Market to dictate new international accounting rules

Date: 02/11/1995

By Fiona McHugh

THE creation of a single set of internationally-acceptable accounting standards allowing European companies to register more easily on foreign stock exchanges should be dictated by the market and not by EU law, the European Commission is expected to decide this month.

Adopting a new flexible approach, Single Market Commissioner Mario Monti is to suggest to his colleagues that the EU plays an advisory rather than a legislative role in the drive to reconcile conflicting systems of bookkeeping in use around the globe.

“I will shortly propose a new approach to accountancy which will strive to keep the use of legislative instruments to a minimum,” Monti told the European Parliament Liberal group last month.

“The idea is to agree with the member states and the accounting standards bodies approaches to specific accounting issues. Member states will not be obliged to implement these solutions: the need for them will be determined by the market forces inside each member state.”

Monti's suggestions are unlikely to meet with opposition from fellow Commissioners, EU sources say, and should be welcomed by industry experts and accountants to whom the task of agreeing a common set of international accounting rules would then fall.

They have long argued against the adoption of new directives, claiming cumbersome decision-making procedures would slow down the harmonisation process.

“We do not want the law to get involved. It always trails behind and is not very flexible. We need a voluntary agreement which would move with the market,” said Liesel Knorr of the International Accounting Standards Committee (IASC).

The IASC hopes to find a way of calculating companies' earnings by 1999 which would satisfy stock exchanges from New York to Paris to Tokyo.

At the moment, European companies which want to sell their stocks on foreign exchanges must produce accounts worked out according to local rules known as Generally Accepted Accounting Practice (GAAP).

Radically-different GAAPs currently in use in the US and the Union often deliver radically-different verdicts on the same firm's commercial performance.

The most notorious example is that of Daimler Benz, which in 1993 posted profits of 615 million deutschemarks according to German accountants and losses of 1.8 billion according to their American counterparts.

While most EU stock exchanges recognise US accounts, American exchanges, which claim that accounting standards on this side of the Atlantic are not rigorous enough, insist that European companies compile sets both at home and abroad.

Doing accounts twice consumes both time and money - a disincentive which has made some EU companies shy away from quoting on lucrative foreign exchanges.

With the 1998 deadline for the privatisation of Europe's large telecoms monopolies looming, the problem has taken on a new sense of urgency. The EU wants cheap, easy access to US capital for its companies - and fast.

So far, the US has insisted that any international set of standards must reflect theirs. Rather than force EU companies to comply with tough US standards while it sets the Union's law-making processes in motion, the Commission is likely to decide to allow the IASC to come up with a European alternative.

IASC hopes to reach agreement by 1999 on how Europe and the rest of the world should do their sums and has adopted an ambitious work plan aimed at incorporating changes by then to the EU's system suggested by the US.

The Commission will participate in forthcoming negotiations, but only to make sure the new evolving international standards respect existing EU accounting rules.

“We have to try to keep up with the game. That means doing so without changing directives each time,” explains one Commission official.

Monti has warned, however, that should the new standards break EU law at any stage, the Commission will reach for its law-making tools.

“We would only reach for a legislative solution if we found that this new approach, over time, caused distortions in the single market,” he said.