Wyższa Szkoła Finansów i Prawa w Bielsku-Białej...Bielsko-Biała School of Finance and Law...

Bielsko-Biała School of Finance and Law Wyższa Szkoła Finansów i Prawa w Bielsku-Białej

SCIENTIFIC JOURNAL Zeszyty Naukowe

Academic Quarterly Publication No 2 (2017)

Wydanie czasopisma (Zeszytów Naukowych Wyższej Szkoły Finansów i Prawa w Bielsku-Białej) w języku

kongresowym angielskim finansowane jest w ramach

umowy 733/P-DUN/2016 ze środków Ministerstwa Nauki i Szkolnictwa Wyższego przeznaczonych na działalność

upowszechniającą naukę.

BIELSKO – BIAŁA 2017

2

Scientific Council Prof. Jerzy Osiatyński (the President)

dr Tomás Vicente Ballesteros, Prof. de Derecho Procesal

Prof. Rudolf Brabeck

doc. ing. Martin Bugaj, Ph.D.

Prof. Jerzy Ciemniewski

Assoc. prof. Jacek Dworzecki

Prof. Vilhjálmur Egilsson

Prof. Jarosław Figwer

Prof. Helena Żakowska-Henzler

Assoc. prof. dr Rajmund Mirdala

Prof. Stanislav Mraz

Assoc. prof. Jan Ostoj

Prof. Stanisław Owsiak

Prof. Massimiliano Piras

Prof. Daniel Stavárek

Prof. Jana Štofková

doc. ing. Michal Tvrdoň, Ph.D.

Assoc. prof. David Zámek

Rev. Msgr. Dariusz J. Zielonka, J.C.D.

Rev. Zbigniew Zieliński, J.C.D.

Editor in Chief

Assoc. prof. Jacek Binda

Field Editors

dr Ryszard Bełdzikowski

dr Jarosław Storczyński

dr Elżbieta Rak-Młynarska

dr inż. Stefan Senczyna

Statistical Editor

Assoc. prof. Danuta Jama

Language Editors

Katarzyna Boronowska

Marcin Twardzik

ISSN 2084 – 1809 eISSN 2543-411X GICID: 71.0000.1500.1631

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TABLE OF CONTENTS

FINANCE AND ACCOUNTING

Papers

Jacek Binda Crowdfunding as a Kind

of Social Support of Business Ventures ..................................................... 5

Wiesława Caputa The Role of Virtual Communities

in the Process of Creation of Knowledge Resources in a Company ....... 27

Beata Hoza, Michał Wójcicki VAT Fraud Prevention .......................... 44

Paweł Mrowiec Available Forms of Money in Payment Turnover

Versus Economic Growth of the Visegrad Group Countries ................... 59

Jan Ostoj Intellectual Capital of Socioeconomic Area: Measure

and Structure. Part II. Intellectual Capital of a Company

and Intellectual Capital Value of a Given Socioeconomic Area ............. 75

Elżbieta Rak Młynarska Crowdfunding

as a Model of Financing a Company ....................................................... 92

Wioletta Świeboda Credibility Versus Measurement of Value of

a Financial Statement Constituents in the Context of Auditing Risk ..... 107

Mariusz Zieliński Changes of the Economic Situation

vs. the State of Public Finances in Poland in 2007-2015 ...................... 117

LAW

Papers

Paweł Artymionek Review of Discretionary

Decisions by Administrative Courts ...................................................... 129

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INTERNAL SECURITY

Papers

Jacek Dworzecki Management in the French System of Police

Education on the Example of France’s National Police College

– Outline of Issues ................................................................................. 142

Scientific Journal WSFiP Nr 2/2017

5

DOI: 10.19192/wsfip.sj2.2017.1

Jacek BINDA

CROWDFUNDING AS A KIND

OF SOCIAL SUPPORT OF BUSINESS VENTURES

Summary

In recent years crowdfunding has become an important instrument of capital raising. Its

importance, popularity and impact are still growing thanks to the development of ICT

technologies and new ways of thinking about investments. Both individuals as well as

small and middle size enterprises see crowdfunding as a new way of collecting capital

by benefiting from free financial assets of Internet users. Therefore, more and more

investors are noticing the clear-cut advantages offered by this kind of financial

instrument. Crowdfunding is rearranging the way that entrepreneurs finance their

endeavors, launch new products and services onto the market and open start-up

companies. Crowdfunding’s social impact appears to be undisputed when it comes to

start-ups, it also seems to be a key factor contributing to the increase in their number

and socio-economic success. The paper presents the basics of crowdfunding i.e. its

models, associated risks and growth on Polish and European market. The world reports

on crowdfunding and the author’s own research in this field were the main sources of

material for this paper.

JEL classification codes: G32, L11, L13, L15, L21, L31

Key words: crowdfunding, crowdsourcing, financial assets, non-profit, ICT, Internet

1. Essence of crowdfunding

Crowdfunding as a term or phenomenon has been known for about

15 years. However, its popularity started growing dynamically a few

years ago, mainly due to the dissemination and popularity of ICT

allowing individuals and SME entrepreneurs to gather free financial

assets of investors without intermediary of a bank. In this way,

crowdfunding occurs as a financial solution that needs no middle

institutions. It allows individuals and entrepreneurs to look for external

funding worldwide through an “open call” on the Internet. It seems to be

Professor Jacek Binda, Department of Finance and Information Technologies,

Bielsko-Biała School of Finance and Law, [email protected]

Jacek Binda

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a less complicated, powerful and effective instrument than the traditional

solutions based on bank credits.

However, it is not as simple mechanism as it seems to be. Especially,

considering a wide range of similar but not identical solutions (e.g.

crowdsourcing, crowd-investing, charity) and restrictions and risks

associated with these terms. The notion of crowdfunding should therefore

be treated as a part of a broader concept of crowdsourcing, in which

crowds of individuals linked via online social networks can act jointly

and develop corporate activities30.

The term crowdsourcing was used for the first time by Jeff Howe and

Mark Robinson31 who indicated that its success is possible thanks to

raising the importance of human capital and perceiving people through

the quality of their ideas rather than their formal academic qualifications.

One of the reasons why, in recent times, online communities have

decided to work together is the fact that there is no need to employ and

pay executives for organizing and managing things. Besides, people are

more effective when they are in a cooperative environment managed by

persuasion rather than by edicts and commands. So, one can say that,

humans generally function better in collaborative online communities

than in rigid hierarchies limiting freedom of thought and team flexibility.

Furthermore, in crowdsourcing communities recognition, opportunity to

show off individual expertise and respect for others can be far more

motivational than the financial aspect.

The definition of crowdsourcing referring to outsourcing specific

tasks of entrepreneurs to the internet community was proposed by many

authors, among others, by Kleemann in 200832.

Definition 1. Crowdsourcing takes place when a profit oriented firm

outsources specific tasks essential for the making or sale of its product to

the general public (the crowd) in the form of an open call over the

internet, with the intention of animating individuals to make

30 Bayus, B., 2013, Crowdsourcing new product ideas over time: an analysis of the Dell

Idea Storm community. Manag. Sci. 59, pp. 226–244. 31 Howe, J., The Rise of Crowdsourcing. Wired 14 (6), 2006, available online at:

http://www.wired.com/wired/archive/14.06/crowds.html 32 Kleemann, F., Voß G.G. and Rieder K., Un(der)paid Innovators: The Commercial

Utilization of Consumer Work through Crowdsourcing. Science, Technology &

Innovation Studies 4, pp. 5-26, 2008.

Crowdfunding as a kind of social support of business ventures

7

a [voluntary] contribution to the firm’s production process for free or for

significantly less than that contribution is worth to the firm.33

While talking about crowdfunding, the above definition should only

be treated as a starting point, in which raising funds by “tapping Internet

society” is a key element of this mechanism34. In this way Internet

individuals can volunteer and provide input in the form of financial help

and have their contribution in the project development. One can also say

that crowdfunding is a type of collection and allocation of capital

transferred for the development of a project in exchange for providing

feedback, which involves a wide range of capital providers. It is also

characterized by ICT and a lower barrier market entry35. It defines

a variety of transactions or source of capital provided by the community

of Internet users, where this unspecified number of investors come

together, to invest their free funds in a well-defined purpose or to support

entrepreneurs.

In literature crowdfunding is defined as financing projects or

businesses with small contributions from large numbers of individuals36

or small amounts of capital usage from many individuals to finance

a new ideas or business venture37. In this way crowdfunding is defined as

an alternative way of financing projects or a venture by a group of

individuals, not necessarily professionals, typically via the Internet38. In

most cases, the beginnings of crowdfunding were based on specific needs

– vision and lack of money. Its phenomenon arose under rather unclear

and ambiguously defined rules.

The origins of crowdfunding may probably be associated with the

rock band Marillion and the year 1997 when the band had no money for

a concert tour and a new album. The band members decided to attract

attention of the Internet society, and persuaded Internet users to invest

their financial surplus into Marillion’s new project, offering in return

33 Ibid. 34 Belleflamme, P., et al., Crowdfunding: Tapping the right crowd, J. Bus. Venturing

(2013), http://dx.doi.org/10.1016/j.jbusvent.2013.07.003. 35 Lawton, K., and Marom D. (2010), The Crowdfunding Revolution. Social Networking

Meets Venture Financing, Amazon Digital Services. 36 Collins, L., & Pierrakis, Y. 2012, The Venture Crowd: Crowdfunding Equity

Investment into Business, London Nesta. 37 http://www.investopedia.com/terms/c/crowdfunding.asp 38 A. Schwienbacher, B. Laralde, Crowdfunding of Small Entrepreneurial Ventures,

[in]: The Oxford handbook of Entrepreneurial Finance, Oxford University Press 2012.

Jacek Binda

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financial benefits. Based on the above, one of a broad set of

crowdfunding definitions is as follows:

Definition 2. Crowdfunding involves an open call, essentially

through the Internet, for the provision of financial resources either in

form of donation or in exchange for some form of reward and/or voting

rights39.

Crowdfunding also resembles the principle of microfinance, which is

a source of financing for entrepreneurs who do not fulfill the

prerequisites to obtain a bank loan or other financial service40. Such

micro finance-based funding can take the form of loans, donations or

investments with potential money providers being both individuals and

institutions.

The above mentioned understanding can be redirected to start-ups

and their endeavors in obtaining capital by means of special Internet

platforms. A great variety of existing equity-based crowdfunding Internet

platforms became a promising instrument to overcome start-ups liquidity

problems, often indicated as an early-stage equity gap. The gap can

significantly endanger the new start-ups success or prevent start-ups from

fully concentrating on their business model. It should be noted that

around 16% of start-ups faced this lack of financial resources in 201141.

Crowd-investing (also known as equity-based crowdfunding) is a subset

of crowdfunding, providing a set of projects or start-ups users invest

receiving shares from the public in return. It can also be said that backers

expect a financial compensation for their investment. One of the

definitions describing crowd-investing could be as follows:

Definition 3. Crowd-investing is an equity-based solution,

exclusively considered as an investment in equity shares or profit-related

returns based on ICT mechanism of communication (also related with

financing start-ups and considered as a part of venture capital).

39 Kleemann, F., G.G. Voß and K. Rieder (2008), Un(der)paid Innovators: The

Commercial Utilization of Consumer Work through Crowdsourcing, Science,

Technology & Innovation Studies 4, pp. 5-26. 40 Bradford, C. S. (2012), Crowd-funding and the federal securities laws, Columbia

Business Law Review 1, pp. 1–150. 41 Hagedorn A, Pinkwart A., The Financing Process of Equity-Based Crowdfunding: An

Empirical Analysis, Crowdfunding in Europe. State of the Art in Theory and Practice,

FGF Studies in Small Business and Entrepreneurship, Springer International Publishing,

Dennis Brüntje, Oliver Gajda (eds.), pp.71-85.


9

However, in order to obtain a crowd of individuals participating in

the future company profits, fundraisers in some jurisdictions offer equity

shares in a private limited liability company (LLC). An example can be

found in British portals such as Crowdcube or Seeders. Unlike the United

Kingdom, start-ups in Germany do not offer common shares in LLC due

to the substantial additional notarial costs. Instead of common shares in

LLC, German startups running a crowd-investing campaign use profit

participating notes, silent partnerships and profit participating loans.

Considering the above mentioned financial mechanism, it can be said

that crowdfunding as a subset of crowdsourcing and crowd-investing is

a form of crowdfunding based on the same fundamental principles as the

above-mentioned early form of reward-based crowd-funding but with

certain distinctions. The similarities between crowd-investing and

crowdfunding concern financing projects through “the crowd” via the

Internet. However, there are also differences in underlying financing

method. Unlike reward-based crowdfunding, where money providers

usually obtain non-monetary rewards, supporters of crowd-investing

projects receive monetary contributions in the form of interests or

dividends.

2. Crowdfunding financial models

There is no doubt that crowdfunding is a real alternative for

entrepreneurs to start their projects because it is an easier way of

investing process (without troublesome banks intermediary). The crowd

of potential investors is a crucial element of every single business model,

but while talking about crowdfunding the relationship between

entrepreneurs and “Internet supporters” is even more important. This is

mainly due to a special relationship created in the virtual sphere. Among

numerous crowdfunding financial models, four of them are the most

recognizable42,43 (Table 1, Fig 1):

Donation model – (also known as a charity, traditional model) - is

anything but new and the most common model (thanks to online

platforms) mainly based on philanthropy. Individuals donate to

specific projects receiving no financial nor material return. The

42 Dziuba D.T. (2012), Rozwój systemów crowdfundingu – modele, oczekiwania

i uwarunkowania [in:] Problemy Zarządzania, vol. 10, no 3 (38), pp. 86–87. 43 Commission staff working document, Crowdfunding in the EU Capital Markets

Union, SWD (2016) 154 final, Brussels, [3 May 2016].

Jacek Binda

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satisfaction from money well spent is essential. In its modified version

(reward-based model) donors can expect their rewards in the form of

books, records etc. The most important aspect of this model is time -

the collection of funds is limited in time and usually lasts from a few

weeks to several months.

Lending model – (also known as crowd lending, peer-to-peer lending

or marketplace lending) offers the possibility of direct funds lending

from the internet community through dedicated platforms in the form

of loan agreement, bypassing banks, para-banks and other

intermediary organizations. There are two specific variations of such

financial model: microfinance model and social lending. The first one

is based on the concept of financial aiding, addressed to the poorest

beneficiaries - the small amounts of money are apportioned between

the target group. The second is based on collecting large amounts of

money that are subsequently lent under certain conditions for

consumption or business. Furthermore, depending on differences in

legal structure the lending financial models across the EU Member

States may vary:

Consumer lending model – presents relations between individuals

(consumer-to-consumer or business-to-consumers) where lending

money is accomplished through unsecured loans.

Business lending model – referring to relations where lending

money is accomplished through secured or unsecured loans by

individuals or institutions directly to businesses.

Mixed business lending model – relations are based on the loan

contract between the lender and borrower, while the role of the

platforms is focused on coordination of payments and

repayments. Another variation allows a platform to cooperate

with a credit institution that originates loan or manages the

escrow account that accumulates pledged amounts. In the last

solution, the transfer of money is activated from escrow account

to project’s account when the pledged amount is reached.

Investment model – its popularity is growing increasingly recently

thanks to the Internet financial platforms. Its essence lies in the fact

that Internet users invest their free financial surplus in projects by

means of financial platforms, expecting in return financial benefits.

This way of investing money is commonly used for financing start-

ups. It is possible to identify three sub-models within the Investment


11

model: collective investment model, investment fund model, securities

model. In the first one, different group of participants including the so-

called angels of business invest small amounts of money in

a company’s development or in a specific project. Royalties or shares

in future profits are highly expected in return. The second sub-model

is associated with collective investing funds (the electronic platform

can be structured as an e.g. an investment fund). Investors take their

financial decisions so as to which project to choose based on e.g. its

future potential. Investors who support a company, participate in

profits, typically buy shares or share of the revenue, receiving

a financial reward in case of profit. The last sub-model involves the

sale of shares and ownership rights transfer to online investors. The

funds invested are usually high.

Invoice trading model – refers to a solution in which business uses

a platform for selling unpaid invoices to a pool of institutions

(investors).

Mixed solution model – combining all above-mentioned features.

Table 1. Comparison of crowdfunding models

Crowdfunding

financial model Main features Level of progression

Donation model

donors receive small non-financial

remuneration for the donated funds

(reward-based model)

wide range of social

interaction (mainly

based on philanthropy)

Lending model

(general)

donors’ funds have the character of

loan

donors receive their money back

within a predetermined period, together

with interest due


interaction due to

internet community,

through dedicated

platforms

Lending model

(microfinance

variety)

addressed to the poorest beneficiaries

based on collecting small amounts of

money that are apportioned between

the target group

addressed for consumption or business

aim

Lending model

(social lending

variety)

based on collecting large amounts of

money that are subsequently lent under

certain conditions

Jacek Binda

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Crowdfunding

financial model Main features Level of progression

Investment

model

projects are the main investment

objective,

donors receive financial benefits in

return e.g. promise of participation in

the company or in profits,

commonly used in financing start-ups

addressed mainly to

businesses of any size.

Dynamically growing

due to Internet financial

platforms accessibility

Invoice trading

model

businesses can sell individual invoices

to an online community of investors

flexibility – possibility of selling

appropriate invoices in predetermined

time leading business back in control of

cash flow,

possibility of quick release of cash,

investors can earn good returns through

a diversified portfolio

addressed mainly to

businesses of any size.

Dynamically growing

due to Invoice trading

platforms accessibility.

New way to trade

invoices

Mixed solution

model

combining all above-mentioned

models’ features


interaction due to the

most complex

mechanism of action

Source: Own work

ICT technology has a significant impact on the development of

crowdfunding. Taking the above-mentioned financial models into

account, four different payout models used by crowdfunding platforms

can be differentiated:

all or nothing,

all and more,

holding,

club membership.


13

Fig. 1 Typical crowdfunding financial models44

Source: Typical crowdfunding financial models.

This payout models describe rules and conditions referring to, among

others, project status (success/failure), based on which the crowdfunding

platform will transfer funds to entrepreneurs (funders). The first model

describes a situation where the pre-determined goal is not met and the

funding project itself is deemed unsuccessful. In such a situation, the

accumulated amount of money will be returned to funders without

additional benefits. The second model (all or more) is based on the

assumption, that despite the fact the pre-determined goal has not been

met, the entrepreneur will receive the accumulated amount of money at

the cost of a higher platform fee. The third one (holding payout model)

describes a situation where equities are bought by the funder in a fund-

seeking company. The last model assumes, that only club members can

participate in profits. It means that funders pay a fee to join a club and

then they can benefit from expert work (experts invest or buy equity on

behalf of others). It should be noted, that equity based crowdfunding is

functioning in many countries under very strict circumstances and

regulations for securities intermediation. In other countries, this model is

not accessible for home based businesses, e.g. Denmark. In effect,

foreign equity platforms (e.g. UK platforms) have started operating in

Denmark.

44 D. Gedda, B. Nilsson, Z. Såthén, K. Solberg Søilen, Crowdfunding: Finding the

Optimal Platform for Funders and Entrepreneurs, Technology Innovation Management

Review, 03.2016 (Volume 6, Issue 3).

Jacek Binda

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As it is seen from the above, every model has its own risk level, and

a level of socioeconomic influence. No matter which crowd investment

model will be chosen, the business plan for effective decision-making is

highly necessary for crowd investment shareholders.

3. Crowdfunding growth

The growth of crowdfunding importance and popularity worldwide

has forced changes in law that governed the way this financial

mechanism is used. As an example, the U.S. market can be recalled.

A turning point and a kind of springboard for crowdfunding in the U.S.

was the passage of JOBS Act in 2012 that heralded the equity

crowdfunding revolution in the U.S.A. This JOBS Act is still expected to

uptick investments in crowdfunding. Based on that Act some small and

middle sized entrepreneurs got another prospect of gaining or investing

their money. The key issue in terms of equity shares using crowdfunding

was the number of investors that are indeed able to put their money into

a business. One of possible options was limiting the number of investors

to accredited investors45 that met basic conditions defined by the U.S.

Securities and Exchange Commission (SEC)46:

a net worth of $1 million or more,

$200,000 worth of annual income and

at least $300,000 worth of joint annual income (family income).

The above-mentioned JOBS Act (Title III) also defined frames,

expected to be a catalyst for crowdfunding in the U.S., e.g.47:

issuers may raise up to $1 million in any 12-month period,

investors with an annual income or net worth up to $100,000 may

invest the greater of $2,000 or 5 percent of annual income or net worth

in all crowdfunding issuers in a 12-month period, but investors with

annual income or net worth over $100,000 may invest up to 10% of

the lesser of annual income or net worth,

issuers raising over $100,000 must provide investors with accountant-

reviewed financials, while issuers raising over $500,000 must supply

audited financials to investors.

45 Due to the risky nature of startup in the U.S., the equity crowdfunding has been

limited to accredited investors – based on Securities Act of 1933. 46 www.sec.gov/answers/accred.htm 47 https://peerrealty.com/blog/an-in-depth-look-at-title-iii-crowdfunding


15

Like in the U.S., Poland has also made some amendments in its legal

system. Crowdfunding in Poland is not covered by a separate legal

regulation devoted to this activity. Therefore, it must be evaluated

through the prism or the general provisions of the Civil Code or special

provisions that regulate the legal aspect, including rules indicated in the

Act on Public Offering. The concept of crowdfunding should be clearly

separated from a public collection, which has been defined in the new

law on the principles of public collections - art. 1: Public collection is

a collection of victims in cash or in kind in a public place on a specific,

legitimate purpose of remaining in the sphere of public tasks, referred to

in Art. 4, paragraph. 1 of the Act of 24 April 2003. Benefit Activity public

and voluntary service (OJ 2010. No. 234, item 1536 as amended. d.), and

for religious purposes.

It should also be noted that most of the crowdfunding projects aim to

achieve commercial success and public utility. Refinement through

entities authorized to conduct public collections contained in art. 3 of this

Act. Crowdfunding exclusion of the principles of public collections frees

the project manager from notification of collection to the minister

responsible for internal affairs or the obligation to report to the

collection. Thus, one can say that the participants in the financing of

social benefit from the Code of Canon Law principle of freedom of

contract (art. 3531 of the Civil Code), determining binding their

relationship at will, however, remaining in line with the characteristics of

sex, the law and the principles of social coexistence.

Crowdfunding systems based on the pre-construction and reward

participants are mostly regulated on sale, so the meaning here takes on

issues concerning a claim for an item of sale, warranty for defects subject

or guarantee. In case of debt crowdfunding, the legal relationship

between the parties (the investor and the designer) regulate both the

provisions of the loan or the provisions of the law on consumer credit (if

the investor is an entrepreneur). In most cases, however, these relations

will be based on the provisions of the Civil Code relating to the loan.

Most ambiguities make regulations relating to the share-crowdfunding,

related to the acquisition of equity units. Based on current legislation, if

such transactions are applied, provisions of the Code of Commercial

Companies, as well as the Act on Public Offering and Act on Investment

Funds can be used.

It should be noted that all permissions for public and non-public

fundraising were issued in Poland based on the Public Fundraising Act

Jacek Binda

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dated 1933 (in force until 18 July 2014) when the law was changed (Art.

40 of the Act on the principles of public collections). However, since 27

November 2015 this financial instrument has been under the supervision

of the Ministry of Internal Affairs and Administration.

The changes in law wide opened the new virtual channel for

crowdfunding operations. In recent years, this concept of funding

projects has led to rapid development of web portals specializing in

crowd investing (ArtistShare.net - portal addressed to artists,

Indiegogo.com – supporting technological inventions projects etc.). One

of the most recognizable platforms, that has dominated the crowdfunding

market is Kickstarter.net - founded in 2009. Its spectacular success and

high competitive market position is mainly connected with over 111

thousand of successfully completed projects and over 11 million platform

users. Taking this outstanding and spectacular success into account, the

question arises on motivation that encourage users to finance a variety of

foreign ideas. Although one may assume that many people would put

their money into a venture, in fact, many of them feel uncomfortable

investing in start-ups or in projects with increased risk level. It is, in part,

because of immaterial form of money influencing the trader account,

public projects nature (open call - no restrictions on access to the

project), accumulation of capital done using ICT solutions. However, the

number of accredited investors has grown from approximately 8.7

million to over 300 million Americans, Fig 2.


17

Fig. 2 Total funding volume48

Source: Total funding volume.

In this way business is expected to rise up to $1 million annually via

registered crowdfunding portals. Thanks to regulations implemented in

the JOBS Act, crowdfunding in 2016 could top $60 billion and even

surpass some traditional forms of finance. This assumption is possible to

be true as crowdfunding continues to book growth each year and

traditional bank landing has not come back to its prior level before the

financial crisis. What’s more, ICT is still growing and offering

technology that helps financial managers to look to peer lending for

higher returns, Fig 3.

48http://www.crowd101.com/crowdfunding-2016-predictions-the-next-real-estate-boom/

Jacek Binda

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Fig. 3 Forecast concerning Volume Raised by Firms in US and UK Using Equity

Crowdfunding Platforms49

Source: Forecast concerning Volume Raised by Firms in US and UK Using Equity

Crowdfunding Platforms.

Based on Fig 3 it can be stated that equity crowdfunding is a key

element of financial strategy of many SME companies and one of the

fastest-growing areas in the alternative finance industry. The BI

Intelligence report confirms that equity crowdfunding grew over 100% in

both the UK and the U.S. in 2015. As the World Bank’s crowdfunding

forecasts, BI Intelligence forecasts concerning equity crowdfunding are

equally optimistic. The forecasts claim that in 2020 companies across the

U.S. and the UK will raise $11 billion, up from $1 billion in 201550.

4. Crowdfunding as a springboard to success for Polish companies

It seems to be undeniable, that crowdfunding is a dynamically

growing financial mechanism. This statement is confirmed by hundreds

of different websites that recently emerged and can be used for equity

sharing. It can be stated that it seems to be a new trend in business

worldwide. Its success is spectacular and mainly based on liberalization

of crowdfunding law and changed mentality of investors. However, only

a handful of crowdfunding platforms achieved success and attracted the

funders’ interest. There were 452 platforms worldwide in 2012 and only

4 of them in Poland51. In the two years that followed, their number

49 NESTA, KPMG BI Intelligence Estimates. 50 http://www.businessinsider.com/equity-crowdfunding-research-2016-10?IR=T 51 Crowdfunding Industry Report 2012, www.crowdfunding.org


19

worldwide increased and amounted to 1246 platforms. Based on the

report of the European Commission (2016), by the end of the 2014, 510

live platforms were identified as active in the EU. Most of these

platforms (502 platforms) were found in 22 Member States, especially in

the United Kingdom (143) and France. The remaining 8 platforms were

found in Australia, Canada, China, New Zealand and the United States52.

While, according to Statista Report approximately 600 active platforms

were located across the EU, Fig 4.

Fig. 4 Number of crowdfunding platforms worldwide as of December 2014,

by region53

Source: Number of crowdfunding platforms worldwide as of December 2014, by

region.

In the report of the European Commission (2016) some different

business models used by crowdfunding platforms were indicated:

investment-based crowdfunding, lending-based crowdfunding, invoice

trading crowdfunding, reward-based crowdfunding, donation-based

crowdfunding and hybrid models of crowdfunding. Although investment-

based crowdfunding and lending-based crowdfunding models were

treated in a particular way, donations or rewards, still remain important

for innovators and early-stage entrepreneurs. The report shows that the

vast majority of platforms (about 30%) were involved in reward-based

crowdfunding, followed by equity crowdfunding (23%) and loan-based

52 Commission staff working document, 154 final ed., tom SWD (2016), Brussels:

European Commission, 2016. 53 https://www.statista.com/statistics/497227/number-of-crowdfunding-platforms-

globally-by-region/

600

375

169

50 37 19

0

100

200

300

400

500

600

700

Europe North

America

Asia South

America

Oceania Africa

Nu

mb

er o

f C

FP

s

Jacek Binda

20

crowdfunding (21%). However, based on Statista.com, the mixed

crowdfunding model was the most popular in Europe - approximately

59% of all crowdfunding platforms were based on this model, barely

15% were based on equity-based crowdfunding model and 0% were

based on donation model (Fig 5). The above-mentioned report states that

crowdfunding market is still gaining popularity across the EU. The

crowdfunding market value across the EU in 2015 raised to about EUR

4.2 billion through crowdfunding platforms. It should be noted that EUR

4.1 billion of EUR 4.2 billion were raised through crowdfunding models

entailing a financial return54. The selected crowdfunding values in the EU

in 2015 are presented in Table 2.

Fig. 5 Share of web-business focused crowdfunding platforms in Europe in 201455

Source: Share of web-business focused crowdfunding platforms in Europe in 2014.

54 Crowdsurfer Dashboard, www.crowdsurfer.com 55 https://www.statista.com/statistics/413507/web-focused-crowdfunding-platforms-in-

europe-model/

15%

19%

7%

0%

59%

Equity-based crowdfunding

Reward-based crowdfunding

P2P lending

Donation-based crowdfunding

Combined


21

Table 2. Crowdfunding in the EU in 2015

Total raised

(EUR)

Average raised

(EUR)

Number of

campaigns

Number of

platforms

Equity 422 039 462 504 832 836 60

Bonds and

debentures 103 368 785 1 590 289 65 8

Loans,

of which: 3 209 368 439 15 688 204 575 77

Secured

business loans 453 423 956 79 132 5 730 6

Unsecured

business loans 728 839 337 58 154 12 533 16

Secured

individual loans 63 497 821 35 834 1 772 3

Usecured

individual loans 1 266 723 276 7 082 178 854 14

Source: based on56

At present, the transaction value of crowdfunding market reached the

level of USD 5.067 million. In the years to come, it is even expected to

show an annual growth rate (CAGR 2016-2020) of 44.6% in 2020. With

regard to global trends it should be noted, that crowdfunding dynamically

raised by 167% in 2014 y/y and reached USD 16.2 billion. North

America maintained the status as a leader, being the first region in terms

of crowdfunding volumes, raising a total of USD 9.46 billion.

The growth of crowdfunding market in Poland looks quite

interesting, while it is much smaller in comparison to e.g. Germany,

France or the U.S. Its transaction value in 2016 in Poland amounted to

USD 3 million. The annual growth rates of the transaction values are also

very promising, at least 20% y/y with the prediction of 50% y/y for 2020.

If the current market growth will be maintained, its size in Poland in

2020 is expected to reach the level of USD 9 million (Fig. 6).

56 Commission staff working document, 154 final ed., tom SWD (2016), Brussels:

European Commission, 2016.

Jacek Binda

22

Fig. 6 Transaction’s Value annual growth rate (CAGR 2016-2020)

Source: Transaction’s Value annual growth rate (CAGR 2016-2020)

The above-mentioned figures present a significant potential of

crowdfunding markets in Poland (Table 3).

Table 3. Social financing platforms in Poland - models, fees, value - selected in

terms of the value of funds collected (Status for 2016)

Platform

name

Type of

financing

Categori

es of

projects

Charges

Value of

collected

funds (PLN)

Number

of

projects

funded

Kokos.pl Lending

model different

3% of the

loan value 133 898 350 118 302

Lendico.pl Lending

model different

2,25% - 5% of

the loan value No data No data

Beesfund.pl Investment

model Business

Platform

commission:

6.9% of the

collected

amount,

Commission

on payment:

up to 3.5% of

the amount

paid

573 200 4


23

Crowdangels.

pl

Investment

model

Busines,

mainly

from

modern

sectors

Platform

commission:

6% of the

collected

amount

152 500 2

Zrzutka.pl Donation

model Various

Fees for

transfers and

advertising

7 756 007 12646

Siepomaga.pl

Donation

model

with participants

rewarding

Charity

Platform

commission:

up to 6% of

the collected

amount

56 163 404 2853

Polakpotrafi.pl

Donation

model

with participants

rewarding

Various

projects,

e.g.

travel

finance,

film

making,

music

Platform

commission:

7.4% of the

amount

collected

Payment

Commission:

2.5% of the

amount

collected

payed to the

online

payment

operator

10 848 202 2082

Source: Own work based on online sources.

As shown in Table 3, most of the capital was donated through the

platform Kokos.pl - over 133 million PLN, which shows strong interest

in social loans. It can also be stated that the growth of crowdfunding

platforms in Poland is meaningful, in particular the donation model. The

dominance of this model is expressed both in the number of Internet

portals as well as in the value of funds obtained through them. Most

funds were raised for charity purposes on Siepomaga.pl Internet platform

i.e. over PLN 56 million and 2853 projects financed. Equally active,

though with much less effect, is the investment crowdfunding model

whose growth has also been observed in Poland. Beesfund.pl seems to be

a leader in this area - used by four companies it collected PLN 573

thousand. Dynamic growth of crowdfunding platforms in Poland allowed

to finance in 2016 over 136,622 projects, with the total amount of funds

raised over PLN 217 million.

Jacek Binda

24

Conclusions

At present the crowdfunding is indeed an important and dynamically

developing element of capital rising used by SME companies. Although

the largest crowdfunding popularity can be observed in the United States,

many of the largest U.S. crowdfunding platforms operate worldwide, also

in Europe. Crowdfunding in Poland is also developing rapidly, what can

be proved by the large number of projects financed and amount of funds

raised in 2016. Its continuous growth in the value and the number of

projects financed shows that this form of financing fills a niche on the

financial market. However, continual growth of crowdfunding market

worldwide causes, that Polish portals must compete with Kickstarter or

Micro Ventures portals.

In Europe, this form of funding projects is on a rising wave and its

importance has been confirmed by the European Commission. It seems to

be an emerging alternative source of financing for SME in their start-up

phase. One can say, crowdfunding has taken investment out of hands of

high-net-worth individuals and opened the market to anyone linked in the

Internet and interested in investing. Its benefit is primarily because

traditional sources of funding such as banks are of limited help when it

directs to lending or investing in small or even micro-businesses57. Based

on the above data it can be stated that crowdfunding seems to be one of

the wide spectrum of technological solutions having potential to

transform the financial system. That is why this financial solution is of

great interest to SME entrepreneurial firms and still gains popularity.

57 Belleflamme, P., Lambert, T., & Schwienbacher, A. 2014, Crowdfunding: Tapping

the Right Crowd, Journal of Business Venturing, 29(5), pp. 585–609.

http://dx.doi.org/10.1016/j.jbusvent.2013.07.003


25

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platforms-globally-by-region/

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10?IR=T

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http://www.statista.com/statistics/497227/number-of-crowdfunding-platforms-globally-by-region/


27

DOI: 10.19192/wsfip.sj2.2017.2

Wiesława CAPUTA

THE ROLE OF VIRTUAL COMMUNITIES

IN THE PROCESS OF CREATION

OF KNOWLEDGE RESOURCES IN A COMPANY

Summary

Development of the Internet and social media allowed for creating and maintaining of

social and business relations in cyberspace which resulted in dynamic growth of virtual

communities whose members are very often stakeholders of a company including:

customers, employees, suppliers, creditors and investors. These entities are

differentiated by their knowledge potential and willingness to share this knowledge with

other entities inside and outside the community. In contemporary companies where the

foundation of competitive potential is knowledge the usage of diversified knowledge

potential is not only a necessity but also a challenge. The main purpose of the paper is

highlighting the possibilities to apply virtual communities in the process of goodwill

creation. The research presented in the paper aimed at determining the reasons for

using virtual communities among the citizens of Poland between 2008 and 2016 and the

results of this research confirmed feeble utilisation of knowledge potential of virtual

communities in the creation of knowledge resource in a company.

Key words: virtual community, relations, goodwill

Introduction -New World – New Challenges

In the age of information and knowledge building competitive

advantage which brings extraordinary added value for the company is

more and more difficult. The changes occurring in the company’s

environment are so dynamic and unpredictable that a new phenomenon

of new normality in economy was coined and new type of competition in

the so called flat world1 emerged.

Dr Wiesława Caputa, professor of Silesian University of Technology, the Institute of

Economics and Information Technnologies, Department of Organisation and

Management, [email protected] 1 Ph. Kotler, J.A. Caslione, Chaos, Zarządzanie i marketing w erze turbulencji, MT

Biznes, Warszawa 2009.

Wiesława Caputa

28

The first phenomenon is characterised by: unpredictability of

economic cycles which, on the macro scale, used to be predictable;

irregular and unexpected falls, recessions as well as rises and upturns

which previously occurred every 10 months and every 7 years; prudent

and oriented manner of investment which replaced the old expansive and

multidirectional investment; avoiding market risks which used to be

tolerated; shift from self-confidence to insecure consumer attitudes and

preferences which used to be stable and evolving and are now

characterised by fear and fight for security2.

It can be easily noticed that modern enterprises conduct their

activities in turbulent or even chaotic conditions which translate into

growth of risks lurking in business environment. For the sake of

a company’s interests it becomes necessary to recombine its resources of

competitive potential in order to offer products on the market whose

value, in the opinion of consumers, is higher than of other similar

products offered by competitors. This advantage will guarantee feeding

of capital at least on the level of minimal expected rate of return. It

should be emphasized however, that due to the above changes the

following factors: increased efficiency of production processes, perfect

norms and regulations, reduced terror ratio, maximum standardization,

economies of scale or increased efficiency are no longer sufficient in

order to succeed on the market3. Offering products of high quality

parameters has become a prerequisite for each company in order to

survive. Thus, creating and maintaining competitive advantage requires

provision of a unique product which will be selected by the consumer

from many others thanks to subjective and volatile criteria which go far

beyond the mere essence of the product.4

2 Ph. Kotler, J.A. Caslione, Chaos, Zarządzanie i marketing w erze turbulencji, MT

Biznes, Warszawa 2009, p. 31. 3 T. Doligarski, Wartość portfela klientów – aspekt teoretyczny [in:] Dobiegała-Korona

B., Herman A. (eds.), Współczesne źródła wartości przedsiębiorstwa, Difin, Warszawa

2006, p 433. 4 H. Szulce, Planowanie i strategia produktu [in:] Mruk H. (ed.), Podstawy marketingu,

Publishing House of the University of Economics in Poznań, Poznań 1996, p. 145; I.

Bielecki, Współczesny marketing, Filozofia, strategie, instrumenty, Studio EMKA,

Warszawa 2006, p 257; P. Doyle, Marketing wartości. Felberg SJA, Warszawa 2003,

pp. 270-272; W. Caputa, Kapitał klienta w budowaniu wartości przedsiębiorstwa,

CeDeWu, Warszawa 2015, pp. 77-79.

The Role of Virtual Communities…

29

A unique product, in the opinion of consumers, solves their problems

better than other similar products offered by competitors.5 Development,

delivery and communication of such a product on the market requires not

only systematic identification of values important for the consumer,

creation of innovative solutions, creation and implementation of new

instruments of communicating the new value on the market but also

development of such architecture of processes and activities which

assures efficient allocation of resources in short and long term. In order

to meet this requirement enterprises must assure superior quality of their

products but also show sensitivity for volatile economic conditions,

expectations of their stakeholders and product and process

innovativeness which will secure the efficiency of operations. It becomes

obvious then, that the substance of a unique product lies upon the

awareness of an enterprise about the value which is determined by the

satisfaction of the user.6

The above statement finds confirmation in the shift of competitive

potential of a company to intangible assets understood as knowledge

resources.7 It is commonly emphasized that these resources are

developed by their utilization and exchange of experiences which may

take place inside and outside the company as well as between the

company and its stakeholders.8

In their attempt to win and maintain capital injection companies have

been forced to compete in the so called flat world which is the second

phenomenon mentioned in the beginning of the paper.9 It is the effect of

the third era of globalization and is reflected in the triple convergence:

critical mass, enabling technology, people and organizations able to

5 W. Caputa, Koszt satysfakcji klienta jako wyznacznik siły konkurencyjnej

przedsiębiorstwa [in:] Figiel S. (ed.), Marketing w gospodarce opartej na wiedzy, the

University of Warmia and Mazury, Olsztyn 2007. 6 W. Caputa, Kapitał klienta w budowaniu wartości przedsiębiorstwa, CeDeWu,

Warszawa 2015, p. 54 and next. 7 W. Caputa, D. Szwajca, Potencjał konkurencyjny przedsiębiorstwa w okresie

globalizacji, CeDeWu, Warszawa 2010, pp. 71-110. 8 S. Supeková, H. Janáková, Interkultúrne aspekty medzinárodného marketingu.

Wolters Kluwer, Bratislava 2014. 9 Ph. Kotler, J.A. Caslione, Chaos. Zarządzanie i marketing w erze turbulencji, MT

Biznes, Warszawa 2009, p. 31.

Wiesława Caputa

30

utilize new platforms and potential of the so called rising economies.10

These are the new driving forces which result in shifting the value

creation processes from the real world to the virtual world:

computerization and development of the Internet,

information flow in real time and, as a consequence, dissemination of

knowledge to everybody who is able to use Google search engine,

work flow software enabling joint work on projects from any point on

the planet,

outsourcing and offshoring thanks to which organizations may

relocate their operations and invest in oversees facilities,

uploading offering possibility to contribute to a collective product

such as for instance Wikipedia,

insourcing whose effect is integrated logistics.11

All the above translates into practically unlimited possibility to

generate and obtain such information which may contribute to the

process of value creation. Moreover, it becomes possible to establish and

maintain relations based on cooperation which facilitates reduction of

risks and increases probability of stable capital injection.12

As is clear from the above, the participants of the creation process of

a unique product are not only employees of a company but also external

users of virtual networks disposing of competences desired by the

company. Mutual exchange of experiences and information, joint

problem solving or communicating of the offered value opens chances

for both parties not only to enhance their own competences but also to

launch the resource leverage.13 The process can take the following paths:

concentration, unconditional directioning of resources onto building

of relations based on profitability and customer loyalty which requires

focusing on creation such values which are considered import ant by

the consumers,

10V.K. Fung, W.K. Fung, Y. Wind, Konkurowanie w płaskim świecie, Budowanie

przedsiębiorstw przystosowanych do płaskiego świata, Przedsiębiorczość i Zarządzanie

KOŹMIŃSKI, Warszawa 2008, pp. 24-25. 11 Ibidem p 24. 12 W. Caputa, Kapitał klienta w budowaniu wartości przedsiębiorstwa, CeDeWU,

Warszawa 2015. 13 C.K. Prahalad, G. Hamel, The Core Competence of the Corporation, Harvard

Business Review - May-June 1990.


31

protection, avoiding reduction of own competence resources as the

result of direct competitive battle,

accumulating which is the effect of systematic learning through

experiences, borrowing resources from other entities or searching for

resources which the company already owns but has not identified yet,

completing i.e. appropriate combining and systematic balancing of

resources or their reusing for various purposes,

recovery of resources which is in line with acceleration of processes

of accumulating added value as the result of shortening of the time

frame between the involvement of assets and the moment when they

start to generate profit.14

Opening a business in the flat world of chaos in which resources of

knowledge are the pillar of competitiveness is a challenge which forces

many companies to undertake activities which aim at utilizing the

potential of knowledge possessed by virtual communities.

1. Essence and meaning of virtual communities in creating of

knowledge resources

The definition of virtual community is not uniform. In the process of

explaining its essence two notions must be taken into account:

community and virtual community which is often referred to as

cyberspace. Community functioning in the real world is well defined by

M.P. Effrat15 who looks at this category from three dimensions

(Image 1).

14 W. Caputa, Kluczowe kompetencje i dźwignia zasobów w procesie kształtowania

wartości przedsiębiorstwa, Scientific Journal of Silesian University of Technology No

13, Silesia University of Technology Publishing House 2003, pp. 275-297. 15 Effrat M.P. (ed.), The Community: Approaches and Applications. New York: The

Free Press, 1974.

Wiesława Caputa

32

Image 1. Three-dimensional outlook on the community

Source: own elaboration based on: M.P. Effrat, (ed.) The Community: Approaches and

Applications, New York: The Free Press, 1974.

In the first dimension community is defined and identified with such

an institution whose pillar is solidarity of its members. Community

members create mutual relations based on closeness, emotions, norms or

roles they play (e.g. family, ethnic group, voluntary organization). The

second dimension builds on the nature of collaboration and identifies

a community as a certain network of informal relations of basic nature

which connect people beyond what is necessary. In the third dimension

communities consist of certain institutional groups of economic, political

or social nature which come into being on the basis of affiliation with

a certain social category. This kind of community although focused

mainly on institutions, may also be created on the foundations of shared

interests.

From the above definition one may formulate a number of

elementary features which characterize the category. Regardless of

attitude, each community is build upon social relations which can but do

not have to be based on shared interests or any other formal relations.

Additionally, communication established between members of the

community may be realized through supporting devices thanks to which

it is possible to transmit information from one person to many people

simultaneously and also the other way round. It is also possible to

broadcast interactively from a place distant from sender or receiver of the

information. These features may be treated as universal attributes of each

community. It should be observed, however, that the mere existence of

the notion of virtual community calls for differentiating it from the

community as solidarity institutions

community as integrally

diversified groups

community as

integrations


33

communities that exist in the real world. Thus an attempt should be

made, to describe this reality and point to factors which differentiate the

two kinds of communities. Virtual reality is for example defined as:

a certain form of simulation of fragments of real world created by

means of computer and appropriate IT infrastructure,16

different kinds of various sensations generated through technical

infrastructure e.g. audiovisual equipment or special software17,

hypothetical three-dimensional visual world created by the computer

which can be entered by the users by means of special tools and in

which users establish interactions with other objects inside and outside

the world,18

a form of network collaboration with the following aspects: games,

interactive theatre of improvisation, comedy and real challenges,19

flexible and open architecture with next space always available to

satisfy the needs of the users,20

attractive field, fulfillment of people’s dreams about simulation and

interaction, a new medium combining poetry with technology.21

Regardless of the definition, virtual world can be treated as a special

open social area in which various human needs and phantasies are

satisfied through interpersonal communication realized by means of

computer. In this way new social forms known as virtual communities

are created for which the indispensable tool of communication is

computer.

With respect to the overview of definitions of virtual communities

presented in Table 1, it can be assumed that these communities are social

networks using computers for: establishing and creating relations within

16 Encyklopedia Internautica http://ecyklopedia.interia.pl (access 16 April 2016). 17 D. Kalisiewicz, Nowa Encyklopedia Powszechna PWN, PWN, Warszawa 1998. 18 http://www.hyperdictionary.com/search.aspx?define=virtual+reality (access 8 March

2017). 19 http://www.hyperdictionary.com/search.aspx?define=virtual+reality (access 8 March

2017). 20 C.A. Silva, Liquid architectures: Marcos Novak's territory of information, Louisiana

State University LSU DigitalCommons, 2005, http://digitalcommons.lsu.edu/cgi/

viewcontent.cgi?article=1901&context=gradschool_theses (access 7 March 2017). 21P. Sitarski 2002, Czy rzeczywistość wirtualna to odkrycie nowego świata? [in:] M.

Hopfinger (ed.) Nowe Media w komunikacji społecznej XX wieku, Oficyna Naukowa,

Warszawa 2002, p. 399.

Wiesława Caputa

34

the group, building networks of relations within a community sharing

certain common features connected with a specific need which the

community members want to satisfy.

Table 1. overview of definitions of virtual communities

Author Virtual community

Slouvka (1996) Groups of people sharing common interests and practices.

G. Bugliarello (1997)

F. Scott (1989)

Incorporeal communities established on the basis of common

interests which can be shaped and re-moulded by the

participant thanks to appropriate electronic IT infrastructure

which makes him think he really belongs to a new reality.

H. Rheingold (2000)

Social aggregations arising on the Internet when sufficient

number of internauts meet on the same public discussion long

enough and with sufficient degree of emotions so that

personal ties can be born

B. Wellman (2001) Networks of human relations as the source of social life,

support, information, feeling of belonging and social identity

M. Castells (2007)

Self-defining electronic network of interactive

communication focused around shared interests or goals but

sometimes communication becomes an aim in itself

L. Albański (2010) Online environments on the Internet where communication

and relations between people is similar as in the real world

Source: own work based on: Albański, L. (2010) Wybrane zagadnienia z patologii

społecznej. Kolegium Karkonoskie in Jelenia Góra, B. Wellman, Physical place and

cyber place: the rise of networked individualism, International Journal of Urban and

Regional Research 1/2001, pp. 227-252, Rheingold H. (2000). The virtual community:

homesteading on the electronic frontier, Cambridge Mass., MIT Press; G. Bugliarello,

Telecommunities: The next Civilization, The Futurist vol. 31/1997, pp. 23-26; M.

Castells, Społeczeństwo sieci, transl. M. Marody, Warszawa 2007, p. 362; M. Slouka,

War of the Worlds: the assault on reality, London: Abacus 1996.

In virtual communities people not only satisfy needs such as:

belonging to a group, solidarity, discussion or support,22 but also:

communication, information, entertainment or transaction.23 The

initiation sources of the communities are also sought in the willingness to

22 W. Burszta, Internetowa polis w trzech krótkich odsłonach [in:] Ekran, mit,

rzeczywistość, W. Buszta (ed.), Warszawa 2003, pp. 161-162, H. Rheingold, The

Virtual Community. Homestanding on the Electronic Frontier, Reading, MA: Addison-

Wesley, 1993. 23A. Wadhwa, S. Kotha, Research Associate Anu Wadhwa, University of Washington,

1999, http://us.badm.washington.edu/kotha/internet/handouts/vc5.PDF


35

come back to collaboration, intimacy and freedom and run away from

hierarchy and control.24

Unlike real world communities in which communication has face-to-

face nature, or alternatively is established remotely by phone; members

of virtual communities are incorporeal and invisible, and communication

runs through channels such as e-mail, chat room or MUDs. These are not

the only features that divide real and virtual communities For instance M.

Smith pointed to five elementary differences (as shown in Image 2). B.

Wellman and M. Gulia in turn, emphasize application of computer in the

process of establishing relations, lack of territorial boundaries,

homogeneity of interests, values, beliefs and attitudes of members but

heterogeneity with respect to age, social status and other related factors

such as freedom of choice .25

Image 2. Features of virtual communities

Source: Own description based on: M. Szpunar, Społeczności wirtualne jako

społeczności – próba ujęcia socjologicznego [in:] M. Radochoński, B. Przywara (ed.)

Jednostka – grupa – cybersieć. Psychologiczne, społeczno-kulturowe i edukacyjne

aspekty społeczeństwa informacyjnego, Rzeszów 2004, pp. 157-184.

24Clayton L., Are there Virtual Communities? http://www.abdn.ac.uk/philosophy/ 25B. Wellman, M. Gulia, Net Surfers Don‘ t Ride Alone: Virtual Communities as

Communities. New York 1997, p. 15, http://www.chass.utoronto.ca/-

wellman/publications/netsurfers/netsurfers.pdf

KEY FEATURES OF VIRTUAL

COMMUNITIES

Aspatiality-interactions are not geographically or

territorially limited Asynchronicity-communication may but does not have to take place in a real

time

Astigmatization-race, appearance,

and sex do not matter

Anonymity- interactions take place amongst unknown entities.

However, participants play significant role in social, cultural or intellectual reality

Incorporeality- text is the most important,

which can alternatively be animated by special

signs

Wiesława Caputa

36

The features determine virtual communities value from the

perspective of enterprise interests implementation, meaning that an

enterprise may gain inter alia a possibility of:

establishing transaction relations in cyberspace, which are not limited

by countries boundaries, obtaining and transmitting information

regarding offered products from and to many participants at the same

time, which may result in desirable purchasing behaviour by

a company. The example may be reading of Onet.pl portal, or

recommendations to buy books, additional items, mostly purchased by

customers e.g. Amazon bookshop,

creating loyal community, resistant to entities' competitive actions,

whose indicative message may support a process of goodwill creation.

Such example are inter alia beer drinkers communities connected with

brewing companies.

creating a positive company's market perception, by using community

to initiate such indicative message which contributes to start and

develop relations based on cooperation and trust. The example may be

IBM company of global GenO26 business.

community use inter alia to: solve problems, obtain new, creative

ideas, test solutions, what can be found inter alia in a growing number

of crowd sourcing platforms.

Mentioned above range of virtual community use indicates that

members of virtual community may actively participate in each phase of

goodwill creation process. They may have twofold roles:

as censors and communicators of an offered value, by starting

indicative message inside a community, which includes product or

tenderer's features, in a form of a reference or recommendation,

as co-founders and creators of value by initiating a one- way or two-

way indicative message, which may be employed as a contribution in

goodwill creation process, at the stage of its creation, production and

market delivery.

Thus, community described may help in the implementation of both

a profitability strategy, achieved through activities aiming at cost

26 IBM Global Business Services Executive Report, Working in the open. Accelerating

time to value in application development and management, IBM Institute for Business

Value https://public.dhe.ibm.com/common/ssi/ecm/gb/en/gbe03283usen/GBE03283

USEN.PDF


37

structure improvement and increasing efficiency of assets use, as well as

a development strategy, established through increasing a possibility to

reach income or rise in customers' value in a life cycle. However, it

should be noticed that the achievement of indicated benefits is

determined by a number of factors, both dependent and independent from

a company (Image 3).

Image 3. Determinants in using a potential of virtual communities

Source: Own work.

Attitude and motivation of a participant to initiate indicative message

gain the fundamental importance. A capital company reinforcement may

be expected only from a participant who possesses knowledge required

from a perspective of a company's goals implementation, and presents

willingness to share and develop the competences by use of a partner's

knowledge and experiences.

2. The participation of Poles in social networks in the years

2002-2016

Analysing a position and a character of virtual communities in

a company's knowledge creation process it is worth referring to the

Public Opinion Research Centre (CBOS) findings, which were conducted

in 2010, 2015 and 2016 respectively in a sample of 1056, 1048 and 1100

Poles. The survey was executed by means of computer- assisted personal

FACTORS DETERMINING

A POSSIBILITY OF COMMUNITY USE

Willingness and ability of an enterprise

(internal barriers)

Willingness and ability

of participants (external barriers)

dependent independent

strategy

culture

competencies

industry factors

complexity and character

of business

network participants'

attitude

network participant

motivation to participate

technical and industrial

possibilities

network participant

position

knowledge and

competences

Wiesława Caputa

38

interview (CAPI). In the investigated period, both worldwide and in

Poland, the number of people using the Internet has been increasing. As

Figure shows the number of Poles using the Internet in 2010 exceeded

one million of inhabitants, which accounted for over 52% of population.

Six years later the involvement grew to over 65%. However, it should be

noticed that compared to the first decade of the 21st century, the growth

dynamics of people using the Internet is currently lower (Image 4).

Image 4. People using the Internet regularly (at least once a week )

*In the years 2002-2008 the percentage of people using the Internet was indicated.

Source: Korzystanie z Internetu, Komunikat z badań CBOS, Warsaw 2016

http://www.cbos.pl/SPISKOM.POL/2016/K_092_16.PDF (access 10 March 2017).

While discussing the issues, it is important to determine whether the

Internet users are willing to register at social networking sites? How

often do they use them? and what is the purpose of the Internet use?

As Figure 5 shows, the number of users registered at social

networking sites has been growing. Compared to 2010, in the year 2016

the participation of users registered at the sites increased by 15%.

Slightly lower percentage was registered amongst adult Internet users,

whose participation in the investigated period increased to 11%. As the

respondents declared, 86% of registered at social networking sites

members, regularly uses the sites. However, it should be noticed that the

popularity of the mentioned networks is determined by sex. According to

the findings in 2016, 70% of women and 63% of men use the described

media. Though, the leading factor here differentiating the users activity is

age.

17

26 2831

37

4448

5156 56

6063 64 65

0

10

20

30

40

50

60

70

2002 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016


39

Figure. 5 The number of people registered at a social networking site (in %)

Source: Own description based on http://www.cbos.pl/SPISKOM.POL/2016/

K_092_16.PDF, (access 10 March 2017).

Social networking sites are the most popular amongst young people.

Between 18-24 years of age, the percentage of respondents registered at

social networks remains at the level of 92 % in recent years. In the next

decades of life, the number of people registered at community sites has

increased. However, it is definitely lower.27

The last question concerned the purpose of social networking use. As

Table 2 presents, in the whole analysed period, the highest percentage of

answers regarded maintaining or renewing contacts with friends.

Consequently, it means that the Internet users particularly employ social

functions of the networks. A considerable number of respondents uses

the Internet to watch films, listen to music or read. Definitely people who

themselves post content into the Internet are a smaller group. Looking for

a job, posting CVs, or business networking is considerably less popular

amongst the Internet users, moreover, in the last year the percentage of

answers is lower than in the previous year.

27Korzystanie z Internetu, Komunikat z badań CBOS, Warsaw 2016


47

62 6258 59 60 62

66 67

2130 32 33 33 36 39 42 43

0

20

40

60

80

2008 2009 2010 2011 2012 2013 2014 2015 2016

Internet users Adults

Wiesława Caputa

40

Table 2. The purpose of social networking sites use (in%)

THE PURPOSE OF SOCIAL

NETWORKING SITES USE 2008 2009 2010 2011 2012 2013 2014 2015 2016

Among the Internet users

Maintaining contacts with friends, group of friends

0 56 53 50 50 50 54 55 58

Renewing contact with friends 40 50 46 43 37 41 40 41 42

Listening to music, watching films or photos , reading

27 38 35 36 33 39 38 39 39

Discussing interesting subjects,

participation in discussion forums

0 0 26 21 26 27 25 28 27

Posting own photos, music,

texts 18 27 27 23 21 24 26 26 27

Gaining new social contacts 21 27 22 21 19 19 20 20 17

Looking for a job, presenting CV to potential employers

11 17 13 16 15 18 16 21 17

Professional and business

networking 9 15 11 13 11 14 15 17 16

Among adults

Maintaining contacts with

friends, group of friends 0 27 27 28 28 30 34 35 38

Renewing contact with friends 18 24 23 24 21 25 25 26 28

Listening to music, watching films or photos , reading

12 19 18 20 18 23 24 25 26

Discussing interesting subjects,

participation in discussion forums

0 0 14 12 14 16 16 18 18

Posting own photos, music, texts

8 13 14 13 12 14 16 17 18

Gaining new social contacts 9 13 12 12 11 12 13 13 11

Looking for a job, presenting CV to potential employers

5 8 7 9 8 11 10 13 11

Professional and business

networking 4 7 5 7 6 8 10 11 10

Source: Internauci 2015, Komunikat z Badań CBOS Nr 90/2015, Warsaw June 2015,

Korzystanie z Internetu, Komunikat z Badań CBOS, Warsaw, June 2016


Presented findings point out that social networking sites users

activity is still based on gaining and maintaining social contacts. The

networks are often a place of ideas exchange and entertainment search.

Business objectives are definitely set aside.


41

Conclusions

Presented considerations confirm a possibility of using virtual

communities in a process of a company's goodwill creation. The potential

may be used at the stage of: creation, production and product delivery, as

well as presenting an offered value at the market.

The research supports the argument that the Internet users'

participation in Poland in social networking is most often combined with

social ideas exchange, entertainment, and gaining and maintaining social

contacts. Consequently, the knowledge potential of the Internet users,

accounting for almost 2/3 of Poland's population, in the process of

a company's knowledge creation is poorly exhausted. However, it should

be emphasized that the youngest Internet users spend more time online

and are more active in employing the Internet capability.

It should lead a company to pursue activation methods and employ

them to the Internet users and members of virtual communities to initiate

indicative message supporting the implementation of its goals.

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kulturowe i edukacyjne aspekty społeczeństwa informacyjnego,

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GBE03283USEN.PDF

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44

DOI: 10.19192/wsfip.sj2.2017.3

Beata HOZA

Michał WÓJCICKI

VAT FRAUD PREVENTION

Summary

Making a clear distinction between tax fraud and activities related to the so called tax

optimisation, appears to be most relevant in the fight against fiscal offences. VAT

leaking is not only a problem for Polish state authorities, but also for all countries with

value added tax in their fiscal system. The paper attempts to define tax fraud and

present its consequences for the state budget, it also offers description of system

procedures of VAT fraud prevention.

Key words: value added tax, tax fraud, state revenue

JEL Classification: G24, H74

Introduction

The amount of VAT fraud has remained relatively high for years.

The actions undertaken by government authorities are not effective in the

fight against value added tax leaking. The authorities do not provide

enough support in terms of leaking, which is the result of discrepancies

between theoretical amount of value added tax due, and actual budget

revenues. This is confirmed by the reports published by the Supreme

Audit Office1 (NIK).

VAT leaking is not only a problem for Polish state authorities, this

phenomenon is present in all countries which possess value added tax in

their tax system. Therefore, it can be concluded that the revenue tax gap

Dr engineer Beata Hoza, Bielsko-Biała School of Finance and Law, Department of

Finance and Information Technologies, Chair of Banking and Finance, [email protected] Michał Wójcicki student of Bielsko-Biała School of Finance and Law.

1 NIK (the Supreme Audit Office) Information regarding inspection results: Zwalczanie

oszustw w podatku od towarów i usług Reg. No. 17/2014/P/13/042/KBF;

Przeciwdziałanie wprowadzaniu do obiegu gospodarczego faktur dokumentujących

czynności fikcyjne Reg. No. 24/2016/P/15/011/KBF.

VAT Fraud Prevention

45

is not only a result of fiscal office weakness, but also, to a certain extent,

a design of a tax itself, which due to a set of immanent features, does not

lead to the elimination of fraud. Due to the existence of the common

market and intra-community trade within the European Union, VAT

issues have become the transnational problem. Moreover, the

harmonisation of turnover taxes requires widely understood cooperation

between national fiscal authorities, relevant institutions in other Member

States as well as in the European Union structures.

The paper attempts to define tax fraud together with its consequences

on the grounds of the Polish legal system, and presents ways used to

counteract tax fraud at two levels: introduction of systemic changes and

use of modern information and communication technologies.

1. Fiscal system in Poland and its legal administrative framework

In the binding Act on Tax Ordinance, tax is defined as public,

unpaid, obligatory and non-returnable cash liability toward the State

Treasury, province, district, or municipality resulting from the Tax

Ordinance Act, which determines tax entity and object of taxation,

incurrence of tax liability, tax basis, tax rates, and rights and obligations

of tax authorities, taxpayers, payers and debt collectors2. The provisions

including the Constitution of the Republic of Poland3 indicate that only

the relevant Acts may regulate the way of imposing taxes, and other

public levies, establishing at the same time the beginning of the Polish

tax system, perceived as all legal and organisational solutions concerning

the form of taxation. All tax administration bodies, including state fiscal

authorities (offices and tax chambers), as well as self-governing tax

authorities (in accordance with local government unit, a municipality

mayor, a head of district, a province governor, as the body of the first

instance and the local government appeals board as the second instance)

are the superstructure of the system. The Administrative Court4 is

responsible for monitoring of the final tax decisions. The Minister

competent for public finance has an important position amongst all the

authorities, and the Tax Ordinance Act provides the Minister with the

2 Article 3, paragraph 1, Article 6, The Act of 29 August 1997 - Tax, Journal of Laws

from 1997 no137 item 926, as amended. 3 Article 217, The Constitution of the Republic of Poland of 2 April 1997, Journal of

Laws from 1997 no 78 item 483. 4 B. Gnela, Podstawy prawa dla ekonomistów, Warsaw 2015, Wolters Kluwer, p. 107.

Beata Hoza, Michał Wójcicki

46

series of competences, including an extremely significant meaning of

a competent authority concerning the interpretation of tax law. Hence,

the Minister of Finance has a right to issue, pursuant to the Act, general

or more detailed interpretation of tax law, as well as posting to the

subordinate authorities.

Amongst all of the state budget revenues taxes are the most

important. Income from taxes constituted 89.9% of total revenues in the

year 2014, 89.8% in 2015 and 86.8% in 20165. The tax system

performing a fiscal function actually makes it possible for the state to

execute its basic activities. Moreover, the literature on the topic

emphasizes a non-fiscal aspect of tax system, which includes

a redistributive role6 - activities connected with redistribution of

a primary domestic product, aimed at realisation of widely understood

rules of social justice7, and stimulating role8 - actions directed at running

an interventionist macro- and micro-economic policy, in order to ensure

a stable and long-term economic growth, including low unemployment

rate9.

Among varied tax classifications, the distribution due to object of

taxation ratio to the source of tax, distinguishing indirect and direct taxes,

is prevailing10. In Poland indirect taxes, including tax on goods and

services as well as excise duty, generate the highest portion of budget

revenue. For example, for the year 2015 it amounted to 123 120,8 million

PLN on account of taxes on goods and services (47.4% of total tax

revenue) and 62 808,6 million PLN due to excise duty (24.2% of total tax

revenue)11. Unfortunately, indirect tax revenue, constituting the largest

source of state income, repeatedly becomes an extremely attractive

income source for criminal organisations. Tax related criminal activity

results in budget deficits reaching billions of PLN. The VAT gap for the

5 CSO data (Central Statistical Data, GUS ), Roczne wskaźniki makroekonomiczne –

część III, update 28 April 2017. 6 M. Podstawka, Finanse, Warsaw 2010, PWN, p. 35. 7 The importance of this role is more often emphasised in numerous studies nowadays.

The examples are edited by Jerzy Osiatyński: Kazimierz Łaski Wykłady

z makroekonomii, Warsaw 2015, PTE; Joseph E. Stiglitz, Cena nierówności, Warsaw

2015, Wydawnictwo Krytyki Politycznej; T. Piketty, Kapitał w XXI wieku, Warsaw

2015, Wydawnictwo Krytyki Politycznej. 8 St. Owsiak, Finanse publiczne, Warsaw 2005, PWN, p. 181. 9 O. Blanchard, Makroekonomia, Warsaw 2011, Wolters Kluwer. 10 J. Osiatyński, Finanse publiczne, Warsaw 2006, PWN, p. 101. 11 CSO data, Roczne wskaźniki makroekonomiczne – część III, update 28 April 2017.


47

year 2016 was estimated at 45 billion PLN12 (Fig. 1). Combining the

amount with total state budget revenue, for the same year, equal to 313,8

billion PLN, it appears that a potential deficit caused by VAT issues is

equal to 14.3% of total annual income of Poland.

Fig. 1 State budget revenues in the year 2016.

Source: own source based on The Budget Act for the year 2016 of 25 February 2016

(Journal of Laws 2016, item 278); http://www.pwc.pl/pl/media/2016/2016-11-23-luka-

vat-2016.html

In the discussion of crimes and offences against the Polish tax

system, it is essential to mention issues connected with penalties for the

abovementioned violations. Generally, the provisions of the Act of Fiscal

Penal Code apply, or in more severe cases e.g. belonging to an organised

crime group committing fiscal offences - respectively the Criminal Code.

The judicature usually takes place in common courts of law, or in cases

when a given offence is committed by a soldier - military courts. Pre-trial

proceedings concerning fiscal offences are conducted by: the National

Tax Authority, the Border Guard Service, the Police, the Military

Criminal Police. While, the Internal Security Agency and the Central

Anticorruption Bureau deal with pre-trial proceedings only in cases of

fiscal offences.

12 http://www.pwc.pl/pl/media/2016/2016-11-23-luka-vat-2016.html [access 01 May

2017].

VAT GAP

FOR TAX ON

GOODS AND

SERVICES

41%

OTHER

INCOME

59%

TOTAL REVENUES 313 MLD ZŁ

VAT 128,6 MLD ZŁ

OTHER INCOME 185,2 MLD ZŁ

ESTIMATED VAT GAP 45 MLD ZŁ


48

In recent years, a trend towards strengthening of the sentences issued

in cases of tax fraud may be observed. A breakthrough in this matter was

the resolution of the Supreme Court of 18 December 201313, which was

given a status of a legal provision. In cases such as issuing so-called

'blank invoices', it enabled application of the provisions of the Criminal

Code, which according to principles, expected stricter sanctions, in place

of Fiscal Penal Code. The next important step was taken on 14 February

2017 with respect to the Criminal Code14, and it consisted of

implementing regulations with regard to VAT fraud only. In cases of the

most serious fiscal offences an imprisonment which can go up to 25

years was provided. The presented solution raises a question whether

courts will really employ such severe penalties in their judicature, and if

it really reduces the number of fiscal offences.

2. Tax fraud and tax optimisation

A clear distinction between tax fraud and activities with respect to

the so-called tax optimisation appears to be very important in dealing

with fiscal crime. Balancing on the border of science, law, and tax

administration one may find various definitions of the same concept.

A lack of clarification concerning the relevant issues within the law

itself, seems to be particularly confusing. Generally, a theory of public

finance, in a readable way enables to capture a borderline separating

fraud from optimisation. It is a question of compliance with applicable

law. Hence, according to academic fields, it is assumed that:

tax fraud15 is an activity connected with tax evasion and obtaining of

unduly tax, which obviously and blatantly does not fall within the

limits set by applicable law;

tax optimisation16 are activities aimed at achieving tax benefits,

acceptable and falling within the law.

Unfortunately, taking into consideration the Polish legal system,

similar and clear distinction of the concepts is not that simple. The

provision concerning tax avoidance originally introduced in 2003 was

13 Resolution of the Supreme Court of 18 December 2013, file no. I KZP 19/13. 14 The Act of 10 February 2017 on the amendment of the Criminal Code and some other

Acts . 15 It is equivalent to tax evasion. 16 It is equivalent to tax avoidance.


49

questioned in a judgement of the Constitutional Tribunal17, which inter

alia demonstrated that it is unacceptable to recognize tax avoidance as

illegal, with legal means. Due to this fact, optimisation together with the

achieved fiscal aim, could not be regarded as banned. In this case, the

Constitutional Tribunal in the judgement referred to the principle of

protection in the state and law, and the principle of legality. Moreover,

judges also paid attention to a slight degree of precision of the

established regulations, which consequently would allow for too far-

reaching interpretation by tax authorities. The removal of the first

provision concerning tax avoidance as well as further amendments

introduced in the Act on Tax Ordinance, as a consequence of the

judgement, considerably limited the power of tax authorities in terms of

omitting tax consequences of disputed legal actions.

On 1 January 2016, once again, an institution preventing from

circumvention of tax law by taxpayers was introduced into the Polish

jurisprudence. According to the new provision, all tax benefits reached as

a result of lawful activities performed in an artificial way (tax

avoidance)18 were questioned. The Act defined a minimal quota of the

mentioned benefits at the level of 100 thousand PLN. The legislator

intended the clause mainly to refer to income tax. Its complement is

added to the Act on the taxation of goods and services, as a completely

new paragraph regarding the so called misuse of laws19. According to the

paragraph, violation of law involves activities due to taxation of goods

and services, within the transaction, which despite meeting the formal

conditions set by the provisions of the Act, were fundamentally aimed at

obtaining tax benefits, what would have been contrary to the objective

the regulations comply with20. Classification of a given activity as

a misuse, in turn results in the development of such tax consequences

which would have taken place in case of the absence of law violation.

New legal standards seem to offer a significant assistance for state

authorities in the fight against tax fraud. However, legislative changes

concerning circumvention of tax law may become problematic. The main

17 The judgement of 11 May 2004, file no. K 4/03. 18 The Act of 29 August 1997 - Tax Ordinance, Journal of Laws from 1997 no. 137 item

926, as amended Section IIIA, Chapter 1 Clause against tax avoidance . 19 The Act of 11 March 2004 on the taxation of goods and services, Journal of Laws

from 2004 no. 54 item 535, Article 5 paragraph 4 and 5. 20 The limit mentioned with the clause concerning income tax (100 000 PLN) is not

valid in terms of law misuse on VAT.


50

objection may be the fact that the provisions are not free from

accusations, originally posed by the Constitutional Tribunal regarding the

first clause on tax avoidance. The scope of information is still relatively

small, and the wording concerning tax benefits, which granting would

have been contrary to the objective, of which the regulations comply with

seem yet again to provide inspection bodies with far too many

interpretation possibilities, potentially raising threat for honest

entrepreneurs. Moreover, the fact that supplemented regulations to

a small extent refer to a mass phenomenon, which is VAT fraud

committed by organised criminal groups, and whose operations bring the

greatest losses, is questionable.

The adoption of the Act on taxation of goods and services on 11

March 2004, was mainly the result of the accession of Poland to the

European Union 21. Tax related issues are also regulated by regulations of

the Minister of Finance and subsequent by the Minister of Finance and

Economic Development. Because of the affiliation to the EU, Poland is

also supposed to implement EU directives. However, the Acts generally

comply with the objective, while in case of VAT tax there is a possibility

of referring to them in a direct way22, only when a given country failed to

carry out a suitable implementation, it was performed after the deadline,

or it was not performed correctly. In such a case, the possibility of direct

EU law application, first before the national jurisdiction, is only given to

taxpayers (such option is not given to tax authorities).

The tax gap regarding VAT is not only a problem for Poland, it is

a phenomenon known throughout the European Union, though at

different levels. According to data published by the European

Commission, in the EU in 2014, 159,5 billion EUR of value added tax

income (VAT) was lost. The tax gap fluctuated from 37.9% of

uncollected VAT in Romania to just 1.2% in Sweden. In Poland the gap

amounted to 24.1%. In absolute terms, the greatest gap equal to 36.9

billion EUR was recorded in Italy, whereas Luxembourg presented the

lowest gap equal to 147 million EUR. In Poland, in 2014, the gap of 9.3

billion EUR was estimated (Figure 1).

21 It substituted the earlier Act of 8 January 1993 on taxation of goods and services and

excise duty. 22 Such a possibility results from the judgements of the Court of Justice as well as the

judgements of the Polish administrative courts. The example can be the Judgement of

District Administrative Court of 23 October 2006 (file no. III SA/Wa 1744/06).


51

Generally speaking, the division of a negative phenomena into the

phenomena resulting from human dishonesty, and those which are linked

to certain, and specific law provisions and regulations, limiting economic

activity are considered to be helpful while analysing reasons of tax fraud.

The first category includes for example cases of unreported sale. The

occurrence of this phenomenon seems to indicate that within a current

tax system regarding VAT, not much can be done with the use of

legislative changes only. Finally, a change of social mentality, which can

be formed by campaigns such as the National Receipt Lottery23 could be

helpful in the fight against fraud. Summing up, much more can be gained

from a detailed analysis of the second fraud category, which is a result of

current, inaccurate legal structure.

Figure 1. Estimates on the tax gap in the EU-27 in 2013 and 2014.

Source: Study and Reports on the Gap in the EU-28 Member States:2016, Final Report,

TAXUD/2015/CC/133.

23 The National Receipt Lottery is an educational action of the Ministry of Finance,

which started on 1 October 2015. Its objective is to inform Poles, what is a role of

conscious consumers regarding an honest economic trading, and to show that receiving

a receipt means supporting honest entrepreneurs and fair competition.

http://www.mf.gov.pl/ministerstwo-finansow/dzialalnosc/dzialalnosc-edukacyjna/

projekty/-/asset_publisher/2IKb/content/narodowa-loteria-paragonowa-1

0

5

10

15

20

25

30

35

40

45

BE BG CZ DK DE EE IE GR ES FR HR IT LV LT LU HU MT NL AT PL PT RO SI SK FI SE UK

2013 2014 mediana


52

The solutions in this field may primarily be: a fundamental change

and clarification of provisions, the use of advanced and well-structured

IT data which allows an effective selection of the entities to be

controlled, or finally system changes which modify completely the way

of collecting tax on goods and services.

3. Key elements of the structure of tax on goods and services

There is no doubt that as long as differentiated rates of tax on goods

and services exist, they will be used in reducing the tax due through an

intentional misclassification of the products or services. In practice, it

appears that sale exempted from tax on goods and services or zero-rated

is particularly favourable, taking into account that those concepts are not

identical due to their legal consequences. Sale which is not subject to tax

on goods and services does not entitle the seller to deduct input tax.

An occasion to avoid taxation may also be an action that is not sale.

An example of this method is contractual penalties. According to the

Civil Code, a contractual penalty is only a repair of the damage resulting

from nonperformance or improper performance of non-monetary

liabilities. It is not subject to tax on goods and services and regardless of

the amount of the actual damage, it is as high as it was fixed on a flat-rate

basis in the agreement between the entities. Due to such a legal structure,

in a situation when, for example, a recipient of a given service is an

entity not entitled to deduct input tax on goods and services24, the entity

has no interest in paying the tax. More profitable action for both parties

of the transaction may be terminating the agreement at one of the last

stages of the service and a settlement through a contractual penalty in lieu

of settling liabilities under the VAT invoice. If the penalty is higher than

the adequate net amount according to the invoice but lower than the gross

amount, such a solution is more profitable both for the recipient and the

provider of a given service. However, at a loss for the state budget.

Another form of fraud, using preferential VAT rates, is the so-called

carousel fraud within intra-community trade in goods. A complicated

network of entities, formally unrelated and controlled by one criminal

group, usually take part in the procedure. The result is huge budget

reductions related to double benefits based on both non-payment of tax

due at one of the stages and tax refund at another. Such an action is

enabled by settling within the Community area the so-called taxation in

24 Such a situation may take place if it is related to: an association, a cooperative etc.


53

the State of destination, which is related to zero-rate tax at the sale to

another EU country, with the simultaneous right to deduct input tax on

goods and services. The scheme is based on a multistage circulation of

given goods from country to country. A product selected for such a type

of trade is usually a product of small size and high value (mobile phones,

expensive software etc.) Its transportation is not related to the easily

controllable carriage by numerous trucks. Frequently, the trade turns out

to be fictitious and is supported only with well-faked WZ documents,

invoices, delivery documents etc. The goods sold previously with a VAT

zero-rate and withheld input tax is finally delivered to an entity intended

to be eliminated in advance – the so called missing trader, frequently

registered under the so called strawperson, which additionally hinders

legal sanctions. The buyer pays the missing trader the full gross amount

but the missing trader does not pay the tax on goods and services

according to the issued invoice. Despite the situation, according to the

ruling of the European Court of Justice25, the buyer who paid the gross

amount keeps the full right to deduct input tax. There is a presumption of

unawareness of a purchase from a tax fraud.

Unfortunately, the method of carousel fraud abovementioned is

extremely difficult to fight against. The multitude of involved entities,

well-faked documentation and participation of so-called strawpersons

cause that the fight with this type of crime would require a well-

organised cooperation of tax inspection bodies from particular countries,

which often fails. Undoubtedly, in this field there is still a chance for

improvement, which should be based on a faster exchange of required

data and information. Unfortunately, it should be taken into account that

this also may be insufficient and due to the tax structure it will not help

eliminate carousel fraud. In this situation, indicating an alternative is

difficult. In terms of intra-community trade, a significant tightening of

the rules, instead of hindering the existing abuse, may bring strongly

adverse effects in the form of an economic slowdown.

25 The ruling of the Court of Justice in joined cases Axel Kittel / Recolta file ref. C-

439/04 and C-440/04, the ruling in joined cases Optigen / Fulcrum / Bond House file

ref. C-354/03, C-355/03 and C-484/03, the ruling in joined cases Mahageben / David

file ref. C-80/11 and C-142/11.


54

4. Crime prevention with the use of modern information

technologies

The fast development of information technologies should result in

their equally fast implementation for the purposes of tax oversight. Those

technologies enable a fast flow of the required information and

a possibility of its analysis with the use of well-constructed algorithms.

Currently, such methods are applied in Poland through a step by step

implementation of an obligation to prepare a single control file (Jednolity

Plik Kontrolny – JPK). The prototype named Standard Audit File for Tax

(SAF-T) was developed by OECD in 2005 and implemented for the first

time in Portugal in 2008 where it brought the required results. It was also

rapidly implemented in other countries: Germany, Great Britain,

Denmark, the Netherlands, Sweden, Slovenia. The JPK covers 7

structures including: books of account (JPK_KR), bank statements

(JPK_WB), warehouses (JPK_MAG), records on purchase and sale liable

to VAT (JPK_VAT), VAT invoices (JPK_FA), tax revenue and expenses

ledger (JPK_PKPIR) and revenues records (JPK_EWP). In terms of the

monthly preparation of JPK_VAT, large enterprises (since 1 July 2016)

and small and medium-sized enterprises (since 1 January 2017) have

been already covered by the obligation, whereas microenterprises will be

covered by the obligation from 1 January 2018. Despite the fact that the

implementation of JPK may turn out to be undoubtedly problematic for

small companies, in the long run there is a chance for satisfactory effects,

not only in terms of the improved collection of tax on goods and services.

In the brochure issued by OECD26 the following aspects are considered

advantageous: a reduction of the costs related to the lack of necessity to

employ specialised staff to draw up similar statements; unification and

standardisation of financial data possible to apply in the exchange

between the enterprises, public authorities etc.; a possibility of easy

archiving of financial data; a reduction of administrative costs related to

the oversight by the tax authorities.

Therefore, the implementation of unified financial data in the form of

JPK may bring mutual benefits. In addition to the public administration,

the entrepreneurs themselves may benefit from the process because they

will be able to use the information for financial analyses or constructing

econometric models. A disadvantage of such a solution is mainly

26 OECD, Guidance for the Standard Audit File – Tax Version 2.0, April 2010.


55

a potential complication of the activity of the smallest economic units

and, after all, also a little influence on the activity of organized crime

groups.

Definitely, the most comprehensive solutions that may hinder tax

fraud are systemic solutions. An example is the split payment model

which completely changes the method of collecting tax on goods and

services. It involves dividing in electronic form a given payment covered

by tax into a net amount which is sent directly to the creditor’s bank

account and the amount of tax on goods and services which is transferred

to a special individual account created for each taxpayer, which would be

constantly overseen by the tax authorities. The split payment solution

involves various possibilities of dividing the payment: by the fully

automated special settlement system that splits the payment or manually

by the taxpayer who directs the transfer into two different accounts.

Depending on the applied solution, the tax account may be located in

a commercial bank selected by the taxpayer or it may belong to the group

of tax authorities accounts and be handled by the central bank.

As the Poland’s Ministry of Finance reports,27 the solution planned

to be applied in Poland will be based on subaccounts handled through

commercial banks and switching to this model will be generally

voluntary. This form is planned to be implemented on 1 January 2018.

The legislator considers various types of gratification to encourage

potential taxpayers to implement the split payment system. Only for

some industries particularly susceptible to tax fraud28, there will be

implemented an obligation of switching to the abovementioned payment

system, albeit this must be accepted by the European Commission

beforehand. It is also worth mentioning that the taxpayers will be able to

use the funds collected on the subaccounts to settle their liabilities in part

consisting of the tax on goods and services, which is to insure the

financial liquidity at an appropriate level29.

27 http://www.mf.gov.pl/pl/ministerstwo-finansow/dla-mediow/wywiady/pawel-gruza/-

/asset_publisher/P3qp/content/od-2018-r-wydzielone-konto-dla-kwoty-vat-

rzeczpospolita-28-kwietnia-2017-r?redirect=http%3A%2F%2F [access 22 May 2016]. 28 Among others, these are industries in which currently the reverse charge mechanism

is applied in relation to tax on goods and services. The split payment model is intended

to replace this mechanism. 29 The response of the Minister of Economic Development and Finance to the

parliamentary question no 10951 of 22 March 2017.


56

The Ministry of Finance has great expectations towards the split

payment system. The model tested previously in other countries30 is

expected to generate additional billions of PLN for the state budget.

Taking into consideration the current condition of public finance related

to the large budget deficit and the comparable in amount VAT gap, each

act of sealing of the collection of tax on goods and services seems

extremely valuable.

Conclusions

Tax fraud in terms of tax on goods and services has numerous

negative consequences – from the viewpoint of the state budget they are

a critical factor. Moreover, they disturb competitiveness among the

entities on the market. The analysis of the administrative and legal

environment discussed in this paper helps realise how essential and

effective the clarification of the provisions is, as well as the creation of

a transparent and coherent legal system and the support of those actions

with an effective analytical and information system. The processed

statistical data will allow forecasting trends and entities that can

participate in the fraud of tax on goods and services. It should also be

emphasized that the preferred solutions should be those which do not

burden excessively honest taxpayers.

Unfortunately, the coherence of the tax law system appears to be

difficult to obtain. The implementation of changes in the law, except for

the compliance with the elementary principles of the Constitution, must

be in accordance with the European Community provisions, determined

in numerous directives. The experience of other countries shows that the

solutions such as the JPK or the split payment increase the budget

revenues in real terms but they cannot eliminate crimes in the area of tax

on goods and services.

30 The split payment model was implemented in a limited scope in the Czech Republic

and Turkey. In Italy it has been in force since 1 January 2015. According to the Italian

tax authorities, the split payment model will enable the protection of the state budget

from the risk of VAT non-payment by the provider and on the other hand, it will relieve

the public law entities from the risk of involving into the schemes that lead to VAT

fraud. Italy forecasts that the implementation of the split payment mechanism will allow

the increase of VAT tax revenues of about one million euro annually. Split payment

Mechanism for Public Bodies, Simonetta La Grutta, International VAT Monitor, 2015

(Volume 26), No. 2.


57

Legal Acts

[1.] The Constitution of the Republic of Poland of 2 April 1997, Journal

of Laws 1997 no 78 item 483, Article 217.

[2.] The Act of 29 August 1997 – The Tax Ordinance, Journal of Law

1997 no 137 item 926, as amended.

[3.] The Act of 11 March 2004 on Tax on Goods and Services, Journal

of Laws 2004 no 54 item 535, as amended.

[4.] The Act of 10 February 2017 on amending the Act – the Criminal

Code and other acts.

Literature

[1.] Blanchard O., Makroekonomia, Wolters Kluwer, Warszawa 2011.

[2.] Gnela B. (ed.), Podstawy prawa dla ekonomistów, Wolters Kluwer,

Warszawa 2015.

[3.] Judkowiak K., Pomorska-Porębska J., Bartosiewicz M., VAT 2017

Komentarz dla praktyków, ODDK, Gdańsk 2017.

[4.] Osiatyński J., Kazimierz Łaski Wykłady z makroekonomii, PTE,

Warszawa 2015.

[5.] Osiatyński J., Finanse publiczne, PWN, Warszawa 2006.

[6.] Owsiak S., Finanse publiczne, PWN, Warszawa 2005.

[7.] Piketty T., Kapitał w XXI wieku, Wydawnictwo Krytyki Politycznej,

Warszawa 2015.

[8.] Podstawka M. (ed.), Finanse, PWN, Warszawa 2010.

[9.] Stiglitz Joseph E., Cena nierówności, Wydawnictwo Krytyki

Politycznej, Warszawa 2015.

[10.] Turaliński K, Podatek VAT Oszustwa podatkowe, przemyt

i zorganizowana przestępczość skarbowa, Artefakt.edu.pl,

Warszawa 2017.

[11.] Turaliński K, Jak kraść? Podręcznik złodzieja, Artefakt.edu.pl,

Warszawa 2014.

http://artefakt.edu.pl/

http://artefakt.edu.pl/


58

Others

[1.] The Central Statistical Office, Annual Macroeconomic Indicators –

Part III.

[2.] The Supreme Audit Office, Information on the Audit Results:

Fighting Fraud of Tax On Goods and Services No

17/2014/P/13/042/KBF.

[3.] The Supreme Audit Office, Information on the Audit Results:

Counteracting the Implementation of Invoices Confirming

Fictitious Actions No 24/2016/P/15/011/KBF.

[4.] OECD, Guidance for the Standard Audit File – Tax Version 2.0,

April 2010.

[5.] The ruling of the Court of Justice in joined cases Axel Kittel /

Recolta file ref. C-439/04 and C-440/04, the ruling in joined cases

Optigen / Fulcrum / Bond House file ref. C-354/03, C-355/03 and

C-484/03, the ruling in joined cases Mahageben / David file ref. C-

80/11 and C-142/11.

[6.] Split payment Mechanism for Public Bodies, Simonetta La Grutta,

International VAT Monitor, 2015 (Volume 26), No. 2.

[7.] The resolution of the Supreme Court of 18 December 2013, file ref.

I KZP 19/13.

[8.] The judgement of 11 May 2004, file ref. K 4/03.

Websites

[1.] http://www.pwc.pl

[2.] http://www.mf.gov.pl

http://www.pwc.pl/

http://www.mf.gov.pl/


59

DOI: 10.19192/wsfip.sj2.2017.4

Paweł MROWIEC

AVAILABLE FORMS OF MONEY

IN PAYMENT TURNOVER VERSUS ECONOMIC

GROWTH OF THE VISEGRAD GROUP COUNTRIES

Summary

The aim of the informal association of Central-Easter Europe countries known as the

Visegrad Group functioning within the European Union is to develop and deepen

collaboration based on their common cultural grounds and common turbulent past

behind the Iron Curtain under the communist regime after WWII. One of the pillars of

this association is cooperation in the economic sphere which is based on free market

principles re-established in the region after the political transformation which took

place at the end of the 1980s. The economic sphere is closely connected with the

payment system whose basic constituent is money. Currently there are three available

forms of money: cash money, non-cash money and electronic money. Out of all

Visegrad countries, which at the same time happen to be a part of the European Union

since 1 May 2004, only Slovakia adopted EURO as its currency, while other countries

in the group i.e. Poland, Hungary and the Czech Republic retained their national

currencies. The Visegrad countries display considerable differences with respect to the

usage of available forms of money and to the pace of changes occurring in the payment

areas of particular Visegrad countries. The differences just mentioned result from

various social and economic conditions. The paper presents the distribution of different

forms of money in the payment turnover in the relevant countries in the context of their

economic growth.

Key words: Visegrad countries, payment turnover, economic growth, GDP, cash and

non-cash transactions

Introduction

Traditional money as we know it today is currently transforming

towards non-cash and electronic forms. Using different forms of money

in an economy triggers different costs of payment turnover which, in

turn, impacts the level of economic development and competitiveness of

Dr Paweł Mrowiec, Bielsko-Biała School of Finance and Law, Chair of Banking and

Finance, Faculty of Finance and Information Technology, [email protected]

Paweł Mrowiec

60

a given economy. The analysis of the above dependencies shall constitute

material on the basis of which shaping future payment behaviour should

be more focused on the forms bringing more benefits seen both from

social and financial perspective.

1. Economic growth of the Visegrad countries

Economic growth is often equated with economic development

despite visible differences between these two notions. Growth refers only

to quantitative changes1 while development refers to both quantitative

and qualitative aspects and has much wider scope as compared to

economic growth. The present paper emphasizes the quantitative criteria

of economic growth in each particular country of the Visegrad Group

such as: growth of GDP, increase in investments, deficit of government

institutions and local government units, rate of unemployment as well as

public debt with respect to GDP.

The Visegrad Group2 was established on 15 February 1991 and

following the dissolution of Czechoslovakia on 1 January 1993, it

consists of four countries: the Czech Republic, Poland, Slovakia and

Hungary; the joint population in the Visegrad Group area amounts to

64.3 million people. GDP generated by the countries at the end of 2014

was 989.37 billion USD, out of which 546 billion USD (55% of total

GDP of the Group) was generated in Poland. The second biggest GDP

was generated in the Czech Republic (205 billion USD which is 20% of

total GDP of the Visegrad region). Hungarian GDP at the end of 2014

amounted to more than 137 billion USD, and in Slovakia only to 100

billion USD.

However, taking into account GDP per capita the situation of

Visegrad countries looks quite different. The highest GDP per capita at

the end of 2014 was observed in the Czech Republic (19.563 billion

USD), next in Slovakia (18.454 billion USD), then Poland (14.378

billion USD) and Hungary (13.881 billion USD). Although the joint

population of the four ECE countries is lower only by about 27% than the

1S. Marciniak, Innowacje i rozwój gospodarczy, the Centre of Social Sciences of

Warsaw University of Technology, PWN, Warszawa 1997, p. 50, [after:] M. Warczak,

Endogeniczne i egzogeniczne czynniki rozwoju gospodarczego z perspektywy finansów

gminy, Contemporary Economy Electronic Scientific Journal, vol. 6, issue 4/2015. 2The name refers to a town in northern Hungary, which was the meeting point of kings

of Hungary, Czechia and Poland in 1335 and 1338.

Available Forms of Money in Payment Turnover…

61

population of Germany (82.2 million people), the GDP generated in these

countries is incomparably (almost four times) lower than GDP of

Germany (3.885.440 million USD).

The differences in generated GDP and GDP per capita in particular

Visegrad countries depend on a number of factors such as for example

innovativeness and transfer of knowledge from academic centres to the

business environment. The economic ratios for the period between 2011

and 2015 in respective Visegrad countries are presented in Table 1.

The economic growth between 2011 and 2015 in all analyzed EEC

countries was characterized by periods of economic slowdown, and in

case of Czech Republic and Hungary there was even a recession (period

2012-2013). Taking into account the accumulated economic growth in

the period 2011-2015, the fastest growth could be observed in Poland

(15.7%). The Slovak economy grew in the analyzed period by 12.4%,

Hungarian by 8.8%, and Czech just by 7.2%

As far as the rate of unemployment is concerned in the years 2011-

2015, all countries showed a falling tendency, the smallest reduction of

unemployment rate was observed in Czech Republic (from 6.7% in 2011

to 6.5% in 2015), it should be added, however, that unemployment rate in

Czech Republic in 2011 was more than 60% lower than the rate of

unemployment in Germany.

The deficit of the government and local government sector in the

analyzed period also shows a downwards trend, the highest deficit of the

country in 2011 the stronger the downwards trend could be observed.

The situation is very similar when it comes to public debt with respect to

GDP, it should be highlighted that public debt in Hungary was especially

high in the analyzed period (80.8% in 2011, falling down to 75.3% in

2015).

Economic development of the real zone is closely related to the

monetary sphere and within monetary sphere to available forms of

money and infrastructure of the payment system.

Paweł Mrowiec

62

Table 1. Economic ratios between 2011 and 2015 in the Visegrad countries

RATIO 2011 2012 2013 2014 2015

GDP growth

[%]

PL 5,0 1,7 1,2 3,36 3,6

SK 2,8 1,5 1,4 2,5 3,6

CZ 2 -0,8 -0,5 2 4,3

HU 1,8 -1,7 1,9 3,7 2,9

Growth of

investments [%]

PL 8,8 -1,8 -1,1 10 5,8

SK 12,7 -9,2 -1,1 3,5 14

CZ 1,1 -3,1 -2,8 2,1 7,7

HU -1,3 -3,4 7,3 11,2 1,9

Unemployment

rate [%]

PL 12,5 13,4 13,4 11,4 9,8

SK 13,7 14 14,2 13,2 11,5

CZ 6,7 6,8 7,7 7,7 6,5

HU 11,1 11,1 10,1 7,7 6,8

Deficit in

government and

local-government

sector [%]

PL -4,9 -3,7 -4 -3,3 -2,6

SK -4,1 -4,3 -2,7 -2,7 -3

CZ -2,7 -3,9 -1,3 -1,9 -0,4

HU -5,5 -2,3 -2,6 -2,3 -2

Public debt with

respect to GDP [%]

PL 54,4 54 56 50,5 51,3

SK 43,3 52,4 55 53,9 52,9

CZ 39,9 44,7 45,1 42,7 41,1

HU 80,8 78,3 76,8 76,2 75,3

Source: Own work based on data from central banks: the National Bank of Poland,

Národná banka Slovenska, Česká národní banka, Magyar Nemzeti Bank.

2. Different forms of contemporary money

Money is a basic economic category3 which evolved in the process of

abandoning the natural economy and bartering system. In the history of

3In the works of Aristotle [Aristotle, Etyka Nikomachejska, PWN, Warszawa 2016]

money was defined as a bundle of services which serves three basic functions:

measurement of value (offers possibility to compare prices of various products and

resources), means of exchange (is commonly accepted equivalent of goods) and a means

of savings (allocation, storing wealth or thesaurisation). Aristotle also emphasized an

opinion that money may fulfil its functions only thanks to the legislation in force and

through commonly accepted social customs, thus already back in times of Aristotle it


63

mankind there has never been and probably will never be a highly

developed culture without trade exchange which is inseparably related to

money. People do not live in isolation, as social creatures they establish

a network of interactions with others and results of their work (better or

worse) are subject to exchange by means of money4. Historically, in

agricultural countries the value of various goods, commodities and

services, was calculated in accordance with highly desirable goods such

as grain or other crops. Another, very popular payment commodity in

Poland was salt5, which was used in court disputes as a fine which the

accused had to pay as reparation; the fine was 300 of the so called salt

crumbles (Polish: krusz) i.e. pellets of salt. The Polish language has

retained a saying for something very expensive: to pay salt for

something. Trade which used desired commodities as a payment method

was too complicated, due to the necessity to determine an appropriate

exchange ratio. That is why, in the course of time, alternative payment

methods evolved e.g. cash money and, with development of banking

system, non-cash money and electronic money.

Nowadays, popularity of cash money as a payment method is

decreasing in favour of electronic and non-cash payments. J. Górka

rightly pointed out that payers while choosing the payment method use

two criteria: convenience of hoarding and payment potential of the

method. Deposits of credit institutions have this advantage over cash that

the risk of theft or loss is considerably lower, moreover deposits may

bring income in the form of interests rates. The second criterion i.e.

payment potential is related to payment instruments. Competition

between different forms of money in payment function takes place on the

level of payment instruments6.

Changes in the forms of money are a continuous process which will

evolve along with social and economic development. D. S. Evans and R.

was believed that money does not present a value in itself (later this idea was developed

by the theory of monetary nominalism). 4 More in: P. Mrowiec, J. Czerny, Humanistyczny wymiar świata finansów, Publishing

House of Bielsko-Biała School of Finance and Law, Bielsko-Biała 2012. 5In Tibet and Ethiopia salt was used to make coins. In medieval Europe salt was so

important that it determined the paths of international trade, the so called salt roads. 6J. Górka, Konkurencyjność form pieniądza i instrumentów płatniczych, CeDeWu,


Paweł Mrowiec

64

Schmalensee enumerate the following breakthroughs in the long history

of money7:

birth of money in the form of coins made of metal,

emergence of cheques, which are a promise of a monetary payment,

emergence of paper money,

emergence of electronic money together with payment cards and other

payment methods.

J. Patla points to an important role of electronic payment services in

shaping the modern history of money8. Contemporary financial system

relies on three kinds of money used for payments (monetary settlements):

cash settlements in which banknotes and coins emitted by central bank

are transferred between parties (paper or token money),

cashless settlements in which the settlement takes place through banks

or payment institutions which are authorised to render payment

services offering payment accounts (i.e. bank money),

electronic money – through different instruments of electronic money.

Among contemporary features of money one may enumerate the

following patterns:

cash money has nothing to do with gold. Its physical form is a piece of

paper which was given the monetary status through a legal obligation

to use it as a payment means (legal tender) in force in a given

country9,

cash money is a national currency which means that the state is

a guarantor of its value. The state guarantees the authenticity of

monetary tokens10,

money is guaranteed by goods and services (substantial money) which

means that nominal value of money should be in line with the

substantial value. Respecting this rule is difficult in practice due to the

tendency to increase the volume of money with respect to the

7D.S. Evans, R. Schmalensee, Paying with Plastic. The Digital Revolution in Buying

and Borrowing, The MIT Press, Cambridge (Mass.), London 2005, p. 27. 8J. Patla, Rozwój nowych sieciowych form płatności przyczyną wirtualizacji pieniądza

tradycyjnego, Kraków University of Economics Publishing House, Scientific Journal

No 754, Kraków 2007, pp. 137-149. 9See: P. Vilar, A History of Gold and Money: 1450-1920, Verso 1991. 10In 2015 the number of forgeries of exchange medium in the turnover was 10.099, out

of which forgery of banknotes was 7.803 and coins 2.296.


65

manufactured goods and available services, which in turn, triggers

inflation occurrences,

with development of e-commerce new payment services emerged

allowing payments through EDI systems (Electronic Data

Interchange) for purchases made in online stores and on online

auctions (e.g. Allegro, eBay, Amazon). Online payments involve

electronic money transfers from bank accounts which the customer

can access via the Internet, as well as payment cards and other

innovative methods (e.g. pre-paid Internet accounts with services

providers, pre-paid cards, short text messages)11.

Within SEPA project one of the fundamental assumptions is

continuous strive for development of electronic and automated forms of

payments. Nevertheless, still a lot of cash remains in the turnover and the

volume of cash is still growing year after year so cash may not be

overlooked in the implementation of SEPA project. Financial integration

and harmonisation of rules for payments in the 32 countries which

implement the project calls for sorting out the non-cash turnover which

costs the European economy between 50 and 75 billion Euro per year12.

In turn, the European Policy Centre expressed an opinion that cash

turnover in the euro zone needs to be sorted out because only systemic

actions may reduce the costs of cash processing which involves

calculating, sorting, storing money values and preparing statistics and

reports from conducted operations as well as complex service and

management of cash volumes in self-service teller machines.

Implementation of SEPA project leads to the increase of importance

of electronic and non-cash transactions, and at the same time emergence

of new, previously unknown bank products and services for the European

market and specifically defined segments of customers13. Involvement of

countries in assuring the success of the project is on different levels,

which is also visible in the ECE region countries.

11According to a poll conducted by Gemius, as many as 83% of the Internet users in

Poland would buy more products online if there were possible to return the goods for

free and 24% do not return unwanted or faulty goods because of shipping costs,

http://www.spidersweb.pl/2014/11 of 25 January 2017. 12Estimates based on data from EPC Cash WorkingGroup and EBC, analysed by PSE

Consulting. 13See: EPC, SEPA Cards Standardisation (SCS) Volume. Book of Requirements,

http://www.europeanpaymentscouncil.eu/knowledge_bank_detail.cfm?documents_id=5

60 of 7 January 2017.

Paweł Mrowiec

66

3. Payment infrastructure and its presence in Visegrad Group

countries

One of the most important factors conditioning development of

payment infrastructure is the number of financial institutions present on

the market which render payment services. While in urban areas the

availability of payment services is rather wide, in rural areas there are not

enough payment institutions what may lead to financial exclusion of

residents of these areas including exclusion with respect to non-cash and

electronic payments. The number of financial outlets offering payment

services per 1 million inhabitants in Visegrad countries is presented in

Table 2.

Table 2. Number of institutions offering payment services per 1 million people

No. Country Outlets per 1 million people

1 Czech Republic 543

2 Poland 1.436

3 Slovakia 569

4 Hungary 642

Source: Own work based on ECB Statistical Data Warehouse http://sdw.ecb.europa.eu

With respect to outlets of institutions offering payment services per 1

million inhabitants, Poland is the leader on the CEE arena. High banking

penetration ratio in Poland is the result of including in the ratio such

outlets which process cash transactions (e.g. the Polish Post outlets) but

which do not process non-cash payments. However, the results of

a report prepared by PRNews.pl show that banks reduce their sales

network by cutting the number of their partner facilities14.

Despite diversified access to outlets offering payment services in

Poland and in other three Visegrad countries, the number of bank

accounts per one inhabitant is very similar, with one exception - Hungary

where the level is lower, only 1,1 (Table 3).

Table 3. Number of bank accounts per 1 person

14http://prnews.pl/raporty/raport-prnewspl-liczba-placowek-bankowych -i-kw-2016-

6552746 of 5 December 2016.


67

No. Country Number of bank accounts per 1 person

1 Czech Republic 1,69

2 Poland 1,6

3 Slovakia 1,57

4 Hungary 1,11


The above data prove that not only the number of outlets offering

payment services assures their availability but also the level of

development of Internet banking, which in turn relies on the availability

of Internet connection. Although in Poland the number of payment

institutions per 1 million inhabitants is definitely the highest, 4% more

citizens of Czech Republic above 15 years of age are in the possession of

a bank account as compared to Poland. Also Slovakia with only 569

payment institutions per 1 million of inhabitants as compared with 1436

institutions in Poland has the ratio of bank account holders above 15

years of age only 1% lower than Poland. The number of bank account

holders above 15 years of age (in %) is shown in Table 4.

Table 4. Bank account holders above 15 years of age (in %)

No. Country Number of bank account holders among

citizens above 15 years of age

1 Czech Republic 82

2 Poland 78

3 Slovakia 77

4 Hungary 72


The smallest percentage of bank account holders in Visegrad

countries could be observed in Hungary (72% of the population above 15

years of age). In Poland the score of 78% could be achieved thanks to

a very popular system of cooperative banks, which at the end of June

2016 concentrated almost 2 million Poles. From the point of view of

utilization of available forms of money, one should not ignore the

significance of the infrastructure of the payment system including the

Paweł Mrowiec

68

network of cash dispensers and cash deposit machines, the number of

facilities accepting electronic payment instruments etc. The number of

cash machines per 1 million inhabitants is presented in Table 5.

Table 5. Number of cash machines per 1 million inhabitants

No. Country Number of cash machines

per1 million inhabitants


2 Poland 533

3 Slovakia 500

4 Hungary 495


The number of cash machines per 1 million people seems to be the

smallest in the Czech Republic (at least 422), at the same time in the

same country the biggest number of physical persons above 15 years of

age has an account in a bank (82%), the Czech Republic consequently

boasts the highest number of bank accounts per one citizen. However,

taking into account all EU countries, ECE countries have the smallest

number of cash machines per 1 million inhabitants. The number of cash

machines per 100 km2 is presented in Table 6.

Table 6. Number of cash machines per 100 km2

No. Country Number of cash machines

per 100 km2


2 Poland 6,6

3 Slovakia 4,4

4 Hungary 5,2


As far as the number of cash machines per 100 km2 is concerned,

Poland is in the leading position, also with respect to the number of cash

machines per 1 million inhabitants, what in fact was caused by the

pressure of Polish payment institutions on the development of electronic


69

distribution channels. Development of cash machines network facilitates

increased utilization of cash in payment turnover, but as compared to the

EU average of the number of cash machines per 1 million inhabitants and

the number of cash machines per 100 km2, Visegrad countries show

much lower ratios. Development of non-cash turnover is, in turn, related

to the availability of facilities accepting electronic payment instruments

(Table 7).

Table 7. Number of POS facilities accepting electronic payment instruments

per 1 million inhabitants

No. Country Number of POS termini

per 1 million inhabitants

1 Czech Republic 9.605

2 Poland 10.347

3 Slovakia 8.425

4 Hungary 10.631


Among countries of Central Eastern Europe with the biggest number

of facilities accepting electronic payment instruments the best ratio can

be found in Hungary (10.631) and Poland (10.347).

The range of services offered through POS terminals includes also

cash back service. M. Rabong points to the following benefits of cash

back15 service:

time saving –withdrawal of cash is possible even during everyday

shopping,

availability – number of retail outlets or petrol stations offering cash

back service is higher than the number of cash machines especially in

small or touristic towns and villages,

simplicity – transaction is executed on POS terminal by the assistant,

and the customer only signs the printout or authorises the transaction

with PIN code.

Number of facilities accepting electronic payment instruments per

100 km2 is presented in Table 8.

15NBP, DSP, M. Rabong, Raport na temat usługi cash back na polskim rynku,

Warszawa 2014.

Paweł Mrowiec

70

Table 8. Number of facilities accepting electronic payment instruments

(POS termini) per 100 km2

Lp. Country Number of POS termini per 100 km2


2 Poland 127

3 Slovakia 93

4 Hungary 113


Number of facilities accepting electronic payment services shows the

ability of service providers to capitalize on new technologies and the

ability to unlock hidden (potential) values which the new technologies

bring. Electronic payment instruments are innovative as they involve new

solutions, technologies or standards which qualitatively change the

existing payment methods. As far as innovativeness is concerned, three

areas of innovation in retail payments can be differentiated: innovative

payment instruments, innovative channels and innovative forms of

money16. Saturation with facilities accepting electronic payment

instruments per 100 km2 and with cash machines per 100 km2 in the

analyzed countries is very comparable – the Czech Republic and Poland

have slightly better ratios than Slovakia and Hungary.

Table 9. Number of payment cards per 1 person

No. Country Number of payment cards per 1 person


2 Poland 0,94

3 Slovakia 0,97

4 Hungary 0,9


The analysis with respect to the number of payment cards per one

person also shows similar results for the analyzed countries and all of

16 W. Szpringer, Elektroniczne instrumenty płatnicze –tendencje rozwojowe, E-mentor

No 3 (50)/2013, http://www.e-mentor.edu.pl/artykul/index/numer/50/id/1031 of 5

December 2016.


71

these countries occupy bottom positions in the ranking of all EU

countries. In the Visegrad countries there are about four times fewer

cards per 1 person than in Luxemburg, almost three times fewer than in

Great Britain and more than two times fewer than in Sweden, Croatia,

Belgium, Malta or Holland.

Table 10. Number of non-cash transactions made with payment cards per 1 person

No. Country Number of non-cash transactions made

with payment cards per 1 person

1 Czech Republic 46

2 Poland 49

3 Slovakia 50

4 Hungary 36


The biggest number of non-cash transactions per 1 person was

observed in Slovakia, which is on average one card more per one person

than in Poland; the smallest number of payment card transactions was

made in Hungary. In spite of the fact that the number of payment cards in

Visegrad countries is at a similar level, the number of non-cash

transactions made with these cards differs from country to country. In all

countries in question, the dynamics of growth of the number of payment

transactions is high what is presented in Table 11.

Table 11. Growth rate of the number of payment cards transactions (annual

percentage change)

No. Country

Growth rate of the number of payment

cards transactions

(annual percentage change )


2 Poland 29,3

3 Slovakia 26,1

4 Hungary 15,3


Paweł Mrowiec

72

Table 11 shows that growth in the number of transactions made with

payment cards in Poland is progressing with double speed when

compared with Hungary. The process of development of non-cash

turnover should involve different entities such as e.g. central bank, banks,

especially commercial banks as well as state and local government units.

The number of non-cash transactions made with a single payment card is

presented in Table 12.

Table 12. Number of non-cash transactions made with a single payment card

No. Country Number of non-cash transactions made

with a single payment card

1 Czech Republic 41

2 Poland 50

3 Slovakia 38

4 Hungary 35


The biggest number of non-cash transactions made by a single

payment card was observed in Poland (50 transactions), second was the

Czech Republic where the number of similar transactions was about 20%

lower than in Poland. In Slovakia and Hungary the number of non-cash

transactions made with a single payment card is on yet lower level.

Table 13. Percentage of non-cash transactions in the total number of payment

cards transactions

No. Country

Percentage of non-cash transactions in

the total number of payment cards

transactions


2 Poland 70,5

3 Slovakia 69,4

4 Hungary 74,6



73

Percentage of non-cash transactions in the total number of payment

cards transactions is at similar level in the four CEE countries. It can be

observed that in Hungary the percentage of non-cash transactions in the

total number of transactions is the highest, but the number of non-cash

transactions made with a single payment card is the lowest among the

Visegrad countries.

Conclusions

The expansion of non-cash turnover together with fast development

of electronic banking brings a number of important benefits and progress

chances for the economy as well as for the state, business entities and

households. However, the diagnosis of the present state of monetary

settlements in countries of Central-Eastern Europe still shows high

proportion of cash in the turnover and considerably low level of usage of

banking infrastructure and non-cash instruments as compared to other

countries of the Western Europe. The above ratios constitute a real

obstacle for the development of national economies also at local and

regional level which hinders their competitiveness and ability to adapt to

the standards of better developed countries. Therefore, undertaking of

a joint initiative within the Visegrad Group to promote non-cash

solutions seems justified.

Utilisation of similar forms of money in the payment turnover may

also facilitate faster economic growth. The analysis of the four countries

from the Visegrad Group shows that there is a network of relationships

between using particular forms of money and economic growth. In this

field financial institutions should be backed by government and local

government bodies.

Literature

[1.] Aristotle, Etyka Nikomachejska, PWN, Warszawa, 2016.

[2.] Górka J., Konkurencyjność form pieniądza i instrumentów

płatniczych, CeDeWu, Warszawa, 2009.

[3.] Evans D. S., Schmalensee R., Paying with Plastic. The Digital

Revolution in Buying and Borrowing, The MIT Press, Cambridge

(Mass.), London, 2005.

Paweł Mrowiec

74

[4.] Patla J., Rozwój nowych sieciowych form płatności przyczyną

wirtualizacji pieniądza tradycyjnego, Publishing House of the

University of Economics in Kraków, Scientific Journal no 754,

Kraków, 2007.

[5.] Vilar P., A History of Gold and Money: 1450-1920, Verso 1991.

[6.] Rabong M., Raport na temat usługi cash back na polskim rynku,

NBP, DSP, Warszawa, 2014.

[7.] Marciniak S., Innowacje i rozwój gospodarczy, Social Sciences

Centre of Warsaw Technical University, PWN, Warszawa, 1997.

[8.] Mrowiec P., Czerny J., Humanistyczny wymiar świata finansów,

Publishing House of Bielsko-Biała School of Finance and Law,

2012.

[9.] Szpringer W., Elektroniczne instrumenty płatnicze–tendencje

rozwojowe, E-mentor nr 3 (50), 2013.

[10.] Warczak M., Endogeniczne i egzogeniczne czynniki rozwoju

gospodarczego z perspektywy finansów gminy, Contemporary

Economy Electronic Scientific Journal, vol. 6, Issue 4, 2015.

Websites:

[1.] http://www.spidersweb.pl

[2.] http://www.europeanpaymentscouncil.eu

[3.] http://prnews.pl

[4.] http://www.e-mentor.edu.pl


75

DOI: 10.19192/wsfip.sj2.2017.5

Jan OSTOJ

INTELLECTUAL CAPITAL OF SOCIOECONOMIC

AREA: MEASURE AND STRUCTURE part II. Intellectual capital of a company and intellectual

capital value of a given socioeconomic area

Summary

This paper is the second in the series of three papers devoted to the estimated value of

intellectual capital belonging to any socioeconomic area: province, municipality,

country, region etc. An idea of the estimated value is based on the assumption that the

value of a given socioeconomic area for its residents is determined by income generated

due to the presence of a business activity in a given area. The structure of the presented

method allows for covering all components of intellectual capital within estimated value

regardless whether their existence is realized or not. The paper presents the valuation

method of intellectual capital to be found in a given socioeconomic area for the purpose

of using this method in the third part of the series in which estimates will be conducted

for each individual voivodeship (province) in Poland.

Key words: intellectual capital, region, province, estimated value

Introduction

This paper constitutes the second part of the series entitled:

Intellectual capital of a socioeconomic area: measure and structure. In

the first part, after providing definitions, the author presented a method

enabling an estimation of amount representing a substitute of a market

value of a region. The completeness principle of value was preserved,

expressing itself in a completeness of all factors determining a region's

value, regardless whether one realizes their existence or not. The

argument was conducted assuming the absence of state or self-

government activity, hence resulting in zero flows of public or self-

Professor Jan Ostoj, Bielsko-Biała School of Finance and Law, Department of Finance

and Information Technologies, Chair of Banking and Finance, [email protected]

Jan Ostoj

76

government finances. This part of paper waives the presumption, what

opens the opportunity to choose 'triple structure' of intellectual capital of

a given socioeconomic area. The calculation also takes into account the

need to rebuild human capital resources – in order to preserve the

expected income sequence in a region. The final objective of this paper is

the derivation of a formal character of the formula that enables obtaining

a substitute of an intellectual capital market value belonging to a given

socioeconomic area.

1. Intellectual capital value and economic structure estimated value

Once equipped with a method of valuation of a given socioeconomic

area, one may attempt at valuation of its intellectual capital. In literature,

a company's goodwill for the purpose of capital valuation of listed

companies is valued by means of the method of multipliers. Its use is

illustrated by formula (5 and 6):

P

BV=

capitalisation

net assets =

capitalisation

equity=

current share price

equity per one share (5)

Hence:

P=current share price

equity per one share ∙BV (6)

where:

P – company's market value as an organised whole

BV – company's book value equal to its equity in accounting terms (net assets )

On that basis, a company's intellectual capital value may be

expressed as (7):

IC=current share price

equity per one share ∙BV-BV (7)

where:

IC – intellectual capital value of an investigated company

The above formula (7) reflects the definition of the intellectual

capital at the moment of its finding. This provides the answer to the

question – how much more are investors willing to pay for a company as

an organised whole rather than it results from the book valuation of its

Intellectual Capital of Socioeconomic Area…

77

assets, including the need to repay liabilities. In other words, one can

discover the difference in value between market equity valuation (market

share price = capitalisation) and equity value (share capital) disclosed in

the accounting books, which according to the definition, is equal to net

assets1 – see Fig. 2.

Fig. 1. Goodwill as an organised whole and the intellectual capital

Source: Own description based on literature.

A positive difference between market share price of a given company

and net assets indicates the existence of an accessible in a company's

resource (intellectual property), not subject to register, which is essential

due to the possibility of generating income by a company now and in the

future. Thus, the market valuates the share capital higher than it is priced

in the accounting books. An equivalent of this resource (intellectual

property2) on liabilities side, is precisely what is called the intellectual

capital.

However, a different approach is possible – through valuation of

a company as an organised whole. A company is perceived here as

a certain organised economic structure (tangible asset) inter alia

consisting of assets enclosed in the balance sheet, having an ability to

1 Article 3 paragraph1 subparagraph 29 of the Act of 29 September 1994 on

Accountancy, Journal of Laws from 1994 No. 121, item 591 as amended. 2 Cf.: Edvinsson L., Malone M. S. Kapitał intelektualny, Warsaw, 2001, p. 40.

A company's market value as an organised whole

= market share price (equity)

P=current share price

equity per one share ∙BV

VProf= ∑Ii

(1+r)i

n

i=1

Profitable goodwill valuation

as an organised total resources

Net assets =

equity

(liabilities)

Assets not a subject to standard records

= intellectual capital (liabilities)

= intellectual property (assets)

Jan Ostoj

78

generate a defined income sequence for their owner. Then a profitable

method of intangible investment valuation is used. The obtained

valuation result VProf informs about right value to defined spread over

time income sequence Ii, with an assumed risk level rr, which is provided

by the ownership of company assets.

Thus generally speaking, it should be noticed that using the

profitable method, one may valuate intellectual capital of each company,

which taking into account the assumptions of the calculation,

corresponds to the difference between the right value, resulting from the

ownership of assets to defined income sequence, and the book value of

a company's net assets. The result gained is theoretically identical to the

intellectual capital value (and its equivalent on the assets side –

intellectual property value) defined as the difference between market

goodwill as an organised whole and its net assets – see Fig. 2.

Assuming that resources accessible in a company were launched in

a best possible way to the owner, and there is no better method known to

employ them3, it can be said that a company market value understood as

a right to generate a specific income sequence with a given risk level, is

equal to the value of available resources (net assets + intellectual

property).

The above argument is illustrated in Fig. 2. The difference between

goodwill as an organised whole and its assets denotes its assets'

resources, from various reasons not subject to standard registry4, which

correspond to intellectual capital.

2. Intellectual capital of socioeconomic area – definition and

structure

Hence for the purpose of this paper one may formulate a substantive

definition of resources corresponding to a company's intellectual capital

– it is all, what as a resource5 is not subject to a standard value register

and at the same time constitutes wealth of a given entity as a company's

owner. They are assets which are not subject to a standard registry

3 See the argument regarding market value and income value in Part I of the series. 4Due to various reasons: e.g. lack of possibility of valuation of human capital, client

capital or organisational capital. It does not mean that their value is equal to zero, as it

was stated by Steven M. H. Wallman who was mentioned in the first part of a series of

three papers. 5The notion of resource means every kind of potential which can be used to implement

a given economic goal or consumption.


79

(outside the inventory) regardless whether they are material or not.

Similarly, one may define resources responsible for intellectual capital of

a given area e.g. a region – it represents all, what as resource, is not

subject to a standard value register and at the same time constitutes

wealth of its residents (companies and households functioning in a given

area).

Knowing the income value of a given area (e.g. region) Vi reg

(determined by the formula 3 – part I), one may take a valuation attempt

of accessible intellectual capital. Following the above argument – if one

reduces the value Vi reg by the book value of all net assets An reg involved

in economic turnover and at residents' disposal of a given area, the value

of intellectual capital resources of that area (e.g. a region) will be

obtained.

A similar rule applies here, as in case of a company's intellectual

capital valuation: a company's income value as an organised whole is

reduced by net assets value subject to records (Fig. 3). As a result, the

resource value, not subject to value register is obtained – resource

corresponding to a region's intellectual capital (formula 8).

VICreg= Vi reg-An reg (8)

where:

VICreg – intellectual capital value of a region

Vi reg – income value of a region (substitute of a region market value)

An reg – book value of net assets in a region

Analysing income generated by companies in a region, in order to

determine their income value, one can say that they are determined by

profit pg increased by Am income constituting depreciation coverage – all

benefits that can be obtained by an owner and a region of a given

company, free of charge and non-refundable. In reality, the owner

receives a financial surplus, consisting of net profit and coverage with

depreciation income (pn+ Am), however, the difference (pg- pn) as a tax,

and other tax receipts are given to self-government bodies in a region6.

Therefore, owners' revenues generated by the business sector in a region:

(pg+ Am) – gross profit + coverage of depreciation of physical assets in

companies' areas. However, from the point of view of companies' owners

– residents in a region – the value of company's income is still

6In order to simplify the argument, it is assumed that taxes remain in full in a region,

and are not redistributed to the country.

Jan Ostoj

80

determined by financial surplus equal to (pn+ Am). The surplus should be

corrected by investment expenditure Ii which should absolutely be

incurred in the subsequent i- years (replacement investments, net

investments), in order to ensure the implementation of the assumed

business plan which is a guarantee of the assumed sequence of

a company's income Ini.

Therefore, a general form of formula of a company's income value is

as follows (formula 9):

VIcc= ∑(p

n+Am)

i

R-Ii

(1+r)i

∞i=1 (9)

where:

(pn+ Am)Ri - financial surplus i-this year of a given company operating in a region R

Ii – replacement investments and net investments, which must be performed by a given

company, in order to ensure the implementation of an assumed business plan which is

a guarantee of the assumed sequence of a company's income Ini

r – sum of rn and rr, meaning return on assets, risk free assets rn, increased by rr, that is

the risk premium

According to the accepted definitions, a region's value is determined

by income obtained by its residents, due to localization of business

enterprises in a particular socioeconomic area. Thus, they also include

income generated by work of households. If one assumes, looking from

the perspective of a decision-making household, that a given localization

is the best possible of all, then by using profitable goodwill valuation one

can arrive at the substitute of the value of the right to the defined

sequence of work income which is similar to the market value – the right

obtained due to localization of business activity in a given area7. At the

same time, valuation of human capital of employees will be obtained as

a resource, not subject to standard registry (outside inventory) accessible

in a given socioeconomic area. Therefore, the second element of

valuation of estimated value, which is represented by a region, is

disposable income8 of households' work InH - constituting remuneration

7 In light of the analysis to be found in the previous paper. 8 That is net salary – salary after deduction of all tax burden and par-fiscal (pension

insurance, health insurance, etc.) from the employees’ point of view, a region's

valuation is determined by net income, just like in case of enterprises.


81

for services, not subject to registry in companies of human capital

resources9.

Unlike physical capital (machinery, devices, and other fixed assets

etc.), human capital is not subject to sale, hence its price cannot be

determined on the market. For the same reasons, human capital, unlike

physical capital, is not subject to book register as a resource –

a component of a company or any other entity's assets.

How can the value of human capital be determined in a given

socioeconomic area (e.g.in a region )? In order to answer this question,

the analogy to physical capital is applied, which from the point of view

of an employee presents work income to be divided into several

components. One of them covers expenses for an employee's current

living needs, other allows for securing an employee's basic family needs,

at the same time from the macroeconomic perspective – continuity of an

aggregate accessibility of work in a given area. Another work income

element may be allocated to an employee's development, in order to

adjust a job offer to the current needs of the market. The mentioned

characteristics enable to regard work resource belonging to a given area

as lasting volume of macroeconomic nature, representing a developing

timeless potential.

At this point it must be pointed out that a company may acquire

physical capital analogous to human capital (the agreement on providing

work service) – that is paying for a possibility of using physical capital

services e.g. based on a lease contract assuming hire of fixed assets. The

operating lease mentioned here, is regarded as a service. A lessor is

responsible for listing a given item in the registry of fixed assets and

amortization write-offs. Obtained via lease a fixed asset is available to

a lessor – a company's owner, however does not constitute his ownership

as a part of a company's assets, does not increase the sum of assets. The

operating lease contract only allows for using a service of production

9 At this stage of analysis, one may indicate shortcomings of a company's intellectual

capital valuation method as the difference between its market value V, and book value

BV. It is clear that a company's buyer as an organised whole would not pay more than

right value is to a defined income sequence, which is provided by the company's

ownership. It should be remembered that employees with better competences

(knowledge, skills, social attitude) from a company's point of view, hence representing

a higher level of intellectual capital, are better paid. Though, higher salary constitutes

larger cost, which in turn limits the owner's income – hence decreases in a company's

market value, what considering a company's unchanged book value, and in

unreasonable way, falsifies the intellectual capital valuation at its disposal.

Jan Ostoj

82

factor made available, 'attributing' it temporarily to a given company10 –

similarly, as an employment contract 'attributes' an employee to

a company. A company's owner (lessor) bears only the cost of loans

(leasing instalment), which for a lessor constitutes income covering its

expenditure (amortization) and usually ensures required profit. Equally,

an employee has an opportunity to use work service and receives

a monthly salary. However, this does not mean that a lessor will not

receive any profit within an agreement, as marginal income for the use of

a given fixed asset should be higher than marginal cost of its acquisition.

The surplus constitutes the presence of a company's intellectual capital

enabling effective development of a given component of physical capital.

It should be noticed that from the lessor's point of view a maximal

valuation Vc max of obtaining lease of physical capital, (machinery,

devices), understood as a right acquisition to a defined income sequence

(Pnwi +Ami+ Ccsi) over the years, is expressed in the following formula

(10):

Vc max= ∑Pnwi+Ami+Ccsi

(1+r)i= ∑

Idi

(1+r)i

ni=1

ni=1 (10)

where:

Vc max - maximal value (upper price limit) of physical capital lease acquisition

forwarded by an owner (lessor)

Pnwi – net profit (after tax) of a lessor i-this year

Ami –depreciation cost with lease income i-this year of leased fixed asset

Ccsi – current service and repairs costs and charged to a lessor

Idi – total net income of a lessor i-this year

It is the price accepted by a supplier of physical capital service

(lessor) reaching annual income Idi of a possibility of using a given fixed

asset. If lease, from the market point of view, is the best option of fixed

asset development – the valuation meets market valuation11.

Consequently, employees of a company provide work service within

limited time. There is no doubt that similarly to machinery service lease,

they are paid over time by a defined income sequence constituting

a salary. The income is spent on meeting, on a demanded level, a widely

understood own and family needs, including self-study and development

10In light of current law, operating lease according to the VAT Act is regarded as

service delivery - a tax base is constituted by net worth of lease instalment. 11 See the previous part of the paper.


83

of other family members. Within the process current household expenses

are incurred, enabling a purchase of tangible assets that ensure widely

understood restoration of work capacities and day to day existence on

a fixed level. The remaining part of the work income may be spent on

development of human capital in a given household as education

expenditures for family members and assurance of better than ever living

conditions.

At this stage of the analysis, it is worth mentioning that exclusion

from the estimation of value of human capital a part of income intended

to cover current employee maintenance costs would be the same as if in

case of physical capital one would try to exclude Ccsi from lessor's

income i.e. this part of income which covers current service and repairs

costs of fixed asset, keeping lessor's responsibility to conduct their

implementation.

And accordingly, by excluding from intellectual capital value

estimate a part of income to be spent on family upkeep, offspring

upbringing and education, from the financial point of view one rejects the

possibility of renewal of intellectual capital resource located in the

region. As far as physical capital is concerned, such assumption

corresponds to the exception of depreciation cover Ami from intellectual

capital value estimate (formula 10).

Moreover, exception from the formula of the remaining part of work

income usually spent on improvement in the living standards and on

development of family members, corresponds to exception of Pnvi – that

is the profit from physical capital value estimate (formula 10). Hence,

preservation of all human capital work income components enables its

correct valuation: current employees maintenance costs guarantee

recreation of ability to work, a part allocated for upbringing, education

and offspring development ensures timeless durability and development

of human capital resource in a region as an aggregate – that is

continuity of its availability on the labour market.

In a nutshell, from the point of view of households, the proceedings

in human capital valuation are similar to operating lease of fixed asset: in

exchange for a possibility of using a service of a given company's

resource, an entrepreneur pays a specific price. This price (lease

instalment, gross salary) constitutes a cost. For business entities

providing services, it is a net income accepted by them.

Therefore – as in case of a fixed asset valuation [formula (10)] – one

can estimate human capital resource Vjhc, for the need of valuation of

Jan Ostoj

84

a region intellectual capital, in case of one j-this employee, receiving net

annual salary Sni over n years12 [formula (11)]:

Vhc

j= ∑

Snij

(1+r)i

∞i=1 (11)

where:

Vjhc – human capital value represented by j-this employee, valued from a household

income point of view

Snji – net salary (household's available income) obtained by j-this employee i-this year

r – the discount race including the risk premium

Summing all discounted net salaries Sn in a region a value of human

capital in it will be obtained VRhc [formula (12)]:

VhcR = ∑ Vhc

jmj=1 = ∑ ∑

Snij

(1+r)i= ∑

(Sn)iR

(1+r)i

∞i=1

∞i=1

m j=1 (12)

where:

Snji – net salary (household's available income) obtained by j-this employee i-this year

(Sn)Ri – total net salaries obtained by employees-residents in a region R i-this year

Vjhc – human capital value represented by j-this employee valued from a household's

income point of view

r – the discount race including the risk premium other signs as in a text.

In the analysis one more fact must be brought to the reader’s

attention, a part of income of both companies' owners and their

employees is redistributed by means of public finances. The transfers

constitute financial justification of existence, creation and functioning of

resources, constituting intellectual capital of a region sensu stricte – that

is functioning of self-government units, units financing own activity of

public resources, as well as investments that make up the infrastructure

of a region.

Assuming that the redistribution of the above mentioned resources

takes place solely within a region, it can be accepted that they are

a source of value a region represents, sensu stricte for its residents as an

access to services of public goods resources, not having a market

valuation. The services enable the use of public health services, local

12 With regard to timeless availability of human capital resource – value n was

substituted by sign of infinity.


85

roads, free education, pension funds etc. However, provision of the goods

cannot take place without public property share - public assets APubl ,

subject to standard register.

Therefore, the value of a region for its residents is a sum of

companies' owners discounted net income, corrected by investment

expenditures, increased by a sum households' discounted net income

constituting a work salary, plus a sum of discounted redistributed income

by means of local finance. Hence, based on the analysis of the

subsection, it can be stated that a region's value for its residents is

constituted by a sum of companies' value located in a region, human

capital value, and a region's value sensu stricte, it is defined by

a following formula (13):

VIReg= ∑(Pn+Am)

iR

-Ii

(1+r)i

∞i=1 + ∑

(Sn)iR

(1+r)i

∞i=1 + ∑

(GDPred loc fin)i

R

(1+r)i

∞i=1 (13)

where:

VIReg – substitute of a region's income value

(GDPred loc fin)Ri – part of gross domestic product, produced and redistributed

entirely by means of local finance in a region R i-this year

(Sn)Ri – total net salaries obtained by employees-residents in a region R i-this year

r – the discount race including the risk premium

other signs as above.

Subtracting in the formula (12) from an adequate values net assets13,

subject to register, involved in a given activity area, one receives:

VICreg= ∑(Pn+Am)i

R-Ii

(1+r)i

∞i=1 - An cc+ ∑

(IHn

)i

R

(1+r)i

∞i=1 - An H+ ∑

(GDPred loc fin)i

R

(1+r)i

∞i=1 -An Publ

(14)

where:

An cc – companies' net assets (book value) in a region R

AnH – households' net assets (book value) in a region R

An Publ – public institutions' net assets (book value) in a region R


13 According to the definition, net assets are equal to book value of a given economic

structure.

Jan Ostoj

86

The formula (14) presents a structure of intellectual capital in

a region (or any other socioeconomic area) which is demonstrated below

in Fig.3.

Fig. 2. A structure of intellectual capital of a given socioeconomic area

Source: own description.

Analysing the formula (14) it can be stated that intellectual capital in

a region consists of intellectual capital accumulated in companies,

increased by intellectual capital located in households14 and intellectual

14 In view of the above, human capital available in a region not only increases

a company's value as an organised whole, being a part of a company's intellectual

capital, but also additionally constitutes a value itself as a household resource. Again, it

is analogous to operating lease e.g. machinery. A lessor offers a possibility of using

services of a given fixed asset for a specified time. The better application of a given

asset is found by a lessor, the greater will be the market value of a company with

unchanged remaining parameters, hence larger its intellectual capital. However, it

should be noticed that a fixed asset value as a resource, remains at an owner's side –

a lessor's. It is the lessor who recognizes on the asset side, a value of fixed asset leased,

remaining in close relationship with income generated of lease. Similarly looks the

situation concerning services of human capital resource: the better the resource is

developed by an employer, the bigger will be an employing company's intellectual

capital. However, human capital resource belongs to households that offer work

services. Therefore, according to the concept of economic account, if it is possible, the

households should record the value of the resource 'on assets side', not an employing

company -contrary to a popular belief. Hence, intellectual capital of businesses

operating e.g. in a region despite the fact that, it includes the human capital of

Intellectual capital of socioeconomic area

Companies intellectual

capital in a region

(a company as an

organised whole is worth

more than its net assets)

Human capital available

in a region

(human capital is not

a part of an employing

company's assets)

Intellectual capital of

a region sensu stricte

(companies and

households prefer

allocating their activity in

a given area, not another)


87

capital belonging stricte e.g. to a region as its public face, as a whole,

quality and institutions available in a given region, like education, health

care, communication infrastructure, work resource, etc.

GDP account shows that GDP is equal to a sum of primary income

for services of a specific company available in a given area, therefore

based on the formula (13) one may arrive at the following (formula 15):

(Pn+Am)i

R-Ii+(IH

n )i

R+(GDPred loc fin)

i

R=GDPi

R- Ii (15)

where:

(Pn+ Am)Ri - financial surplus i-this year of a given company operating in a region R

Ii – replacement and net investments, conducted by a given company in order to ensure

the implementation of an assumed business plan, which is a guarantee of the assumed

sequence of a company's income

(InH)R

i – households' net income in a region R obtained i-this year

(GDPred loc fin)Ri – part of gross domestic product , produced and redistributed entirely

by means of local finance in a region R i-this year

GDPRi – GDP created i-this year in a region R


Hence, based on formulas (14) and (15) one may formulate what

follows:

VICreg= VIreg-An reg= ∑GDPi

R- Ii

(1+r)i

∞i=1 - An reg (16)

where:

VICReg – a region's intellectual capital value

VIReg – substitute of a region's income value

An reg - net assets in a region, a subject to a standard book register equal to An pp + An H

+ An Publ

GDPRi – part of gross domestic product in a region R i-this year




r – a sum of rn and rr meaning rn – the discount rate of financial assets, risk- free,

increased by rr, that is the risk premium r

employees, does not completely illustrate human capital value, as a resource belonging

to a given socioeconomic area.

Jan Ostoj

88

However, in order to establish striving for infinity, a predicted

sequence of words GDPiR, one must assume an actual and close to reality

growth of components of the sequence, and the investment level which

will trigger this growth, and only then one may proceed with a formula,

accepting the income sequence as close to infinity.

Therefore, based on a formula (16) one may state the following:

VIreg= ∑GDPi

R- Ii

(1+r)i

∞i=1 = ∑

GDP1R

∙(1+av.ratinc)i-1

∙(1-av.ratin)i-1

(1+r)i

∞i=1 (17)

where:

VIreg – value represented by a given socioeconomic area (e.g. a region) for residents

locating their activities in the area from the point of view of their income

GDPRi – part of gross domestic product in a region R i-this year




GDPR1 – GDP created in the first year from a date, when intellectual capital valuation,

belonging to a given socioeconomic area (e.g. a region) is performed

av. ratinc. – an average real GDP growth rate in a region R

av.ratin – an average investment rate in a region R

r – discount rate including the risk premium of total income loss in a region

Generally, one may state that the geometrical sequence with

a module q =<1 and an introductory expression 1

(1+𝑟) has been acquired.

After application of formula for a sum of the infinite sequence one

may say that:

VIreg=GDP1R∙

1

1+r∙

1

1-(1+av.ratinc)∙(1-av.ratin)

1+r

=GDP1

R

r-av.ratinc+av.ratinc∙av.ratin+av.ratin (18)

where signs – as in the formula (17)

Hence, summing up intellectual capital value in a region, one may

acquire (formula 19):

VICreg=VIreg-An reg=GDP1

R

r-av.ratinc+av.ratinc∙av.ratin+av.ratin-An reg (19)

where:


89

VICReg – intellectual capital value belonging to a given socioeconomic area (e.g.

a region)

VIreg – value represented by a given socioeconomic area (e.g. a region) for residents

locating their activities in the area from the point of view of their income

An reg – net assets of a given socioeconomic area (e.g. a region) subject to a standard

book register equal to An cc + An H + An Publ; (that is Anccp – net assets of companies

(book value) in a region R; An H – households' net assets (book value) in a region R; An

Publ – public institutions' net assets (book value) in a region R)

GDPBR1 – GDP created in the first year from a date, when intellectual capital

valuation, belonging to a given socioeconomic area (e.g. a region R) is performed

av.ratinc. – an average real GDP growth rate in a region R

av.rat.in – an average investment rate in a region R

r – discount rate including the risk premium of total income loss in a region

Conclusions

In conclusion, formula 19 enables a region's (or any other

socioeconomic area) intellectual capital valuation in accordance with

content-related capacity of this phenomena, in its original and historical

form i.e. as a difference between a substitute of a given economic

structure market value and a substitute of its book value. In order to

arrive at the estimate one must possess only gross domestic product value

created in a given region R, in the year when an estimate (GDP1R) is

made, an estimate of average real GDP growth rate in the subsequent

years av.ratinc and an average investment rate av.rat.in in a region,

discount rate r and net assets value An reg.

Thanks to the proposed solution, an estimate of intellectual capital of

any socioeconomic area can be made, providing that there is a regular

GDP account kept and an investment rate, and assets value are known, or

one may define these values based on a data available. The genuineness

of the mentioned argument seems to indirectly confirm the relationship,

which is difficult to deny, between intellectual capital available in the

country and a value of a real GDP of that country.

According to the theory, an important element of the paper is a triple

structure of the intellectual capital, emerged in conditions of

completeness of investigated components, constituting intellectual capital

of a given socioeconomic area. Its value creates companies' intellectual

capital operating in a given area, employees' intellectual capital

belonging to households active in this area as well as intellectual capital

sensu stricte of specific area as a potential of outside the inventory assets

of self-government units, their multiannual achievements as 'frozen' idea

Jan Ostoj

90

of performed infrastructural solutions, provided services and in many

other areas.

Literature

(for three parts )

[1.] Begg D., Fischer S., Dornbusch R., Makroekonomia, PWE,

Warsaw 2007.

[2.] Begg D., Fischer S., Dornbusch R., Mikroekonomia, PWE, Warsaw

2007.

[3.] Bochniarz, P., Raport o Kapitale Intelektualnym Polski, the Group

of Strategic Advisors of the President of the Council of Ministers,

Warsaw 10-07-2008, http://kramarz.pl/Raport_2008_Kapital_

Intelektualny_Polski.pdf [access 29 March 2017].

[4.] Bontis, N., National Intellectual Capital Index. United Regions

initiative for the Arab region, [in:] Journal of Intellectual Capital,

2004 vol. 5, no. 1.

[5.] Domański S. R., Kapitał ludzki i wzrost gospodarczy, PWN

Warsaw, 1993.

[6.] Edvinsson L., Malone M. S., Kapitał intelektualny, Warsaw, 2001.

[7.] Kasiewicz S., Rogowski W., Kicińska M., Kapitał intelektualny

spojrzenie z perspektywy interesariuszy, Kraków 2006, Oficyna

Ekonomiczna.

[8.] Ostoj J., Podstawy alokacji zasobów specyficznych

w przedsiębiorstwie, Bielsko-Biała 2004.

[9.] Ostoj J., Rynek wartości negatywnych, the Silesian University,

Katowice, 1996.

[10.] Statistical Yearbook of the Republic of Poland 2014, Central

Statistical Office of Poland , 70-81p. ISSN 1506-0632.

[11.] Statistical Yearbook of the Republic of Poland 2015, GUS, 693 p.

ISSN 1506-0632.

[12.] Rutkowski A., Zarządzanie finansami, Warsaw 2007.

[13.] Schiuma, G., Lerro, A., Carlucci, D., The Knoware Tree and the

Regional Intellectual Capital Index. An assessment within Italy

[in:] Journal of Intellectual Capital, 2008 vol. 9, no.2.

[14.] Stewart T.A., The Wealth of Knowledge. Intellectual Capital and


91

the Twenty-First Century Organisation, Nicholas Brealey

Publishing, London 2001, p. IV.

[15.] Strojny M. Metody i narzędzia pomiaru kapitału intelektualnego

w organizacji, [in:] Dobija D., Pomiar i rozwój kapitału ludzkiego

przedsiębiorstwa. PFPK, Warsaw, 2003.

[16.] The Act of 29 September 1994 r on accountancy, Journal of Laws

from 1994 No. 121, item 591 as amended.

[17.] Węziak-Białowolska, D., Model kapitału intelektualnego regionu.

Koncepcja pomiaru i zastosowanie, Publishing House of Warsaw

School of Economics, Warsaw 2010.


92

DOI: 10.19192/wsfip.sj2.2017.6

Elżbieta RAK - MŁYNARSKA

CROWDFUNDING AS A MODEL

OF FINANCING A COMPANY

Summary

Access to finance is a key issue especially for companies in the early stages of

development. Bank credit is not always available and own funds are often barely

enough to start a business. The answer to this challenge may be found in some

innovative solutions for raising financial resources for business ventures. These

solutions have originated thanks to rapid development of information technology.

Crowdfunding i.e. financing through small amounts paid by many individuals, is one

example of these solutions. The aim of the paper is to present the essence of

crowdfunding and the characteristics which differentiate it from other funding models.

The paper also offers a presentation of the Internet platforms supporting investors in

Poland and in other countries in the world. The main factors that hamper the

development of crowdfunding are also indicated.

Key words: alternative finances, equity crowdfunding, crowdinvesting

Introduction

Today’s economy is very challenging for businesses especially with

respect to strong competition on the market. Competitiveness is a factor

which determines which entities remain on the market and the key to

survival is the ability to find such investors who are not afraid to take

risks. While getting access to financing is relatively easy for companies

well established on the market, for seed-stage companies and start–ups

this may be incredibly difficult. Rapidly developing information

technologies offer entrepreneurs a wide range of financial innovations

thanks to which they can obtain resources for current and future business

Dr Elżbieta Rak-Młynarska, assisstant professor in Bielsko-Biała School of Finance

and Law, dean of the Department of Finance and Information Technololgies, Chair

of Banking and Finance, [email protected]

Crowdfunding as a Model of Financing a Company

93

activity. Crowdfunding – social financing1 is an example of such

innovations, and crowdinvesting is a special form of crowdfunding where

micro-investors acquire clearly defined stakes in the profits.

1. Genesis and definition

Crowdfunding belongs to the so called alternative finance sector i.e.

financial channels and instruments that have emerged outside of the

traditional finance system such as regulated banks and capital markets.

The sector has evolved in recent years at the intersection of capital

market, social media and advanced technologies2.

Social financing (crowdfunding) is usually defined as ‘a mechanism

of allocation of financial resources by means of the Internet from many

people towards a given goal and getting in return reciprocal services

which result from the execution of the project3.’ The Polish Association

of Crowdfunding provides a slightly different definition4: ‘it is a source

of equity supplied by a wide virtual community who wishes to support

a creative mind. The equity gathered in this way may amount from

a couple of hundreds to a couple of millions PLN.’

Crowdfunding is a new form of financing and its popularity may be

attributed most of all to rapidly progressing digital technologies, because

it is capital delivered by an online community. In virtual world the ideas

may reach a huge number of potential sponsors and the money collected

may be used to finance a portfolio of various projects e.g. charity, social,

cultural, business etc. K. Król5 defines crowdfunding as ‘a kind of

1 The present article is a continuation of a series of papers on various sources of

financing a company. Other publications of the author on the topic include: E. Rak-

Młynarska, P. Mrowiec, Alternatywne źródła finansowania małych i średnich

przedsiębiorstw [in:] Scientific Journal of Bielsko-Biała School of Finance and Law no

3 (2011) ISSN 2084-1809, pp. 80-98; E. Rak-Młynarska, Rynek usług biznesowych jako

forma outsourcingu [in:] Scientific Journal of Bielsko-Biała School of Finance and Law

no 2 (2012) ISSN 2084-1809, pp. 17-28; E. Rak-Młynarska: Veture Capital/Private

Equity w krajach Grupy Wyszehradzkiej [in:] Przegląd Nauk Stosowanych 8/2015,

ISSN 2353-8899, pp. 92-105. 2 http://cgs.org.pl/pl/ogromny-wzrost-crowdfundingu-i-swietne-perspektywy-w-europie/

[access 10 April 2017]. 3 http://cgs.org.pl/pl/baza-wiedzy/ [access 10 April 2017]. 4 K. Król, Finansowanie społecznościowe jako źródło finansowania przedsięwzięć

w Polsce, http://stowarzyszenie.crowdfunding.pl/index.php/polskie-towarzystwo-crowd

fundingu [access 10 April 2017]. 5 Ibidem.

http://cgs.org.pl/pl/ogromny-wzrost-crowdfundingu-i-swietne-perspektywy-w-europie/

Elżbieta RakMłynarska

94

collection and allocation of equity engaging a wide circle of investors

who unite to finance a given undertaking and in return expect reciprocal

services, it is characterized by usage of ICT technologies and lower entry

barriers as well as better transactional conditions than those available on

the market’.

According to D. Dziuba6 ‘crowdfunding is a perspective method of

financing projects and business ventures. It is an alternative source of

acquiring equity to the traditional system of banks, stock markets,

business incubators etc. creating various economic opportunities for all

entities on the market, but on the other hand characterised by various

economic and legal barriers’.

Crowdfunding is not a uniform term7 (see Image 1). One may

distinguish between reward crowdfunding – based on advance sale of

goods and services or alternatively, or donations in which case it does not

meet the reciprocity criterion; the next type is equity crowdfunding based

on sales of stocks and shares, in social lending type more than one lender

grants a loan to a borrower, and in case of hybrid crowdfunding the

financing is based on various forms of financing at the same time e.g.

offering shares of the company and, simultaneously, advance sales of

goods. A common feature of all the above mentioned forms of

crowdfunding is the use of the Internet and widely understood social

media in the process of acquiring financial resources. In contrast, public

fundraising is conducted by non-governmental organisations which

cannot offer any reciprocal services in return. They are based on the trust

investors have in certain institutions and belief that their money will be

spent appropriately.

6 D.T. Dziuba, Rozwój systemów crowdfundingu – modele, oczekiwania

i uwarunkowania Problemy Zarządzania, vol. 10, no 3 (38): 83 – 103 ISSN 1644-9584,

© Department of Management UW, DOI 10.7172.1644-9584.38.6 7A thorough review and typology of crowdfunding can be found in works of Dariusz T.

Dziuba, Rozwój systemów crowdfundingu – modele, oczekiwania i uwarunkowania,

[in:] Problemy Zarządzania, vol. 10, no 3 (38): 83 – 103 ISSN 1644-9584, ©

Department of Management UW, DOI 10.7172.1644-9584.38.6


95

Image1. Different forms of crowdfunding.

Source: Own work based http://cgs.org.pl/pl/baza-wiedzy/

Crowdfunding differs from other similar approaches e.g. donations

or public fundraising, by certain characteristic features (see Image 2):

Reward-based CF

Equity CF

Lending-based CF,

social lending

Hybrid CF


96

Image 2. Characteristic features of social financing

Source: Own work based on K. Król, Crowdfunding. Od pomysłu do biznesu, dzięki

społeczności, published by crowdfunding.pl, Warszawa 2013.

In case of crowdfunding, gathering resources for implementation of

own ventures is possible thanks to the presence of web portals which

specialize in presenting projects, their financial aims and possible

rewards for supporters – the person who is collecting the capital promises

in return a given added value (e.g. ticket to a concert or performance).

The number of such portals is increasing every year8.

Crowdinvesting is equity social financing in which users invest in

start-ups and in return for the capital donated they receive shares. The

investors become stakeholders in start-ups and participate in profits and

sales. While in traditional crowdfunding investors do not receive shares

in the businesses but only a symbolic return, for instance a CD.

8 In 2015 there were about 1600 registered web portals, and in the European Union

alone the Internet users financed projects worth 5.1 billion dollars.

•cash almost always is handed over in a dematerialised form.

Money

•clearly defined destination and obvious effects of the invested resources.

Goal

• information on the project is available to a large audience, practically to everyone.

Wide audience

• the request for support is disseminated in an open way for an undefined recipient without any barriers in access.

Open call

• the whole process of gathering of equity takes place by means of ICT technologies.

ICT

• the equity is acquired on more favourable conditions then those widely available on the market for the author of a given project.

Better conditions

•each act of support is rewarded by a reciprocal service. The reciprocity may have different forms but it must not be merely of emotional nature.

Reciprocal services


97

The motives that drive social investors are diversified; some just

want to support a creative idea, others expect financial rewards such as

participation in profits.

Before emergence of crowdfunding possibilities to invest in

companies in their early stages of development were rather limited.

Nowadays the situation is different as social fundraising based on equity

makes it possible for private persons to participate in the initial phase of

development of a business i.e. implementation of the idea itself.

Crowdfunding is even more common than equity crowdfunding. It is

a consequence of the fact that the first phenomenon exists longer, and to

be more specific, has always existed9. Crowdfunding is a way of

fundraising in which people cooperate in order to finance a specific

project, and the nature of this project is usually artistic or charitable,

without this support the success of such projects would probably never be

possible. In case of crowdfunding the return of invested resources comes

in an immaterial form, thus it can be compared to a kind of donation i.e.

people help other people for altruistic reasons.

Taking into account the character of payment made by donors one

may distinguish: donations, remuneration and investment. Donations are

characteristic for charity initiatives, where the main purpose of the

fundraising is e.g. collecting money for expensive therapies. In case of

donations reciprocal service principle does not apply. Remuneration is

when in return for financial support the donor receives products, services

or unique bonuses related to the execution of a given project. Investment

is defined as support of a certain idea or undertaking and in exchange

rewarding the donors with shares, the right to participate in profits or

other kind of material benefit.

2. Models of alternative financing in Poland and abroad

In the report ‘Sustaining Momentum. The 2nd European Alternative

Finance Industry Report’10 ten models of alternative financing were

9 For instance collecting money for construction of the Statue of Liberty (1865-1886),

some composers e.g. Mozart and Beethoven used crowdfunding to finance their

concerts and works by selling apriori subscriptions and offering as a reward an

exclusive access to their works. 10Sustaining Momentum The 2nd European Alternative Finance Industry Report,

Cambridge Centre for Alternative Finance 2016; https://www.jbs.cam.ac.uk/

fileadmin/user_upload/research/centres/ alternative-finance/downloads/2016-european-

alternative-finance-report-sustaining-momentum.pdf


98

identified. The most popular (with respect to the value of the generated

volume of the transaction) is a model based on social loans granted by

private persons – 36% of market share, then loans for businesses –

20,1%, in the third place is equity crowdfunding – 15,63%. The smallest

proportion of market share belongs to profit sharing crowdfunding –

0,05%, balance sheet business lending – 0,22% and crowdinvesting

based on debt instruments – 1,05%.

Table 2. Classification of alternative financing models.

Financing model Description

Millions

of EUR

in 2015

Market

share

(C2C) Peer-to-Peer

Consumer Lending

Natural persons or institutions grant

loans to other natural persons 365,8 35,89

(C2B) Peer-to-Peer

Business Lending

Natural persons or institutions grant

loans to businesses 212,08 20,81

Crowdinvesting

Equity-based

Crowdfunding

Natural or legal persons purchase

shares issued by the company 159,32 15,63

Reward-based

Crowdfunding

Natural or legal persons offer financial

support in return for non-financial

rewards or products

139,27 13,66

Invoice Trading Natural or legal persons buy invoices or

liabilities with a discount 80,59 7,91

Real Estate

Crowdfunding

Natural or legal persons provide equity

for investment in real estate 26,97 2,65

Donation-based

Crowdfunding

Donors offer financial support to

persons, projects or businesses for

purely altruistic reasons

21,71 2,13

Crowfunding based on

debt instruments Debt-

based Securities

Natural persons or institutional funds

purchase securities based on debt

instruments which provide equity for

businesses

10,73 1,05

Direct loans Balance

Sheet Business

Lending

Crowdfunding platform grants a loan to

a specifically selected business 2,25 0,22

Profit Sharing

Crowdfunding

Natural persons or institutions acquire

securities from businesses in exchange

for the right to participate in profits.

0,54 0,05

1019,26 100

Source: Sustaining Momentum The 2nd European Alternative Finance Industry Report.

Cambridge Centre for Alternative Finance, 2016. https://www.jbs.cam.ac.uk/fileadmin/

user_upload/research/centres/alternative-finance/ downloads/2016-european-alternative-

finance-report-sustaining-momentum.pdf [access 15 May 2017].


99

The beginning of the 21st century saw the emergence of Artistshare

and SellaBand platforms through which it is possible to support one’s

favourite artists in exchange for their new album or the possibility to take

part in their exclusive gigs.11 In the United States, where the

crowdfunding was born, its success can be accredited to two platforms:

Indiegogo and Kickstarter. Projects such as Pebble won millions of

dollars in support for the platforms, while the donors were given

a sample of the product in return.

Since the administration of Barrack Obama passed the so called

JOBS Act12 in 2012, the number of platforms operating in the equity

crowdfunding sector has considerably increased, but it is difficult to point

to just one most representative platform. However, on the global market

there are several portals worth mentioning, the leaders on the market13

(see Table 3).

11 https://www.companisto.com/en/.../crowdinvesting-vs-crowdfunding [access 07 April

2017]. 12 A legislative package destined for boosting entrepreneurship which includes the

CROWDFUND Act dedicated for social fundraising. 13 http://www.moneycrashers.com/equity-crowdfunding-sites-investors-entrepreneurs/

[access 23March 2017]; http://www.crowdcrux.com/top-10-equity-crowdfunding-

websites-for-startups/ [access 5 May 2017].

http://www.crowdcrux.com/top-10-equity-crowdfunding-websites-for-startups/



100

Table. 3 Leading Internet platforms in the social financing sector.

AngelList

American platform for businesses in their start–up phase,

helps to collect equity or debt investments. It is open only

for accredited investors.

Early Shares platform of equity crowdfunding for small and middle-

sized enterprises in the USA.

Crowdcube platform of equity crowdfunding for British entrepreneurs.

Fundable platform offering both reward-based campaigns and equity

crowdfunding for small enterprises.

Seedrs

platform destined for companies looking for resources to

finance research in the early phase of development (seed

and start–up), platform with headquarters in Great Britain

but open for investors and entrepreneurs from all over

Europe.

CircleUp equity crowdfunding platform located in San Francisco.

Crowdfunder

global social network for small businesses, start-ups and

social cooperatives focused on gathering of own capital and

own contribution.

WeFunder.com their motto "We help to invest in start-ups. We are like

Kickstarter but we offer shares”.

Equity Net

a crowdfunding platform launched in 2005, it is used by

thousands of entrepreneurs, investors, government entities

and business incubators.

RockThePost

a platform, that connects small entrepreneurs with

accredited investors interested in investing in promising

new companies in start –up phase.

Indiegogo

which officially does not offer equity crowdfunding

services but has been doing so for some time. It is also true

about RocketHub.

Source: own work.

Studying the dynamics of growth of the alternative finance market in

Europe between 2013 and 2015 it can be noticed that the market grew

considerably in the analyzed period (see Image 3), however one must not

ignore that a huge proportion of this market was occupied by Great

Britain i.e. 75% of the market in 2014 and 81% in 2015. However, the

dynamics of growth fell y/y from 151% in 2014 to 92% in 2015. But still,

https://angel.co/

http://www.earlyshares.com/

http://www.crowdcube.com/

http://www.fundable.com/

http://www.seedrs.com/

https://circleup.com/

https://www.crowdfunder.com/

http://www.wefunder.com/

https://www.equitynet.com/

https://rockthepost.com/

http://www.indiegogo.com/


101

in Great Britain, which is the leader on the crowdfunding arena, this form

of acquiring capital is gaining popularity in the start-up sector14.

Image 3. Volumes of transactions on the alternative finance market in Europe

(including UK) between 2013 and 2015 (millions of Euro).

Source: Sustaining Momentum The 2nd European Alternative Finance Industry Report.

Cambridge Centre for Alternative Finance, 2016. https://www.jbs.cam.ac.uk/

fileadmin/user_upload/research/centres/ alternative-finance/ downloads/2016 -

european-alternative-finance-report-sustaining-momentum.pdf

Apart from Great Britain, the countries with considerably high values

on the alternative finance market in 2015 were: France (319 million

EUR), Germany (249 million EUR), Holland (111 million EUR), Finland

(64 million EUR) and Spain (50 million EUR). When it comes to Poland,

the market was only worth 10 million EUR. The per capita value of the

market in GB amounts to 66 EUR, in the second place is Estonia (24

EUR) and third is Finland (11,6 EUR).

According to the report mentioned above, Europe with the volume of

transactions of 5.4 billion EUR loses ground with respect to the value of

the market measured as the volume of transaction to Asia and the Pacific

where the volume of transactions in 2015 amounted to 95 billion EUR,

and the region of both Americas where the recorded volumes in the same

year was 33.6 billion EUR. Each region or continent boasts its own

leader who stands out from other market participants. In Europe the

14 https://www.jbs.cam.ac.uk/fileadmin/user_upload/research/centres/alternative-

finance/downloads/2016-european-alternative-finance-report-sustaining-momentum.pdf

0

1 000

2 000

3 000

4 000

5 000

6 000

2013 2014 2015

1 127

2833

5431

151

92


102

leader is Great Britain, in the Americas – the USA, and in Asia and the

Pacific region – China.

3. Crowdfunding in Poland

In Poland crowdfunding is a relatively new form of financing which,

as every novelty, awakens certain distrust. Unnecessarily, because this is

a perfectly legal form of financing, however due to some fiscal and legal

loopholes it is better to use well established Internet portals which

guarantee safety in the process of gathering equity. Taking into account

relatively fast development of Internet platforms in Poland, it may be

assumed that the period of skepticism is slowly coming to an end.

Traditional crowdfunding has been well received what is confirmed by

the popularity of platforms such as siepomaga.pl, polakpotrafi.pl,

wspieramkulture.pl and megatotal.pl. As far as equity crowdfunding is

concerned, this form has not taken off yet. There are four major

platforms on the Polish market: Polish language version of CrowdCube

which unfortunately features no Polish projects, and platforms called

Beesfund, CrowdAngels and GetFunded.

On the Polish market of equity investment (crowdinvesting) the

situation does not look bright. Even though the platform Crowdangels.pl

managed to generate a record sum of 1.572.000 PLN to finance the Willo

project – organic aspirin. Nevertheless, overall statistical data show that

the volumes of investments in Polish businesses are declining. In 2016

there were only eight transactions worth more than 1million PLN each,

the total sum amounted to 154 million PLN and 89% of this money went

to only two companies – Brainly which was fed with 57 million PLN of

investment and DocPlanner which took 80 million PLN. As for the

remaining businesses which received support, the average amount of

investment was 2.8 million PLN per company. The six companies fed by

venture capital funds shared 17 million PLN among themselves (which

equals about 2.8 million PLN per investment). It may be expected that

the situation will further deteriorate as the sources of capital are running

out.

Taking into account the criterion of the model of financing in Poland,

the dominating forms in 2015 were: invoice trading (4.1 million EUR),

then reward based crowdfunding (3 million EUR), peer-to-peer consumer

lending (1.9 million EUR), donation-based crowdfunding (0.1 million


103

EUR), real estate crowdfunding (0.4 million EUR) and equity-based

crowdfunding (0.2 million EUR).

Image 4. Models of financing businesses in Poland in 2015 (millions of Euro).

Source: own work based on a report Sustaining Momentum The 2nd European

Alternative Finance Industry, Cambridge Centre for Alternative Finance, 2016.

https://www.jbs.cam.ac.uk/fileadmin/user_upload/research/centres/ alternative-finance/

downloads/2016 -european-alternative-finance-report-sustaining-momentum.pdf

Statistics confirm15 a common opinion that, most companies in the

early stage of development are financed with their own capital. Financing

from own resources seems to be a reasonable solution because it does not

put a burden on the company in the form of liabilities, bank loans or

expectations of the investor. However it also entails certain limitations as

own funds in the long perspective cannot secure dynamic growth of the

company. Hence, the search for external sources of financing among

which the most popular are EU funds (24%), venture capital funds (22%)

and money invested by the Angels of Business (17%)16. Generally

businesses count on EU or government funds and very few show any

interest in financing from private equity. Referring to the results of the

research mentioned above, as many as 8% of examined companies chose

15A Report on the Condition of the Small and Middle-sized Enterprises in Poland,

Warszawa 2016, https://www.parp.gov.pl/images/PARP_publications/pdf/2016_raport_

msp_pl_clik.pdf [access 14 August 2017]. 16 P. Róziecki, Inwestycje w Polsce, coraz trudniej o kapitał,

http://crowdfunding.com.pl/inwestycje-w-polsce-coraz-trudniej-o-kapital [access 14

April 2017].

4,1

3

1,9

0,10,4

0,2

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

4,5

Invoice trading Reward-based

crowdfunding

Peer to peer

consumer lending

Charity

crowdfunding

Real estate

crowdfunding

Profit sharing

crowdfunding

mln

EU

R


104

a bank loan as a source of financing and only 3% turned or is going to

turn to crowdfunding.

When analysing the data provided by the Central Statistical Office

one may observe that, small, middle-sized as well as large enterprises

point to budget funds and bank loans as the main sources for financing

investments; other solutions such as e.g. crowdfunding have been used

by a mere 3% of examined companies. Taking into account the

requirements and conditions to be met when applying for a bank loan

when compared with relatively fast and easy availability of capital in the

equity crowdfunding mechanism, it is difficult to explain a very low

interest in crowdfunding especially among innovative companies, such

companies should be open to new solutions such as equity crowdfunding.

On the other hand, there is a number of factors that hinder the

development of this form of fundraising.

4. Barriers that hinder the development of equity crowdfunding

in Poland

P. Róziecki17 lists a number of factors which hinder the evolution of

equity crowdfunding:

Legal regulations Unclear jurisdiction with respect to the sales of

shares online forces the Internet portals administrators to look for

loopholes and balance their activities close to the border of illegality -

which may discourage potential investors. At the moment the model

which collides with law to the smallest extent is crowdfunding for

limited liability companies.

Nominal amount of a share in a limited liability company Minimal share value in a limited liability company is 50 PLN, which

means that with the minimum value required by law of 5,000 PLN one

must purchase 100 shares worth 50 PLN each, what may pose

a serious barrier for small investors. As the idea behind equity

crowdfunding is collecting small amounts of money from a lot of

investors who by investing small amounts in different businesses can

diversify their investment portfolio.

Notarial obligation Each sales of shares in a limited liability

company requires a notary’s certification, so in case of equity

17 P. Róziecki, Crowdfunding udziałowy i jego hamulce, http://www.crowdangels.pl/

Crowdfunding-udziałowy-i-jego-hamulce.html, [access 10 April 2017].


105

crowdfunding arises a problem with preparing contracts for hundreds

of small investors. All costs related to such activities are usually

shifted on to the investors.

No incentives for potential investors The British market of

alternative financing already quoted above offers examples of good

solutions which accelerate the development of crowdfunding. On the

British market investors enjoy tax reliefs enabling them to write off

the sums invested in young businesses from the tax base, this attracts

investors and drives the economy forward. Thanks to such solutions

the value of the British crowdfunding market is the biggest in Europe.

Sadly, similar solutions do not exist in Poland.

Conclusions

The statistical data included in the report18 quoted a number of times

in the present paper show that alternative financing for businesses in

Europe has increased significantly since 2013 and has become an

important source of obtaining equity for entrepreneurs, start-ups and

small and middle-sized enterprises. In 2015 Internet financial platforms

raised 536 million EUR providing capital for nearly 10 thousand

businesses19. In contrast to 2014, in 2015 the dynamics of growth in the

volumes of transactions conducted through Internet platforms

reached 167% year/year! The most popular type of crowdfunding has

reciprocal nature (loans, debt instruments, direct loans). It indicates an

additional path towards obtaining capital for countries where

entrepreneurs encounter difficulties with obtaining capital, especially in

case of businesses in early phase of their lifecycle. The presence of

equity crowdfunding is rather marginal and it is a consequence of the

absence of relevant legislation enabling a perfectly lawful utilization of

this form of financing. If crowdinvesting is to become an attractive

method of financing for businesses, it is necessary to introduce such legal

regulations which would guarantee its proper application.

Literature

[1.] Dziuba D.T., Rozwój systemów crowdfundingu – modele,

oczekiwania i uwarunkowania [in:] Problemy Zarządzania, vol. 10,

18http://microventures.pl/rynek-alternatywnych-finansow-wnioski-z-raportu/ 19 Outside Great Britain.


106

no 3 (38): 83 – 103 ISSN 1644-9584, Department of Management

UW, DOI 10.7172.1644-9584.38.6

[2.] Król K., Crowdfunding, Od pomysłu do biznesu, dzięki

społeczności, published by crowdfunding.pl, Warszawa 2013.

[3.] Król K., Finansowanie społecznościowe jako źródło finansowania

przedsięwzięć w Polsce, http://stowarzyszenie.crowdfunding.pl/

index.php/polskie-towarzystwo-crowdfundingu/ [access 10 April

2017].

[4.] Report on the Condition of Small and Medium-sized Enterprises in

Poland, Warszawa 2016, https://www.parp.gov.pl/images/PARP_

publications/pdf/2016_raport_msp_pl_clik.pdf [access 14 August

2017].

[5.] Róziecki P., Crowdfunding udziałowy i jego hamulce,

http://www.crowdangels.pl/ Crowdfunding-udziałowy-i-jego-

hamulce.html

[6.] Róziecki P., Inwestycje w Polsce, coraz trudniej o kapitał,

http://crowdfunding.com.pl/inwestycje-w-polsce-coraz-trudniej-o-

kapital

[7.] Sustaining Momentum The 2nd European Alternative Finance

Industry Report, Cambridge Centre for Alternative Finance, 2016

https://www.jbs.cam.ac.uk/fileadmin/user_upload/research/centres

/alternative-finance/downloads/2016-european-alternative-finance-

report-sustaining-momentum.pdf

Websites

[1.] https://www.companisto.com/en/.../crowdinvesting-vs-

crowdfunding/ [access 07 April 2017].

[2.] http://cgs.org.pl/pl/ogromny-wzrost-crowdfundingu-i-swietne-

perspektywy-w-europie/ [access 10 April 2017].

[3.] http://cgs.org.pl/pl/baza-wiedzy/ [access 10 April 2017].

[4.] http://www.moneycrashers.com/equity-crowdfunding-sites-

investors-entrepreneurs/ [access 23 March 2017].

[5.] http://www.crowdcrux.com/top-10-equity-crowdfunding-websites-

for-startups/ [access 5 May 2017].

http://www.crowdangels.pl/%20Crowdfunding-udziałowy-i-jego-hamulce.html

http://www.crowdangels.pl/%20Crowdfunding-udziałowy-i-jego-hamulce.html

http://crowdfunding.com.pl/inwestycje-w-polsce-coraz-trudniej-o-kapital

http://crowdfunding.com.pl/inwestycje-w-polsce-coraz-trudniej-o-kapital



http://cgs.org.pl/pl/baza-wiedzy/

http://www.moneycrashers.com/equity-crowdfunding-sites-investors-entrepreneurs/

http://www.moneycrashers.com/equity-crowdfunding-sites-investors-entrepreneurs/




107

DOI: 10.19192/wsfip.sj2.2017.7

Wioletta ŚWIEBODA

CREDIBILITY VERSUS MEASUREMENT OF VALUE

OF A FINANCIAL STATEMENT CONSTITUENTS

IN THE CONTEXT OF AUDITING RISK

Summary

Preparing financial statements is essential for each business entity in order to transmit

information necessary for the intended user. The statements must reflect current

financial situation of the company on the basis of which it will be possible to take

appropriate decisions. Information is only reliable when it is useful. Preservation of

credibility of financial statements in business practice raises doubts relating to the

possibility, allowed by the International Accounting Standards, to present estimates.

Another concern is connected with the increasing usage of fair value measurement

instead of the principle of prudence1. The aim of the paper is to define the notion of

credibility with respect to elements of financial statement, auditing risk of these

elements and application of estimates. The author also highlights the essence of fair

value measurement and the impact of financial auditing on shaping the credibility of

information in the financial statement. For the purposes of the paper the author

researched the legal acts in force and used the case study method.

Key words: financial statement, audit risk, credibility

Introduction

Accountancy as a system of economic recording is a source of

business information about each company. It shows financial situation of

a business entity to both internal and external recipients. Accountancy is

also a scientific field and elementary source of information which

examines, explains and uses description of the value and nature of

a firm’s assets, liabilities and owner’s equity on daily basis. The essence

of accountancy lies in the fact that it embraces the overall wealth of

Wioletta Świeboda (MA), Katowice University of Economics, the Chair of

Accountancy, [email protected] 1 J. Bodzianny, D. Markiewicz –Rudnicka, Wiarygodność sprawozdań finansowych

a wartość godziwa, WSB University in Wrocław, p. 1.

Wioletta Świeboda

108

a company, information about the origin of this wealth as well as

development of economic processes.

1. Credibility of constituents of a financial statement

The aim of audit of elements of a financial statement is to determine

the accuracy of the balance sheet and the financial result. It is regulated

by a resolution of the Polish Council of Ministers on audits of financial

statements in state-owned companies2. Another relevant regulation refers

to substantiation of the audit by means of a protocol confirming the

accuracy of the financial statement or pointing to areas for corrections to

be made in a set period of time. Pursuant to the regulation the organs

responsible for conducting the audit were audit committees constituted

for an indefinite period of time. The composition of the committees

included auditors appointed by the Minister of Finance.

It is unavoidable that each financial statement may contain

consequences of errors made in the course of entering information in the

books or caused by unconscious omission of economic occurrences. The

key aspect here is examination of irregularities in the annual financial

statement and determination of errors which could possibly lead to false

impressions or wrong decisions taken by the receiver after studying the

data included in the financial statement3. Each business entity responsible

for preparation of a financial statement should strive towards credible

presentation of financial information because this information is critical

in shaping the right opinions and decisions.

Application of International Accounting Standards offers possibility

to walk away from the principle of prudence and which, in the view of

the Accounting Act4, involves obligatory inclusion in a financial

statement of a business entity as at the balance sheet day all occurrences

which caused decrease in the value of assets or threat of losses and as

a consequence events which impacted the financial result. Application of

the model of fair value measurement may lead to a situation in which

2 Resolution 332 of the Polish Council of Ministers of 16 August 1957 on audits of

financial statements in state-owned enterprises acting on the basis of economic

settlements (M.P. No 73 of 1957 item 438). 3 J. Pfaff, Rewizja finansowa wydanie II poprawione i uzupełnione, Publishing House of

the University of Economics in Katowice, pp. 61-73. 4 The Accounting Act of 29 September 1994 (Journal of Laws of 2013 items 330 and

613; Journal of Laws of 2014 items 768 and 1100; Journal of Laws of 2015 item 4).

Credibility Versus Measurement of Value of Financial Statement…

109

a financial statement does not respect the requirement of true and reliable

picture5.

The definition of fair value can be found in the International

Financial Reporting Standard No 13 on Fair Value Measurement. This

standard defines fair value on the basis of an 'exit price' notion and uses

a 'fair value hierarchy', which results in a market-based, rather than

entity-specific, measurement. It is such kind of a price that can be

obtained for sale of a constituent of assets, or a price that must be paid as

the result of transfer of liability between market participants on the date

of valuation6. This definition is convergent with Article 28 item 6 of the

Accounting Act7, which stipulates that the fair value is an amount for

which a given asset could be exchanged, and a liability settled in an

arm’s length transaction between willing, well-informed and non-related

parties. Both definitions treat the net sales price as an equivalent to the so

called ‘exit price’. When fair value is determined on an active market it

acquires all advantages and disadvantages of the applied standards of

current net sales price. High credibility is assigned to market prices. In an

event when the fair value must be measured, the credibility is

diminished8. The advantages coming from the fair value are presented in

Table 1.

5J. Bodzianny, D. Markiewicz – Rudnicka, Wiarygodność sprawozdań finansowych

a wartość godziwa, WSB University in Wrocław, p. 1. 6J. Gierusz, Pomiar wartości aktywów i zobowiązań w świetle MSSF 1,Wycena

w wartości godziwej, http://jmf.wzr.pl/pim/2012_4_3_16.pdf , pp. 1 - 13 [access 22

October 2016 ].

Wycena w wartości godziwej, http://jmf.wzr.pl/pim/2012_4_3_16.pdf [access 22

October 2016]. 7 The Accounting Act of 29 September 1994 (Journal of Laws of 2013 items 330 and

613; Journal of Laws of 2014 items 768 and 1100; Journal of Laws of 2015 item 4,

article 28 point 6). 8 J. Gierusz, Pomiar wartości aktywów i zobowiązań w świetle MSSF 13

Wycena w wartości godziwej, http://jmf.wzr.pl/pim/2012_4_3_16.pdf , pp. 1-13 [access

22 October 2016 ].

Wioletta Świeboda

110

Table 1. Advantages of the fair value

Advantage Description

Prospective picture

Fair value offers better possibility of copying the ability of

a business entity to make successful cash flows in the future

than in the case of application of historic cost principle. It

allows estimation of the accounting value of this entity’s

capital with respect to its market value.

Grounds for

valuation of some

effects of economic

decisions

Offers possibility to compare profitability of such financial

instruments which demonstrate similar economic profile.

Allows for skills evaluation conducted by executives or other

persons responsible for company management with respect to

the adopted and conducted investment policy.

Costs realignment

Measurement of assets according to fair value better meets

the principle of cause-and-effect matching of costs and

revenues because current selling prices of products are

replaced by real not historic costs.

Flexible solutions

It is possible to use different variants of value measurement

which helps business entities choose the most useful

technique with the best specificity for the item under

valuation and opens access to market information.

Alternative for

historic cost

In some cases fair value measurement is the only possible

valuation method.

Source: Own work based on: B. Gierusz, T. Martyniuk [2009] Rola rachunkowości

w świetle społecznej odpowiedzialności przedsiębiorstwa9.

The obvious drawback of fair value is the fact that the value

determined on an active market is purely hypothetical10.

The Accounting Act also defines the way of presenting information.

It offers guidelines for recording of economic occurrences of financial

nature in the books of accounts and in the financial statement in

accordance with their economic content11.

9J. Gierusz, Pomiar wartości aktywów i zobowiązań w świetle MSSF 13

Wycena w wartości godziwej, http://jmf.wzr.pl/pim/2012_4_3_16.pdf , pp. 1-13 [access

22 October 2016]. 10 Ł. Matuszak, Wycena a wiarygodność i porównywalność sprawozdania finansowego,

Poznań 2012. 11M. Adamczyk, Jakość informacji finansowych jako podstawa wiarygodności

sprawozdań finansowych jednostek samorządu terytorialnego, Scientific Journal of the


111

In order to assure credibility of financial information, the

presentation of data should correspond to the economic content.

Impartiality is an important condition which guarantees credibility of

a financial statement. It is related to the principle of prudent valuation,

completeness and economic aspect i.e. the cost of obtaining the data

versus their informative value.

Article 24 of the Accounting Act describes requirements so as to the

manner of keeping the books of accounts. The books must prove

credibility of a financial statement. The regulation states clearly that the

books of accounts should be kept in a reliable, error-free and verifiable

manner and on an ongoing basis. The documentation of entries must

allow for identification of documents and the manner in which they were

recorded. Entries must be kept in a chronological and systematic order.

Completeness and access to data must be ensured. In order to assure

credibility of information included in a financial statement, impartiality is

required. The communicated information is impartial when it is not

received as intentional or when there is no visible interference which

would trigger a certain reaction or impact the user’s bevaviour12.

The issue of credibility raises a considerable number of doubts in the

accounting practice. The reason behind these doubts may be the fact that

the International Accounting Standards allow to use estimates in the

financial statement. IAS No 8 AcAccounting Policies, Changes in

Accounting Estimates and Errors defines estimates as such

approximations which may need verification when additional information

becomes available. The example refers to determination in a financial

statement of profit or loss generated as the result of a conditional

occurrence, which does not constitute error correction13. The changes in

value are the consequences of new information or occurrences. It should

be emphasized that appropriate interpretation of a financial statement is

possible thanks to the knowledge of a given set of accounting principles

applied by an organisation. That is why it is important to provide the

grounds behind the choice of particular principles available within the

range compliant with IFRS as well as any other additional information on

the applied measurement methods. In business practice it is sometimes

University of Szczecin No 718, Finanse. Rynki finansowe. Ubezpieczenia No 53, 2012,

pp. 1-12. 12 Ibid. 13 IAS No 8 Accounting Policies, Changes in Accounting Estimates and Errors, Official

Journal of the European Union, pp. 1-8.

Wioletta Świeboda

112

the case that measurement is conducted based on various models what

results from the lack of information on current market prices. According

to IFRS, the information relating to uncertainty with respect to value

estimates must be disclosed. The disclosure obligation especially refers

to the following:

assumptions of future occurrences which may impact the reserves

presented in the balance sheet;

applied methods as well as significant assumptions for fair value

measurement of tangible assets in revalued amounts, investment

properties valued in accordance with information coming from the

market or other factors subject to disclosure, financial assets and

liabilities and assumptions used for measurement of fair value of

intangible and legal assets in revalued amounts14. One of possible

ways of counteracting the loss of credibility is audit of financial

statements conducted in accordance with guidelines to be found in the

Polish Domestic Accounting Standard No 7 Changes of accounting

policies, correction of errors, changes in estimates and events after

balance sheet date.

2. Risks of auditing elements of financial statements

International Standards on Auditing (ISAs) and Domestic Auditing

Standards put special emphasis on risk assessment. The term risk is

defined in ISA 200, which stipulates risk as a possibility that the auditor

will express an inappropriate audit opinion in a situation when the

financial statements are materially misstated. Risk assessment is a pre-

condition for a correct audit of a financial statement. The evaluation of

risk is broadly related to the situation of the audited business entity. The

audit conducted by a certified auditor ought to provide reasonable

assurance that the data presented in a financial statement is free from

material misstatements, whether due to fraud or error. International

Standard on Auditing No 200 defines the risk of material misstatement as

the risk that the financial statements were materially misstated prior to

audit. This consists of two components, described as follows at the

assertion level:

14 J. Bodzianny, D. Markiewicz – Rudnicka, Wiarygodność sprawozdań finansowych

a wartość godziwa, WSB University in Wrocław, pp. 186 -187.


113

the inherent risk,

the risk of internal control.

The first type of risk - inherent risk - is the susceptibility of an

assertion about a class of transaction, account balance or disclosure to

a misstatement that could be material, either individually or when

aggregated with other misstatements, before consideration of any related

controls15. The second type of risk - control risk – is the risk that

a misstatement that could occur in an assertion about a class of

transaction, account balance or disclosure and that could be material,

either individually or when aggregated with other misstatements, will not

be prevented, or detected and corrected, on a timely basis by the entity’s

internal control.16

The auditing risk is a product of three ratios: the inherent risk,

control risk and detection risk. The inherent and control risks remain

outside the auditor’s mandate. The detection risk must be well adjusted

by the auditor. It means that material misstatements once overlooked by

internal control may not be detected by the external audit.17 The three

kinds of risks together with factors increasing their emergence are

presented below. Interrelations between different kinds of risks are

shown in Table 2.

Table 2. Interrelations between different kinds of risks

Detection risk lowest Detection risk medium Detection risk highest

Inherent risk: high Inherent risk: low Inherent risk: low

Control risk: high Control risk: high Control risk: low

Source: Own work based on: M. Adamczyk, Jakość informacji finansowych jako

podstawa wiarygodności sprawozdań finansowych jednostek samorządu terytorialnego,

Scientific Journal of the University of Szczecin No 718. Finanse. Rynki finansowe.

Ubezpieczenia No 53, 2012.

15 Glossary of financial audit terms available at http://www.ifac.org/system/files/

downloads/ Polish_GuidetoUsingISAs_Glossary.pdf, p 21 [access17 July2016 ]. 16 Ibid., p. 20. 17 M. Adamczyk, Jakość informacji finansowych jako podstawa wiarygodności

sprawozdań finansowych jednostek samorządu terytorialnego, Scientific Journal of the

University of Szczecin No 718, Finanse. Rynki finansowe. Ubezpieczenia No 53, 2012 ,

pp. 1-12.

Wioletta Świeboda

114

Example: Auditor companies generally assume the audit risk at the

level of 5% which means that there is 95% of certainty that the issued

opinion is fair and correct. In an event when the auditor assesses the

inherent and control risks as high (with respective values of 80% and

70%) it means that the audited business entity made 80 errors per 100

documents and internal control does not discern 70% of them i.e. 56

errors. To achieve the standard audit risk of 5% the calculation proceeds

as follows:

Detection risk = Audit risk / Inherent risk x Control risk

Detection risk = 0.05 / 0.8 x 0.7 = 0.089

The above calculation shows that the detection risk should be

determined on the level of 0.089 (so it should amount to 91,1%)18. The

calculation presented above allows for determination of the detection risk

and determines stages of limiting the audit risk.

The nature of a given business entity makes it possible to determine

the value of particular risks which result from this very nature and which

become clear for each and every experienced auditor. Credible

information coming from an audited financial statement guarantee that

the receiver will dispose of reliable data about the company’s wealth and

its financial situation.

Conclusions

Together with the development of economy rises the need to get

access to economic information about the performance of business

entities. It is accountancy that provides this data. Without accountancy

efficient functioning of companies would not be possible. External users

obtain the information they desire from data included in the financial

statements. An important role of accountancy is then the provision of

reliable and clear information about the wealth and financial information

of a business entity and its performance and financial results. Therefore

the financial statement released to the outside world must necessarily be

of the highest possible quality. An auditor should be a guarantor of this

high quality. Nevertheless, one must bear in mind that each financial

statement may contain some errors or consequences of errors which were

18 A. Kwasiborski, Dokumentacja rewizyjna z badania sprawozdania finansowego,

Rewiks Sp. z o.o., Warszawa 2004, pp. 17 – 19.


115

committed in the course of recording the economic transactions into the

books, inventory proceedings or omission of relevant economic

occurrences. Once the information is regarded as insignificant, trying to

retrieve it would not be rational as the costs related to the retrieval of this

information would be higher than the expected results and the costs of

detected errors.

Legal acts

[1.] Resolution 332 of the Polish Council of Ministers of 16 August

1957 on audits of financial statements in state-owned enterprises

acting on the basis of economic settlements (M.P. no 73 of 1957

item 438).

[2.] Act of 27 August 2009 on Public Finance (Journal of Laws of 2009

No 157 item 1240 article 7 point 1).

[3.] The Accounting Act of 29 September 1994 (Journal of Laws of

2013 items 330 and 613; Journal of Laws of 2014 items 768 and

1100, Journal of Laws of 2015 item 4).

Literature

[1.] Adamczyk M., Jakość informacji finansowych jako podstawa

wiarygodności sprawozdań finansowych jednostek samorządu

terytorialnego, the Scientific Journal of the University of Szczecin

No 718, Finanse. Rynki finansowe. Ubezpieczenia No 53, 2012.

[2.] Bodzianny J., Markiewicz – Rudnicka D., Wiarygodność

sprawozdań finansowych a wartość godziwa, WSB University

in Wrocław.

[3.] Gierusz J., Pomiar wartości aktywów i zobowiązań w świetle MSSF

13 Wycena w wartości godziwej, http://jmf.wzr.pl/pim/

2012_4_3_16.pdf [access 22 October 2016].

[4.] Gierusz B., Martyniuk T. [2009], Rola rachunkowości w świetle

społecznej odpowiedzialności przedsiębiorstwa (CSR) [in:]

Problemy współczesnej rachunkowości, Warsaw School

of Economics, Warszawa.

[5.] Kwasiborski A., Dokumentacja rewizyjna z badania sprawozdania

finansowego, Rewiks Sp. z o.o., Warszawa 2004, pp. 17 – 19.

Wioletta Świeboda

116

[6.] Matuszak Ł., Wycena a wiarygodność i porównywalność

sprawozdania finansowego, Poznań 2012.

[7.] IAS No 8 Accounting Policies, Changes in Accounting Estimates

and Errors, Official Journal of the European Union, 29 November

2008.

[8.] International Financial Reporting Standard No 13.

[9.] Pfaff J., Rewizja finansowa wydanie II poprawione i uzupełnione,

Publishing House of the University of Economics in Katowice.

Websites

[1.] Glossary of financial audit terms available at

http://www.ifac.org/system/files/downloads/Polish_GuidetoUsingI

SAs_Glossary.pdf, [downloaded on 17 July 2016].


117

DOI: 10.19192/wsfip.sj2.2017.8

Mariusz ZIELIŃSKI

CHANGES OF THE ECONOMIC SITUATION

VS. THE STATE OF PUBLIC FINANCES

IN POLAND IN 2007-2015

Summary The paper is devoted to the analysis of the impact of changes in the level of economic

growth on the volumes deciding about the condition of public finances. The main

hypothesis put forward in the paper is the assertion that the changes of the economic

situation affect substantially the state of public finances, causing changes on the level of

revenues and expenditures of public sector. The second hypothesis is the assertion that

fiscal policy in Poland, in the analyzed period, was of a passive nature. The paper

contains data analysis of the period between 2007 and 2015 provided by the Central

Statistical Office with the use of correlation rates. Statistically significant negative

dependence was observed between GDP growth and expenditures of the State budget,

total public debt and government sub-sector debt. Such results indicate the dominance

of passive fiscal policy during the analyzed period.

Key words: economic cycle, economic growth, recession, public finance sector, GDP

Introduction

The current state of finances in public sector, which is illustrated by

budget deficit, depends on the current economic situation. Increasing the

economic activity provides public sector with revenues from all sources.

The situation reverses in periods of recession (a weakening of economic

growth). In case of expenditures, the period of good economic situation

limits the need for fiscal intervention of the State, while the downturn

implies the need for increase of social expenditures as well as stability of

operations. The scale of the State impact on the economic situation

through the fiscal policy depends on the preferences of decision makers

and the level of debt in public sector. High public debt limits the

Dr Mariusz Zieliński, professor of Opole University of Technology, e-mail

[email protected]

Mariusz Zieliński

118

possibility for further indebtedness and also raises the interest rate

expected by the investors buying public bonds.

The main hypothesis in the paper is the assertion that the changes in

economic situation affect substantially the state of public finances,

causing changes on the level of revenues and expenditures of public

sector. The second hypothesis is the assertion that fiscal policy in Poland,

in the analyzed period, was of passive nature. To verify the above

hypotheses the author used the data related to the formation of

appropriate rates in Poland in 2007-2015, published by the CSO in

Statistical Annals of the Republic of Poland. As for the methods, the

article uses initial descriptive analysis of secondary data. In addition, the

author provides the analysis of correlation rates formation where as

a specified variable the author assumed the pace of GDP growth and as

the explained variables the author assumed the following ratios: the level

of expenditures and revenues in public sector, level of budget deficit and

public debt.

1. Economic situation as a determinant of finances in public sector

There are downturn fluctuations on the market which means

successive ups and downs in economic activities. They form the business

cycle defined as short-term production deviations from its long-term

trend.1 In a classic business cycle understanding there are four phases:

crisis (decline of economic activity), depression (further decline in

economic activity and its stability at the level of bottom cycle), recovery

(increase of economic activity) and boom (further increase in activity

until the summit cycle). For the purposes of this paper, it is enough to

distinguish two phases in the economic situation: the phases of high rate

of economic growth and relatively low rate of economic growth (possibly

a recession)2.

Due to the fact that the phase of high growth is usually longer than

the period of decline in the level of economic activity (and in parts of

cycles the recession does not appear at all) long-term trend is positive

1 P.A. Neumeyer, F. Perri, Business Cycles in Emerging Economies: The Role of

Interest Rates, Journal of Monetary Economics 2005, no 52, pp. 545-580; R. Barczyk,

M. Lubiński, Dilemmas of economic stabilization, Publication of the University of

Economics in Poznań 2009, p. 13. 2 R. Barczyk, L. Kąsek, M. Lubiński, K. Marczewski, New face of business cycle, PWE,

Warszawa 2006, pp. 131-132, 140, 151.

Chnages of the Economic Situation vs. the State of Public Finances...

119

(the economy grows). Individual economic situation cycles are

considered from the perspective of the duration and scale derivation from

the trend, stating their turning points (initial and final moments of the

cycle phase occurrence). The upper turning point (the highest level

during the period of economic growth) designates the end of prosperous

economic situation. The lower turning point (the lowest level during the

period of economic growth) defines the end of unsuccessful downturn.

Successful phase of the economic situation is between lower and upper

tuning point and the phase of unsuccessful downturn is between upper

and lower turning point3.

Changes in the direction of the trend generally first affect the

financial market. The growing economic phase is characterized by high

level of business investments, high demand for credit and rising prices

which reduce the real burden of debt. The banking sector decides to

extend credits due to favorable financial situation of borrowers. In the

long run, it leads to excessive debt, changes of mood and expectations on

the financial market, drop in asset prices and paying off difficulties by

some debtors. If in such situation the creditors demand to pay off debts,

there is a wave of debtors bankruptcies, whom the decline in the value of

assets does not allow to pay off their obligations4. The collapse of

a financial market entails a decrease in production (economic downturn

on the material market), the decline in employment and the increase of

unemployment (which deepens the problem on material and financial

market).

As the economic fluctuations destabilize economy, trigger nervous

reactions of the investors and lead to the unemployment growth which, in

turn, awakens social dissatisfaction, the State may decide to use

stabilization policy aiming at limiting fluctuations in the economic

situation5. The two main tools of stabilization policy are: fiscal policy (at

the government discretion) and monetary policy (belonging to the

competence of the Central Bank)6. The unsolved question about the

3 R. Barczyk, M. Lubiński, Dilemmas of economic stabilization,…op. cit., pp. 13-17. 4 M. Lubiński, Business fluctuations vs. financial perturbation, [in:] Problem of

economics and development policy, J. Stacewicz [ed.], the Warsaw School of

Economics, Warszawa 2005, pp. 26-28. 5 R. Barczyk, L. Kąsek, M. Lubiński, K. Marczewski, New face of business cycle …op.

cit., pp. 148-149. 6 J. G. Nellis, D. Parker, Principles of Business Economics, Prentice Hall, Financial

Times, Harlow, London, New York 2006, p. 23, 350.

Mariusz Zieliński

120

economic theory still remains i.e. which of the above tools should

dominate or even if the stabilization policy should be applied at all?

In the so-called economy mainstream one can distinguish two

dominant directions which give different answers to the above question.

Representatives of the neo-classical direction (referencing to the output

of classical school) are against stabilization policy of the State as they do

not believe in its effectiveness. In their view, monetary policy is enough

to stabilize the economic situation, government should not use the

expenditures growth (fiscal policy) for rescuing the economic activity.

Representatives of neo-Keynes direction are of different opinion

(referencing to the output of J.M. Keynes). They believe that the State

should counteract the downturn and fiscal policy is the best possible way

to do so7.

The State can be interested in counteracting the downturn because as

the result of limitation in economic activity during the downward phase

of the business cycle, there are tensions in public finances. Lower

economic activity results in a decrease in the revenues of public sector in

an event when expenditures side of public finance is rigid or even

requires more expenditures during the downturn. This is especially true

for the social security system (insurance connected with retirement,

health, pension, maternity, unemployment or breadwinner’s death) which

are mostly financed by employers and employees. The State, however, is

the guarantor of these benefits (must cover the deficit of the social

security system which increases in the economic downturn)8. Apart from

the necessity for social security funding, deepening the deficit in the

sector of public finances during the downturn may occur if the State will

try to rebuild the economic activity by fiscal stimulation (tax reduction,

7 T. Laubach, New evidence on the interest rate effects of budget deficits and debt, the

Journal of the European Economic Association 2009, no. 7, p. 858; W. Stankiewicz,

History of economic thought, PWE, Warszawa 2000, p. 40; M. Zieliński, Fiscal policy

and economy crisis in chosen European Union countries, [in:] J. Sokołowski, M. Rękas,

G. Węgrzyn (ed.) Economics, Academic Work of the University of Economics in

Wrocław no. 245, Wrocław 2012, pp. 697-699. 8 P.M. Gaudament, J. Moliner, Public finances, Warszawa: PWE 2000, pp. 417-418; A.

Siwy, A. Adamczyk, T. Lubińska, W. Tarczyński, Fiscal level and unemployment and

rate of GDP changes in European Union countries and in Poland in 1990-2000.

Economist 2004, no. 1, p. 101; E. Denek, J. Sobiech, J. Wolniak, Public finances.

Warszawa, PWN 2001, pp. 204-206.


121

public expenditures increase) which is a sign of active (in that case

expansive) fiscal policy9.

The root tension in public finances during the economic downturn is

related to the income decrease. As the most important component of the

State revenue is income tax, the structure of these influences is essential.

Stability of income taxes is mostly between direct taxes (income and

property) and indirect taxes (tax on goods and VAT services, excise tax

and income tax). From the point of view of the level and stability of

budget revenues, direct taxes are more effective as it is more difficult to

evade paying them10. Besides, direct taxes put a burden, most of all, on

the consumption which changes to a smaller extent than incomes, thus

constitutes a more stable source of revenues.

The effect of changes in the economic situation are the changes

between the revenues and expenditures of public sector. If the

government does not implement extreme variant of fiscal policy

(expansionary or restrictive) during the summit of the economic

situation, the level of the budget deficit decreases (or there is a budget

surplus), in the lower cycle point there is the deepest deficit in the public

finance sector. Consequently, there is a rapid growth of public debt in the

period of downturn, on the other hand, the growth is insignificant during

the period of good economic situation (or public debt is even lower if the

budget surplus occurs).

2. Economic situation vs. public finances sector: situation in Poland

in 2007-2015

The analysis of changes and the situation of public finances relating

to the condition of economic situation, was based on the data published

in the Statistical Annals of Polish Central Statistical Office. The most

important rates are: GDP changes, budget deficit level and public debt.

To define the reasons of debts in public sector it is necessary to consider

income and expenditure side with all sub-sectors. Table 1 shows the level

of public revenues, the evolution of the revenues from direct taxes and

9 R. Barczyk, L. Kąsek, M. Lubiński, K. Marczewski, New face of business cycle …op.

cit., p. 59. 10 J. Kudła, Changes of the structure in budgetary influences in chosen European Union

countries in 2008-2010, [in:] J. Sokołowski, M. Sosnowski, A. Żabiński (eds.), Public

finances, Academic Work of the University of Economics in Wrocław 2012, no 247, pp.

181-182.

Mariusz Zieliński

122

income tax (from individuals and enterprises) as the main sources of the

State budget revenues and hence the possible causes of changes in budget

deficit. The table includes the income and expenditure of the Social

Security Fund as the most essential element of the social security sub-

sector.


123

TABELA

M. ZIELIŃSKI

OSOBNY PLIK

WKŁADANY PRZY

PDFie

Mariusz Zieliński

124

The period included in the analysis covers the years 2007-2015. The

starting point marks the last peak of economic cycle and closes with the

last year for which comparable data was available. From the perspective

of public finances, the most important fact is that Poland did not suffer

from any recession during the last economic crisis. The lowest level of

economic growth was recorded in 2013 and it was 1.4%. Relatively high

growth of the Polish economy (5.0%) was recorded in 2011. Throughout

the tested period, the budget deficit occurred, the lowest was recorded in

the summit of economic situation while the highest in 2010 when it

amounted to 3.1% GDP. Public debt, analyzed in this period, gradually

increased and its one-time drop in 2014 was caused by transfer of the

funds from Open Pension Fund (OFE). The effects of this decision are

also visible in the decline of the level of budget deficit and increase of

the level of incomes to the Social Security Fund.

The State revenues gradually grew and in two years (2010 and 2013)

there was a drop in year-on-year. While considering tax revenues, one

has to note that year 2013 (since a part of the OFE funds was acquired)

was the only one where there was a decline from indirect taxes which are

the basic source of the State budget revenues. It could also be observed

that the revenues from income tax decreased (tax from individuals and

enterprises) while more rapid declines in income tax were recorded in the

period 2009-2010. Lower tax revenues in 2013 could be explained by the

downturn and it should be pointed out that it was the second year of

a very weak economic situation. The level of budgetary expenditures was

more stable than tax revenues. The expenditures gradually grew, and in

this case, there was double decline in year-on-year (in 2010 and 2014).

Considering the structure of public debt, the key sub-sector is the

governmental sector. This sub-sector generates over 90% of public debt.

The sector of public fund from OFE makes the analysis of debt more

difficult. We can notice a very high increase of debt in governmental sub-

sector in 2013 and even higher decline in debt in the next year.

Unfortunately, 2015 brought a major increase in the debt of

governmental sub-sector (over 50 billion PLN). The changes of level in

the Social Security debt are a reflection of their guarantee by the State

budget. A very high increase of sub-sector debt in 2009 probably resulted

from the lack of topping up funds from the State budget, which at that

time experienced financial difficulties. Decline to an insignificant level

of debt in this sub-sector in 2013 resulted from the transfer of funds taken

from OFE. This conclusion can be formulated thanks to the fact that the


125

biggest negative differences between revenues and expenditures of the

Social Security Funds occurred in 2009 (when social sub-sector debt

rapidly increased) and in 2013 when the debt of this sub-sector declined.

The only rate included in Table 1, which constantly was increasing in the

analyzed period, was the debt of the local government sub-sector. Still

this is a sector which jeopardizes the public finances stability, however,

its debt in the total debt of public sector increased from 4.6% in 2007 to

8.2% in 2015.

To determine the relation between the growth pace of GDP and

forming of basic rates influencing indebtedness in public sector,

correlation coefficients was made (Table 2).

Table 2. Correlation coefficients of GDP growth with the basic rates influencing

public finances conditions

Specification GDP growth (%)

Budget revenues -0,6404*

Indirect taxes -0,4332

Income taxes -0,225

The State budget expenditures -0,7139**

The State budget deficit 0,4293

Total public debt -0,6243*

Governmental sub-sector debt -0,6446*

Local government sub-sector debt -0,5341

Social security debt 0,0753

Incomes of social security funds -0,2812

Expenditures of social security funds -0,5074

**p<0,05; *p<0,1

Source: Own calculation based on data from Table 1.

Significantly negative relation (0,05) was observed only between

GDP growth and expenditures of the State budget. This is consistent with

the literature on the subject because higher rate of economic growth is

accompanied by smaller needs of support to both the social security

system and active fiscal policy. In accordance with literature, but

statistically insignificant, there are also positive correlations among GDP

growth and deficit of the State budget as well as social security debt.

Mariusz Zieliński

126

When it comes to other rates influencing the condition of public

finances, a negative correlation with GDP growth was observed which is

incompatible with the subject literature. Significant negative relation with

significance level 0,1 was observed among GDP growth and budget

revenues, total public debt and governmental sub-sector debt. Taking into

consideration that in the whole analyzed period the recession did not

occur, this indicates a passive approach to tax policy. During the period

of good economic situation, the tax collection relatively drops while

strengthening tax policy during the periods of economic downturn in

order to obtain the expected income. In the fields of tax collection the

next government followed the pro cycle policy (increasing the downturn

and without cooling the economy in periods of high growth). Negative

correlation between GDP growth and total public debt while the negative

relations of budget expenditures (mentioned above) can confirm the

reduction in tax collection in the economic summit and indicate the lack

of debt payment in good economic conditions which grew during the

downturn. This explanation suggests statistically significant negative

correlation between the economic growth and government sub-sector

debt with the positive correlation in the budget deficit. Negative,

statistically insignificant, correlation in 2007-2015 also occurred among

the economic growth and tax revenues, local government sub-sector debt

as well as revenues and expenditures of social security funds.

Conclusions

Primary analysis of changes in the level of economic growth and

basic rates characterizing the condition of public finances, leads to the

conclusion that in the tested period almost all analyzed rates were

gradually growing. There are two exceptions to this rule: the level of the

budget deficit depending on the current economic situation and the level

of social security debt depending on transfers from the State budget

which in recent years was drastically limited due to the acquisition of

financial resources from OFE. In downturn periods there were declines in

revenues and expenditures of the State budget and social security funds.

There was also a one-time drop in total public and government sub-sector

debt, however, this was the result of the acquisition of partial financial

resources from OFE. The only rate gradually increasing in 2007-2015

was the debt of local government sub-sector. These observations allow to

hypothesize that changes of the economic situation significantly affect


127

the condition of public finances causing changes in the level of revenues

and expenditures of public sector.

Based on the analysis of the coefficients correlation, it can be

concluded that fiscal policy in 2007-2015 was inconsistent. On one hand,

there is the strongest negative correlation between the economic growth

and budgetary expenditures as well as the highest positive (although

statistically insignificant) correlation with the budget deficit. On the other

hand, most of the rates characterizing the level of public revenues and

expenditures indicate a negative correlation with the economic growth.

The dominance of negative correlations between the economic growth

and public revenues and expenditures allows for partial confirmation of

the second hypothesis of this paper, that fiscal policy in Poland, during

the tested period, was of a passive nature. Full confirmation of this

hypothesis is not possible, according to subject literature, with correlation

among the economic growth and expenditures and deficit of the State

budget as well as social security debt (although the success of reducing

the expenditures growth may be attributed to the decrease in need for the

economy and society support during the periods of high economic

prosperity and is not the result of deliberate fiscal policy).

Literature

[1.] Barczyk R., Kąsek L., Lubiński M., Marczewski K., Nowe oblicza

cyklu koniunkturalnego, PWE, Warszawa 2006.

[2.] Barczyk R., Lubiński M., Dylematy stabilizowania koniunktury,

Publishing House of the University of Economics in Poznań,

Poznań 2009.

[3.] Denek E., Sobiech J., Wolniak J., Finanse publiczne, PWN,

Warszawa 2001.

[4.] Gaudament, P. M., Moliner, J., Finanse publiczne, PWE, Warszawa

2000.

[5.] Kudła J., Zmiany struktury wpływów budżetowych w wybranych

państwach Unii Europejskiej w latach 2008-2010, [in:] J.

Sokołowski, M. Sosnowski, A. Żabiński (eds.), Finanse publiczne,

Scientific Work of the University of Economics in Wrocław 2012,

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[6.] Laubach T., New evidence on the interest rate effects of budget

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[7.] Lubiński M., Wahania koniunkturalne a perturbacje finansowe

[in:] Problemy ekonomii i polityki rozwoju, J. Stacewicz (ed.)

Warsaw School of Economics, Warszawa 2005.

[8.] Nellis J.G., Parker D., Principles of Business Economics, Prentice

Hall, Financial Times, Harlow, London, New York 2006.

[9.] Neumeyer P.A., Perri F., Business Cycles in Emerging Economies:

The Role of Interest Rates, Journal of Monetary Economics 2005,

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[10.] Siwy A., Adamczyk A., Lubińska T., Tarczyński W., Poziom

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Europejskiej i w Polsce w latach 1990-2000, Ekonomista 2004,

no 1.

[11.] Zieliński M., Polityka fiskalna a kryzys gospodarczy w wybranych

krajach Unii Europejskiej, [in:] J. Sokołowski, M. Rękas, G.

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129

DOI: 10.19192/wsfip.sj2.2017.9

Paweł ARTYMIONEK

REVIEW OF DISCRETIONARY DECISIONS

BY ADMINISTRATIVE COURTS

Summary

The paper concerns reviews conducted by administrative courts of decisions issued by

public administration authorities on the basis of their administrative discretion. The

author presents decisions of the administrative law doctrine and case-law of

administrative courts, with particular regard to the current views. The author reflects

on admissibility of the review of discretionary decision. He indicates the differences and

similarities between a constrained decision and a discretionary decision, and also

answers the questions whether it is admissible to conduct the review of the discretionary

decision by administrative courts on the basis of the criterion of expediency and it is

possible that the court considers only the criterion of legality.

According to the main conclusions of the paper, there are no differences between the

constrained decision and discretionary decision in terms of the review by administrative

courts; the criterion of expediency is permitted if it results from the regulations

empowering the authority to issue discretionary decisions; it has also been observed

that administrative courts increasingly expand the review capacity to ensure the

compliance with law, so that any such review could also be used to verify the

correctness of the discretionary decision which has been issued.

Key words: discretionary decision, administrative decision, administrative court review,

criterion of administrative court review, review of public administration authority

Introduction

Article 177 of the Constitution of the Republic of Poland of 2 April

19971 states that common courts apply justice to all cases except from the

ones legally reserved to other courts. Within the meaning of this

provision, with regard to Article 184 of the Polish Constitution,

administrative courts are specialized courts, for which certain types of

cases are reserved by the law. Article 184 of the Polish Constitution

Paweł Artymionek (MA) a doctoral student of the University of Wrocław, Department

of Administrative Proceedings and Administrative Judiciary, [email protected] 1Journal of Laws No 78, item 483.

Paweł Artymionek

130

forwards the review of public administration to administrative courts

within the scope specified by the law. The review also covers ruling on

cases concerning consistency with the law by territorial self-government

authorities and normative acts by local government administration

authorities. Additionally, the Polish Constitution in Article 166 Section 3

forwards to administrative courts the ruling on disputes of competence

between self-government authorities and government administration, and

in Article 165 Section 2 the Polish Constitution forwards the protection

of the autonomy of territorial self-government units to courts.

The subject of this paper is definition of the criteria of public

administration review by administrative courts in the context of

complaints concerning decisions of public administration authorities

issued on the basis of administrative discretion. For the sake of accuracy

of further reasoning, it should be stipulated that in this paper the review

will be considered not as an inspection of a public administration

authority’s activity and its comparison to the required condition, without

the possibility of a strong influence on this activity2, but as a sequence of

actions of the administrative court, which are a combination of control

and supervision, which gives a specific form customarily called a review.

As T. Bigo and F. Longchamps noticed, the term “review” does not fully

fit to the administrative court activity, but it also cannot be called

a “supervision” because there is no relationship of priority and

dependence between the controlling and controlled entities and the court

is not responsible for the results of the controlled unit”3.

1. The discretionary decision and the constrained decision

An administrative decision is an ex parte “decision issued by a state

administration authority on binding consequences of the applicable

standard for an individually determined entity and a specific case, given

by this authority in external relations”4.

Both the constrained decision and the decision issued on the basis of

administrative discretion are administrative decisions. The constrained

decision is issued on the basis of substantive law, which clearly

2 A. Sylwestrzak, Kontrola administracji, Koszalin 1998, p. 10. 3 T. Bigo, F. Longchamps, Kontrola administracji, Studia Prawnicze, 1965, Issue 7, p.

23. 4 Decision of 22 September 1983, SA/Wr 367/83, ONSA 1983, no 2m, item 75, p. 183.

Review of discretionary decisions by administrative courts

131

determines that when legal standard is realized, the authority will issue

a specific decision.

The discretionary decision is based on the so-called administrative

discretion, which is an authorization of a public administration unit,

resulting from the law, to determine a certain legal standard. M. Mincer

determines administrative discretion as the last stage of the application of

law, which is the settlement of legal consequences. The discretion takes

place when the legal standard does not determine those consequences

univocally, leaving the choice to the administrative authority. The

discretion concerns the future. M. Mincer assumes that a standard

consists of a hypothesis and a legal consequence, therefore, the discretion

in this case means the choice on a legal consequence provided by law,

made by the administrative authority5. According to E. Ochendowski,

administrative discretion takes place when administrative authorities can

choose from various solution to implement the legal condition. The

discretion takes place when the standard does not determine univocally

the legal consequence, but it leaves the choice to the authority, therefore,

the law allows the choice on legal consequence from two or more

possibilities6. When defining administrative discretion, A. Błaś sees its

essence in the fact that the administrative authority, in the circumstances

defined by the legal standard, has a choice of various types of attitude: it

can settle the criteria of the decision by itself and on the basis of them, it

can settle the content of this decision. A. Błaś indicates that the source of

many forms of autonomy of the administrative authority, including

administrative discretion, is a blanket legal standard. Administrative

discretion is “the autonomy provided to the administrative authority by

a blanket legal standard considered as a standard with a fully developed

hypothesis, the disposition of which takes a disjunctive form, which

means that the administrative authority has a choice on various types of

attitude”7.

In terms of administrative procedure, the differences between

a constrained decision and a discretionary decision are not significant;

nevertheless, they were noticed in case law of administrative courts.

5 M. Mincer, Uznanie administracyjne, p. 63-64; also M. Jaśkowska, Uznanie

administracyjne a inne formy władzy dyskrecjonalnej, [in:] System prawa

administracyjnego, R. Hauser, Z. Niewiadomski, A. Wróbel (ed.), Warszawa 2010, p.

260 and 261. 6 E. Ochendowski, Prawo administracyjne, część ogólna, Toruń 2001, ppp. 190-191. 7 A. Błaś, [in:] Prawo administracyjne, J. Boć (ed.), Wrocław 2007, p. 324.

Paweł Artymionek

132

Administrative courts indicate that decisions issued on the basis of

administrative discretion have to be reasonably justified. “When issuing

an adverse decision for a taxpayer in the field of administrative

discretion, a tax authority has a particular obligation, resulting from

Article 7 of the Code of Administrative Proceedings, to present in the

justification its decision on why the case was not solved in accordance

with the legitimate interest of the citizen. The justification of such

a decision in such cases cannot be laconic, based on wording that does

not explain the motivation for such a decision”8. In another judgement,

“according to Article 107 Section 3 of the Code of Administrative

Proceedings, an administrative authority is obliged to present in the

factual justification of its decision the evidence relied upon and the

reasons for which other evidence has been treated as not authentic.

Fulfilling this obligation becomes particularly significant when an

administrative authority settles a candidate for the perpetual usufructuary

of the property among several persons applying for this position,

according to discretion only, due to the lack of the legal criteria of

choice. In such a situation, the authority is obliged to explain in detail the

motivation for its decision in the case”9. A similar judgement was issued

by the Supreme Administrative Court in Katowice on 14 May 1997, in

which the court emphasizes: “Discretionary decisions also require

a probing and logical justification.”10

In Article 52 Section 1 and 2 of the Act on the Law of the

Administrative Courts Procedure, the legislator regulated the premises of

admissibility of lodging a complaint about the administrative decision in

administrative court, restricting the judicial review to final decisions

only. The complaint can be lodged after exhausting the remedies at law,

in a situation when the party is not entitled to any remedy at law:

a complaint, appeal or motion for re-examination of the case. Such

a provision indicates that the legislator considers the judicial review as

a kind of extraordinary control, which is not aimed at relieving from the

duties the appeal bodies of public administration and replacing the appeal

with a complaint to an administrative court.

When comparing the decision connected with (sensu stricto) the

decision issued on the basis of administrative discretion, in terms of

8 Decision of the Supreme Administrative Court of 21 April 1994 , SA/Po 3423/93. 9 Decision of the Supreme Administrative Court inWarsaw of 22 October 1981, I SA

2147/81, ONSA 1981 2 item 104. 10Decision of the Supreme Administrative Court in Katowice, I SA/Ka 145/96.


133

admissibility of the complaint in the administrative court, it should be

stated that there are no differences between them. The provision of law

does not exclude admissibility of the complaint in the administrative

court about the decision issued on the basis of administration discretion11.

Only a direct exclusion of the review of discretionary decisions included

in commonly applicable regulations could restrict the jurisdiction of

administrative courts to the investigation of constrained decisions only.

2. Admissibility of the judicial review of the discretion decision

When discussing the criteria of administrative courts review of

discretionary decisions, the possibility of such a review should be

considered. In the current legal situation and conceptions shaped by the

doctrine of administrative law, the admissibility of the review is

undoubted. However, over the last century there has been a range of

conceptions refusing the right of administrative courts to review the

decisions issued on the basis of administrative discretion. Without going

into detail of the historical and theoretical consideration, several aspects

which became a fundament for the current conceptions of administrative

discretion, should be noticed,

In the inter-war period, there was the binding Act on the Supreme

Administrative Tribunal of 3 August 192212, which in Article 6

Subsection 2 directly excluded the administrative discretionary cases

from the control by the Tribunal, within the boundaries of the discretion.

Despite such an unambiguous statutory standard, most of the authors of

the inter-war period interpreted the above provision very narrowly,

indicating that the decision on the advisability and motivation of the

administrative authority were not subject to review. The Tribunal could

investigate if the legal boundaries of administrative discretion were

respected. The Supreme Administrative Tribunal also ruled so, allowing

the complaints about the administrative discretionary decisions. It was

assumed that the discretion is not an unrestrained activity of the

administrative authority, but like every other administrative activity is

subject to legal boundaries. The exception is the view of M.

Zimmermann, who claimed, on the basis of his theory, the existence or

non-existence of a general standard ordering the administrative authority

11 B. Adamiak, J Borkowski, Postępowania administracyjne i sądowo administracyjne,

Warszawa 2009, p. 363. 12 Journal of Laws of 1922, No 67, item 600.

Paweł Artymionek

134

action according to the public interest that the review of the legality of

the administrative discretion acts is “impossible in the conceptual

context”13.

In the period of the Polish People’s Republic, due to the lack of

administrative courts the conceptions of administrative law doctrine were

postulates in the discussion on the creation of administrative justice. The

views of J. Starościak had a significant influence on the matter.

According to him, an increase of significance of administration in Poland

brings an increase of significance of the decisions based on discretion.

The more the scope of discretion is, the more strict control over it should

be14. As J. Starościak claims, the best solution is to subject the legality of

the administrative decision to the judicial review, excluding the

advisability, because entering of the court into this field would cause the

replacement of the authority’s discretion with the judicial discretion15.

Similar theses were formed by other authors of Poland under the

communist regime: T. Bigo16, S. Jędrzejewski17, or L. Bar18.

The current views on the advisability of the judicial review of the

discretionary decision, formed after the creation of the Supreme

Administrative Tribunal, are homogenous. Nobody denies the

advisability of the review any more. They differ only in terms of the

review criteria.

Similar judgements were issued by courts, allowing the review of

discretionary decisions in terms of compliance with the law. In the

judgement of 11 June 1981, the Supreme Administrative Tribunal

emphasized that: 1. in the current legal situation so-called administrative

discretion lost its existing shape. The scope of the administrative

authority’s freedom, resulting from the substantive law, is currently

restricted by general rules of the administrative proceedings, defined in

Article 7 and other provisions of the Code of Administrative Proceedings

(...) 4. an administrative authority, acting on the basis of the substantive

law which states the discretionary nature of the decision, is obliged –

13 M. Zimmermann, Wywłaszczenie. Studium z dziedziny prawa publicznego, Lvov

1933, p. 227. 14 J. Starościak, Swobodne uznanie władz administracyjnych, Warszawa 1948, p. 105. 15 Ibidem, p. 127. 16 T. Bigo, Kontrola uznania administracyjnego, Gazeta Administracji, 14A, 1959, p.

65. 17 S. Jędrzejewski, W sprawie sądowej kontroli aktów administracyjnych, Nowe Prawo

1972, issue 4, p. 548. 18 L. Bar Sądowa kontrola decyzji administracyjnych, PiP 1973, z. 3, pp. 12-13.


135

according to Article 7 of the Code of Administrative Proceedings – to

deal with the case in compliance with the legitimate interest of the citizen

if the social interest is not an obstacle and it does not exceed the

administrative authority’s capacity resulting from its granted powers and

measures19.

To summarize, most of the authors, starting from the period when the

Act on the Supreme Administrative Tribunal was in force, through

abolishment of the administrative justice, to the current legal situation,

did not undermine the possibility of the review conducted by

administrative courts on decisions based on administrative discretion. In

the period when there was no administrative justice, the doctrine formed

postulates de lege ferenda, which were reflected in case-law and

provisions. The conceptions denying the possibility of the judicial review

of administrative discretion should be considered as exceptions, because

they were not reflected in case-law of administrative courts. Concepts

which exclude the possibility of judicial review of administrative

discretion should be treated as exceptions as they did not find reflection

in judicature of administrative courts.

3. The criteria of review of discretionary decisions

In the current legal situation and scientific works of administrative

law, nobody denies admissibility of the review by administrative court on

the decisions issued on the basis of administrative discretion. Differences

of various views are the criteria, according to which administrative courts

can infringe on the content of the discretionary decision. The criterion of

legality is virtually not denied by anyone. Discrepancies appear at the

review of advisability of discretionary decisions.

3.1. The criterion of compliance with law

Decisions issued on the basis of administrative discretion are subject

to review by administrative courts in terms of their compliance with the

current law. The court investigates if the authority did not exceed the

boundaries of the applicable law when issuing the discretionary decision.

The court particularly verifies if “the discretionary decision was issued

by the competent authority and the party could participate in the

proceedings and taking of evidence. If issuing of an authorizing decision

or a decision imposing an obligation is left by the legislator to the

19 ONSA 1981, No 1 item 57.

Paweł Artymionek

136

authority’s discretion but the possibility of action is dependent on certain

conditions, the court will be obliged to verify if those conditions actually

existed. Also, any evaluation of evidence collected in the case or issuing

of the decision against the actual state are the basis for a full infringement

of the court”20.

The criterion of legality was defined by M. Mincer, who claims that

the court in the process of the review of discretionary decisions should

investigate: the existence and correctness of the legal basis, obeying of

the provisions on the administrative procedure and the competence of the

authority issuing the decision. M. Mincer unambiguously indicates that

the judicial review “should go as far as it is possible to evaluate the

decision according to the criteria resulting from the law”21.

The application of the criterion of legality in the review of the

decisions issued on the basis of administrative discretion, conducted by

administrative courts, results already from the Act on the Law of the

Administrative Courts Procedure22. Article 3 Section 1 of the Act states

that “administrative courts have control over public administration and

apply the measures defined in the act”. The review of compliance of the

discretionary decision with the law covers the verification of compliance

of the decisions with all the provisions of the substantive law and

procedural law, which can be applicable to the case. In case-law the

significance of the substantive law provisions is emphasized: “the state

authority, acting within the administrative discretion, before issuing the

decision to what extent it will use its rights, is obliged to explain in detail

the actual state of the case, and before issuing the decision – to consider

the actual state in terms of all the substantive law provisions that can be

applied to the case”23, as well as the procedural law: “in cases regarding

tax liabilities the decision on the introductory issue is not a basis for an

obligatory suspension of the proceeding but leaving it the evaluation of

a tax authority. In consequence, when investigating the legality of such

a decision, as in case of investigating the other decisions’ legality issued

20 J. Świątkiewicz, Przedmiotowy zakres sądowej kontroli legalności decyzji

administracyjnych, PiP 1980, z. 3, pp. 14-15. 21 M. Mincer, Uznanie…, pp. 152-153. 22 Act of 30 August 2002 concerning the procedure of administrative courts, Journal of

Laws No 153, item 1270 as amended. 23Decision of the Supreme Administrative Court, Katowice Branch, I SA/Ka 145/96.


137

within so-called administrative discretion, the court evaluates only if the

rules of the proceeding were obeyed”24.

3.2. The criterion of advisability

The review of discretionary decisions conducted on the basis of the

criterion of advisability creates discrepancies in the administrative law

doctrine. According to most of the views, it is indicated that advisability

of the decision issued on the basis of administrative discretion can be

investigated only if the purpose of the standard application was defined

in the provision authorizing to discretion. J. Świątkiewicz said:

“advisability aspects, therefore, administrative policy can determine the

court’s evaluation measures, only within the scope in which they are

reflected in the formal provision of law. The provisions of law are a form

of the policy implementation, but the policy is not always implemented

with this method”25. Similarily, A. Matan noticed that when investigating

the substantive law provisions, the court should verify if the boundaries

of administrative discretion were not exceeded and the social-legal

purpose of a given substantive provision was not infringed”26.

Many views of the administrative doctrine regarding the review of

the decision issued on the basis of administrative discretion in

accordance with the criterion of advisability, take the form of postulates

de lege ferenda. J. Łętowski pointed out that public administration

increasingly infringes the lives of citizens, because the complicatedness

of the social and economic life also increases. According to the author, in

the modern world the concept of law and order, and the review of

administrative compliance with the law should be redefined. The

increasing competence of the authorities should be followed by the

extension of the scope of review by administrative courts, also by the

principles of fairness and justice27. When considering the reason for standard limitation of the scope of

the review by administrative courts regarding the discretionary decisions,

J. Łętowski pointed out “the prohibition of co-administration” by courts,

which was one of the main fundaments of judicature form its very

24Decision of the Supreme Administrative in Warsaw of 22 April 1998, III SA 231/97. 25 J. Świątkiewicz, op. cit., p.14. 26 A. Matan, [in:] G. Łaszczyca, C. Martysz, A.Matan, Postępowanie administracyjne

ogólne, Warszawa 2003, p. 96. 27 J. Łętowski, W sprawie zakresu rzeczowego sądownictwa administracyjnego, PiP

1982, z. 5. pp. 36-37.

Paweł Artymionek

138

beginning. There was a concern that courts would infringe the ‘free

decisions’ and the judicial infringement in the activities of administration

is something undesired, something that should be limited28.

The views of M. Mincer relating to the criterion of advisability show

similar conclusions. She claims that the court’s review “should not

evaluate the correctness of the decisions according to non-statutory

criteria of advisability”29. The review should be conducted on the basis of

law compliance, and in a situation when advisability results from a legal

standard, it is also subject to the court’s review. M. Mincer indicates that

it is not the criterion of advisability that requires consolidation, because

this aspect is taken into account within the appeal proceedings.

According to the author, the review of legality requires consolidation,

therefore, the review by the administrative court should be reduced to

this basis30.

Conclusion

The admissibility of the review of discretionary decisions conducted

by administrative courts does not bring doubts any more. Currently, the

applicable provisions of the Act on the Law of the Administrative Courts

Procedure allow the complaint in the administrative court about the

administrative decisions, without any exemptions regarding discretionary

decisions. “… in the activity of public administration of a democratic

rule of law all areas have to be related to law and cannot be excluded

from the judicial review. It is obvious today that blanket legal standards

of the administrative substantive law, including the legal constructions of

the so-called administrative discretion, allow the unacceptable scope of

autonomy of the administrative authorities in terms of the applicable

law”31.

The discretionary decision does not differ in terms of the review by

administrative courts from the constrained decision. In both cases, the

administrative court controls the compliance of the issued decision with

28 J. Łętowski, Prawo administracyjne. Zagadnienia podstawowe, Warszawa 1990, pp.

168-169. 29 M. Mincer, Uznanie…, p. 153. 30 Ibidem, pp. 151-153. 31A. Błaś, Sądowa kontrola decyzji uznaniowych (problemy jednolitości orzecznictwa

NSA), [in:] I. Skrzydło-Niżnik, P. Dobosz (ed.), Jedność systemu prawa a jednolitość

orzecznictwa sądowo-administracyjnego i administracyjnego w sprawach

samorządowych, Kraków 2001, p. 67.


139

law, therefore it investigates if the authority obeyed all the provisions and

did not exceed its competence. The argument that discretionary decisions

are not subject to review in terms of legitimacy of the decision, does not

allow their differentiation from the constrained decisions, because these

also are not subject to review in term of their legitimacy. In relation to

both types of decision, the judgement of the court is only a cassation

decision, not an altered judgement.

When controlling the discretion decision, the court will verify if the

public administration authority did not exceed the boundaries of

administrative discretion32. The review of the grounds for discretion is

considered as a verification if the administration authority was entitled to

issue the decision based on administrative discretion and if the discretion

authorization exists in the provisions of law. The review of the

boundaries includes a verification if the authority, when issuing the

decision, obeyed all the provisions of the substantive law and procedural

law. The interpretation of the provisions conducted by the authority in

order to read the legal standard is also subject to review.

With reference to the criterion of advisability of the discretionary

decisions review, it should be noticed that despite the lack of grounds for

review of discretionary decisions in the provisions of the Act on the Law

of the Administrative Courts Procedure, administrative courts more often

rule with regard to advisability of the issued decision, extending the

scope of the review in terms of the compliance with law as much as

possible. The implementation of the review based on the criterion of

advisability would require changes in the provisions of law, both political

and procedural changes. However, it may turn out de lege ferenda that

such changes to the provisions will not be necessary. As J. Łętowski

rightly points out, in the modern administrative law the boundary

between legality and advisability becomes blurred, because advisability

is frequently given a legal framework in cases, when the legislator is the

one to define the purpose of the application of law by the public

authority33.

32 J. Jagielski, Kryterium legalności w kontroli administracji publicznej, Kontrola

Państwowa 2003, Issue 1, p. 16. 33 J. Łętowski, Prawo… p. 167.

Paweł Artymionek

140

Literature

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administracyjne, Warszawa 2009, p. 363.

[2.] Bar L. Sądowa kontrola decyzji administracyjnych, PiP 1973, Issue

3, pp. 12-13.

[3.] Bigo T., F. Longchamps, Kontrola administracji, Studia Prawnicze,

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[13.] Ochendowski E., Prawo administracyjne, część ogólna, Toruń

2001, pp. 190-191.

[14.] Starościak J., Swobodne uznanie władz administracyjnych,


[15.] Sylwestrzak A., Kontrola administracji, Koszalin 1998, p. 10.


141

[16.] Świątkiewicz J., Przedmiotowy zakres sądowej kontroli legalności

decyzji administracyjnych, PiP 1980, Issue 3.

[17.] Zimmermann M., Wywłaszczenie. Studium z dziedziny prawa

publicznego, Lvov 1933, p. 227.


142

DOI: 10.19192/wsfip.sj2.2017.10

Jacek DWORZECKI

MANAGEMENT IN THE FRENCH SYSTEM

OF POLICE EDUCATION ON THE EXAMPLE

OF FRANCE’S NATIONAL POLICE COLLEGE –

OUTLINE OF ISSUES

Summary

The aim of the study is presentation of the French system of police education on the

example of its central academic institution - France’s National Police College. The

paper describes the management system of the College, recruitment procedures in the

French National Police as well as forms of education and professional training offered

by the police training centres in France. In the introduction to the main body of the

paper, the reader will find detailed description of the central organisation unit of the

French Police i.e. the General Directorate of the National Police with headquarters in

Paris.

Key words: internal security, the National Police, France’s National Police College

Introduction

Tasks related to upholding security and public order in France are

executed by three institutions i.e. the National Police (Police Nationale)

which comes under the jurisdiction of the Minister of the Interior of the

French Republic, the Municipal Police (Police Municipale) under the

direct authority of local government units (the Mayors), and the National

Military Gendarmerie (Gendarmerie Nationale) which is a component of

the French armed forces. It should be brought to the readers’ attention

that the National Gendarmerie has the status of a military formation

deployed in the structures of the Ministry of the Armed Forces (until

May 2017 the official name was the Ministry of Defence). However,

from substantive and methodological perspective the Gendarmerie is at

the service of the Minister of the Interior (as of 1 January 2009) who,

within the powers bestowed, organises and manages the formation,

Dr hab. Jacek Dworzecki, e-mail: [email protected]

Management in the French System Of Police Education…

143

supervises recruitment processes and specifies indispensable equipment

for gendarmes who execute domestic and international security tasks. If

gendarmerie officers are to be sent on a military mission outside the

territory of the French Republic, authorisation from the Minister of the

Armed Forces is required.

The main focus of the paper is organisation and management of

France’s National Police College, which is the central component of the

French Police education system. The paper should be of special interest

for those who are scientifically and professionally involved in widely

understood security issues as well as for students of internal security,

national security, law, administration or management of uniformed

services.

1. Outline of the organisational structure of the French National

Police

The organisational structure of the French National Police, which is

a huge uniformed law enforcement service (145,000 employees)

responsible for security and public order and performing a wide portfolio

of security related tasks, is very complex. Headed by the DGPN (General

Direction of the National Police) with the headquarters in Paris1, the

French Police is divided into the following directorates:

Administration Directorate of the National Police (Direction de

L'administration de la Police Nationale);

Directorate of Human Resources and Management of Competences in

the National Police (Direction des Ressources et des Compétences de

la Police Nationale);

Central Directorate of Judicial Police (Direction Centrale de la Police

Judiciaire);

Central Directorate of Public Security (Direction Centrale de la

Sécurité Publique) – a uniformed patrol and response section;

Intervention groups of the National Police (Groupes d'Intervention de

la Police Nationale) – regional special groups for tasks that require

special tactics and intervention techniques assigned for counter-

terrorist sub-divisions able to execute simple special operations such

1 J. Tulard, Histoire et dictionnaire de la Police: du Moyen Âge à nos jours, Paris 2005,

Robert Laffont, p. 231.

Jacek Dworzecki

144

as arresting dangerous criminals, releasing hostages or protection of

special convoys;

Central Directorate of Border Police (Direction Centrale de la Police

aux Frontières);

General Inspectorate of the National Police responsible for internal

control in the formation (Inspection Générale de la Police Nationale);

Directorate of the Republican Security Companies (riot police)

(Direction Centrale des Compagnies Républicaines de Sécurité);

Directorate of International Cooperation (Direction de la Coopération

Internationale);

Central Directorate of Internal Intelligence (Direction Centrale du

Renseignement Intérieur);

Central Directorate for Recruitment and Training (Direction Centrale

du Recrutement et de la Formation de la Police Nationale);

Important Persons Protection Service (Service de Protection des

Hautes Personnalités);

Prefecture of Paris Police (Préfecture de Police);

Recherche Assistance Intervention Dissuasion (Research, Assistance,

Intervention, Detterence RAID) – a counter-terrorist unit for serious

incidents on national level2.

At this point the attention of the Polish reader must be drawn to the

fact that the General Directorate of French National Police is only to

a certain extent the equivalent of the Polish Police Headquarters. The

competences of the Director General of the French National Police

embrace not only issues of directly police-related character but also

broad powers with respect to crisis management, which in Polish reality

is assigned to other than police agencies and institutions of state

administration and local authorities. As far as jurisprudence of the

Director General of the National Police is concerned, it bears

resemblance to the jurisprudence of the Polish Minister of Internal

Affairs and Administration. The difference between Polish and French

distribution of powers connected with the issues of security is caused by

the fact that relevant bodies of French central administration are

predominantly focused on legislative activities, and only to a lesser

extent on executive activities.

2 J. M. Tanguy, Le RAID - 30 ans d'intervention, Paris 2015, Pierre de Taillac, p. 90.


145

Image 1. Organisational structure of the General Directorate of the National Police

and independent organisational units controlled either by the National Police or

the Ministry of the Interior.

Source: Own work.

General Directorate of National Police

Independent entities and organisational

units under General Directorate

of the National Police

Organisational units

of General Directorate

Directorate

of National Police Administration

Directorate of Human Resources and

Competence Management

General Inspectorate of National Police

Directorate of Public Security

Directorate of Border Police

Directorate

of the Republican Security Companies

Directorate of Criminal Police

Directorate of International Cooperation

Important Persons Protection Service

Central Counter-Terrorist Unit

RAID

Bureau of Coordination

of CounterTerrorist Operations

Operational and Staff Centre

Press and Information Office

Ministry of Interior Agency

for Coordination of Drug Control Policy

Governmental Agency

for Support of Victims of Crime

National Bureau

of Public Transport Coordination

Bureau of Mass Events Coordination

Bureau of Logistics

of Domestic Security Agencies

Bureau of Scientific Research

and Forensics

Prefecture

of the Paris Police

France’s National

Police College

Colleges and police

training centres

National Centre

of Research

and Criminological

Expertise

Jacek Dworzecki

146

General Directorate of the National Police has authority over all

prefectures and their employees, civil servants, intervention groups

which are used for incidents of mass violation of public order, judicial

police and other kinds of police forces. The Director General has also

influence, on the basis of merit, on the prosecutor’s office, National

Gendarmerie (including gendarmerie pyrotechnics), professional fire

service as well as other entities that make up local structures of civil

defence.

In parallel to the administrative division of the French Republic,

there are respective regional directorates of the National Police (which

more or less correspond to the Polish voivodeship police headquarters)

and department directorates of the National Police (which more or less

correspond to the district headquarters of the Polish Police).

2. Recruitment to the National Police forces

Recruitment process to the biggest agencies of the internal security

system in France i.e. the National Police and National Gendarmerie

respects the administrative division of the country. The National Police

has primary responsibility for major cities and large urban areas, whereas

the Gendarmerie Nationale is responsible for policing (and recruiting) in

smaller towns and rural as well as border areas.

Fundamentally, basic requirements for candidates to both law

enforcement agencies are similar. Those wishing to join the

police/gendarmerie forces must meet the following criteria:

French citizenship;

age between 17 and 35 years;

good health condition;

fluent knowledge of the French language in speech and writing;

certificate of participation in the Defence and Citizenship Day3.

3Defence and Citizenship Day (Journée Défense et Citoyenneté) is a day established in

1998 in France by the French president, Jacques Chirac as one of the elements of the

reform of the national security system. As the result of the reform, mandatory military

service was discontinued and a range of initiatives for promoting security issues was

implemented. One of these initiatives was the Defence and Citizenship Day addressed

to all citizens of the French Republic aged between 17 and 25. The certificate of

participation in the Day is needed to take the baccalaureate examination (except for

persons under 18 years of age), to enrol in public university, to obtain a driving licence


147

Of course, the candidates must demonstrate clean criminal record

and preferably higher education diploma (minimum secondary school

education is required). The pre-requisite criteria may slightly differ with

respect to the kind of corpus candidates apply for.

Joining the National Police forces is possible by means of two

different paths. The first one requires sending an application form to

a relevant regional Police Directorate which is advertising vacancies. It

must be emphasized that on this path successful candidates are obliged to

serve in the territory of a given region for the period of minimum 8 years.

The second path allows to enter recruitment process on central level. The

successful candidates are obliged to serve all over the country and must

be ready to relocate in accordance with the needs of the formation. The

minimum length of service on this path is 5 years. Earlier resignation

from service, in both cases, entails financial penalty.

In the recruitment procedure candidates must go through the

following stages: a written multiple choice test in which questions relate

to current affairs as well as widely understood subject matter of security;

an essay (to be written in the allotted time of three hours) on a set topic

related to social issues. For the essay candidates may be awarded 20

points in total and obtaining fewer than 5 points means disqualification

from the recruitment process. Next steps in the procedure include:

physical fitness test, psychological aptitude test, resistance to stress test,

interview and a short test in a selected foreign language at elementary

level (English, Dutch, Arabic, Spanish or Italian).

Upon entry into the formation, young recruits are obliged to undergo

a 12-month-training at the central training institution of the French

National Police (France’s National Police College, also referred to as

ESPN) where they participate in a didactic cycle which combines both

theoretical knowledge and field professional practice. Resignation from

basic training entails financial penalty. Upon completion of the training

the graduates receive the status of a law enforcement officer and are

transferred to further service in units of the French National Police.

or to apply for any civil servant jobs. Source: http://www.defense.gouv.fr/jdc [access 1

July 2017].

Jacek Dworzecki

148

2.1. Preparatory courses for candidates wishing to work in public

administration institutions organized under the French

Government’s policy for promoting equal opportunity

The French society, as it is commonly known, is multicultural and

consists to a large extent of immigrant population i.e. people without any

starting capital or support of indigenous ancestors. Therefore the social

structure of the French society is constantly subject to stratification. That

is why in institutions of state administration various initiatives are

undertaken in order to eliminate social inequalities. Vast majority of job

offers in French institutions of public administration, and that refers also

to vacancies in the National Police, is built upon competition

proceedings4. In order to encourage young people from socially

discriminated environments to become law enforcement officers and

enter the recruitment process, there are special preparatory courses aimed

at erasing inequalities and increasing chances for success in the

competition. Information about such courses may be found on websites

of various public institutions.

Training courses which prepare candidates for service in the National

Police forces are organised by France’s National Police College. During

the courses trainees study for written tests whose subject matter relates to

public order in the Republic, functioning of the police and elements of

the general knowledge, they also master their knowledge of a selected

foreign language and work out on their physical fitness because physical

agility test is one of the key elements of the recruitment procedure to the

National Police.

3. The outline of the police education system in France

The education system of the National Police in France consists of

one central didactic unit as well as schools and police training centres

located all over the country. The central unit is called France’s National

Police College (ESPN) which is a higher education institution educating

future officers of the National Police and providing professional

development opportunities for officials on management level of the

formation.

The infrastructure of the College, which commenced its academic

activity under the current name on 1 January 2013, is located in two

4 L. Bui-Trong, La Police dans la société française, Paris 2003, PUF, p. 112.


149

towns: in Saint-Cyr-au-Mont-d'Or in Auvergne-Rhône-Alpes region and

in Cannes-Écluse in Île-de-France region. Other colleges of the National

Police are located in: Draveil, Vincennes, Châtel-Guyon, Fos-sur-Mer,

Périgueux, Reims, Roubaix, Saint-Malo, Sens, Toulouse, Montbéliard,

Nîmes and Oissel. The National Police training centres are located in

Chassieu and Nice. Additionally, there are overseas police training

centres located on the territories of French collectivities in: New

Caledonia, French Polynesia, French Guiana and on the Isle of Maiotta.

Police colleges and training centres are responsible for professional

development and training of French Police officers on elementary level.

Image 2. Locations of ESPN as well as other police colleges and training centres.

Source: own work.

In this short outline of different forms of professional training in the

education system of the French Police, it should be emphasized that the

training course for the lowest level of law enforcement officers,

organized by the French police colleges, lasts 12 months. The curriculum

consists of theoretical module (e.g. administrative law, criminal

proceedings, criminal code and other selected branches of law as well as,

interestingly, the art of typing), and practical skills module (e.g. self-

defence, shooting, general physical education, tactics and intervention

Jacek Dworzecki

150

techniques). Moreover, the trainees gain hands-on experience in local

ground units.

The recruitment process is carried out by HR units deployed in

various Departments of the National Police. The candidates for the

course must be below 30 years of age. In the recruitment process the

average mark from subjects on the certificate of completion of secondary

education is NOT taken into consideration. Applicants, who prior to the

training have served at least one year in the security sector (it does not

include periods of professional training or internships) may, already

during the course, file for promotion to the rank of a brigadier (it is the

third service rank in the Management and Enforcement Corps which

more or less corresponds to Polish joint corps of privates, constables and

NCOs). During the course each participant is paid a monthly salary of

1351 Euro. The highest achievers on the course may be offered

interesting positions in the formation (the positions must correspond to

the level of the Management and Enforcement Corps).

Image 3. Service ranks in the French National Police.

Source: Author’s own materials.


151

The course culminates with state examinations after which graduates

sign a three-year-contract with the National Police which may be

prolonged for another three years. During this time police officers are

obliged to raise their qualifications and be promoted to a higher rank and,

as the result, their work contract may be changed for indefinite period of

time.

There are also other forms of preparatory courses for candidates to

the National Police forces organised by the French police colleges.

General courses are dedicated for candidates who are between 18 and 25

years of age. The courses last 28 weeks and are a mix of theoretical

training with 12 weeks of practical work (including a seven-week-period

of work experience at a police station). The courses prepare students for

state examination towards the rank/position of a keeper of the peace.

The training course in prevention lasts five months during which

students acquire skills necessary to perform activities of coherent

subunits and intervention groups undertaken to restore security and

public order. The training cycle includes two months of practical classes

in self-defense, intervention techniques, shooting, simulations and, of

course, theoretical content related to e.g. organization and functioning of

the police forces, code of criminal proceedings, criminal law,

administrative law, and practical classes. The course is dedicated for

candidates of French citizenship below 35 years of age.

The candidates for the above mentioned courses must be holders of

the certificate of completion of secondary comprehensive or technical

school; they may not exceed the set age limits unless they have served for

at least a year in one of the country’s security agencies. The applicants of

security (peace guards, sub-brigadiers) after four years of service may

enter the competition proceedings for a higher rank in the Management

and Enforcement Corps i.e. the rank of brigadier (equivalent of sergeant

in the Polish Police).

4. France’s National Police College (École Nationale Supérieure

de la Police - ENSP)

Created under a Decree of 28 April 1988, the Ecole Nationale

Supérieure de la Police (France’s National Police College) acquired the

status of a State administration institution, and joined the ranks of the

prestigious state administration Grandes Ecoles. Previously the College

functioned under the following names:

Jacek Dworzecki

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The Security Officers College before 1995;

France’s College of Police Officers before December 2012;

France’s National Police College since 1 January 2013.

The mission of the College is to offer training courses for law

enforcement officers leading to the ranks of lieutenant and police

commissioner in the Command Corps and to the rank of police

commissioner in the Conception and Direction Corps of the National

Police. The College also offers full study programmes accredited by

renowned French academic centres as well as professional development

training courses for police officers and national and local administration

officials. Moreover, ENSP conducts scientific research in security and

disseminates its results on local and international arena. The College

collaborates with a number of French and foreign academic centres as

well as various institutions of security and public order.

ENSP with respect to content and organisational matters is

administered by the Ministry of the Interior. When it comes to learning

content and the offer of professional training, the College is under the

authority of the Director General of the National Police force, it has

financial autonomy and is a legal entity in its own right.

As stated above, the College premises are located in two different

locations. The property provided for ENSP by the State in Saint-Cyr-au-

Mont-d'Or covers nearly 5 hectares. It consists of 16 buildings and

annexes which include: 3 auditoriums, 15 rooms used for classes and

practical work, 1 criminal policing simulation room,

2 IT rooms, 1 television stage set/audiovisual control room, 1 shooting

range, specialist library and a reading room, the museum of criminology,

68 bedrooms, 1 self-service cafeteria (seating 164) and 4 dining rooms

(seating 120), a cafe, TV room with hot spots and sports facilities such as

2 dojos, 1 sports hall, 2 climbing walls, 1 weights room.

The second College facility located in Cannes-Écluse covers 17

hectares and includes 33 000 m2 of didactic and living quarters

infrastructure that can educate and accommodate 720 trainees. The

didactic base consists of: 18 rooms used for classes and practical work, 2

auditoriums, 2 language laboratories, 4 specialized classrooms, 4

simulation facilities, a library, a shooting range and a police intervention

simulation facility. The College sport grounds includes: 2 sport halls, 3

gyms, a football pitch, a rugby pitch and two tennis courts.


153

The Board of Governors of the College sets its educational

orientation, development strategy and budget. Chaired by a senior

member of the Council of State, the Board comprises:

4 highest-ranking officers in the national police force i.e. the Director

General of the National Police, the Prefect of Paris Police (the

counterpart of Warsaw Metropolitan Police), the Director of Central

Recruitment and Training and the Director of the General Inspectorate

of the National Police;

4 members appointed by the Minister of the Interior from senior

officials in partner administrations;

3 members appointed by the Minister of the Interior from senior

officials with experience in security issues;

10 members appointed by the Director of the College in the rank of

Inspector General from employees, students and trainee

superintendents.

The Board is headed by a President who does not belong to the

management board of the College. The Board is in charge of constant

supervision over the learning processes, shapes directions of the

College’s development and facilitates partnerships between related

institutions (the Ministry of the Interior, the Police Directorate, ESPN).

The process of education i.e. curricula and learning content is shaped

by the Teaching Council. This advisory body is headed by the Director of

ESPN, who appoints and dismisses the members of the Council which,

within the powers bestowed, propose, issue opinions and recommend

implementation of amendments into the educational policy, modification

of existing curricula, introduction of new teaching programmes and

forms of professional training. The Council fulfils the following duties:

analysis of the teaching content of the curricula of teaching

programmes offered by the police educational centres;

identification of new training needs with special emphasis on

criminology;

approval of curricula of programmes for police officers and higher

education studies addressed to candidates applying for higher

commissioned officer service ranks.

The composition of the Teaching Council includes the Head of the

General Inspectorate and the following directors/members:

Jacek Dworzecki

154

Director General of the National Police;

Director of the General Inspectorate of the National Police;

Director of the Domestic Security Directorate (prevention agency);

Director of Criminal Police;

Director of the Republican Security Companies;

Director of the Central Directorate of Internal Intelligence;

Director of Border Police;

Director of International Cooperation Directorate;

Director of Central Recruitment and Training;

Prefect of Paris Police;

Director of Personnel and Training of the Paris Police Prefecture;

Director of Public Order and Traffic Control of the Paris Police

Prefecture;

Director of Criminal Police of the Paris Prefecture;

Director of Public Security of the Paris Agglomeration (responsible

for suburban areas of the Paris agglomeration);

Director of Internal Intelligence of the Paris Police Prefecture;

ENSP Deputy-Director (equivalent of departmental deputy

Commandant-Rector);

ENSP Deputy-Director for development strategy, education and

scientific research;

Director of the ENSP Research Centre;

two representatives of trainees on ENSP training course for

superintendents in the Conception and Direction Corps;

two representatives of trainees on ENSP training course leading to the

rank of the superintendent (lieutenant) in the Command Corps.

Third collegial body functioning within France’s National Police

College is the Scientific Board responsible for approval of reports from

completed projects and for cutting new paths for scientific development

of the College and new research areas as well as supervision over

respecting ethical code by the academic staff. The Scientific Board is

chaired by the President of the Scientific Board who is not a full-time

employee of the College. The Chairperson is usually elected from the

members of the French Academy of Sciences. The composition of the

Scientific Board (12 persons in total) includes personages with highest

academic titles and degrees as well as personalities with extraordinary


155

achievements in the field of security. Moreover, 7 other institutions5

delegate one representative to the Board.

As stated above, the College is headed by the Director (in the rank of

Chief Inspector– which is the second highest service rank in the French

National Police), who works closely with one uniformed deputy director

(Controller General – the third highest service rank in the French Police)

and one deputy director responsible for development, education and

scientific research. Additionally, the management board of the College is

in charge of the academic research centre, the professional training

centre, finance and logistics. The Director of the College is responsible

for:

professional training department, which is responsible for all training

courses for officers in the strategy and management branch;

secretariat general which manages all the human and physical

resources necessary for training and cooperation activities (trainees,

civil administrative employees and academic staff);

joint and international training department, which manages training

courses for other branches of the national police force;

training of public administration staff and locally elected officials;

second cycle studies (MA programme) in Domestic Security;

training of foreign trainees and non-graduating participants;

advice/support/research department, legal information and advice

centre and professional documentation centre;

scientific research conducted by the College academic staff;

fixed and movable assets;

execution of the College budget;

communication and international relations.

4.1. Training course for candidates to the rank of lieutenant in the

Command Corps of the National Police

Organised by France’s National Police College, the officer training

course (for candidates to the rank of leiutanant in the Command Corps –

5 The delegates to the Scientific Board represent the following institutions: General

Inspectorate of the National Police, cyber-crime unit deployed in the structures of the

Ministry of the Interior, strategy and development unit deployed in the General

Directorate of the National Police, National Institute for Advanced Studies in Security

and Justice, the National School for Correctional Administration, Police College in

Saint-Cyr, Directorate of Central Recruitment and Training of the National Police.

Source: http://www.ensp.interieur.gouv.fr [access 12 May 2017].

Jacek Dworzecki

156

equivalent of the junior officers corps in the Polish Police) is 18 months

long and is divided into 12 months of theoretical work and 6 months of

field practical training. The theoretical part of the course covers issues of

management, security and public order, code of criminal proceedings,

criminal code, administrative law, IT, operational intelligence and

investigation activities. Practical skills mastered during the course pertain

to self-defence, tactics, intervention techniques and shooting. The course

is open for French citizens below 35 years of age, holders of a minimum

BA degree, additional advantage in the recruitment proceedings is

a university degree in law or a related field. The average number of

places on the course is 45-50 and the number of applications received

each year reaches 3,000. It is one of the most prestigious forms of

educating state administration officials in France open for members of

the general public as well as employees of the National Police in the

Management and Enforcement Corps. The candidates recruited on the

course from the general public are obliged to remain in service for the

period of at least 4 years (in case of early resignation financial penalty

applies).

There is also a separate course profile for officers serving in special

forces and local rapid reaction units. Each year there are 20 places on the

course for candidates from these specialised units. The monthly salary on

the course is 1,923 Euro.

Upon completion of the course and after passing all the required

exams the trainees are promoted to the rank of lieutenant. Next

promotion, to the rank of detective chief inspector, is possible after

serving five years in the rank of lieutenant and at least four years of

service in the rank of lieutenant is required to be eligible to enter

competition proceedings for the position of police superintendent (the

first service rank in the Conception and Direction Corps which

corresponds to the Polish corps of senior police officers).

4.2. Training course for candidates for the rank of superintendent

in the Conception and Direction Corps of the French National

Police

ENSP runs courses for senior officers of the National Police (for

candidates to the rank of superintendent in the Conception and Direction

Corps). The staff of the Conception and Direction Corps constitute a key

asset for the French National Police as they supervise regional outposts

and head highly specialized organizational units, preside over decision


157

taking bodies, initiate solutions for improvement in the level of security

and public order on local and regional level.

The course with total duration of 24 months is divided into 12

months of theoretical work and 12 months of practical field work.

Analogically to the course for junior officers, the theoretical body

consists of issues pertaining to management, upholding security and

public order, code of criminal proceedings, administrative law,

Information Technology, operational intelligence and investigative

activities as well as basics of forensic crime scene investigation and

identification of forensic evidence. Practical classes include the usual

portfolio of skills necessary for each police officer such as self-defense,

tactics, intervention techniques and shooting. The training course is open

for French citizens, graduates of second-cycle studies. The preferred

candidates should be holders of a full master degree in law,

administration, security management or related fields. Each year the

College may accept 25-30 new students. In view of experts, it is the most

prestigious form of education for police officers in France open for

officers of different service ranks in the Command Corps, who have

served at least four years in their last service rank. It is possible to be

accepted on the course in the competition proceedings (without entrance

examinations) for officers who are eligible for a position in the

Conception and Direction Corps and served in the rank of capitaine or

commandant for at least 5 years.

4.3. The “prepa-superintendent” course

Each year France’s National Police College carries out a training

course for future senior officers of the National Police, this integrated

preparatory class for future superintendents serving in the Conception

and Direction Corps of the National Police, falls under the French

Government’s policy of promoting equal opportunity. 15 to 20 applicants

are selected each year on the basis of the following criteria:

full Master’s degree;

appropriate motivation and eagerness to get involved in the didactic

process (the level of motivation is verified during an interview with

a psychologist);

confirmation from the relevant superior that there exists a guaranteed

vacancy in the Conception and Direction Corps awaiting the

Jacek Dworzecki

158

candidate for which completion of training for superintendents is

required;

certificate from a relevant (so as to the place of service) financial unit

or from relevant tax revenue office (as to the place of residence) about

the overall annual gross income of applicant and/or their

parents/spouses not exceeding €30,000 per year.

The eight-month-training course is run by ENSP in cooperation with

University of Lyon or University of Paris and contains theoretical and

practical module. Recruitment for the prepa-course is carried out among

trainees of police course (final examinations are administered by

France’s National Police College) as well as among officers serving in

ground units of the National Police (final examinations are administered

in Regional Directorates of the National Police). The police officers who

demonstrated outstanding achievements in the service for their country

may be delegated to take part in the above mentioned training course.

4.4. Forms of professional training offered by ESPN

Apart from the training courses for law enforcement officers

discussed above as well as second cycle full academic programmes,

ENSP offers other forms of professional development addressed to all

officers in the French National Police forces e.g. management of

organisational units of the formation, training courses for officers from

operational intelligence and investigation units, trainings in crisis

management, conflict management, internal control, training for officers

from international cooperation units and for officials working in other

bodies of state administration and for police officers from other

countries. The ongoing training policy is based on three principles:

bilateral cooperation and continuous communication with territorial

units of the formation and dialogue with institutions of state

administration, local government and social organisations in the

context of identification of training needs for functionaries, staff and

members;

search for strategic partners, patrons and other entities involved in

activities for upholding security and public order;

dissemination of security culture and promotion of modern methods of

security management.

The College offers courses (also with instruction in the English

language) devoted to international police cooperation for representatives


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of French and foreign uniformed agencies, representatives of state

administration and for students-candidates for the service. The topics

covered on the courses include:

French security cooperation platforms (SCTIP, SCCOPOL);

Interpol;

Europol;

European Union Agency for Law Enforcement Training (CEPOL);

Frontex;

CCPD Police Cooperation Centre.

60 hours of the course are devoted to mastering the English language

(especially with respect to specific vocabulary related to the issues of

internal security). The fundamental aim of this course is equipping the

trainees with skills that will enable them successful communication in

international operational environment. Other courses offered by the

College include:

ESPOC AEPC (in English);

CEPOL (in English).

The training portfolio of the College also includes courses in security

management in local communities and in implementation of regional

security strategies. The seminars are addressed to officials of local

government units and may take place in the premises of ENSP or directly

in the officials’ workplaces. The thematic scope of the course includes:

the role and tasks of local government officials responsible for

shaping the level of security and public order levels;

forms of cooperation between local government units and institutions

of state administration with respect to public security;

creation of local-government security forces;

organisation and functioning of state institutions responsible for

security and public order (the National Police, the National

Gendarmerie);

legal responsibility of local government officials for security policy.

Among other forms of professional development offered by ESPN

the following are worth mentioning:

extramural preparatory course for officers applying, in open

competition proceedings, for the position of superintendent;

training course for officers serving at the border crossings of the

Republic.

Jacek Dworzecki

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Various forms of vocational training offered by France’s National

Police College are under constant modification to respond to the

changing needs of the National Police or other agencies executing public

security tasks. The College is very flexible and offers various

professional development courses in national police units all over the

country.

Conclusions

The French Republic in terms of population, economic and military

potential as well as its leading position in Europe, is coming up as one of

the most powerful countries in the world. Many experts and

representatives of international organisations regard France as one of the

five best developed countries in the world. However, as far as living

conditions are concerned, global rankings put France on 11th place. The

discrepancy between France’s position in the world and the level of

living standards of French citizens is the result of a series of tragic events

whose aftermath was painfully felt by the French society. The terrorist

attacks in Paris, Nice and the act of terror in Normandy (Saint-Étienne-

du-Rouvray) seriously impacted the security levels of the people and

found reflection in the results of the last presidential elections.

The government administration and subordinate agencies are

expected to undertake steps towards considerable improvement in the

level of domestic security in the country. The National Police as the

biggest uniformed agency in France plays a critical role in providing

security and public order In order to meet the challenge of upholding

public security in a troubled country, all constituents of the system must

cooperate closely to counteract fluctuant social situation in the country

and on the European continent. Proper selection, education and

professional training provided by the police training centres constitute

a vital element of functioning of the National Police. Only synergic and

well-coordinated multi-layered activities may bring positive results in the

fight against crime, terrorism and other threats to security and public

order.


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Legal acts

[1.] Act No 66-492 of 9 July 1966 on Organisation of the French

National Police.

Literature

[1.] Bui-Trong, L., La Police dans la société française, Paris 2003,

PUF, ISBN: 213-0532-94-2.

[2.] Tanguy, J. M., Le RAID - 30 ans d'intervention, Paris 2015, Pierre

de Taillac, ISBN: 978-2364-450-64-6.

[3.] Tulard, J., Histoire et dictionnaire de la Police: du Moyen Âge à

nos jours, Paris 2005, Robert Laffont, ISBN: 222-1085-73-6.

Websites

[1.] http://www.defense.gouv.fr/jdc

[2.] http://www.ensp.interieur.gouv.fr

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