From Times Online, UK
September 05, 2004
Keeping track of the money
Converging European and US accounting standards will free the world's flow of capital, reports Damian Wild
The European Union's enthusiasm for international financial reporting standards has little to do with pure accountancy and everything to do with investment. Currently Europe, for all the lip service that it pays to size and confidence, plays second fiddle to America.
The European Commission believes that ensuring all 7,000 listed companies use a single set of standards to draw up accounts will help encourage potential investors to view Europe as a single capital market. But the EC is also sensible enough to recognise that accounting standards cannot achieve this on their own. That's why it launched the financial sector assessment programme (FSAP) in May 1999, with a completion date of 2005.
"The commission recognised that financial reporting was an important part of this plan," says Henri Olivier, secretary-general of the Federation des Experts Comptables Europeens (FEE), the European accounting body.
There is an awful lot at stake. The commission believes integration of EU financial markets will bring significant benefits to businesses, investors and consumers. It estimates real GDP across the EU will directly increase by 1.1% or €130 billion (£87.4 billion, in 2002 prices) over a decade. Total employment will increase by 0.5%. Businesses will be able to get cheaper finance. Investors will benefit from higher returns. "If we don't have a comprehensive financial reporting system in place, then it will discourage cross-border investment," says Olivier.
In June, the commission reported on good progress. Almost all the FSAP's legislative measures had been completed on schedule, though with implementation of new rules on company law, audit and money laundering yet to happen, it admitted it was too early to declare victory. But the EC is struggling on another front: it failed to prevent accounting reform from becoming bogged down in political intrigue. Last summer French president Jacques Chirac warned that International Accounting Standards Board (IASB) proposals for financial derivatives could have "nefarious consequences for financial stability". A year on, IAS 39 is still to be ratified.
Eric Anstee, chief executive of the Institute of Chartered Accountants in England & Wales (ICAEW), wrote to the commission in August arguing that failure to adopt the unabridged version of IAS 39 in time for January 1, 2005 would "make a mockery" of the aim to have EU companies apply global standards. But it's not just the EC, companies and their auditors who face a challenge to be ready — it's the regulators themselves. Securities regulators in the 25 EU member states must ensure they can police the new regime.
Ensuring this happens falls to Financial Services Authority chief executive John Tiner, who chairs the Committee of European Securities Regulators' financial reporting group. "Quite frankly, all 25 members are going to have to be there and be ready," Tiner says. "From 2005 and beyond, all will need to have an enforcement mechanism of some kind."
Despite concerns that it will be the 10 accession countries that struggle most, accountants working closely with the EC say most now have rigorous accounting, auditing and governance systems. In Estonia, for example, companies have been able to use IFRS since 2003, and the majority already use this system. The Czech Republic adopted international standards for listed companies in 2002, Bulgaria in 2003, and Russia begins phasing them in this year.
Little wonder then that Siemens corporate vice-president Bernd Stecher told April's European Economic Summit: "It was very simple for us to decide to invest in central and eastern Europe, because we knew these countries." Assuming Europe gets it right for next year, then the really hard work can begin. For the standards to be truly global, the US needs to adopt IFRS — or the gap between IFRS and US GAAP needs to narrow to a point where they become indistinguishable, and both are accepted by the US Securities and Exchange Commission (SEC).
That way, as well as freer movement of capital within Europe, transatlantic movement of investment could become a reality.
Progress is already being made: in 2002, the US Financial Accounting Standards Board (FASB) and the IASB signed the Norwalk agreement, committing them to converging US and international accounting standards. But further work is needed. Nevertheless Sir David Tweedie, the IASB chairman, is confident it can happen. He describes working on convergence with the US as his "number-one priority". His opposite number at FASB, Bob Herz, shares Tweedie's confidence: "The main focus has to be to converge US and European standards."
But perhaps the best indication that convergence will happen came from the powerful SEC in June.
"If the IASB operates as a strong, independent standard-setter, if the commitment to quality application of IFRS remains, and if good progress is made in accounting convergence and the development of an effective global financial reporting infrastructure — then, in this decade, the SEC will be able to eliminate the reconciliation," chief accountant Donald Nicolaisen told a public hearing on the IASB constitution review.
"I assure you that I am eager to embrace IFRS, because I believe our investors in the US will benefit."
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