characterized by the usage of traditional statistical methods rather than more
modern ones such as expert systems based on neural networks or case based reasoning. Most of the Romanian
financial institutions use very simple methods of computing the credit score by taking into account several features
and using weights which are established by experts without making usage of statistical, mathematical or informatics
instruments. The statistic regression is an important tool of evaluation in the Romanian credit institutions: some
features are taken into account and their significance is tested on a data set that includes both successful examples
(clients that could pay back their debts to the bank) and defaulted credits. As a result, some variables are kept, while
others are discarded. The following step in developing the evaluation model consists of associating a parameter to
each characteristic. The level of this parameter depends on the type of variable and its level of significance.
Therefore a model is built, each factor having a certain parameter which depends on the influence of the variable on
the result (success or default). Each time a new customer applies for a credit, his features are evaluated and replaced
in the model, his credit score is computed and specialized persons from the credit institutions evaluate this result by
comparing it to a certain cut-off value. The decision is taken depending on the comparison made between the
client’s specific score and the cut-off value.
(“�¢¤�£��£�£
The necessity for an efficient credit scoring application
The creation of an efficient credit scoring evaluation expert system is compulsory if we take into account the
fact that the rigidity of the conditions required by banks when it comes to customers’ eligibility for credit granting
has significantly increased during recession. The scientific literature in the domain has presented a wide variety of
credit risk evaluation models (survival analysis, discriminant analysis, the logit models and neural networks), each of
them presenting not only great advantages, but also some disadvantages. The problem that appears is the need to
minimize as much as possible the risk associated with a certain type of model so that the result given by the model
could be accepted with a high confidence level.
Financial institutions around the world use a lot of expert systems (Moody’s RiskScore, FAMAS LA Encore
or COMPASS (Bank of Scotland)), and an analysis of the results achieved by these banks can represent a starting
point in the process of improving of the existing models by taking into account of some new dimensions or of some
new building techniques. A more efficient model could take into consideration an essential aspect in the credit risk
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evaluation process: the selection of the optimal number of characteristics that have an influence over the risk and the
association of weights depending on each factor’s importance.
The improvement of credit risk evaluation models has become a very stringent problem during recent years if
we take into account the number of failures reported by many financial institutions. Consequently, many statistic
models have been studied, detailed and combined in order to diminish type one errors.
The current state of art for credit risk evaluation models
The current state of art in the domain on a national and international level can be resumed by presenting the
main characteristics of the models introduced by different scientific publications.
One example of credit risk evaluation model is Data Envelopment Analysis (DEA) which, unlike the
traditional statistic methods (discriminant analysis, logit models and neural networks) does not require apriori
information. (MIN, H., JAE and LEE, YOUNG-CHAN, 2008). The advantage brought by this model is undoubtful if
we take into account the fact that one of the main problems in the way of an efficient credit risk evaluation is
represented by the lack of historical data concerning the analysed customer.
The oldest method used is Linear Discriminant Analysis (LDA) which was introduced for the first time in
1936 by Fisher. The method brings as a main instrument the Linear Discriminant Function (LDF). The main
weakness of this method consists of the supposition that there is a linear dependency among the input and output
variables, fact which is not true for most of the practical cases.
The literature has analysed the results obtained through the usage of the artifficial intelligence specific
instruments : Artificial Neural Networks (ANN) : Probabilistic Neural Networks sau Multi-layer feed-forward nets.
It has been noticed that the evaluations registered good results when it comes to customers that fail and are correctly
classified (this is a very important aspect : it is more important to have a high performance in the correct
classification of bad clients than in the correct classification of good clients (the risk of not granting a credit to a
customer evaluated with a higher risk than the real one)).
The most difficult aspect in the application of neural networks in the credit scoring evaluation process is the
difficulty of explaining the algorithm that gives the decission of accepting or rejecting certain customers. DEA
requires only the input and output data sets in order to compute the credit score. It is computed as a ratio between
total output and total input. Consequently, the observed units are classified and an efficiency border is drawn, while
the efficiency degree of the new units is going to be established depending on their position related to the efficiency
border. A very interesting study which compares neural networks with the traditional methods used in the credit
scoring activity of Egiptian banks has been recently carried out. (Hussein Abdou, John Pointon şi Ahmed El-Masry,
2008).
Another method introduced for the first time in 1984 is the CART method (Classification and Regression
Tree) and it consists of the building of a maximal tree that contains all the units of the training set and can be divided
into several trees out of which the most efficient one is chosen through cross-validation methods.
In 1991 the MARS model (Multivariate Adaptive Regression Splines) appeared for the first time bringing the
advantage of being combined with neural networks. The algorithm has two steps: firstly, a high number of basic
functions are built, out of which some are going to be eliminated in the order of the least contributions (the cross
validation method).
Case Based Reasoning (CBR) is a model that has the goal to learn from practical failure cases and tries to
build a pattern based on which to classify the new customers.
The RCSM model (Reassigning Credit Scoring Model) is an algorithm made of two steps : the classification
of the applicants in « good » or « bad » cases and the redistribution of the « good » cases that have been incorrectly
classified as « bad ». in order to prove the model’s efficiency, researchers have tried to apply this algorithm on a data
set related to credit cards. (Chun-Ling Chuang and Rong-Ho Lin, 2008)
During the first phase the algorithm uses MARS in order to reduce the number of input nodes from the ANN
(Artificial Neural Networks) and simplify the networks. The simplified neural network (a backpropagation network
characterized by an unique input tier, a hidden tier and one output tier) is used for the classification of the applicants
into good or bad customers. The customers considered to be “bad” are going to be reassigned through the CBR
method, by identifying the similarities existing between them, on one hand, and the good practical cases, on the other
hand. The application has to search in the data base for those cases that present a series of similarities with the new
applicants. If the new applicant’s profile approaches more the successful cases than the failure ones, the person is
reclassified as a “good” one and the loan is granted. The similarity is measured through the “distance” between the
two cases, by using the nearest neighbor approach.
Other examples of credit risk evaluation models described in the scientific literature are:
• Multi Criteria Decision Making
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• Recursive Partitioning Algorithm
• Mathematical Programming Approaches
• Logistic Regression Analysis (LRA)
• fuzzy algorithms
• Multivariate Conditional Probability Model
• k-NN
A general scoring methodology
We believe that it is relevant to present the general steps of the research methodology when it comes to
building an efficient credit scoring model:
STEP 1:
The observation data set is selected (the selection of those loan applicants for which there is a high possibility
to find values for all the characteristics that could influence the associated risk)
STEP 2:
The identification of the potential characteristics for each candidate (factors:income, age, accommodation,
marital status, etc.)
STEP 3:
The selection of the final characteristics (instruments: the statistical analysis and domain experts). The result
is a data set that contains the most representative indicators. It has to be mentioned that the indicators can be input
indicators (previous loans, liquidities, buildings, etc.) or output indicators (in the case of the companies, one can take
into consideration whether the company finances itself from its own sources or its ability to pay interests from its
own incomes).
STEP 4:
The computation of credit scores as a result of the chosen model.
STEP 5:
The validation of the results with the help of regression (econometric tool used in order to test whether the
chosen variables are significant for the result) (the chosen indicators represent the independent variables and the
result is the dependent variable), the discriminant analysis (in order to quantify the performance of this classification
method) and practical failure cases. It is interesting to analyze whether the results correspond to the results given by
other classification methods.
STEP 6:
The choice of the final credit scoring method.
A general credit scoring model
The model that we propose is based on semantic interoperability. Semantic interoperability is the ability of a
set of “business” partners to coordinate their activity based on understanding the meaning
¡�David
of the communications
that flow among them Frankel, 2007, p.
(“�§�£�¤���¤�¡�¢£�¢©����¢�©�£��©���¤�©��£�¦��¤¢��¤¢©�£¨£�
7)
The semantic network for credit risk evaluation, in the way we see it, represents the communications
involved in designing the customer’s profile. It consists of messages (data), as well as the transformation of those
messages from one format to another, and is related to the information required by banks in order to determine the
features of each client.
In order to determine a minimalistic, general model for risk evaluation that can be used by customers to
simulate and calculate the chances they have in order to obtain a credit, we will implement a Service Oriented
Architecture (SOA), which will integrate semantic web service communication facilities. In order to compute the
scoring with the help of our general model integrated in a software application, several steps should be followed.
These steps will be taken automatically and will partially be supervised by the user:
Step 1: determining the common elements that banks take into account when creating the user profile. This
can automatically be achieved by designing semantic networks for several banks and determine the similarity
between terms.
Step 2: after obtaining a set of general features we propose a model based on scores. The series of sores are
created after analyzing the risk evaluation models of several important Romanian banks.
Step 3: when the series of scores is complete, we calculate a level of risk by combining the set of features
with the scores. In this manner, the client can determine with a certain level of probability his chances of obtaining a
credit.
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However, we are convinced that we can not obtain full semantic interoperability. Complete automation of
all mapping decisions is probably not is very hard to achieve. For this reason, the solutions offered by this
application are not 100% trustworthy. This happens because humans are involved in the evaluation decision process
in the credit institutions. However, we hope that the results will be guaranteed with a maximum average of 45%.
The design of a software solution
In order to develop a software solution we establish the following objectives:
• designing the general context for modeling risk (identifying the main rules and knowledge, identifying the
adaptive processes to the specific banks’ environment, specifying the semantic credit institutions’ interoperability
elements, etc)
• developing ontologies specific for every institutions which will structure the evaluation rules, and also
developing a component for semantic web service design for obtaining the characteristics in a OWL (Ontology Web
Language) format.
•designing efficient classification algorithms for the rules used by banks(developing an automatic scoring
system designing classification algorithms based on Bayesian theory, implementing an algorithm for automatic
renewal of the weights/scores system, implementing an efficient document mining algorithm).
The proposed solution’s architecture will be web service oriented and will consist of two components: a
service implementing the semantic module and a service implementing the “business” logic (the effective module for
calculating the scoring and determining the clients’ chances for obtaining a credit).
The Service oriented architecture (SOA) represents a concept of great interest at software products’
architecture level, because it facilitates interoperability by integrating services with web technologies. This type of
architecture represents the basis for developing semantic web services that use ontologies from a certain domain of
interest (a research theme of great interest at international level). The ontologies are a key technology for the
semantic web. Ontology is a set of concepts from a particular field and the relationships between them and is used to
facilitate the development of semantic models and necessary user specific information search, with the help of
semantic queries. Furthermore, they enhance the development of personalized content and enable the decentralizing
and the cooperation of content management, and also multilingual research.
In order to represent ontologies, several languages were developed. These languages are based on XML.
One of the most frequently used is OWL(Web Ontology Language). At the web service semantic specification
languages level, the most important initiatives of extending the OWL language are:
• OWL-S (US initiative)
• WSMO (Web Services Modeling Language- the European initiative-logical and formal )
• WSDL-S (W3C initiative)
This service oriented approach assures solution portability and liability. As part of the service that is in charge
with semantic processing classification algorithms and document mining algorithms will be implemented in order to
extract the key concepts from each evaluation form. Afterwards, another method will design the semantic network
that is a hierarchic structure based on semantic and lexical relations, for each evaluation form. After the semantic
networks were designed, a special algorithm for computing semantic similarities (Lin algorithm) in semantic
networks will be implemented. Based on this algorithm, the common features that banks take into account for
developing clients’ profile, will be calculated. These parameters will be transmitted by the service description
language (WSDL) to the web service that will implement the evaluation model. The evaluation model consists of
associating a set of weights to each characteristic. For the client that solicits the evaluation a score will be computed
in this manner and afterwards it will be compared to a cut-off value. This value is determined based on analyzing the
scores obtained by the clients that successfully obtained a credit (they were able to pay it up) and also by analyzing
the scores obtained by the clients that even though obtained a credit they were not able to pay it up (we will take into
consideration the clients’ profiles).
The output of this general, orientative and minimalistic evaluation model, represents, with an average
maximum confidence level of 45%, the client’s chances for obtaining a credit.
So that this application to be complex, flexible, portable, distributed and to permit a high level of
interoperability with the help of semantic web service, it is essential to implement automatic or semiautomatic web
service modalities. This type of applications is considered to be the most suited for modeling the risk evaluation
process for the activity of credit granting.
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In order to implement the requirements referring to assuring interoperability and also for offering automatized
support in the risk evaluation process, it is necessary to improve the collaboration between the two web services (one
implementing the semantic functionalities and one implementing the client’s reliability evaluation model).
By unifying all the elements mentioned above, a new type of software application architecture, the OMG
Model Driven Architecture (created by Object Management Group) and it is mainly used in developing interoperable
and platform independent systems. The objective of this architecture is to model the credit granting process as close
to reality as possible. The processes are seen as activities collections connected both logic and semantic.
Conclusion
The paper presents some general aspects related to the necessity of developing an efficient credit scoring
evaluation model. Some of the most discussed models in the scientific literature are described and both their
advantages and disadvantages are emphsized.
Consequently, a general methodology for building a credit scoring evaluation model is proposed and the
authors introduce some theoretical aspects related to web semantics and ontologies. These tools can be used in order
to develop a more efficient software application.
The proposed application offers a specific approach both at conceptual and also at technologic level but it is
in connection with the present standards and research. To be more specific, the project will have a service oriented
architecture, will implement a specific semantic for the Romanian language, but also it will be able to offer support
for English, and will implement ontologies for credit granting rules modeling.
Aknowledgements
We would like to thank our coordinators (prof. PhD Bodea ConstanŃa and prof. PhD. Smeureanu Ion) for the
advice and the suggestions that led to the improvement of the present paper.
This article is a result of the project „Doctoral Program and PhD Students in the education research and
innovation triangle”. This project is co funded by European Social Fund through The Sectorial Operational
Programme for Human Resources Development 2007-2013, coordinated by The Bucharest Academy of Economic
Studies.
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��
183

METHODS OF GIS SYSTEMS PERFORMANCE
IMPROVEMENT
Smeureanu Alexandru, Dumitrescu Stefan Daniel
Academy of Economic Studies, Bucharest, Romania, alexandru.smeureanu@i-neo.ro
Politehnica University of Bucharest, Bucharest, Romania, dumitrescu.stefan@gmail.com ��¦�©��¨£�©�£����¤�����¤���¤£��¢¤©�£��¨ ����¨¤��¡�¢££��¡£������£�§�§�¨ �¢�¡£���©�©�¤��� �§¢¢¤��¨
Keywords: GIS, spatial partitioning and indexing, raster and vector images, QuadTree and R-Tree
Classification JEL: Y90
Introduction
In this article we study GIS (Geographic Information System) in terms of performance gained from the use of
specific algorithms. We study the QuadTree and R-Tree algorithms, in terms of architecture and implementation;
also we compare their efficiency, both among themselves and compared with classical methods of linear search.
Next, we present briefly GIS systems, the way information is stored in these systems, and inherent problems that
arise.
GIS systems
�£�¤¢§£�£¨ �¢��¤��¤£¢£�©�£¨£� ���¤¨£�¤¢¢¤�§¨��£��£�¤� ��¤¤�¤�§�£���£�¤¢¤¢§£¢¤�£��¢¤©�¤�¨£�¤©¢¨ ¡£����¤�£�¤����¤§�¤��©�©�¤�� ��£�¢¤¢§£¢¤���¤§�¤����©�£©¨ £��¤�£���¤���£¢§¤��¦���£��©�¤¢¡¤�¢¤�¤���¡�����¤�¤©¨��¢£������©�¤¨ ��¤���¢¤¤©�� §©��¢¤¤�¡¤���¡ ��¤¤��¤��£�¤�¤������¤£¢§�¤�����©¢¤�¡£���¨©��£�©¨�¤�����©����¤����©¢£����¤�¡¤¤���¤�¡�©¨��¢£�����¢�� �£��¤¢¤����£������£¤¡�¡¤¡£¨¨¢¤�¤©¨��¤¢¤�§¨������¤�¡�©¨��¢£�������©£�¤��¢��©��¤�£©¨¨ �¤�¤¨��¤� ©��¨£�©�£���©��¡£¨¨����¨§�¤� �£��§��£��¡�£��£���¢¤�§£�¤����¤§�¤�£��¢©��£�¤� ��©��©¢��¤�����§�¤���¢£��¤�£����¡¤�����©¢�£�¢©¢
A GIS integrates hardware elements, software and data for capturing, managing, analyzing, and displaying
geographically related information. This system allows viewing, understanding and querying data in multiple ways
that reveal relationships and patterns in the form of maps, reports or charts.
A GIS helps with answers to questions and solving problems by looking at existing data in an intuitive and easily
distributed way.
A GIS can be seen in three different ways: in terms of a database (database view), the map (map view) and model
(model view). In Database View the GIS is seen as a structured database that describes the world in geographical
terms. In View map the GIS is seen as a set of intelligent maps and sketches which characterized relations over the
Earth. In Model View the GIS system is seen as a set of tools for information transforming for obtaining new derived
datasets from existing data sets. These tools extract information from existing data, apply analytic functions, and
write results into new derived datasets.
Data representation in a GIS system can be done either in Raster or Vector way.
Raster mode is essentially any type of digital image represented as an array of pixels. The pixel is the smallest unit of
an image. A combination of these pixels will create an image. This representation consists of rows and columns of
cells, each cell with one stored value. Raster data can be images (raster image) with each pixel containing a value,
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usually a color. Additional values recorded for each cell may be a discrete, defined by the user with relevant GIS
system, a continuous value, such as temperature, or a null value if no data available. A raster cell that stores only one
value can be extended by using raster bands to represent RGB colors (red, green, blue), or an extended attribute table
with one row for each single cell unique value. Resolution in raster mode is pixel size in physical units (eg distance).
Raster data are stored in various formats, from standard file structure of TIF, JPEG, etc.. and directly in binary data
fields (BLOB) of common databases.
Vector mode is used especially in GIS systems where, geographical features are often expressed as vectors, by
considering the elements as geometric forms. Various geographical elements are expressed by different types of
geometry forms:
• Points - zero-dimensional points are used for geographical elements that can be best expressed by a single
point of reference, in other words, simple location. There in no posiblity to make any measurements in this
case.
• Lines - The lines are used for one-dimensional linear elements such as rivers, roads, topographic lines, and
so on. Lines also allow measurement of the distance.
• Polygons - Polygons are two-dimensional elements that are used to represent a geographical area on the
surface of the Earth. Polygon features make it possible to measure the perimeter and area.
In order for the GIS to be useful, they must work properly and provide the requested information timely manner. The
common problems of such systems are scalability and speed of processing user requests. When the system operates
with more elements, the scalability problem becomes more pronounced issue. Problems in repeated rendering of
large number of elements appear (eg moving the map in a specific direction) when finding a particular item, and
querying the system for the position of an element, inserting or deleting an item, etc..
We will use as an example of these problems, the selection of an object on the map. This function allows the
identification of an item on the map via the mouse cursor for the purpose of viewing or editing features. Although the
function used for detecting the existence of an object under mouse cursor does not have a high complexity, (in
general O (1) for points, lines and most types of polygons), regular repeated calls to check for each item on the
screen takes too long. When working with an overview of the entire structure of the elements of the screen coincides
with the total number of elements of the whole system. In this case the complexity associated with the operation of
finding the item selected by the user's cursor is O (n) (where n is the total number of items).
For a large number of items in the orders of thousands, hundreds of thousands or even millions, a linear search is
very highly inefficient. Later we will investigate ways to search faster, using spatial partitioning, and we study the
influence this class of algorithms on performance.
Spatial partitioning techniques and systems
In mathematics, the concept of spatial partitioning refers to the process of dividing Euclidian in two, disjunctive
subspaces, so any that any given point, is owned by only one of subspaces. Spatial partitioning schemes are most of
the time hierarchical in the sense that a region of space can be subdivided into several regions which are in turn
subdivided into a recurring manner. All partitions generated according to the above process can be organized as a
partitioning tree. These techniques include BSP trees, QuadTrees, Octrees, kd trees, R-Trees, etc..
Spatial partitioning techniques play an important role in computer graphics. They are generally used for 2D, 3D
space organization and storage. Storing objects in space partitioning structure facilitates rapid response to a series of
geometric queries, collision detection for 2D, spatial indexing, occlusion solution to the problem of spatial objects
and so on.
Next we study how does the use of QuadTree and R-Tree impacts performance in contrast with the complexity
introduced in the code.
QuadTrees
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A QuadTree is a data structure characterized by nodes that have a maximum of four children. We used this tree for
recursively divided the 2D into four quarters of rectangular shape. For each quarters obtained we verify that the
number of elements contained dose not exceed a preset limit. If this is exceeded the quarter is sub-divided into four
quarters, continuing the process recursively until all the regions obtained by splitting respect maximum number of
objects contained rule.
Figure 1. Example of space division using the QuadTree algorithm and the internal tree representation
Some restrictions identified when using QuadTrees are:
• All the space that needs to be indexed has to known in in the beginning
• The index tree has to be entirely rebuit if the space indexed by it has been shrinked or enlarged
The procedure used for creating a QuadTree
QuadInsert (i, n) [insert into the node n] is trying to insert in node n. Check the capacity of the current node if node is
full and the node was expanded previously recursively call the add item function for the child node that contains it.
Otherwise, if the current node contains the maximum number of elements N, and has not been expanded, the node is
expanded by creating the four child nodes. Information is then inserted to the child node to which it belongs. Finally,
if the current node is less than N elements and is a leaf the information is added to it.
The creation of the tree is achived by repeated calls of the QuadInsert procedure for each item of the system.
QuadBuild: Create QuadTree, initially empty. For each element of the system, call the QuadInsert (i, root).
After creating the QuadTree by repeated insertion, it is possible to contain empty leaf nodes. These empty leaf nodes
are removed.
The complexity depends on the distribution of tree elements in the area that is indexed. The cost of adding an
element is given by the depth calculated as the number of nodes transited to reach the root of the tree from where the
item is added. This can be computed by counting each recursive call of the QuadInsert. Each time the function is
called for adding an item the depth increases by one.
If all items are closely clustered, in a very small area the complexity is high because a leaf nodes will be at a great
depth. However the maximum depth is controlled by the number of bits used to represent the position of items. This
number of bits is virtually constant in the complexity calculation. Thus if the tree is evenly distributed so that all
leafs have the same depth, cost to incorporate all elements would be O (NlogN) = O (Nb)
Disadvantages of this technique
If geometric division fails to reduce the number of elements for each quarter (ie the overlapping elements, elements
which intersect each other), the capacity should be increased to allow the algorithm to continue execution. For
example, if the maximum capacity of a node is eight, if they are nine elements to a certain point (x, y), the division
186

would produce three empty quarters, and one which contains nine points, and so on. Because the tree must allow
more than 8 items per node, QuadTree complexity decreases to almost O(N) for datasets with arbitrary geometry
R-Tree
R-trees are balanced trees similar to B-trees. The tree structure is designed in a manner in which it tires to minimize
the number of nodes that need to be search in order to get to the requested element.
A leaf node contains more tuples. Each tuple consists of an index to an object and the n-dimensional bounding box
(the rectangle of n-minimum volume that contains the object). When working in 2D space the bounding box is
actually the minimum area rectangle that contains the object. Non-leaf nodes contain tuples consisting of an index to
a child node situated at a higher level of depth and the bounding box that contains all the rectangles associated with
that child node.
The R- Tree construction must comply with the following rules:
• Each leaf node contains between nmin and nmax tupluri (index rectangle) except the root node.
• Each tuple of leaf nodes contains an index to an object space and the smallest rectangle containing n
dimensional object.
• Each non-leaf node has between nmin and nmax children except the root node.
• Each tuple in the non-leaf node contains a pointer to an index-child node and the smallest rectangle containing
the rectangles in the child node.
• Root node has at least two if not leaf node.
• All leaves have the same depth (the tree is balanced)
The maximum depth in the worst case is |lognminN|-1 and is achieved when all nodes are just branched and they
contain the minimum number of elements. The maximum number of nodes is +1 and is achieved when the
fill factor of all nodes except the root is . In this particular case each non leaf nodes have the minimum number
of children, and the leaf nodes index objects.
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187

The search algorithm in a R-Tree
Figure 2. R-Tree, internal structure and graphical representation
The search algorithm in a R-Tree is similar to the search in a B-Tree. However, unlike B- Trees, the search is
required through several sub-trees of the node, making it impossible to predict the performance. This due to the fact
that in R-Trees the information cannot be stored ordered in the node (the child nodes of a node don’t respect any
hierarchy),The inserting algorithm structures the data so that it will allow search algorithms to eliminate the
irrelevant search subspaces focusing the only to regions close to the area searched.
If the algorithm is required to search items contained in a rectangle S the main steps are:
Starting from the root node if the node is not a leaf node, for each sub-tree of the current node check whether the
rectangle is associated to overlaps with S. For all entries that overlap is call the search function recursively starting
from the sub-tree root.
If current node is a leaf node, check all tuples (spatial object, "bounding box") whether S the search area overlaps
with the "bounding box". If they overlap the item is added to the result list.
Inserting objects into a R-Trees
Inserting objects into a R-Trees is done in the same manner the insertion would be done in B-Tree index except that
in this case the spatial information indexed is added to leaf nodes. Nodes reach the maximum allowed nmax elements
are expanded and the stored tuples are propagated to lower levels.
Application
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To illustrate the usefulness and the performance increase gained by using space partitioning algorithms, we
implemented a GIS application that can work alternatively with both data structures, R-Trees and QuadTrees. The
use of tree structures will facilitate the rapid retrieval of a set of requested information. One of the places where the
retrieval is mostly used is when finding the item that is hovered with the mouse cursor; in programming that is
necessary for implementing the events such as "mouseover". The speed of these searches needs to be as high due to
the high frequency of queries. Each time the mouse cursor is moved the search has to be reissued. An increased in
the time need to retrieve the information leads unwanted lag in a place where the user expects the application to
respond almost instantly. We chose this method of testing after we studied of processor time consumed by calls to
various functions of GIS applications. The study revealed that the “mouseover” is consuming a substantial portion of
the processor, and in the same time is real-time critical in terms of user interface.
At the first glance the optimization of not investigating all the elements of the system just those visible in the screen,
thus reducing the number of possible items to be selected is sufficient, but this method is not sufficient, because the
screen can contain an overview of all elements of the system. In this situation the proposed optimization dose not
reduce the number of elements that need to be investigated, further improvements are required.
In order to obtain increased performance when retrieving the item we propose using indexes create based on R-Tree
or QuadTree. To highlight the performance we have implemented in the GIS the three search methods: linear,
QuadTree indexed and indexed by R Tree, with the ability to switch between them. To best evaluate performance we
used synchronization mechanisms to ensure "critical section" in the search functions.
In order to analyze the degree of scalability, the GIS system was populated it with data sets of different sizes,
generated randomly. The size of data sets increases from 1 item to 10 million items, increasing the powers of his 10.
Since the expected complexity of algorithms for search in tree R and Quad is logarithmic, we chose data sets whose
size increases exponentially. Items have a stable size (rectangle of fixed area) and are arbitrarily placed on the map
application.
189

Below we present the results obtained from the conducted tests:
Required memory test
In implementation of the indexing algorithms data
objects references were used instead of the actual
object. In this way the tests for required memory will
only count the memory needed to store the actual
index. In the case of linear algorithm the memory
used beside the actual data objects is zero.
It is noted that as the number of elements increases
QuadTrees begins to use more space than the R-
Tree. As the number of elements increase QuadTree
needs to subdivide the space in even smaller
divisions in order to accommodate all the data object
references. Note that these divisions consume more
space when items are clustered tightly rather than
when they are distributed relatively evenly in the
plan.
Search response time
Search time is as expected, in proportion to the
complexity of search algorithms used. When we use
the linear space search that iterates trough all the
elements, the complexity is O(N). We can see that
time is almost directly proportional to the number of
items. When we use indexes that have a logarithmic
nature of complexity O(logN) the time seems to have
a line representation in the chart that has a
logarithmic X Axis.
Chart no. 4 shows the search time needed for linear
serach versus time obtained by using QuadTrees and
R-Trees. It is noted that at relatively small number of
elements, the difference is not distinguishable (up to
500). When operating with a small number of
elements linear search is faster because of the high
speed of browsing versus traversing index trees.
However, if the number of elements increases, the
linear search times get extremely weak relative to
the performance obtained from index trees.
Chart no. 5 details the results of the two compared
tree structures used without linear search included. It
can be seen that a large number of elements that our
implementation of R-Trees runs faster than
QuadTree.
Note that the distribution of elements in the plan is
important. When a uniform distribution used, the
performance of the two methods are close, but when
the distribution is clustered, R-Tree out performs
QuadTree.
Figure 3. Memory used for storing R-Tree and QuadTree index
Figure 4. Search response time when using linear search,QuadTree
and R-Tree indexed search
190
Figure 5. Search response time when QuadTree and R-Tree indexed
search

Conclusions
The designing of GIS systems has to be made having regard for the desired performance. In the design stage, in order
to maintain performance levels, analyses regarding resource consumption have to be done in order to choose which
algorithms are suitable.
In this article we showed that the simple use of a linear searching in order to resolve spatial query is a huge consumer
of resources (CPU time) when working with a large number of entries. To reduce this consumption we presented two
methods of indexing: the trees and R trees Quad and we showed that these methods logarithmically reduce the time
needed to execute the query.
However this improvement has a cost given by the construction and maintenance of the indexing tree. Both
algorithms consume additional resources: memory to store the tree and CPU time to construct and update. We can
say that the mechanisms used for spatial indexing consume more time to add, delete objects and decrease the time
needed for querying / retrieval. This behavior is similar to the index structures in the relational database.
The performances obtained using QuadTrees and R-Trees are similar. Both methods reduce the search time by a
logarithmic law given by the searching in a hierarchical tree structure. However QuadTree is less robust due to
several exceptional cases leading to poor performance and even crashes if not treated separately. QuadTree is not a
balanced tree structure and because of this it cannot ensure a unitary homogeneous performance across queries
issued on all regions. The memory consumption is also considerably higher for QuadTree.
According to study it is advisable to use spatial indexing when working with more than 10 4 entries and becomes
imperative to be used when the number of data objects exceeds 10 5 .
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Antonin Guttman: �©�£�¦��¤���¢§��§¢¤��¢��©�£©¨�¤©¢��£��, Proc. 1984 ACM SIGMOD
International Conference on Management of Data, pp. 47-57
H. Samet, �£�����©�£©¨�©�©��¢§��§¢¤�, Addison-Wesley, Reading, MA, 1990
H. Samet, ����§�¤¢�¢©��£���¦�©�¤�¢��¤��£���©���¦�, Addison-
Wesley, Reading, MA, 1990
Yannis Manolopoulos, Alexandros Nanopoulos, Apostolos N. Papadopoulos, Yannis Theodoridis: ©�����¨£�©�£���, Springer, 2005
���¢¤¤� ��¤�¢ ����©�£©¨�©�©��¢§��§¢¤� ���¨£�©�£��� ��¤�¤�£��©����©¨ �� ���¢¤¤�
191

Knowledge based authentication in citizen oriented application
Bogdan Vintilă, Dragoş PalaghiŃă
ASE, Bucharest, Romania, vb@vintilabogdan.ro
mail@dragospalaghita.ro �§��¤��£�©�£���¤�������¢£���¢�©�£��©��¨£�©�£���©¢¤�¢¤�¤��¤����¤�§���£��£���¤��©�£������¤ £��¡¨¤��¤�©�¤�©§��¤��£�©�£��£�©�©¨ �¤����¤£��¨£�©�£�������¤£��¡¨¤��¤�©�¤�©§��¤��£�©�£��£�£���¢�©�£�� ©��¨£�©�£���©¢¤©�©¨ �¤�� ¤�������¢£��¢��£����¤£���¢�©�£��©��¨£�©�£����¤�§¢£� ©¢¤�¤�£�¤���§�§¢¤ ����¢©��
Keywords: knowledge, authentication, security, informatics applications, citizen orientation.
JEL classification: L86 - Information and Internet Services; Computer Software
Introduction
Digital economy assumes completing economic transactions using IT&C. The explosive development of IT&C
leaded to an ascending evolution of the volume of online economic transactions. The increasing volume of online
economic transactions leads to the arising of a new category of applications that must fulfill the users’ requirements.
The transaction number grows through the increase of the number of transactions made by existing users and,
mainly, through attraction of new user intro the system. The increased number of users leads to the application’s
update as to support new technologies that increase the quality level. The increase of transactions also leads to an
increase in the application’s security requirements. Citizen oriented informatics applications came to answer the
users’ requirements regarding online informatics applications’ qualities.
Citizen oriented informatics applications
Citizen oriented informatics applications are a new category of applications designed to solve problems that a very
large number of persons deal with. Citizen orientated informatics applications, compared to other informatics
applications, have as their objective to maximize the degree of customer satisfaction. The other applications serve the
purpose of solving problems of the organization for which they are developed. If the effects of classic informatics
applications reflect in other areas of the beneficiary, the citizen oriented applications bring in profit for the owners
directly proportional to the degree in which the citizens that use them solve their problems. COIA are integrally at
the customer’s disposal, which can solve its problems using it while the classic applications interact with citizens to
solve problems for the organization, the citizen being only the operator, not the beneficiary. The essential differences
between citizen orientated and classic informatics applications are:
- COIA are created in order to solve citizen problems, while classic applications are created to solve the
companies’ problems;
- COIA offer the citizens for use a succession of steps to solve their problems, while the classic applications
focus on the steps for solving the company problems;
�¤�¤¨���¤���£¢¤��£�����¢©§��¤��£�©�£���¤�����©¢¤�¢¤�¤��¤��
- within COIA the information which is presented is that in of which the citizen is directly interested, while
classic applications focus on promoting the company and its products and services.
- the application is developed only after the target group is studied and all steps of the developing cycle are
realized taking into account the target group’s characteristics;
- COIA are free applications, the owner’s revenue being dependant of the number of users the application
has; classic applications have acquisition and running costs;
- COIA are online applications to be available regardless of time and space;
- COIA are characterized by high security level compared to classic applications for witch security is not an
important issue.
Considering the advantages of COIA it is necessary that all applications be characterized to a certain degree by
citizen orientation. Classic application are replaced with citizen orientated ones, which come with solution for their
problems.
The quality characteristics system
Considering the fact that COIA means resource allocation and working independently of the owner and
developer, they must be gifted with the following quality characteristics:
- coverage, meaning if the citizens need to solve within problem P, for which COIA is built, the sub problems
SP1, SP2, ..., SPN the application must implement components that correspond to all the N sub problems;
192

- correctness establishes the measure in which perfect correspondence is achieved between the results from
the test data sets and the effective results obtained inputting them; a test data set SDTi contains inputs,
intermediary results, and final results; in the testing process data is inputted and intermediary SDTi results
are compared with the intermediary results returned by the application, respectively the final results from
the test data set and the application returned final results; correctness is relevant when there is no doubt
regarding the quality of the test data sets;
- completeness ensures that all processing made in all possible situations, to solve a sub-problem, that any of
the target group members comes across;
- reliability gives the measure in which the application executes without incident the necessary processing for
solving citizen problems; this characteristic depends also on the hardware components on which the
application runs on; a reliable COIA must execute processing without incident for the citizen even if in the
computer network it runs in machine defects are present;
- COIA maintenance measures the effort level necessary to update; knowing COIA characteristics, their
update is frequent to fulfill citizen requests, thus a high level of maintenance must characterize this kind of
applications; the maintenance costs must be low to allow updating the application and avoiding redesigning
it;
- auto-configurable; COIA must auto-configure itself according to the most frequent citizen problems; for this
the application must record the frequency of problems which it solves, at a certain time interval, by autoconfiguration
it shortens the time needed to solve the most frequent problems; the reconfiguration must take
into account the data sets recorded in the past for a higher level of efficiency;
- user friendly; COIA addresses a large and diverse target group compared to a classic informatics
application, this leads to the need of developing a easy to use interface;; as the majority of citizens that use
the application are not IT specialists, the friendly GUI must characterize COIA and allow all users to solve
their problems;
- flexibility represents the ability of the application to adapt to messages received from the environment;
when in use by the citizens the application must be able to adapt their demands and give adequate solutions
to their problems;
- easy to return to previous steps; input data refresh must be done in a easy and logical way, messages must
be clear;
- time memory which assumes storing citizen data, activities, and input data such that the users will not be
required to input them again when using the application in the future, only to update them if needed;
- portability refers to the possibility of running the application with no regard to the hardware platform used;
taking into account the large number of application users and their diversity considering the used hardware
platform, it is vital that COIA will run on as many hardware platforms as possible; with no regard to the
platform COIA offers its users the same functionality, a function is not allowed to be available on a
platform and unavailable on another one;
- computation precision refers to the number of decimal places stored during computation; for COIA it is
important the computation precision is at its highest level because at a large number of users errors are
propagated and precision is reduced;
- security represents the application’s ability to ensure users’ data and actions protection against criminal
attacks.
Citizen oriented informatics application’s security is a vital quality characteristic that must be fulfilled to the highest
degree. The application must guarantee that the user’s data and actions are protected against criminal attacks.
COIA security
Taking into account the high number of users of COIA, the security is a very important aspect. Each user must
access only his data and must realize actions only on his account. The user’s access to COIA must be granted based
on username and password only if the application implies economic activities. For COIA designated to expose
information the access must be free, only paid services being subject to authentication.
Authentication is defined as the process of establishing if an object is authentic. For COIA this means to establish if a
user is the one he claims to be.
193

Figure 4 Authentication mechanism
The functioning mechanism of informatics applications’ authentication procedure is presented in (Error! Reference
source not found.). The user launches a request of authentication or password reset. The authentication service
verifies if the user supplied the password associated to his account and grant access to the application’s components
if it checks. If a password reset request is received, it is forwarded to the password reset service. If the request is
authentication type but the password doesn’t match the account, the user is requested other credentials.
For COIA, the knowledge based authentication assures a high degree of security and offers the users a comfortable
authentication method.
Knowledge based authentication is used as a primary system or as sub-system for authentication in citizen
orientated applications. This type of authentication is based on a set of factoids which represents knowledge
possessed by the user used to identify him from a set of users.
A factoid is represented under the form of a pair: �§�£���
where:
Incorrect
username/
password
START
Insert credentials
Authentication
service
Application’s
components
STOP
k – is the key given by the user;
v – is the value associated to the key k.
Authentication/
Password reset
request
New credentials
Password reset
request
Password reset
service
194

The factoids have the following characteristics:
- memorbaility represents the ease with which the users remembers the data he entered;
- guessability is the ease through which one is able to guess the information given by the
user without having any prior knowledge which relates to him;
- simplicity represents a characteristic which is closely tied to memorability, is the factoid
is simpler then memorability increases;
- usability is the characteristic that allows an easy use of the factoids registered in the
system;
- unicity is the characteristic that guarantees that one factoid will not resemble another in
the set;
- portability insures the correct behavior of the knowledge based authentication system
regardless of the platform;
- familiarity is a sub-characteristic of guessability which regards the personal character of
knowledge within the factoid.
In order to increase the security level a set of factoids
��¡¢is
�¤§�£¤��¤��The
used where the factoid
and the factoid elements in the set have the following properties:
-
meaning meaning and �£¥�¤, are randomly chosen from
the £�¡ ¦�¡�§set¡
�¨©��if
�¨is -
and only if related to the user
�which has ownership over the factoids
included in set
�;
- they have a finite number set by the administrator with regard to the optimum security
level. ££¥£¤ �££��£�¥�£¤��¤� �£¥�¤ � �£§�££��£� �§��¨� �§
In (figure 2) the environment of the factoids is presented, it is composed from 2 major elements the user and
the system. The user supplies the factoids to the authentication system which after running a cross reference with the
factoids stored by the user beforehand accepts or denies access to the privileged resources.
Interference
Interference
Key
Figure 2. Factoid environment
Interference is caused by network communication issues between the user and the system or by
deliberate attacks meant to intercept the user credentials in order for the attacker to be able to impersonate
the user and gain access to his resources.
Considering the user set where each user has associated a factoid set
�£¡¢which
��an identifies him in the user set identity matrix, is generated and presented in
(table 1). � �£§��£¨� ��£§ �£ ���¢ �§��¨� ��§
User
System
Table 1. Identity matrix.
Value
Factoid
195

Users Factoids
U1 F11 F12 … F1m
U2 F21 F22 … F2m
… … … … …
Un Fn1 Fn2 … Fnm ��£. Each user from the matrix is identified using any factoid from the set The user is identified upon
providing a valid value for a random key picked arbitrarily by the system from the factoid set assigned to the user.
Conclusions
Citizen oriented informatics applications redefine the concept of informatics application to correspond the target
group’s requirements. These fulfill a set of quality characteristics that the classic applications don’t fulfill or do it in
a low degree. Security is an important characteristic for the COIA the overall quality of the application being
strongly influenced by it. The usual authentication method the informatics applications use is the one that uses an
username associated to a password. �£
Using knowledge based authentication in citizen orientated applications has the following advantages:
- the degree of failed authentication attempts is reduced, considering the fact that the
factoid set is large and they all contain knowledge that the user is familiar with;
- the degree of risk involved by dictionary attacks is reduced because the factoids
contained in the set associated with the user are randomly picked and they have a
personal character which is unknown to third parties , as the knowledge contained by the
factoids must only be known by the user and partially by third parties.
Disadvantages of knowledge based authentication are related to the public character of the knowledge in the
factoids and their availability in the virtual space. This is why it is recommended to use information as diverse as
possible and with reduced availability.
This article is a result of the project „Doctoral Program and PhD Students in the education research and innovation
triangle”. This project is co funded by European Social Fund through The Sectorial Operational Programme for
Human Resources Development 2007-2013, coordinated by The Bucharest Academy of Economic Studies.
196

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�¤�¢£�����£�£�¤� §©¨£�
197

IDENTIFYING AND BREAKING POLICY CONSTRAINTS, THE
MAJOR BARRIER TO IMPROVING COMPANY
PERFORMANCE
Georgiana Cioană
Bucharest Academy of Economic Studies, Bucharest, Romania
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Constraint; Theory of Constraints; System; Continuous Improvement.
JEL Classification System: M11
1. Introduction
The dominant logic of companies, the norms and beliefs that the companies formulate and adopt, a way of
thinking with respect to the strategies they implement, has always been that maximum results are obtained by fully
using the available resources they dispose. This logic is thought to ensure security and stability in every organization,
and was always seen as the best attitude towards achieving its objectives, having no doubt in succeeding, but as it is
demonstrated, the enemy of change and transformation is the constancy of inertia. Innovative organizations should
combine tradition and gold rules with new ideas, new business models and practices in order to be a step ahead their
competitors, to be receptive to the challenges of the industry in which they perform, to overcome the barriers to
continuous improvement. The most difficult issue is to identify those norms and beliefs that impede the business
processes to deliver the best outcomes taking into account the overall strategy of the firm, customer’s needs and the
way competitors behave on the market. “At the industry level, thought leaders introduce beliefs that create an
industry culture, or a set of firmly held business norms that become conventional wisdom. At the same time,
individual companies have prevailing ideologies and principles to which they adhere without often challenging them.
The most successful industries and enterprises are especially susceptible to established beliefs that become dogmas”.
(iSixSigmaEurope, 2009, )
Traditionally, the optimum performance of a system is considered to be the result of the individual
performance of its component parts; if all its components are using their maximum capacity, the system as a whole
will deliver the best results. However, a number of theoreticians have demonstrated the opposite
The concept of system constraints was introduced for the first time by Dr.Eliyahu Goldratt in the Theory of
Constraints (TOC) which is essentially about change. (Dettmer, 1997, p.11) This theory was latter on completed with
a set of tools and the logic reasoning supporting them, based on fundamental assumptions, known under the name of
the Thinking Processes, in Goldratt’s book “It’s Not Luck”. These tools are: the current reality tree, the conflict
resolution diagram, the future reality tree, the prerequisite tree, the transition tree The TOC Thinking Process defines
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Policy �©�©�¤¢ ©¢¤
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those actions required to improve a company given the current situation and to guide each step to its sometimes not
so obvious conclusion. It provides the answer to the three fundamental questions every manager should consider:
what to change, what to change to and how to cause the change. And it is used to guide the implementation of the
TOC and to aid in creating breakthrough solutions. This can also be of significant importance to the implementation
of the TOC-based system by ensuring that any undesirable effects that manifest themselves during the
implementation process are eliminated. (Stein, 2003, p.258)
2. Policy constraints – the real challenge
Policies are the rules and measures that govern the way organizations go about their business. Policies
determine the location of the physical constraints and the way in which they are managed. Policies define the
markets that the organization serves, how products are purchased from suppliers, and they are the work rules inside
the factory. They are managerial constraints that inhibit the system’s ability to continue to improve.
Policies, both written and unwritten, are developed and followed because people, through their belief
systems, develop and follow them. Managers institute rules and procedures that enable the people in the organization
to make decisions and take actions that will yield good results for the company. However, organizations nowadays
are riddled with inappropriate policies. (Scheinkopf, 2000, p.18)
The general belief is that policy constraints are easier to change because they only require reformulating
rather than the replacement of a new piece of equipment, which is, theoretically, a bigger effort, both physical and
financial. In practice, two things conspire against breaking a policy constraint, which make it even more difficult:
first, identifying the policy constraint that causes the resultant effects is a complex issue, as it is very difficult to trace
a chain of cause and effect back to a root cause; second, identifying the constraint is not enough – it is usually
somebody else’s task, somebody whose cooperation is essential to change it. This is frequent in organizations that
have several departments because persuading a lot of people to act on a policy constraint they might be responsible
for is not an easy job. It takes the acceptance of policy makers of the responsibility for the company’s poor
performance, but few people are secure enough in their positions and able to admit they own a problem and that it is
in their hands the decision whether to undertake or not the change.
Two possible reactions can appear when people are told there is something wrong in their system and when
the policy is pointed out as having negative influence: one is denial – “it’s not really a problem, it’s your
imagination”; the other is the justification of the need for such a policy – “Well, maybe you’re right…but we need to
have this policy because…”.(Dettmer, 1998, p.22) No matter the reaction, people are likely to resist accepting the
responsibility and undertaking to do something about it. It is the human resistance barrier that total quality
management and just about every other management innovation has come up against as it is a great struggle to try to
change the status quo.
For this reason, Goldratt contends that policy constraints are like bad laws – it not only takes to persuade a
majority, it is also crucial to overcome resistance of the parties who have special interests for the system to work to
their advantage; which makes them more difficult to identify and break.
3. The tools for breaking policy constraints
3.1 The current reality tree (what to change)
It is very well known that by identifying accordingly a problem, it is already half-solved. The current
reality tree is a tool that helps managers to examine the cause – and – effect logic behind the policies, plans and
strategies they want to implement. At the beginning, there are the undesirable effects that by their presence,
communicate the existence of a problem, a phenomenon that is out of its actual pace and frequency, so to say; an
element that is disturbing the order and the well-functioning of the other elements in the system. Starting from this
particular point, the manager can work back at tracing the root causes that generate all the undesirable effects
experienced.
This is the purpose of the current reality tree: to communicate to the ones responsible for the system what to
change – how should the policy be changed in order to have the greatest positive effect on the organizational system.
But before making this change, the issue that needs to be tackled should be very well identified, meaning that the
policy constraint that interferes in our system must be correctly determined.
Breaking a constraint requires change. Sometimes that change can involve a significant financial
investment. And even if it does not, breaking a constraint often represents such a significant change to the way
business is done that it results in considerable organizational turbulence or confusion. Whether the effect is financial
or functional, it makes no sense to commit to such change unless one is sure he/she is working on what’s really
constraining the system because it is as simple as that to acknowledge the fact that working on nonconstraints is time
199

consuming and requires an allocation of precious resources. Therefore, there is a need for more that educated
guesses; it takes theoretical understanding, experience, evidence, and cause-and-effect logic.
Eq4| Q3 Eq5| Q2 Eq3| Q1
Source: Stein, �������¢©£���, 2
Marcel Dekker Inc., New York, U.S.A., 2003, p.259
Figure 1. The product flow diagram £����¤��¤�¢ ��¤�����¨ ©�§�©��§¢£��� R.E���¤����£�¤¤¢£����¤
Equipment E2 has gaps in the
buffer because of late deliveries
from operation P1
The operators working at E4 will
focus on maximizing productivity
Operators’ performance is
evaluated based on productivity
Sales orders are shipped
late for the product
The product is arriving late
from the production floor
Eq4| R3
Product Eq1| P3 Eq2| P2 Eq3| P1
Orders for part P1 cannot be
expedited in time to meet the
demand of the buffer
E4 is not producing parts Q1
and R1 according to the
schedule
E4 combines lots to maximize
productivity and save setup
Productivity is maximized
through setup savings as well
Operators are concerned about
making their equipment productive
Figure2. The current reality tree
Eq5| R2
The product incurs gaps in
the shipping buffer
The protective capacity at
equipment E1 cannot
overcome the lateness
Eq3| R1
nd edition,
In order to better understand how the principles of the Theory of Constraints work and how its instruments
can be applied to identify and break policy constraints, we propose the following case study: reformulating the
200

measurement system for evaluating the production performance of the operators on the production line in a manner
consistent with the goal of the company. As a reference point for the further analysis, a product flow diagram is
supplied. It describes the flow of parts from one operation to the next and the equipments necessary to process them
in order to make up the final product. (Fig.1)
As an example, during the manufacturing process various undesirable effects may arise, such as:
1. Equipment E3 receives mismatch parts from E4.
2. Sales orders are frequently shipped late for the product.
3. Equipment E2 often incurs gaps in the buffer because of the late orders for parts P1.
4. There are gaps in the shipping buffer for the product.
These previously defined undesirable effects are to be found in Fig.1. In Fig.2 the current reality tree is
created based on the assumptions above mentioned. The core cause identified for generating the late orders is “E4
combines lots to maximize productivity and save setup”. The issue now becomes understanding why setup savings
are performed at equipment E4. The answer is given in the same figure: operators usually act on how they are
measured and they are concerned about making their equipments as efficient and as productive as possible; their
actions will consequently regard saving time at E4, which is seen as a measure of increasing productivity. So the core
cause is actually a policy constraint: the operators are measured inappropriately, which is a managerial constraint.
3.2 The conflict resolution diagram (what to change to)
It is also known under the name of the “evaporating cloud” (Detmerr, 1998, p.103) and was designed to
resolve the hidden conflicts that usually perpetuate chronic problems. The conflict resolution diagram (CRD) is built
on the idea that most core problems exist because some underlying conflict prevents solution of the problem. This
diagram could be seen as a creative engine that allows managers to invent new, breakthrough solutions to such
unpleasant situations. Consequently, the CRD provides the first part of the answer in determining what to change to.
The CRD includes the objective of the organizational system, the necessary-but-not-sufficient requirements
that lead to it, and the prerequisite – usually the outward indications of the conflict – needed to satisfy them. The
CRD is intended to achieve the following purposes: to confirm that the conflict actually exists, to identify the conflict
that perpetuates a major problem, to identify all assumptions underlying the problems and conflicting relationships,
to explain in depth why a problem exists, to create solutions in which both sides win, to create new, breakthrough
solutions to problems, to resolve the conflict by avoiding compromise at the same time.
The key to resolving the conflict lies in the assumptions – sometimes subconscious – that could be made
about the relationship between the necessary conditions, the requirements and the prerequisites that must be fulfilled
in order to satisfy them.
Figure 3 reveals operator’s contradiction. The objective in this situation is to increase the return on
investment, as this is the purpose of each company that seeks for efficiency from the financial perspective. In order
to increase the return on investment (throughput) the requirement is to increase productivity of E4 and to exploit E2.
In order to increase productivity, there is a prerequisite that should be considered, namely reducing the number of
setups. Regarding the other requirement, exploiting E2, it is fulfilled only if E4 produces according to the schedule.
But operators at E4 cannot respect the schedule while reducing setups. Therefore they are faced with a conflicting
situation – two events that are mutually exclusive.
OBJECTIVE
Increase throughput
REQUIREMENT 1
Exploit E2
REQUIREMENT 2
Increase productivity of E4
PREREQUISITE 1
Produce according to the schedule
PREREQUISITE 2
Reduce setups
Figure 3. The conflict resolution diagram – identifying the conflict
CONFLI
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3.3 The future reality tree (what to change to)
The future reality tree (FRT) was developed as a means to model the changes after defining the
breakthrough solution from the CRD. The concept behind it is relatively simple. First of all, it all starts with
injections – the changes that are to be initiated. To those, elements of existing reality are added, producing new
effects not currently existing. To the new effects, other injections are added as required to advance the chain of cause
and effect progressively toward the ultimate objective – the desired effects. As the future reality tree is developed,
the answers to two very important questions about the proposed idea are to be revealed: first, will it really get things
closer to the desired effects or are they to mill around aimlessly? Second, what are the weaknesses of the basic idea?
In other words, what additional changes (injections) will be required to sustain progress toward the desired effect?
Knowing the answer to the first tells whether the idea is worth continuing with in the first place. Knowing the answer
to the second provides some idea of the other factors needed to be considered to make the basic idea work.
DE
Sales orders for the product
will no longer be shipped late
DE
The product will not arrive late
from the production floor
DE
Parts will be completed on time at E2
DE
E2 will receive P1 according to the schedule
DE
E3 will receive parts from E4 in the right
time
E4 will process parts as they are received
Operators will focus on delivering parts according to the
schedule for E2
INJECTION
The operators’ performance is measured according to
the Throughput Dollar Days accumulated
DE
Gaps in the shipping buffer for
product A will not be incurred
Figure 4. Designing the future reality tree
The schedule for E2 is communicated to E4 through the
release schedule for E6
The FRT is actually easier to build than the CRT. First, when building the current reality tree, there is
nothing but the undesirable effects that come out, to build a detailed picture of existing reality. The previously
202

constructed CRT gives a fairly clear picture of the existing reality and its interdependencies. And after all, almost
anything is easier to be built when having the important building blocks in place to start with. Already having the
undesirable effects from the CRT, the desired effects are no more than the diametric opposite of those and by
reversing them, the top of the future reality tree is clearly pictured. Other elements of the FRT are to be taken from
the conflict resolution diagram, such as the objective of the system and at least one requirement. Thus, building the
tree becomes an exercise of interpolation – filling in the gaps between established milestones – which is why the
FRT usually comes together much more quickly.
In order to solve the conflict that the operators at the production line are struggling with an injection is
introduced: the introduction of a new measurement system for the performance of the operators, the Throughput
Dollar Days, which will determine the operator focus more on delivering parts according to the schedule for E2.
(Fig.4)
3.4 The prerequisite tree (how to execute)
The prerequisite tree (PRT) helps to execute the decision. It identifies the obstacles that might keep the
devoted manager from doing what he/she wants to do and helps determine the best ways to complete the major
milestones in implementing the decision. The PRT provides the first half of the answer to the last question how to
change.
What are the minimum requirements for successful change? The recipe is fairly simple:
1. Identifying and deciding how to overcome obstacles to implementation.
2. Laying out an effective step by step plan for execution, including accountabilities and measures of success.
3. Acting with determination and perseverance to execute the plan, this being purely a leadership function.
Neither the principle nor the tools of the theory of constraints, or any other methodology, can substitute for
the will to see the job done. But TOC tools, especially the thinking process, can be particularly useful in the first two
requirements. The prerequisite tree was specifically designed to help identify and overcome the obstacles to effective
change.
The prerequisite tree has only three kinds of elements: an ultimate objective, obstacles, and intermediate
objectives. There is only one objective. It’s the deliverable of the effort – a completed project or executed change –
and it resides at the very top of the PRT.
OBSTACLE
Operator does not understand the
measurement process based on
throughput calculation
OBSTACLE
There are no appropriate tools to
support the new measurement
system
INJECTION
The operators’ performance is measured according to
the Throughput Dollar Days accumulated
Figure 5. The prerequisite tree
INTERMEDIATE OBJECTIVE1
The operator understands the measurement system
INTERMEDIATE OBJECTIVE2
Appropriate tools are available to support the
measurement system
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This is an example of tree that can be very well built in a small group because some degree of creativity is
necessary to discover all possible obstacles of the implementation of the change and to enumerate them. A single
person might not see the tree from the forest, but working together is very likely to produce a complete list of
obstacles.
Figure 5 presents the possible obstacles that may arise impeding the action described by the injection and
the intermediate objectives that can be used to overcome these obstacles.
3.5 The transition tree (how to cause the change)
It happens frequently that great ideas remain only ideas. The effective execution that turns them into
solutions never occurs. As previously stated, clearing objectives is definitely important, but not enough by itself to
guarantee success. At the strategic level, it’s sufficient to establish what must be accomplished and when it should
happen in a general way at the system level. A strategic plan usually addresses large-scale goals, such as opening a
new market, completing a merger or acquisition, or developing a new product line. It might also establish the time
horizon for these achievements and who has responsibilities for them. Armed with such a plan, individuals or groups
usually know what’s expected of them, though they might not always have a big picture or know precisely why they
are doing what they are.
The last of the basic five tools, the transition tree (TT) helps develop the detailed step-by-step instructions
for implementing the chosen course of action. It also provides the rationale for each step, a critical factor in
persuading people to get involved in the implementation process. It may be seen at the same time as a detailed road
map to the attainment of the objective established, answering the second half of the question: how to change.
The transition tree looks very much like the future reality tree. It is in fact a type of FRT, because it contains
a series of causes and effects that do not exist yet, injections that must be accomplished, but which are more concrete
than those in the future reality tree. And these differences between the two trees appear due to the fact that their
purposes differ significantly. The FRT is built for test and validation, whereas the TT is built with the purpose to
implement the ideas tested previously.
Constructing a transition tree is similar to building a future reality tree, starting at the bottom with an initial
action, and building upward toward a predetermined objective. But the process begins with some elements already in
place, since the objective and the intermediate objectives from the prerequisite tree are put together in this new tree.
INTERMEDIATE OBJECTIVE1
The operator understands the
measurement system
INTERMEDIATE OBJECTIVE2
Appropriate tools are available to
support the measurement system
INJECTION
The operators’ performance is measured according
to the Throughput Dollar Days accumulated
ACTION 1
Train the operator in order to learn about the new
measurement system
Figure 6. The transition tree
ACTION 2
Create the appropriate tools
The two actions needed to achieve the intermediate objectives and together to attain injection include
training the operator to understand the new measurement system that is implemented and creating the necessary tools
to collect and manipulate the date regarding the throughput dollar days from the shop floor. (Fig.6)
4. Conclusions
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This paper presents a set of instruments by which to identify and eliminate policy constraints, aiming at
continuously improving systems’ performance. The example of the inadequate measurement system used for
evaluating the performance of the operators on the production line is very eloquent in this respect. Applying the
Theory of Constraints tools to tackle the policy constraint that managers on the shop floor are dealing with represents
a tremendous shift from the classical approach, and it changes the way management perceives organizational systems
for the future. The implementation of the TOC tools can solve an important number of policy constraints that have
impeded companies to improve their performance and to continuously innovate in the past few years. Therefore
future investigation could be directed towards analyzing the cases of companies that applied the principles of this
theory, to see what worked or did not work, and how it could be adapted to different business environments. Further
research regarding the application of these tools to the service sector and to other functional areas of a company such
as marketing and accounting is required.
This article is a result of the project „Doctoral Program and PhD Students in the education research and
innovation triangle”. This project is co funded by European Social Fund through The Sectorial Operational
Programme for Human Resources Development 2007-2013, coordinated by The Bucharest Academy of Economic
Studies.
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205

WORLD FINANCIAL CRISIS IMPACT ON IT INVESTMENTS
The Bucharest Academy of Economic Studies
Bucharest, Romania
ciolac_c@yahoo.co.uk
Ciolac Camelia Elena
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Key words: IT investments, economic crisis , European Commission recommendations, recovery strategies,
information technology , management
JEL Classification: M15, D92
I. Introduction
During actual economic crisis, both IT providers and their beneficiaries needed to review the IT strategy in order
to surmount the financial loss. IT providers opted for partnerships and strategic acquisitions to empower their
product portfolio, while end-user companies redesigned the IT investment strategy and revised undergoing IT
projects’ opportunity.
�©§¨¨�¡ ¤§££�¤ ¢¡¦¤�¡¢¡¨¢¥¦¢§¡£¢©¤ ¤¥£ ¤¥§££¡¢¡¡¢¢©¤ ¡¢©¢� �¢ §¢¤¢�¥£ ¢©¤¥£¨¨£ ¡¡¢ �¤§ �¡���¨¤¤�¢¢£�£¡¢ £�¤ ��£¤¨§¢¡¡¢¡£ §£§��£©¡£�¤ �¡¤ £¥¢©¤�� ¤¡¢¡£¡¡¢�£¥�¡¤ ¡� �§ ¡¤££�¢¡¡¢©¤§ ¢¡�¨¤£
206

Considering the divergence between European Commission’s directions and financial institutions’ advice
regarding companies’ positioning towards IT during crisis, this paper aims to answer the question: which is the world
financial crisis impact on IT investments and which are the major changes in the European IT ?
II. Strategies adopted by IT providers
II.1. Acquisitions and strategic partnerships
Siemens announced by the end of April 2009 the acquisition of Elan business, a software provider specialized
in MES (Manufacturing Execution Systems) products in Toulouse, that addresses the pharmaceutical and the
biotechnical industries. This acquisition allows Siemens to enrich its solution portfolio on the industrial software
market and strengthens the company’s anchoring in France.
Present on the financial market as well as on the telecommunications market, Sun Microsystems has been
profoundly affected by the crisis and did not recover, having registered 209 billion $ loss in the last term of 2008,
according to ITR MANAGER(2009,).
IBM, another IT market leader, took advantage of the world economic crisis to initiate and develop negotiations
for acquiring and integrating in its structures one of the most important businesses in Sillicon Valley: Sun
Microsystems. The product portfolio and the technologies that this acquisition would have brought to IBM consisted
of a microprocessor of RISC (Reduced Instruction Set Computer) architecture, the OpenSolaris operating system and
the programming language Java. The new business IBM-Sun would hold 2/3 of the Unix market, if we take into
consideration the IBM AIX and the Sun Solaris systems. Also, they would control an important market share on the
servers’ market, considering IBM Power and Sun SPARC servers.
Due to the fact that IBM underestimated Sun business, speculating its disadvantageous situation caused by the crisis, Sun’s council of
administration did not approve the transaction.
The same strategy of acquisitions was adopted by Oracle, who made an offer to buy Sun’s actions, as reported
by Rafal, Olivier (2009). The transaction was approved by Sun’s council of administration at the end of April 2009
and reached the sum of 7.4 billion $; it is still in progress its approval by the stakeholders and by the authority of
regulations. The benefits of the new business Oracle – Sun contain the middleware Java Fusion and the Solaris
exploitation systems for Oracle Database deployment. Thanks to this acquisition, Oracle surmounts IBM from the
technologies offer point of view.
Oracle’s acquisition of the Java development platform represents the premise for fulfilling clients’ demand of
reduced complexity and diminished risks in using Oracle products. Another benefit is the possibility to develop
Oracle products based on standards and under open source licenses.
In the web sector, the pioneer business that became the leader in micro blogging, Twitter, is the subject of recent
acquisition negotiations by Google. Valuated at 250 million $ and considered an important Internet service, Twitter
represents an interesting investment for Google for its real time search engine and its prestige.
From this analysis, it arises a trend of big IT companies trying to enrich their product portfolio during crisis,
aiming to enter new retail markets and to integrate new technologies that would increase the potential of their own.
An Ovum study underlines the fact that fusions and absorptions in the networking and telecommunications
sector are not always successful due to equipment integration difficulties.
II.2. Sales and cutting costs strategies
In order to surmount crisis effects , the big IT providers adopt different cutting costs strategies. A rigorous
evaluation of the business is carried out in order to identify and remove unprofitable activities.
Oracle, database leader, sold OnTarget, its former consultancy division specialized in Siebel products.This
business had been acquired by Oracle in 1999 for 259million euro.
A company that has been profoundly affected by the economic crisis is Microsoft , as reported by Lambel,F.
(2009) . Microsoft registered loss in its main operating fields, for the first time in 23 years of existence. The online
service division experienced a decrease of 14.5% during the first term of 2009. The division of peripherals and media
encountered a decrease of 1.6% in revenues, while the individual operating systems division encountered a decrease
of 15% in revenues in the same period. Simultaneously, the Microsoft ERP division ,Dynamics, registered a decrease
of 5% in revenues in the first term of 2009.
According to market research carried out by Microsoft , the general trend on the IT market is customers shift
towards cheaper products. To defeat sales loss , Microsoft had to reduce Windows license prices and to approve
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Windows XP installation on laptops, in damage to Windows Vista , in order to counteract Linux offensive, as related
by Nemec-Poncik M. (2008).
On the other hand, Microsoft cutting costs strategy includes: reducing spending in low-priority fields, reducing
marketing campaigns for Windows Vista, decreasing investments in data-centers, slowing the recruitment process
with 15% and reviewing mobility costs for the own employees.
SAP, the German IT ERP solutions provider, encountered 33% sales loss in the first term of 2009 compared to
the same term of 2008, as reported by Gros Maryse (2009). Still, SAP’s world revenues decreased by only 3% during
this period , thanks to the application maintenance division. The support services price increase from 17% to 22% of
the license’s value , could be staggered till 2015, depending on a measurement system that would evaluate the ERP
solution’s contribution to the client business. Simultaneously, in January 2009 , SAP announced a personnel dismiss
of 3000 jobs out of the total 50500 employees, of which 1900 employees already left the company in the US and UK
and shifted towards other jobs.
Economic agents’ behavior and IT budget
A study carried out by Celent ,¦���¤��£��£��£�©��£©¨�¤¢�£�¤��©�¨��©¨�¤¢��¤��£�¤������,predicts that IT
investments will reach a total amount of 353.3 billion $ in 2009 among financial institutions, which represents a
1.3% decrease compared to 2008. This prediction is a rupture in the general trend of increase in IT investments
during the last years: a 6.4% increase during 2007 and a 4.5% increase in 2008. Still, the study predicts that, in 2010,
IT spending on specific products and services in the financial sector will register an increase up to the value of 364.5
billion $ (figure 1).
billion $
370
360
350
340
330
320
310
300
World IT investments in the financial sector
2006 2007 2008 2009 2010
IT investments 321.92 342.53 357.95 353.3 364.5
IT investments
Figure 1. IT investments evolution in the financial sector, according to the Celent study
Out of the total amount of IT investments during 2008, 71.9% addressed IT maintenance and this important
percentage will be maintained during the following years as the financial crisis reduces the value of new investments.
Another significant trend is the increase of the founds allocated for IT insurance, currently estimated at 105
billion $ in 2009, 1% higher than in 2008.
The Celent study concludes that in 2009, due to the financial crisis, IT spending will diminish to the value of
31.8 billion $ in North America, respectively to the value of 24.8 billion $ in Europe. The corresponding decreases
compared to 2008 are 12.4% in North America, respectively 5% in Europe.
Due to the fact that companies will need to readjust the costs, IT spending will become a source of business
efficiency through an intensive usage. The need for productivity will maintain IT investments in the operational
fields, outsourcing the non-operational IT services. From the IT acquisitions perspective, the main differential factors
in 2009 will be the prices and the financing opportunities. Reorganizations will determine the abandon of
unnecessary projects.
The SOA (Service Oriented Architecture) and the resource virtualization strategies will become the main
methods for cutting costs. IT services will register high price pressures and will need well-founded acquisition
justification. Outsourcing will became a mid-term opportunity.
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III.1 IT sectors have been affected differently by the economic crisis
For the first time after many years, in 2008 it was registered a decrease in the volume and in the value of the
printers market , as reported on the website ITR MANAGER.COM (2009,). Laser printers
registered a loss of 6% in sales, while inkjet printers registered 9% loss in sales during 2008. In France, the printers
market decreased from 2.57 billon $ in 2007 to the value of 2.44 billion $ in 2008.
Because almost all of the enterprises and about 2/3 of home consumers in France are equipped with printing
solutions, actual printers acquisitions address in 80% of cases replacement and modernization issues. For this
purpose, Lexmark adopted the strategy of increasing client loyalty, by keeping prices at the quality level of their
products and to the brand prestige. The differentiation strategy adopted by Lexmark is based on the concept of Green
IT, laser cartridge recycling ,promoting their belief that printing quality is more important than printing quantity.
According to an Idate study, it is expected that the economic crisis would reduce investments in network
exploitation along with the deployment of future Internet on optical fiber. Even so, networking providers must
continue their investments in service reliability and security.
The Bouygues Group estimates that the right approach that could protect telecommunications providers from the
financial crisis effects resides in diversifications, exploiting foreign networks and consultancy services for
connecting client companies to international networks.
A field less affected by the crisis is the mobile communications, which are expected to grow with 6.3% in 2009
compared to 2008, considering the total number of connections and the revenues.
At the opposite pole we can find the component providers that registered a 10% decrease in sales in the last three
months of 2008. Companies of this IT branch face the crisis effects differently: while small entrepreneurship must
decrease their business, big companies take advantage of this conjuncture to increase their advance to the market
competitors. An important factor that allows IT companies to surmount the effect of the sales decrease is their
financial reserves. The component providers that will resist crisis are aware of their importance for the further
development of digital economy.
III.2. IT role shift within company
During crisis, information system managers become the innovation drivers and a source of economic growth for
the enterprise. Information systems face two phenomena nowadays: on one hand it is the rupture in operational
models for accelerating change and on the other hand it is the rupture caused by the Internet and the mobile
technologies. IT managers have now the opportunity to place IT near the operational branches as an activity that
creates values for the company, according to ITR MANAGER (2009, < www.itrmanager.com>). In order to change
the place of IT within the enterprise, IT managers should leave their role of managing an auxiliary company function
mainly concerned about costs, and should approach an innovation leader’s vision.
According to a study carried out by the Resources Global Professionals, 37% of IT managers drawn priorities
and allocated budgets for IT for 2009 similar to 2008. Another relevant trend indicates a decrease of investments in
ERP (Enterprise Resource Planning) solutions, accompanied by a harden of project selection criteria. Shared services
will continue to play an important role among priorities, while outsourcing will not.
The economic crisis may be a favorable circumstance for IT to become the main innovation factor within the
enterprise. IT can demonstrate decision makers how to improve customer loyalty by creating a collaborative platform
with them in order to define the products they wish.
Also, during economic crisis, IT can get rid of its status of costs generator obtained due to the failure of many IT
projects that raised mistrust among company managers.
This reorganization needs to substantially modify information systems objectives and offer them a foundation
severely supervised. From this point of view, the crisis has a positive effect because it accelerates the change process.
III.3. The economic crisis impact on IT labor
Due to the economic crisis, the labor offer diminished in the IT sector. An example is Cisco, a networking and
communications company, which fired 2678 employees in October 2008. At the same time, the company’s jobs offer
decreased from 1830 to 128.
According to a study carried out by Skills Survey in 2008, the last years suffered a lack in IT experts. This
conclusion resulted from the number of IT vacancies within companies. The economic crisis dims the recruitment
209

crisis brought by expert mobility. The fields that are most affected by the lack of IT personnel are: the programming
languages (C, Java, Visual Basic), Internet services (SOA, .Net, J2EE), networks and system administration.
From the IT managers’ perspective, a study carried out by CIO Connect predicts their involvement in company’s
reorganization. IT experts obtain a key role in the company’s commercial relationships and in projects’ startup,
thanks to their profound knowledge of the business.
As they come from a dynamic field, affected by continuous changes, IT managers can
efficiently implement the organizational change strategies within the enterprise by aligning it to
the new trends of resource virtualization and “cloud computing”.
IV. European Commission’s and banking institutions’ recommended strategies
Due to the high price pressures, IT solution providers will need to develop strong centralized corporative
business relationships because decisions move their center from the local divisions towards the central company.
Also sophisticated technical and functional features will loose importance when compared to the portability,
architectural integrability and price.
Small IT providers need to align their business with the big IT infrastructure providers and to the big
outsourcers.
The companies that will recover faster after the economic crisis will be the ones that adapted, experimented and
implemented new technologies, thus obtaining a significant advance in the competitive environment.
According to the European Commission communicate addressed to the European Parliament in 20.07.2005, �£�����¢��¢©��¤¦������������§(2005),the EU
IT strategy contained to main spending programs for the following period 2007-2013:
- the seventh framework for research, technical development and demonstration (RTD) that addressed
excellence promotion, knowledge and researchers’ free mobility, R&D regional clusters promotion. This framework
represents a large scale approach to the public-private partnership for technological initiatives’ implementation (such
as nanoelectronics, embedded systems)
- the framework for competitiveness and innovation ��¤����§�£� �¤�� ���������£�����¢�¢�¡��©�����¨�
The “ i2010- an information European society for economic growth and jobs” initiative aimed to support
technologies usage and production as a key factor for economic and social development.
According to Acad. Filip F.G. (2005,pp 33-34), priorities of the “i2010” initiative referred to:
- establishing a framework for IT market management : telecommunication frequency spectrum
control, laws for electronic commerce, providing security in the information society.
- an increase of investments in IT research with up to 80% in order to reduce the difference from USA,
Japan and China
- implementing the digital economy elements in the social life through e-government services, einclusion
and digital culture
On 20.04.2009, in Brussels, “the ICT boundaries movement ”[2] was presented as a new strategy for future
research and technology improvement in Europe.
focuses �§¢��¤������ ��¢¢¤�¤©¢�����§�§¢¤©��¤�¤¢�£���¤����¨��£¤�£�
The document
on the research strategy in the field of new technologies and FET (Future and Emerging
Technologies). The European Commission elaborated this document in times of economic crisis, as a solution for
companies to surmount it through investments in innovation for the future. It comes underlined the multidisciplinary
and collaborative approach, where recent discoveries in biologic systems with automatic organization should be
included in IT projects. Although this approach meets high risks, the document opposes them the potential high
revenues and the chance of revolutionary innovations.
This strategy recommends that companies should focus on research and innovation in order to increase the ICT
European industry competitiveness on a long term. Fields like quantum informatics, novel systems, IT systems
inspired from neurology, bi-directional brain-machine interfaces, collective intelligence, represent projects supported
by the FET strategy, bringing Europe the leader position in this research fields.
��£����¤¦���¢���£¤¢��©��¢©�¤�
210

In an economic crisis context, companies tend to take cautious action, to develop in-house investments and
priority research focused on short-time market needs. In order to defeat this trend that could slow the innovation
process, the European Commission recommends important investments both in public and private environment in
high risk research, presenting the benefits that could be obtained in the future.
Compared to the document of 2005, from the researchers’ perspective, the focus changes from the mobility
possibilities towards their freedom to explore unconventional new ideas and novel approaches. If research undergoes
radical change process, supported by the involvement of the business actors, European ICT will be able to take
advantage of the new market opportunities once the economic crisis is over.
The collaborative side within IT research is justified by the actual research framework, whose strong
fragmentation led to efforts’ replication, priorities’ divergence and opportunities underutilization. In order to achieve
this goal the European Commission suggests common research agendas based on shared vision “Joint Technology
Initiatives”. The failure probability of ITC research projects can be reduced through the partnership between
academia and business environment, along with frequent dissemination of FET projects aiming to reduce the gap
between research directions and their applicability.
A special place within the framework belongs to the small and medium enterprises (SMEs), who should be
helped to surmount the crisis as they represent the main beneficiary of the research results, according to the European
Commission. Those SMEs whose activity is driven by an intensive valuation of research products should be the first
supported because they can convert early research results into successful industrial stories.
Another important aspect underlined by the European Commission refers to the free sharing of results and
scientific knowledge. From the IT perspective, this recommendation can be materialized through standards
implementation and open source products.
The European Council is permanently preoccupied with IT evolution during crisis, so that its working agenda
systematically contains aspects regarding the IT strategy. All of the member states adhered to the long term solution
that implies the development of new technologies’ market, intensifying research and innovation, satellite-solutions
for the rural area. The European economic recovery plan includes large scale Internet projects of 5 billion euros,
allocated for both improving the existing IT infrastructure and for extending it in the rural areas.
In order to support the high risk research, the European Commission suggested doubling investments in this
field until 2015, both at a national level and in the EU. Even if the European Union provides a third of the world
scientific knowledge base, the IT research receives only a quarter of the world financing founds, according to
PublicTechnology.net ( 2009, < www.publictechnology.net> ).
The European Commission especially indicated the following research fields: the development of fault tolerant
systems that copies the human brain processes for coping with hardware failures, processing power faster than the
light speed that is able to process unlimited quantities of data of petabyte size ( 1 petabyte=1000 terrabyte).
Outstanding research results in high risk IT projects were awarded Nobel prizes : Albert Fert (France, 2007),
Peter Grunberg (Germany, 2007), Theodor Hansch (Germany, 2005).
The European Commission concluded that the new generation of IT systems should not be built in a top-down
“great visions” approach, because the financial collapse demonstrated the vulnerability of not mature complex
systems. It is preferable an organic development of technologies, supervised by both researchers, big companies and
SMEs in a collaborative environment.
Regarding the IT budget allocation, banks’ recommendation suggests that companies should not carry out a
strong savings policy and that firms should focus to identify those technological niches to help overcome the actual
difficulties. Contrary to the European Commission’s recommendations, banks suggest firms to invest in productive
ICT products that are profitable on a short term. Banks counsel their client companies not spending IT budgets on
technologies that have not yet reached maturity or that they do not master.
Along with high-risk innovative research promotion, the IT strategy designed by the European Commission
includes a shift in the IT investments from the telecommunications field towards software, as reported by Nemec-
Poncik, M. (2009).
Telecommunications have been considered a priority until late due to their high revenues and jobs offer , but
now the IT infrastructure needs to be exploited by an adequate and intensive software usage.
The Commissar for the information society Viviane Reding , appreciates that software impact is at least as
important as that of telecommunications from the usability point of view. After a projects contest , the group formed
by the institutes : Idate (France), Institut Fraunhofer ISI (CNRS Germany), London Economics (UK) became the
coordinator for a project that aims to promote software and IT services in Europe for a total amount of 424600 euro
during 15 months.
The group will be coordinated by INFSO (Information society and media) and the European Commission.
The goals of this research consortium include:
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-European IT actors mapping
-defining a set of IT regulations
-simulating scenarios for European software development incentives
The project’s agenda includes meetings with the main IT actors :
-developers ( including license vendors and maintenance providers)
-IT associated service societies (like Internet service providers)
-new services (outsourcing, data-centers, cloud-computing, Software-as-a-Service)
-online advertising websites (Google)
-professional associations, public institutions, end-users, financial specialists
In order to fulfill program objectives, the group will include elements like financing facilities, research
encouraging , SMEs’ notification of the possible benefits brought by an adequate IT equipping , inside its software
promoting project.
Conclusions
The present study enlightens the major changes and the major IT directions supported by the European Union
for the next years.
This research can become a guide for those Romanian companies that aim developing IT projects by accessing
European founds for financing , as well as for the Romanian IT market actors that need to align to the European
trends in this field.
This study might be developed in the future , by considering the findings of the European IT consortium
research in software development and, also , by considering the results of those directions that the European
Commission recommends within its innovation strategy.
Acknowledgements:
This article is a result of the project „Doctoral Program and PhD Students in the education
research and innovation triangle”. This project is co funded by European Social Fund through
The Sectorial Operational Programme for Human Resources Development 2007-2013,
coordinated by The Bucharest Academy of Economic Studies.
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��� �£�����¢��¢©��¤¦������������§ ��¤����§�£�
��¢�£���¢£�£¦�¢¤�¤©¢�� ��§��¤£¨���¢©�¤� ���£��£�� ��£¤��¤�¤ ��¢¢¤�¤©�����§�§¢¤©��¤�¤¢�£���¤����¨��£¤�£��§¢��¤ ��£����¤¦���¢���£¤¢��©��¢©�¤�
213

Resolving interdepartmental contradiction between production and
marketing
Ilinca Hotăran
assistant professor, PhD economics, Academy of Economic Studies, Bucharest, Romania,
ilincahotaran@yahoo.com
(Drucker, � ¢¤©¨£� �¤�
Peter Drucker used to say:
F. Peter 2006). The article is based on a fact: there are many concepts, generally considered
valid, adopted without being studied, that stay valid because of inertia, but their results can be dramatic.
The article highlights the perception of people about the interdependence between the departments of
production and marketing, which are regarded as components of any company. We realize that we are continuously
maintaining an incorrect relationship, and this may have adverse effects. The practical problem presented in the
article identifies a preconception: the production department must execute what is ordered by the department of
marketing, the demand resulting from the market research conducted. This article suggests, first, a generic problem
solving of resource allocation (mix of production) and on the other hand, the correction of the payment system,
which would harmonize the work of both departments. After presenting and analyzing several views, resulted from a
questionnaire, and after we conduct a numerical analysis based on solving the problem presented, we can illustrate
the proper relationship between the two departments. This relationship is necessary in order to support company
objectives.
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Keywords:
Production, marketing, interdependence, remuneration system
In the context of a global economic crisis in full momentum, all areas try to solve problems. What is in fact
the most affected segment? This segment is composed of units of production and market. What to do when the
people produce can not sell to the market? What to do when we offer something that the market no longer wants to
buy or no longer afford? If until now its have been accepted and validated a number of erroneous concepts, now is
the time when all of them should be reviewed and should be offered solutions. The relationship between the
department of production and marketing is erroneously understood, as I demonstrate in the following study. This
theory was false but passed from generation to generation until it was imposed as it’s true.
Marketers have a very important role, but can not do this alone, and they must know how to maintain good
relations with partners inside and outside the company, working together to enter in connection with customers
(Philip Kotler Gary Armstrong 2008). Without interdependence between departments and without communication
and an effective system of remuneration, the success of organizations is compromised.
How do we know when it needs changing and what to do in order to not follow the path which goes to this?
It’s easy: when you have a runny nose, you know that you are sick and you need aspirin. Unfortunately, we already
have a cold – you are in the middle of the phenomenon and you must exceed it fast, with costs as low as possible and
follows as less serious as possible. It's important to know what caused disorder, in order that the next time to avoid it.
Not to be desired, sometimes happens that a nose that runs to be a sign of old diseases, a chronic disease a deep body
malfunctions. Also in the case of bankruptcy of an organization, we can find a reason an ineffective remuneration as
a result of misunderstanding of the interdepartmental –relationship
I conducted a market study consisting of a segment of 50 subjects, who where directed the following
question: "what is the link between production department and marketing department, in your opinion?” Responses
may be included in the same sphere of explanations, as shown in Figure 1.
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9%
7%
33%
5%
Figure 1 Research 1.
Responses were as follows:
1. 46% of subjects responded in different forms of expression, the idea that "Marketers should promote and
sell what is produced in the department of production”
2. 33% believed that "There is a relationship in the double sense: Marketing provides market information,
the producer analyzes the demand, and then the marketer promotes the offer"
3. 9% offered other similar answers
4. 7% of subjects considered that "the manufacturer must fulfill with market demand”
5. only 5% believe that "Marketer's must realize which is the best sold product, and must request its
production"
The second case study provided responses to the question: "What is the main element that should be taken
into account in the setting of remuneration of marketing department?" (Figure 2).
21%
9%
Figure 2 Research 2
Results can be classified as follows:
1. 70% of subjects considered that the best paid should be "Those who sell the highest quantity of
production”, so that the system of remuneration must be reported as a selling percentage
2. 21% believe that the best paid must be "Those who identify the best the market demand"
3. only 9% believe that the most important is to pay "Those who promote and sell the more expensive
products and make a maximum profit"
Following the analysis conducted on these responses, we found that the general opinion is that an effective
marketer is that one which provides a more clear picture of the market, and then sells the most requested products.
In the context of economic crisis, a good entrepreneur must know first how to remunerate his employees.
Behavior is very strongly influenced by the manner in which their work is measured. The measurement of quality of
an activity is a segment difficult to explore, and an ineffective measurement system can produce only damage. So
what is the situation in present? Almost all managers of production department remunerate the marketing department
depending on the quantity sold. Interest is clearly going to sell those products more expensive in order to accumulate
the largest amounts, and receive a high percentage. It is an inefficient thinking, is a concept that can bring the
70%
46%
1
2
3
1
2
3
4
5
215

company on the verge of a bankruptcy. If the marketing department sells the most expensive products, and record
high revenue, why can still be inefficient for the company?
In order to demonstrate the set, I took a simple numerical example:
Resource acquired
5$ /unit
Resource C
12 min/unit
Resource A
15 min/unit
RM 1
20$ /unit
Product P
90$/unit
100 units/ week
Resource D
15 min/unit
Resource C
8 min/unit
Resource B
15 min/unit
RM 2
20$ /unit
Product Q
100$/unit
50 units/ week
Resource D
7 min/unit
Figure 3 Problem of production – example
Resource B
15 min/unit
Resource A
10 min/unit
RM 3
20$ /unit
This scheme shows the activity of an organization that sells two products: P and Q. The product P is sold by
90$/ unit and can be produced in a quantity of 100 units/ week, while Q is worth 100$/ unit and can be produced in a
quantity of 50 units/ week. After that, we can see the time needed by each resource. We must note that we need
resources RM1, RM2 and RM3, which is worth 20$, and we also need one resource that cost extra 5$.
We must also know that there is a single resource A, B, C and D, and that each can be used only
2400minutes/ week.
We must offer the perfect production that assures the maximum profit.
At first glance, if we trust the marketer to calculate what is effective to sell, he will make a simple
calculation based on the profit and cost of each product.
There are two situations. In the first version, he decided to sell the Q because it is more expensive and
therefore earnings will be higher. In the second situation, he calculates the profit margin for each product. This is
calculated by subtracting the costs from the price.
For the Q = 100 $ -20 $ -20 $ = 60 $
For the P = 90 $ -5 $ -20 $ -20 $ = 45 $
Hence, it will conclude that it is more efficient to produce and sell in the first place all the Q.
Continuing the calculations, suppose that we decided to produce 50 Q and P, and calculate the return. A sale
of 50 products Q, records revenue of 50*60 $ = 3000$. After we produce 50Q, we see that due to limited capacity of
resources we can produce only a few P. To produce 50 Q, resource B was used 50unit * 30min = 1500min.
Maximum capacity is 2400 minute. It appears that we can use this resource for 900minute, sufficient to produce
216

900min/15min = 60 units of product P. It follows that we have a profit of $ 3000 + 60unit * 45 $ = 5700$. If we
follow this decision of selling, after we reduce the operational costs, we conclude the month with loss of 300$.
It's effective to leave the selling decision to the marketing department? It's effective to sell what they ask
us? It is effective that the best paid employees are those who sell the most value? To answer these questions, we will
try to approach this issue through the production department.
The first calculation that will make a worker in the production department will be to calculate the narrow
place, the place for which demand is greater than it can provide. Thus, they calculate the minutes needed to produce
the two products in the maximum and they observe that the resource B exceeds its capacity of 2400 minutes:
resource A= 15min*100unit P +10min *50unit Q= 2000min
resource B= 15min*100unit P + (15min+15min) *50unit Q= 3000min
resource C= (12min+8min)*100unit P +8min *50unit Q= 2400min
resource D= 15min*100unit P +7min *50unit Q= 1850min
Knowing which is the narrow place, in order to establish the most appropriate production mix, the
department will first calculate the yield of the narrow place. Thus, resource B efficiency through product P = 45 $
(profit margin) / 15min (minutes necessary of resource B) = 3 $ / minute. Resource B efficiency through product Q is
= 60 $ / 30min = 2$ per minute. From here we deduce that it is more profitable to produce the P, and not the product
Q as it appear at first observation.
A staff of production department will determine that it will sell the entire quantity of the product P.
Following this production, it will remain available 900 minutes of resource B. This ensures the production of 30
products Q. So, the production mix most effective is composed of 100 units P and 30 units Q.
This problem of determining the mix of production through the narrow place is actually a linear
programming problem, which can be easily solved by introducing consistent data and variables and solving them
using the solver in Microsoft Office Excel.
RESOURCE P Q RAW MATERIALS
A 15 10 P Q
B 15 30 MP1 1 0
C 20 8 MP2 1 1
D 15 7 MP3 0 1
REPER 1 0
PRICE $90.00 $100.00 RAW MATERIALS PRICE
QUANTITY 100 30 MP1 $20.00

anumit produs, produs care are un randament scăzut al loclui îngust. Indiferent de cererea înregistrată, pentru
organizaŃie, activitatea se dovedeşte ineficientă. Apar pe piaŃă multe produse ce nu satisfac concomitent clientul şi
producătorul. Este de apreciat un angajat ce poate vinde capacitatea exactă a firmei. Trebuie să realizăm că în acastă
perioadă de criză nu putem vorbi despre o stopare a vânzărilor, ci despre o încetinire a acestora şi despre necesitatea
gestionării mai exacte a resurselor şi a producŃie, pentru a nu mai exista pierderi sau surplusuri, deoarece
organizaŃiile nu şi le vor mai putea permite.
Remarcăm tendinŃa generală a organizaŃiilor de a-şi remunera personalul în funcŃie de vânzări. Principala
problemă este deci faptul că nu ştiu să măsoare corect relaŃia de interdependenŃă dintre departamentul de producŃie şi
cel de marketing. În momentul în care este remunerat cel care înregistrează încasări maxime, acesta va fi stimulat să
se axeze către produsele mai scumpe, fără a conştientiza existenŃa marjei profitului sau a capacităŃii de producŃie. Am
demonstrat numeric faptul că, decizia de a vinde cel mai scump produs este o decizie ineficientă. În momentul in
care remunerez angajaŃii, această remunerare poate fi făcută doar prin prisma banilor existenŃi. Dacă vânzările
înregistrate depăşesc milioane de euro, dar costurile aferente producerii acelor bunuri sunt exorbitante, este ineficient
să ofer salarii în funcŃie de vânzări. Vom oferi practic bani care de fapt nu există, bani care au fost acoperiŃi şi
depăşiŃi de investiŃia realizată.
Care este deci relaŃia de interdependenŃă dintre departamentul de marketing şi cel de producŃie? Un sistem
de remunerare care să vizeze pe cei care pot vinde capacitatea maximă a organizaŃiei în condiŃii de eficienŃă.
Figure 4 Solving linear programming problem - solver
To solve the problem of the relationship of interdependence between production department and marketing
and to find a solution to the problems encountered on the market, as well as in the system of remuneration, we should
be able to answer three questions: What to change? What to change to? How to produce change? (Dr. Eliyahu M.
Goldratt, 1984). The answers are simple: change the behavior of sales department! You change in an efficient rapport
between the two departments! We produce the change in the light of the remuneration system.
Conclusions:
There are many negative consequences of a wrong approach of the inter-relationships. They were
propagated at the occurrence of the phenomenon of economic crisis. Thus, when the market stops buying, the
organizations remain with large stocks, and loss. In classical design, production department must do what marketing
asks.
In an ideal situation, the marketing department should be able to sell the highest company capacity at its
best price. In the context of crisis in particular, the pay should highlight the people who are able to undertake these
tasks. Assume that an employee in the marketing department promotes a product, that product has a low yield of the
narrow place. Regardless the demand, for the organization, the work proves ineffective. There are many products on
the market that do not meet the demands as well with the customer as with the manufacturer. It is appreciated that an
employee can sell the exact capacity of the company. You must realize that in this period of crisis we can not talk
about a completely stop in sales, but about a very slow action. Because of this they need more precise management
of resources and production, in order to not have any longer loss or surplus, as is the time that organizations can not
afford.
It is noted the general trend of organizations to pay their staff according to sales. The main problem is
therefore not knowing to properly measure the relationship of interdependence between production department and
marketing. When we will pay in the light of percentage, the agent will be stimulated to focus more on expensive
products, and not to realize the profit margin or production capacity. We demonstrated numerically that the decision
to sell the most expensive product is inefficient. When we pay the employees, that remuneration must be made only
through the existing money. If sales in excess of million, but costs of producing those goods are exorbitant, it is
inefficient to offer salaries based on sales. We provide practical money actually that can not overlap the investment
made.
What is then the interdependence relationship between the department of marketing and production? A
remuneration system that would promote those who sell full capacity of the organization in terms of efficiency.
Bibliography:
Drucker, F. Peter, 2006, ��¢��¤��������£��¦��¢��¤�¤����©�¤¢�©�£�, Editura Meteor Press
Goldratt, Eliyahu M., Cox, Jeff, 2004
Kotler, Philip, Armstrong, Gary, 2008, Editura Teora, Bucuresti
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218

CREDIT RISK MANAGEMENT
Oprea Ioana Aurelia
Academy of Economic Studies, Bucharest, Romania
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Keywords: banking system, credit risk, credit risk management, Basel I, Basel II
The banking system in Romania
Romanian banking system has known in the last decade a spectacular development, given the situation that
started in 1990, characterized by the existence of an excessive central banking, most functions being concentrated in
the banking operations of National Bank of Romania, only certain areas being covered by other specialized banks.
The stage of development of Romanian banking system is clearly determined by the overall economic
development in this field. It may be said that the Romanian banking system, although more advanced compared to
other economic branches, is in the transitional period, being necessary restructuring and development of both
quantitative, in terms of number of banking establishments as well as qualitative improvement, in the sense of
operating structures and modernization activities, implementation of modern products and services that bring
benefits both banks and their clients.
The image of the current Romanian banking system was first contoured mainly by the opening of the
Romanian economy, which resulted in adjustment of the operating requirements and international practices. Banks
have developed and adapted according to the bid requirements of the impact of exogenous factors on the real
economy, as well as the increasingly pressure from apparent competition in the financial - banking in Romania.
Bank Podium
The trend of banks in the recent years has been to increase the number of units to accelerate business
growth. Banks bets on improving efficiency, increasing the productivity of each employee, with smaller increases in
assets
Whole banking system assets were in 2008 of 79 billion Euros, up 25% compared to 2007. The year 2008
though brought major changes but in the classification of banks by total assets, the most important being the entry
into Top 3 of Volksbank Romania, which jumped 5 positions in relation to the previous year.
According to data provided by the central bank, Romanian Commercial Bank has the largest number of
actives (21.6% of total assets), each of the 588 actives generating units of over 28 million. With a total value of 16.6
billion Euros, the bank has registered a growth of only 1.8% over the value of assets held in 2007, the holdings being
calculated according to International Financial Reporting Standards (known as IFRS).
The bank located on the second place, by the number of assets, BRD - Groupe Société Générale, had the
fastest growth of assets, 10.7%, reaching a total value of 11.85 billion Euros, representing approximately 15.4 % of
assets held by banks on the Romanian market.
Even Raiffeisen registered a growth of 16% compared to 2007, reaching 4.57 billion Euros (5.9% of total
assets), third place in the classification of banks in 2008 is strongly attacked by Volksbank, whose assets have
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219

increased to the value of 4.5 billion Euros. On the fifth place, after Volksbank, is Transilvania Bank that amounts
5.68% of assets.
Depending on the obtained profit, BCR, ranking leader, has increased net profit after tax by 63.5% to 759.5
million RON. The spectacular growth of Commercial Bank profit has been exceeded by the earnings of smaller
banks, such as Bancpost (with assets of 5.3 billion Euros) and Romanian Bank, both obtaining a triple profit
compared to the one reported during the same period of 2007. Thus, Bancpost reached a profit of 23.5 million
Euros, and Romanian Bank, about 14 million Euros.
A large increase in profit also had the two banks of the rating, namely: BRD - Groupe Société Générale has
achieved a net profit of 515 million lei (140.3 million Euros), compared to 417.20 million lei, registering an increase
of 22.44% and Raiffeisen Bank a net profit of 74 million, 57% higher than in 2007, when profits reached 47.2
million.
To the other extreme, the banks that have seen a decrease in income, the percentages are equally amazing.
The largest decrease in profit was recorded in Libra Bank case, which recorded a net profit of 48 917 lei (13,328
Euros) 8.4 times lower compared to the same period in 2007 when the profit was 412 000 lei. Another sharp decrease
of profits held occurred in Carpatho Commercial Bank (BCC), whose earnings fell by 51.6% to 3.39 million lei,
according to the increase with 17.3% of bank assets by to 2.17 billion as the bank announced.
The list of the banks who have come at a loss in 2008 is completed by the CEC Bank, the player placed on
the ninth place, reported a cumulative net profit of 28 million lei (7.6 million), less than 40% by 2007. Another bank
that reported a contra performance is ING, with a net profit which fell to 1.92 billion, lower by 25%. though keeping
the place in the top 10.
The concept of bank risk
Bank risk is a phenomenon that occurs during the performance of banking operations causing negative
effects on those activities by impairing the quality of business, reducing profit or loss recording functionality with
impaired bank. This may be due to internal external bank causes or, generated by the competitive environment. The
concept of risk can also be defined as an undertaking that carries uncertainty because the probability of gain or loss.
In banking, risks assumption can be investigated for its potential future benefits, such as speculative
transactions on the financial markets or exchange, but also the unpredictable possible loss. In general, risk taking is
related to the investment that banks have in the economy. Generally, investment risk is the attribute of ownership and
thus its assumption becomes inevitable and justified the existence of banks.
As you know, banks are investing borrowed resources - which are a substantial multiple of their own
capital. Delayed recovery of invested resources causes a number of imbalances in the bank that can put different
forms and can feed each other. The present period is called, “period risk management” in banking system and risk
management is an extremely complex task and management of the bank. Usually, the assumption of risk entails
higher earnings.
Typology of risks
Banking practice has revealed in time a variety of risks. Acuity and their importance varies from period to
period depending on the state economy, transformations that occur in society and the existence and functionality of
the banking system, financial market volatility, etc.., therefore it became necessary to study the systematic banking
risk and their classification by different criteria.
In the case of banks the risk is induced by many causes, the biggest being considered the nature of banking
institution. The bank is faced with certain specific risks, and risk across all operators. Their classification leads to the
establishment of the distinction between general and specific risks.
General risk category includes:
- commercial risks (customer risk / product risk, market risk, commercial image);
- risks of goods and persons (risk accident, risk of crime);
- technical and operational risks (the risk of treatment operations on the risk related to
telecommunications);
- internal risk management (regulatory risk, the risk of ethics, strategic risk, operational risk of failure,
the risk management staff, the risk of technological dependence, risk communication).
Risks specific to banks include:
- financial risks (the risk of interest rate risk, liquidity risk on variable-income securities);
- risks of signature(customer risk, interbank risk, country risk).
220

In its activity, the bank is subject to risks on two plans: on the one hand the bank is liable to face the risks of
their own businesses, and on the other hand the bank functions as a specific intermediate in the process of movement
of capital and engages itself in the classical banking risks related partnership (counterparty risk).
Business risk arises from the fact that the bank is a business which employs people, capital, and deals with
risks which may result from gains or losses that are paid to employees input factors.
As a company, the bank faces a threefold risk:
- organization of the human connection - that risk brings to the fore the issue of quality management
- material - the risk of downtime or the risk of feather material works in the area and affect the proper
functioning of the banking operation
- ambienal environment - the rules of legal or tax and the negative influences they can exert on the bank
and its profits.
Counterparty risk (partnership): making their professional duties, the banks engaged relationships with
depositors and creditors and particularly with a lot of borrowers, holders of credit or other recipient of services
provided by the bank in this regard is committed different risks in specific partnership arising from loans related to
interest or exchange rates designated by different names, these words are the same risk - partner.
The main forms of counterparty risk are:
- credit risk - reveals the loss caused by breach of debtors of the options provided in the credit;
- clearance risk - is difficult for banks to procure the necessary resources to meet their commitments at a
time;
- interest rate risk - the risk is diminishing income bank (and so does profits), following the movement
of interest rates.
Another series of risks to which banks are subject to are:
- market risk refers to adverse deviations of market value, the position, during the minimum period
required to liquidate positions;
- the risk of exchange (exchange rate risk) can be defined as the risk of registering losses arising from
exchange rate developments. It is closely linked to interest rate risk
- the risk of bank solvency and bankruptcy risk is the risk of not have sufficient funds to cover possible
losses;
- operational risks are determined by the quality of bank assets, of the compartments that perform its
functions of the bank;
- technological risk is the type of risk associated with the quality and structure of supply of financial
products;
- new product risk expresses the likelihood of production new combined events: the demand located
below the anticipated level, the overrun cost, lack of professional managers, etc.;
- strategic risk - the probability of not choosing the right strategy in the given data;
- the risk of fraud - the likelihood of committing theft or acts contrary to the interests of the bank by its
employees;
- the risk of human resources - generated by the policy staff through recruitment, training, motivation
and maintenance specialists
- economic risks associated with economic development are the environment in which the bank and its
customers act.
Credit risk
For most of the universal bank credit remains the main active operation. Losses of banks caused by
bankruptcies of debtors are an integral part of the loan. Therefore, the provisions established by a bank to its
portfolio of loans is a measure of risk assumed by it. Credit risk is in a general formulation, the risk of losses caused
by breach of obligations of debtors provided by the credit. Late payment of interest or rates of events is also a risk.
In its final form the credit risk brings to the bank losses through the debtor bankruptcy, in which case the
losses are irretrievable.
Bankruptcy of a client is in itself a result of development that has degraded over time and whose initial or
subsequent stages, slower or faster, must be received and considered the best by any normal lender. So the bank, if
necessary, to prevent the credit risk should take preventive measures in time through a rigorous selection of
borrowers. One of the main measures to prevent risks in the banking field, namely, the delegation of decisions to
grant loans based on risk.
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The system allows:
- decentralization of decisions;
- personal liability in certain limits;
- collective responsibility by hiring commissions, committees and other groups formed as such and
entitled to decide on granting the loan, according to a graduated scale set.
Setting decisions on business loans is done by analyzing the complex and multilateral projects, through the
prism of economic efficiency and the possibility of providing the potential for loan repayment conditions.
On the other hand, analysis of the global financial situation in a significant period of time and in all its
details, and feedback based on professional motivation, behavior and moral credibility of the management team of
the company are expressive and binding. This is the case where it should be taken into account, in particular, the
elements about the asymmetry of information and moral hazard, elements which may be decisive in certain cases.
As regards the distribution of loans granted to the needs of their household, familial, modern technology for
granting focuses on using methods information on the methods of credit scoring systems, the special importance of
their selection criteria. They must be small in number but high in significance, to provide a differentiation in the
choice of potential customers.
The experience of developed countries underlines the need to develop the portfolio of information on all
bank customers and a base of information processing preferably as a main way to strengthen the bank's position in its
relations with customers, regardless of their size, and as a weapon in preventing and avoiding credit risk.
With a great continuity in the selection of clients, updating a database tracking allows the use of credit to
repayment, so you can see in advance any changes in assets and customer business development which would affect
the performance of contractual obligations of the debtor. Referral to appropriate amendments quality claims as
outlined in the management of the bank. It changes optical and working processes towards the client, which is
granted, necessarily, increased assistance to complete a stage which is expected to be transient in nature.
Since credit risk is the risk that must be fought, the state, by law and community banking and by precise
rules, creates a bank protection system (in its internal control over banks and external) to be permanently promoted.
Credit risk management
Given the importance that the banking sector stands for any national economy – the vital function that it
performs, namely: the payment system, credit system or the real economy of a vehicle of transmission of domestic
monetary policy - regulation and prudential supervision on a main component of the banking system becomes an
essential and at the same time an essential condition for ensuring and maintaining economic and financial health of a
country. The risk is found today in the banking business. Risk management is a key function of modern banks
focused on the market. The operators in international markets are faced with increased volatility and crisis with
repercussions that can quickly be transmitted from a financial center to another. In this case we talk about systemic
risk and the appearance is made in connection with a significant increase in the volume of transactions in financial
derivatives: swaps, futures, options.
Risk management should be understood broader, as an action, and restricted, individually with persons
responsible for overseeing risk. The risk must be regarded as a conglomerate of risks, often interrelated, in that it
may have common causes that one can trigger production of others. Therefore it is necessary to manage the bank's
overall risk. Objectives of risk management are embedded in the respective bank strategy and specific policies in
various areas of banking and are found in the organizational structures of the banks.
Managing global credit risk has two principles:
- division;
- limiting risks.
Credit risk division seeks to avoid concentration risk by diversifying investments and loans in particular.
Customer focus in a single area of activity is relatively dangerous for a universal bank: during the recession there
may be operational difficulties. In the sphere of private lending, portfolio diversification is primarily a territorial
diversification. Lending economic agents priors the importance of diversification and economic sector, and on the
foreign customers - geographic diversification. Banks in Romania propose a diversification of institutional portfolios
by developing of private sector lending.
On the other hand it may happen that large-sized businesses to need to exceed the credit limit reasonable
commitment of a single bank. Typically, where the state of the market allows, such firms use markets to provide
financing without intermediates. Another solution is to establish links banking pool. A banking pool is the total
banks of a single large enterprise, structured overview of an organized in a precise manner. This solution has the
disadvantage that dilutes the participating banks, but also the benefits of dividing of risks. The pool allows small
222

anks to finance large enterprises (operation less risky and less expensive) and has greater authority to impose a
recovery plan for the debtor in case of difficulty.
Limiting risk is of a normative and prescriptive. Each bank, depending on the quality of economic
environmental and development of its own parameters, ensures the limitation of risks in two ways: global and
analytic, as follows:
- setting a limit of its own, internal, its global commitment in risky but profitable, operations. It being
set a maximum limit for the risky share (investment) in total assets or relative to capital bank account;
- setting credits ceilings on debtor, group of borrowers, activity sectors or geographic areas to prevent
significant changes in the economic situation of these groups to negatively affect their exposure.
Very useful may be also the internal limits set on the basis of crisis scenarios, limits hard to define when the
crisis occurs, it is preferable that the bank be prepared for the event of a crisis, as it would seem unlikely in a given
context.
Depending on financial performance and debt service, loans are classified into five categories (Table 1).
Financial performance evaluation is done by each company and bank loans will be included in one of the
following categories:
- category A: very good performance, allowing payment at maturity of the debt, while maintaining the
performance;
- category B: good performance, but uncertainly of a medium prospect;
- category C: satisfactory financial performance with the tendency of worsening;
- category D: low financial performance and cyclical;
- category E: losses and the inability of repayment.
Debt service can be appreciated as:
- good: refunds with maximum delay of 7 days;
- weak: delays of up to 30 days;
- inadequately: late over 30 days.
Table 1. Classification of loans
Good Weak Inadequately
A Standard In observation Substandard
B In observation Substandard Doubtful
C Substandard Doubtful Loss
D Doubtful Loss Loss
E Loss Loss Loss
Basel I and Basel II impact in Romanian banks
Global legislation which establishes a global link between equity of financial institutions and the risks they
assume it is known as the Basel Agreement. Basel Committee on Banking Supervision introduced in 1988 the
Agreement concerning the Capital to cover risk. Banking business, practice risk management, the approaches of the
supervision and the financial markets have had significant changes since that year. Merits of the Agreement of 1988
were recognized in more than 100 countries, including the countries of central and eastern Europe introducing it in
the national banking systems.
Knowing what the importance to establish a solid legal and transparent framework can have on rendering
self confidence in the banking system, the international authorities submitted in June 1999 new proposals to improve
the Basel I rules, whereas in the latter there were some limitations on that assessing capital requirements based on
rigid methods of calculating the exposure to credit risk. Thus, the degree of credit risk granted for economic agents,
secured by mortgages, pledges, transfer debt etc. was 100%, regardless of their standing economic and financial, of
the strategic importance for the national economy, the credit rating for debt service, etc. On the other hand after
completion of Basel I, it was registered a development of methods and techniques of risk assessment used in parallel
by leading banks, who have created their own systems of risk assessment based on probabilistic methods, which
estimated losses potential for credit risk, market and operational.
Since the end of 2006 banks in the European Union have been aligned to the new Basel agreement (Basel
II), the agreement being applied to Romania when it joined the European Union. The need of Basel II occurred as a
result of improving the quality and complexity of assessing exposure to risk, including the introduction of
operational risk equation.
223

Thus, according to Basel II, risk exposures can be assessed both through standardized methods similar to
those currently existing under the Basel I, as well as through methods based on historical observations and methods
of mathematical probabilities. In this respect, it should be borne in mind that for more advanced methods, banks must
have historical databases (with information from several years) that underpin the forecasts indicator.
Subject to several conditions and minimum requirements on information disclosure, banks that have
received approval to use the approach based on internal assessment of credit risk (IRB) may rely on their own
internal estimates of risk components. Components of risk include: where the probability requirement (probability of
default - PD), loss caused by failure obligation (loss given default - LGD), exposure to risk of default (exposure at
default - EAD) and maturity (M). IRB approach is based on the measurement of unexpected losses (UL) and
expected losses (EL).
The new provision pays close attention to determining the need for adequate level of capitalization of
financial institutions as a function of aggregate level of risks to which they are exposed in the conduct of their
activities. However, these regulations sought, in equal measure, the fundamentals of a convergence in prudential
supervision, to ensure a transparent and competitive environment for all banks operating in the world. The ultimate
goal was ultimately represented by the improvement of bank policy risk management and adaptation to the financial
realities of a world characterized by a high degree of uncertainty and volatility of the particular capital flows.
This article is a result of the project „Doctoral Program and PhD Students in the education research
and innovation triangle”. This project is co funded by European Social Fund through The Sectorial Operational
Programme for Human Resources Development 2007-2013, coordinated by The Bucharest Academy of Economic
Studies.
Bibliography:
1. Basno Cezar, Dardac Nicolae (1999) – Riscurile bancare. CerinŃe prudenŃiale monitorizate,
Editura Didactică şi Pedagogică, Bucureşti;
2. Berea, Aurelian (2000) – Sistemul bancar românesc şi integrarea europreană, Editura Expert,
Bucureşti;
3. Berea, Aurelian, Stoica Emilia (2000) – Creditul bancar: coordonate actuale şi perspective,Editura
Expert, Bucureşti;
4. Bessis, Joel (2003)– Risk Management in Banking, Second Edition, John Wiley & Sons
Publishing House;
5. Brendea, Cosmin, Daeanu, Valentin (2001) – Riscul şi performanŃa creditului bancar în România,
Coresi Publishing House;
6. Dănilă, Nicolae, Berea, Aurelian (2000) – Management bancar: fundamente şi orientări, Editura
Economică, Bucureşti;
7. Dedu, Vasile (1997) – Management Bancar, Editura Didactică şi Pedagogică, Bucureşti;
8. Helian, D. (2004). Impactul aplicării Acordului Basel II asupra sistemului bancar românesc;
9. NiŃu, Ion (2000)– Managementul riscului bancar, Expert Publishing House;
10. Roxin, LuminiŃa (1997) – Gestiunea riscurilor bancare, Editura Didactică şi Pedagogică;
11. Santomero, A. (1997). Commercial Bank Risk Management: an Analysis of the Process, Wharton
Financial Institutions Center;
12. Sinkey, J. (2002). Commercial Bank Financial Management, 5th Edition, Prentice-Hall;
13. BNR – Norme metodologice;
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14. www.monitoruloficial.ro;
15. www.bankingnews.ro.
225

THE CONNOTATIONS OF ONLINE MARKETING TOOLS
OVER CRM RELATED ACTIVITIES IN MODERN ECONOMY
Carmen Pantea
Academy of Economic Studies Bucharest, Romania
pantea.carmen@gmail.com ��¤����£���¢�©����¨£�¤�©¢£¤�£�����¨�
Abstract: ©�����£��¨£�����¤£��¨£�©�£�����§�£����¤£��¤¢�¤�©����¤�¤���¨�� ��¤����©�£¤��£��¢�¤¢��©��¢©����©£��©£� �§����¤¢��£��¢¤©�¤��¤£¢¨� ©¨� �©�¡¤¨¨©����¤�¤¨��¨����¤¢�¢¤¨©�£����£��¡£����¤�� ¦�£�����£�¤¢¤���©���¤����©� �¡¤��£�¤£���¤�£¢��©����¤����£���¢�©����¨£�¤�©¢£¤�£�����¨�©¨¨��¤ ��¤�§¢���¤����£��©�¤¢£����¢¤�¤��©�����¨©��£�
Key words: online marketing tools, customer relationship management, email marketing, online
advertising, blog, social networks, search engine optimization
JEL classification: M31 - Marketing §��¤¢��©����¤£¢�¨£¤�������¤¨£�¤¢�¤¢���©¨£�¤��¤¢�£�¤�©����£¤¤���¤£¢�¨£¤����
1. Introduction
A few years ago, the companies were wondering about the role of the internet regarding the performance of
their business, and today, they do not do without it. Even though initially, business people have considered the
internet to be just an opportunity for saving money, now the internet targets the communication management process
with regard to improving the efficiency of the transactions, adding value and increasing clients’ implication (Berton
et al, 2003).
The internet should be considered in the context of commercial and social progress. It should be used not
only for selling, but also for creating the marketing mix. In this way, it should be more than just a place where the
image and the company’s products are presented; it should change the occasional visitors into potential clients, and
moreover, to persuade them to become active clients (Constantinides, 2002). So, the online marketing tools are not
used just for advertising to a passive public, but they refer also to building and participating in commercial and social
communities.
In the traditional marketing communication model, there is just a communication way, taking into
consideration homogeneous consumers, without the interaction opportunity. In the new marketing communication,
the companies can interact with the clients and can deliver them content. For this reason it is necessary to redesign
the marketing concept and its functionalities for including the consumer in the marketing process and it is also
needed the redesign of activities in order to become adapted to the internet. Therefore, it is very important for the
companies to know the environment where their consumers interact, so that they can become active agents in the
interactive process and an integrant element of the company’s commercial strategy (Hoffman, Novak, 1996). Faigin
(1997) assumes that a coordinated and coherent strategy will bring the consumers on the internet.
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2. Literature review
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The opportunities offered by the internet as a marketing instrument have been deeply analyzed (Cronin
1996; Chaffey, 2004) but there are still few researches about the efficiency and their impact. The results of these
instruments should not be measured only at the audience’s dimensions, as many authors did (Lichtenthal, Eliaz,
2003; Ellsworth, 1995; Glossbrenner et al., 1995), but they should take into consideration the specific objectives of
the business, which can vary from company to company. The websites contribute to achieving the objectives, in this
case, there should be evaluated their efficiency. If a website has a high commercial potential, this potential can be
difficulty attained except the case when the objectives are clearly stated and integrated in the company’s strategy
(Porter, 2001; Strauss, Frost, 2001). Lichtenthal and Eliaz (2003) consider that the internet is the only way to achieve
all the communication objectives. Moreover, its performance can be correlated with the investments in this field.
The appearance of the internet, as an environment and as a support platform for commerce, has brought
major changes also in the way companies compete. The organizations that do not take advantage of this technology
and the instruments that appeared together with it are seen as not offering added value to the services delivered to
their clients, so they incur a competitive disadvantage. Obviously, the internet offers the companies different
instruments that they can use in order to adapt to the clients’ diverse needs and which could be used in order to
obtain competitive advantage from the economic and / or strategic point of view. In return, companies that use the
technology (having at least a corporate website where the products are presented), are seen as being in a continuous
fight to satisfy the current needs of their clients. These companies incur low costs and so they can focus their efforts
to delivering high quality products. This general tendency has created pressures on those businesses that use only the
traditional means and instruments. Consequently, the use of online marketing tools is imperious in managing
customer relationships, because it helps the companies to better understand their clients, to deliver personalized
services and to retain them.
For understanding the role played by the use of digital instruments in managing customer relationships,
other researchers have treated this problem by examining the way the internet is used by the companies in their
relations with the clients and online communities (Adam et al., 2002). Boyle (2001) has reported that the usage of
internet, as a substitute of the traditional instruments employed by the companies in their relationship with the
customers, has increased. In addition, Bradshaw and Brash (2001) have highlighted the fact that organizations
become more efficient in managing relations if using the internet. The enterprises need to improve their capacity of
serving their best clients and transform them into loyal customers as well as identifying and attracting potential
clients, for sustaining a profitable increase. Even though, there is a continuous need to examine, empirically, the
impact of using the internet in the different dimensions of the customer relationship management – the understanding
of customer’s behavior, offering personalized services and gaining its loyalty.
Previous research have examined the usage of digital instruments in managing customer relations, both in
SMEs and large companies (Dutta, Segev, 1999; Hamill, Gregory, 1998; McGowan et al., 2001), in the field of
services and B2B (Berthon et al., 1999), in different geographic regions (Adam et al, 2002; Dutta and Segev 1999).
Although the web has become an integrant in all marketing activities done by the companies, it is obvious
that the offline strategies designed by companies are not always reflected in the online world, being that this
environment has unique characteristics who ask for special theoretical and practical considerations. The way in
which the organizations present themselves on the internet and manage their activities using online marketing tools,
vary depending on the strategy and the global objectives of the company.
As a consequence of the fact that the number of website visitors have rapidly increased, the competition
among the organizations has intensified. The companies are confronted with difficulties in differentiating themselves
from competition and gaining new clients. Therefore, companies rethink and redesign new methods and means to
increase sales and profits. Relationship marketing and the accent on customer relationship management is not a new
phenomenon. This perspective has been discussed in the marketing literature in the past decades. The concept of
relationship marketing was introduced in the services marketing by Leonard Berry in 1983. On the services market
and B2B, where there is a limited number of clients and / or where the interactions with the clients constantly appear,
it is easier to preserve relationships. When a company is presented on more markets, the relation is more difficult to
be obtained, but it can be profitable and is definitely possible with the use of digital tools.
So the relationships with the clients become determined by the success of the business since loyal clients
tend to become less sensitive to price changes and more attentive to the relationship developed with the companies.
Reichheld (1996) highlighted that profits can grow as a result of customer retention. That is why, companies that do
not focus on managing customer relations, risk to lose a huge number of clients from the internet, in the favor of their
competitors.
The online marketing tools, for instance the email, website, social networks, blogs etc., and generally the
internet, are effective, efficient and interactive means to obtain useful information about the potential clients. For
organizations, no matter the methods used for collecting information, they represent knowledge about the customers’
227

ehavior. As a consequence, companies can offer personalized products to respond to the individual needs of their
clients.
Galbreath (2002) illustrates the fact that processed information is used to create a better user experience, for
instance personalization, which can lead to increased trust and loyalty towards company and its products.
It is very important to understand the needs and wants of each person, as well as to know and respect his
preferences. Dolan (2001) noted that clients’ preferences represent the heart of marketing. Generally, when analyzing
customer’s behavior, the most important aspect studied is the way the consumers make buying decisions (eg. the
process by which the get to choose that specific product / service, not another one).
Such, companies need to explore any source they have at hand for obtaining information about clients,
which will give them the opportunity to maximize sales and profit. Apparently, the internet is an efficient place to
collect information (Boyle 2001; Hoffman, Novak 1996). With the instruments used, the internet becomes a meeting
place between companies and clients, in the virtual space, and which collects information about them. Arnott et al.
(2002) suggests that the interactivity offered by online instruments increases the capacity of the companies to
understand customers’ behavior and helps them to offer them the services they want and need. Therefore, using
online marketing tools has a positive impact in understanding customers’ behavior.
There should be taken into consideration that digital instruments offer the opportunity to personalize both
the messages sent to potential clients, but also the products and / or services delivered. Gummesson (1996) noted the
importance of using online marketing tools in building and managing business relations. An efficient usage of these
relationship marketing tools assumes a step forward from attracting new clients to developing, and preserving
present relations – increasing consumers’ loyalty.
3. Online marketing tools used in customer relationship management
Online marketing is done by those individuals or organizations which exchange ideas and offers by using
computers, online networks and interactive media, in order to reach their marketing objectives. (Vegheş, Pantea,
2008).
The most important online marketing tools that can be used by companies for attracting, maintaining and
developing profitable long term relationships with their clients are: websites (where there are included also those
tools used for attracting the customers to the company’s website: online ads, sponsored links, advergaming etc.),
email marketing campaigns, newsletters, blogs, RSS feed, forums, online discussion groups and instant messaging.
Next, there are presented each of the tools mentioned above and the way they can be used for achieving the
marketing purpose settled – relating with clients.
is
3.1 Website
A in its essence a marketing tool which only costs its owner once, and it stays in people’s
attention for an unlimited period of time. Its objective is to support the promotional activities, being similar to a
billboard where potential visitors can find details about the company, its products/services, contact details etc. This
type of information dissemination saves time for the company, but also for the clients, offering a complete and free
instant access to the company and its products.
Nowadays, most consumers have come to consider a successful company, a company that owns a website.
The lack of a website can make the youngsters categorize the company as an unprofessional and inexperienced one.
If the website is designed so that it reflects the image the company owner wants, it will attract new clients and it will
help maintaining the old ones. In addition, if a customer heard about a company and wants to learn more about it and
does not find a website, it is very probable to get to a competitor’s website.
A website offers the possibility of making business 24 hours a day, 7 days a week because the information
is available and permanently accessible. Through the website, companies can keep in touch with its clients, inform
them about new promotions, new products / services, special events that the company involves in.
Online marketing campaigns offer not only the opportunity of precisely selecting the communication target,
but it does also save time and money. Their objective is to increase traffic to the website, which leads to increase in
sales and company’s profits.
Next, there will be presented the most appreciated online marketing tools used in order to attract potential
clients to company’s website:
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The email represents the result of the natural evolution of the mailing. Email marketing is used in order to
inform potential consumers and current clients by the use of the internet. The email or the electronic mail is one of
228

the most efficient tools from the direct marketing’s arsenal on the internet, from the investment’s profitability point
of view. The results regarded by an email marketing campaign is achieving sales from 5 to 15% of the cases, as
compared with 0,5 to 2% in the case of the banners.
There are two forms of email communications: ��¤����§�¤¢: due to the presence on the companies’ websites of a
contact page, the organizations offer their potential and / or current clients the opportunity to get in touch with them.
The client sends an email where he explains the problems or complaints that he has concerning the product he has
bought, or asks for details regarding a certain product. The company will answer also by email in the shortest time.
The email is the cheapest web solution of the customer relationship management strategy (eCRM). Its main
disadvantage is that it does not offer the opportunity to communicate with the client in real time.
An important aspect is related to the companies’ capacity to manage their clients’ replies to emails. It is
imposed that when receiving the message, an email of confirmation to be sent immediately, and the clients’
requirements to be redirected to the responsible departments in the organization.
:
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the email is a valuable tool for sending short messages that
call for action on behalf of the recipient. The companies usually develop email marketing campaign with the purpose
of maintaining current customers, build buyer’s loyalty, improve the relationship between the client and the seller,
announce or remind the clients about different offers or special events they can attend. In order for such a campaign
to be efficient, the messages should be addressed to a target, so that the rate of response is high. Usually there are
inserted links to a “landing page” (a web page where it is driven the person who click on the link inserted in the
email, which offers additional information concerning the products presented in the message). The email is the most
spread internet application, which can be used strategically in direct marketing reasoning and in the bilateral
communication with the target.
The main advantages of email communication are:
- the informational content and the relationship sender - recipient – the beneficiary can receive complex
information (images, audio, video files or documents) rapidly and conveniently. He can read them whenever he
wants, without incurring problems such as when using phone communication, where even though there is fast
communication, there can be the case when the interlocutor can not talk at the moment of calling or does not
understand well the message due to the circumstances he finds himself in. It can also be attached a short presentation
movie where the product is presented and its features or there can be added representative pictures about the object
of the direct email campaign;
- in most cases, the feedback is more consistent than phone calls or mailing, because the interlocutor can
reply whenever he wants, however he wants and whatever he wants;
- probably the costs are the most important advantages to be taken into consideration, both by the
organization and the beneficiary of the communication. They are lower then any other existing communication mean.
That is why the beneficiary of the communication will have the reasoning to answer, since in most of the cases, he
does not incur any additional costs;
- segmentation and targeting – both strategic components receive a special significance when using the
email. Thus, the campaigns can be easily customized according to the consumers’ particularities;
- the results of an email marketing campaign can be easily measured with by using special software, which
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generate reports based on the number of emails opened by the recipients. When the company inserts links to the
landing page, the soft reports how many times those links were accessed. The main advantages of including links in
the sent message are, on one hand the increase of traffic on the website, as well as the registered persons.
The electronic message should be developed starting from the current positioning of the organization
(including its products / services / brands) and to materialize intro an attractive offer for potential consumers
(Vegheş, 2003).
The email is a valuable marketing tool for conveying short, simple messages that call for action on behalf of
the recipient. Usually companies develop email marketing campaigns for attracting new customers, persuading the
existing customers to buy again, encourage customer loyalty, announce or remind about special offers or events etc.
For an email marketing campaign to be efficient, it is wanted a greater number of responses from those in the target.
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An online ad is somewhat similar to a traditional advertisement we would see in a printed publication such
as a newspaper or magazine, but it has the added ability to bring a potential customer directly to the advertiser's
website (Boyle, 2001). An online ad also differs from a print ad in its dynamic capability. It stays in one place on a
page, like a magazine ad, but it can present multiple images, include animation and change appearance in a number
of other ways; moreover, depending on the target, companies can choose which online ads to be seen by those
229

targeted (eg. only persons from Bihor county).
The technology used for delivering the online ads is called AdServer. According to its performances there
can be obtained precious information regarding the number of page views, the click rate or there can be designed
campaigns based on geographical criteria or the frequency page views / user.
The online ads can be classified according to: ���¤�¤�£��– there are static, dynamic (animated) and interactive ads; ���¤�£�¤��£���IAB (Interactive Advertising Bureau) the authority in this field of activity, has defined
some standard formats called (http://www.iab.net/standards/adunits.asp) and the main
categories are: banners and buttons; skyscrapers; rectangles and pop-ups: ��©��¤¢©��: these are rectangular advertisements which generally appear horizontally at the top of
the web page. Some are static while others use graphics, video and audio to capture the visitors’ attention. While this
style of ad is popular, many web users are so familiar with them that they are beginning to ignore them. As a result,
advertisers have started creating variations on the banner ads, in which some will automatically fill your web page
when you first open it and then shrink back to normal size. These types are banner ads are proving more successful
with higher click-through rates than those that remain one size. Still, banner ads account for more 54% of online
advertising revenues; ��§����©�: A graphical advertising unit, smaller than a banner ad and square or rectangular in
shape. Whereas banners are often placed at the top or bottom of a page, buttons are often placed towards the middle
of a page on the left
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or right sides; ��¢©�¤¢©���: these are similar to banner ads except that they are positioned
vertically down the side of the web page which allows them to be bigger - often be 2 - 3 times larger than a banner
ad. Sidebar ads are considered more effective than banner ads because they are bigger, and the ad does not disappear
so quickly when the user scrolls down the web page. As a result, more people will click on a sidebar ad which means
advertisers will pay more for sidebar ads than banner ads; �����§�©��: these advertisements appear in their own, small browser window. Many web users
consider these types of advertising extremely irritating because the ad obscures the web page they are trying to read,
forcing them to either close or move the window out of the way. However, more users click on pop-up ads than
banner ads, but many access them by mistake or with the desire of closing it as soon as possible. ��£�¤�©¢©����£
£��¤¢��£�£©¨©��. Other formats include:
Online ads are recommended to be used mostly in the campaigns designed to increase awareness due
to the low rates of response (about 1% clicks) the success being influenced by factors such as: the creative message
used; the period and the duration of the campaign; the formats of the online ads used; the location of the ads in the
websites; the rate of loading of the website with other campaigns.
The main reasons for not using online ads are: the phenomenon of (the spaces from a
website where the banners are placed become invisible, so the user ignores them), the possibility of being blocked by
AdBlocker (software that blocks the appearance in the browser of the flash format in which the ads are designed). £��£�£�¨¤�©��¤¢� ©���§�£�©��©���¢ ©����£�£ ¤��¤��£�¨¤©����¨�©�£��©����©�¤�¤¤¨©����¤¢¨©
�������¤©¢�����£�¤���£�£�©�£�������
Daily, there are millions of people who use search engines in order to find information. The majority of
them do not go further than the first page of results, and most of them do not go further than the third page of results
retrieved by the search engine.
Search engine optimization is the process of improving the volume and the quality of traffic towards a
webpage, from search engines. It has a more technical nature, combining programming elements with persuasion,
selling and passion to solve puzzles in a written form capable to maintain the wanted level of turnover and in the
same time being in the top of the retrieved results. It is not just a technical process, nor does it belong to the
copyright or links or registration in the search engines, but it is a complex combination of more than one hundred
variables in a website’s composition. Its obtaining is rather difficult without the methodology and the required tools.
In order to succeed in using search engines as online marketing tools, the point of interest should not be
placed on how these search engines work, but rather on the mentality of the one who is searching – the potential
buyer. Marketers and website administrators should find key words, then to correlate them with the content of the
pages, then to make sure that the page where the visitors are redirected is appropriate, and of course, to make sure
that the visitors are buying a product or do the desired action. It is nice to see that the website has increased traffic, it
is more wanted to attract clients, but of course it is ideal to succeed in combining those two (what keyword phrases
result in terms of most traffic).
Some optimization processed of search engines implies the optimization of the source of the website, the
presentation and structure, without making notable changes for the users, for instance the implementation of a
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hierarchical structure of the website, including a unique content that can be easily indexed and extracted by search
engines when retrieved by users.
Search engine optimization is a last generation weapon that the marketers can use, which incurs low costs
and high results.
Marketers bet on key words expected to be more frequently used by the target when searching for those
products and services that they want. For instance, if the product wanted to be sold is represented by red roses, of
course the key words used should be “red roses”, and hoping that the potential client would type these words; he will
see the company’s link and will get to its website. �����������¢¤�¨£�£�
This type of advertising is called sponsored link or contextual advertising and it usually appears in the right
or sometimes above the results retrieved by the search engines. The organization only pays when the user accesses
the sponsored link.
Many of the companies present on the internet are using games for attracting clients, exposing them
messages about the company’s brand and in the same time collecting data about these potential clients, registering
them in a database. This strategy that involves the combination of advertising and marketing elements, in an online
game, is known as advergaming.
Companies are spending from thousands of euro (for a two-dimensional Java-base game) to hundreds of
thousands of euro (for a 3-D game), because it is considered that these games will bring gains in what positioning is
concerned. ���������¤¢�©�£��
All online marketing tools presented above have as main objective to direct the visitor to the company’s
website and to determine him to become the client of that company. Next, there are presented those online
instruments that companies can use in order to maintain and develop long term relationships with their clients:
3.2 E-newsletter
The newsletter is a periodical message sent online to the company’s database of subscribers who have
previously agreed to receive it. It usually contains one or more of the following tools: an article / interview /
editorial, case study, news, special offers / promotions, new projects / up-coming events, contests, polls or other
resources.
The difference between the email marketing and newsletter is that the email marketing calls for immediate
action from the recipient while the newsletters are meant to develop a long-term relationship between the sender and
recipient. Newsletters are intended to offer the readers added value; they are more personal and informative.
When planning the online marketing strategy, these instruments should not be treated separately. For
instance, the newsletters sent by email can be promoted on the website and vice-versa. Combining different
instruments offered by the internet in a single strategy can improve the rate of its success.
Before setting up a newsletter campaign intended to attract or increase loyalty of customers there should be
clarified the following aspects: (potential and company’s existing clients);
(relevant content, information on how the products or services can be used, the field of activity);
(it should be correlated with the information sent and the
recipients’ expectations); (eg. the page
where they can find out the results of the case study presented in the message); ��¤��¡¤��£�¤�����¤�©��©£��(brand (the emails can be in text format – smaller dimensions – or HTML, which offer a plus in design and
paging); by potential clients, increase customer loyalty or sales;
secondary objectives such as increase the number of subscribers, the rate of opening the message, click-rate on the ��¤�©��©£�� ��¤�¤����¨�� ��¤¨©��£���©�¤¡�¤¢¤��¤����§�¤¢����¤�£¢¤��¤����£����¢¤£���¢�©�£�� ���¤��£����¤�¤¡�¨¤��¤¢ �¤�¤¢�£�¤��¤�¢¤¢§¤�� �¤¡�¨¤��¤¢ ��¤���£�����¤ �¤�£�£����¤�©¢�¤�
links).
recognition
The technological solution used in designing the newsletters should allow personalized communication, as
well as a database that registers other information besides the email address of the person.
3.3 Online community
People tend to believe that each company has only one goal, the gain and this is what they see behind any
promotional or informational message. This is the reason why companies should continuously search for new
resources of gaining the trust and legitimacy of the consumers.
§�¤���¢£��¨¤�¤��£��
231

Customers buy from people they know and they trust. Clients trust the brand firstly because they trust the
managers of the company, its specialists and / or its employees. That is why the companies should treat very
carefully the public image of its employees. An online community has as main objective to get into contact persons
with common concerns.
A blog (web log) is a user-generated website where entries are displayed in a reverse chronological order.
Even though sometimes the term is explained as “online journal”, the blog does not necessarily imply a low quality
of content and not even an informal or semi-formal tone. In return, when it is used for personal branding of the
management of the company or of its employees, it is a very good instrument to highlight their personality.
People can communicate on the blog personal experiences, opinions about important events, links or images
with things that kept their attention. In addition, the blog permits the owner to receive feedback from the readers; to
be quoted on other blogs etc. In the last years, more and more managers and experts have designed blogs and more
and more companies use this method to communicate with theirs stakeholders.
Micro-blogging is a Web 2.0 tool, which allows sending short messages or links to those interested, and the
best example is Twitter.com, which is similar to a chat room, where companies can send short messages to potential
clients, or can connect with them, by using this service. This instrument allows companies to see what the public
states about the organization and to offer additional information to the clients, to solve different problems or clarify
problems.
RSS feeds (Really Simple Syndication), also called web feeds, are a mean for sending content, which, if
handled adequately it can create online traffic due to the high rate of refresh of information. News websites, online
personal blogs and companies can include RSS content such as: news about the company or product, vacancies,
information regarding new posts on the site, etc.
�������¨��¡����¤¤�
Social networks are dynamic systems which nurture relationships between people through the content they
create and share. Their rate of usage has increased, not only in Romania, but also world-wide. As a consequence, this
is involuntarily forcing advertisers and marketers to rapidly evolve customer relationship through social networks.
Both blogs and social networks have developed due to the individual needs to tell their story and share their
feelings and opinions. These websites offer the opportunity to become acquaintances and preserve friendships in the
virtual environment. There has come to more than 150 websites of this kind, most important being: facebook.com,
myspace.com, flixter.com, LinkedIn, hi5.com, tagged.com, etc. but also classmates.com, myyearbook.com,
blackplanet, asiantown.com etc., each having its specific audience.
Brian Solis points out the fact that social networks such as facebook, myspace, twitter, yelp and other online
communities should transform online marketing into an opportunity to engage and interact with customers. Social
networks have become an obsession for branding, advertising, marketing, and communications between experts and
professionals worldwide. Many businesses are building social channels to broadcast messages in a one to many, topdown
practice that not only prevents relationship building, but impedes any hope of cultivating communities and
empowering customer relationship (Solis, 2009).
Moreover, John Burbank, the CEO of the Nielsen Company is convinced that social networking has become
a fundamental part of the world and "will continue to alter not just the global online landscape, but the consumer
experience at large." (Burbank, 2009). The organization he represents estimates that on a global basis, at every 11
minutes, one minute can be attributed to social networks, blogging websites, or other types of online community
activities.
Marketers from organizations should learn how to use this instrument, firstly in order to create a corporate
profile and then to interact with the other members of the network, to establish relationships.
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One of the best ways to generate traffic online towards the company’s website or personal blog is to
participate in the discussions within online communities. These communities can be discussion groups, some of them
by email (eg. Yahoo groups) or forums, made available by the company on its website. Most of the discussions and
debates are related to topics such as important problems of different industries, which call for the participant’s
reaction. This is the reason why online discussions are excellent opportunities to help and offer added value to a
target (potential clients, partners, journalists, etc.). Because the members of these groups are always interested to
know their interlocutors and it is desired to know the person who comments on forums. This is the reason for
including in the messages posted a link to own website or blog.
232

A discussion group or a forum allows the participants to debate on subjects they are directly interested in. It
is assumed there are more than 10 million people actively involved in online discussions and that there are more than
15.000 different topics they talk about. The purpose for using these tools is to attract new customers, communicate
with existing ones, market research, improve brand awareness.
For attracting potential clients to a forum or a discussion group it is necessary firstly to identify a group that
corresponds to that product’s or service’s target. The messages sent should be supervised in order to familiarize with
the different topics and to the rules imposed. In the next stage, there are sent messages by the company, short ones
and they should begin with a description of a way it can help the members of the group. It is important to monitor
these forum and online groups in order to prevent the dissemination of false information about the company.
3.4. Instant messaging
The usage of the interactive dialog window (chat) as a direct communication instrument has as a purpose
getting in touch with customers, for answering questions related to the products bought, instructions for using the
products, but also for answering potential customers to different concerns regarding the products or services offered.
The great advantage offered by this tool is the facility of real-time communication to a representative of the
company.
This is an application that eases direct communication between clients and customers, as a response to their
desires to introduce the human element in ecommerce. By offering the opportunity to the consumers to ask for details
about the product bought, by directly answering to their questions, companies generate an increase in the level of
satisfaction of the users of this application.
Due to online businesses’ desire to be closer to their clients, using instant messaging is more than welcome.
Most of the ecommerce companies have introduced in their digital shop the facility to connect directly to one of the
company’s consultants, by applications such as chat rooms or by using the well-know Yahoo Messenger to
communicate with the clients.
4. Conclusions
For one thing, the internet is used because people need to be informed – so companies should deliver
accurate information to those interested – and on the other side, due to people’s need to communicate. This
interaction need should be explored by the company by using the online marketing tools they have at their hand, for
settling and consolidating long term relationships.
More and more people are using the internet for buying products and services. However, it is not at all
recommended to use the website as a raw selling mean, just like a catalogue or a brochure. If the online marketing
strategy consists only of exposing and selling products, the competition will be given only at the level of prices.
Internet users can effortless search and compare prices in order to find the cheapest products available.
The success of the strategy depends on the ability to correlate own purposes and interests to that of the
public through valuable information and interaction, and technically by using those online communication tools
desired by (potential) clients.
The paper presents theoretical aspects concerning the main online marketing tools companies have at their
hand for relating to their clients. This paper represents only the theoretical basis and it will be followed by an
exploratory research where there are going to be analyzed the perceptions, attitudes and preferences of the internet
users regarding how the companies employ these digital instruments for developing relationships.
To sum up, the internet should not only be a place where the company presents itself and its products, but a
means of changing occasional visitors into potential clients, and moreover to transform them into active customers.
Using of the online marketing tools is imperious in managing customer relations because it helps the companies to
better understand their clients, to deliver personalized services and to keep their clients.
This article is a result of the project “Doctoral Program and PhD Students in the education research and
innovation triangle”. This project is co funded by European Social Fund through The Sectorial Operational
Programme for Human Resources Development 2007-2013, coordinated by The Bucharest Academy of Economic
Studies.
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