Cross-border deals prompt changes to accounting rules

Date: 13/07/2000

By Peter Chapman

INTERNAL market chief Frits Bolkestein is targeting EU accounting rules in his quest to complete the Union's single market for capital.

The flurry of merger activity between European firms and bourses is just one symbol of the increasing trend to look beyond national borders. But the Dutch Commissioner fears this integration will be hampered if EU companies still have to comply with a host of conflicting rules and regulations, including those covering the accounting standards they must abide by.

In a bid to reduce the burden, he wants to introduce new rules forcing listed companies to use standards developed by the newly reformed International Accounting Standards Committee from 2005 onwards.

Supporters of the move say it would give investors a massive boost because it would make it easier to compare the financial performance of companies listed in different markets. Firms listed on more than one stock market also favour this approach because it would make it simpler for them to produce the financial data required by local securities commissions, and would facilitate cross-border deals.

But the EU's accounting profession is gearing up for a battle over other parts of the policy paper, which is expected to be followed up with formal proposals for legislation at the end of this year. It opposes Bolkestein's plans for a tough "endorsement mechanism" for vetting international standards, under which Union accounting experts and national officials could call on EU firms to modify those standards if they were deemed to be inappropriate.

Many fear this and a similar US proposal announced by the Securities and Exchanges Commission will lead to the creation of three sets of standards - the original international ones and their modified European and American versions. If that happens, the result would be the same mish-mash of standards as currently exists. "We think you should have one set of standards. That is to the benefit of the capital markets and the companies that are using them," said Graham Ward, president of the Institute of Chartered Accountants of England and Wales.

Bolkestein is also planning other reforms to the accounting system to boost pan-European investors' confidence in the auditors of Union firms. The move mirrors US fears that auditors who scrutinise companies' books could be getting too close to their clients when they offer additional, and more lucrative, consultancy and legal services. "The subject is difficult and controversial. We want to produce a core set of principles on auditor independence which would ensure that all member states basically follow the same approach," said a senior official.

Auditors are meant to provide the vital check that financial accounts are a true and fair record of their clients' activities. However, ignoring potential cracks in accounts could paint companies in too favourable a light, misleading investors, and crucially, inflating stock prices.

Under the Commission plan, auditors would be prohibited from offering consultancy and legal services to companies for which they prepared the 'statutory audit', except in strictly limited circumstances.

Auditors working on projects would also be banned from owning shares in their clients' firms. Although the proposals would be in the form of non-binding 'recommendations', the profession would face the threat of formal legislation if it failed to meet the requirements.

Internal Market chief Frits Bolkestein is targeting EU accounting rules in his quest to complete the Union's single market for capital. Article forms part of a survey on financial services.