Accountancy: Whose standard should we bear?: Mary Keegan reports on the problem posed by multiple accounting to European unity

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AS EUROPEAN heads of government wrangled about the appointment of a successor to Jacques Delors, the realities of the single market were already having an impact on how businesses operate across Europe.

In the area of the information that companies give to their shareholders, however, member states are far from united. Despite the enactment in every member state of legislation derived from company law directives, there are still big differences between the accounting policies applied to company accounts.

Times are changing, however. As companies look for new methods of raising capital, market forces are changing the way they prepare their accounts. In many Continental countries, the traditional sources of business finance - government, the banks and wealthy families - are no longer able to supply the capital needs of multinational businesses. And as companies grow and prosper, their funding needs quickly outstrip the resources of domestic capital markets, particularly those without big pension funds. As a result, many companies are trying to raise equity finance outside their home territory.

Companies have also benefited from supply-side measures, enabling them to obtain overseas listings. In the past decade many governments have abolished or liberalised exchange controls, and restrictions on foreign ownership of companies have been lifted. Capital markets in many developing countries now compete to attract foreign-based multinationals.

Within Europe, multiple listings will be encouraged by the agreement of European Union finance ministers in May this year to simplify the market registration procedures for large European companies. A 'voluntary' directive aims to benefit companies of 'high quality, large size and international standing listed in the Community for at least three years and showing a good record of compliance with EU listing directives'.

Between 400 and 500 European companies could benefit from further listings. This seems to be a first step towards setting up a 'Eurolist' of companies quoted on at least six European stock exchanges - with an estimated trading turnover of pounds 200m and market capitalisation of pounds 800m. And there is every reason to believe that a global trend towards multiple listings will continue.

Recent statistics show that one in every five shares traded worldwide involves a foreign share or a foreign investor. This compares to just one in 14 in the late 1970s.

This change in how companies fund themselves is affecting the nature of financial information in company accounts. Those governments, banks and family-owners that provided companies' capital once had access to 'insider information'. There was therefore little need to provide the sort of financial statements to which we are accustomed in the UK.

But as companies look towards other capital markets for their funding, they are producing financial statements under International Accounting Standards - the framework of financial reporting built by consensus between countries worldwide over the past 20 years. They are also often required to produce financial statements under national accounting frameworks, accounts which can show quite different results to those presented to foreign capital markets.

Daimler-Benz, of course, took a different route when it needed more capital. Looking to the US market, it produced its 'international accounts' under US generally accepted accounting principles (US GAAP). Its DM168m profit under German accounting standards translated into a DM949m loss under US GAAP.

The impact of 'multiple accounts' is also felt by UK companies with US listings. The UK accounting framework 'fits' within that of International Accounting Standards, but not with US GAAP. And most UK companies with a US listing are still obliged to provide two different sets of financial statements.

Unfortunately, the lack of acceptance of International Accounting Standards in the US seems to have been a key reason for the continued proliferation of standards throughout the world.

In January, the chairman of the Securities and Exchange Commission, Arthur Levitt, defended its requirement for US-style accounts and disclosures, saying: 'The more information the market has, the more efficient, effective and fair the market will be.' And the chairman of the US Financial Accounting Standards Board, Dennis Beresford, observed in March that International Accounting Standards were 'so broad that you can drive a truck through them'.

Some observers want US GAAP to become the common set of international standards, on the grounds that they are the most advanced. Daimler-Benz has already been marketing US GAAP as 'the right international framework'.

Most countries, however, would not find it 'politically correct' to adopt US accounting standards. International Accounting Standards are the only standards to have been developed through international consensus. And while standard-setters have been rather laissez faire about acceptable alternative accounting treatments, current moves to remove options are starting to provide an acceptably restrictive framework.

The future of accounting in Europe could depend on the EU Accounting Advisory Forum, created by the Commission in 1990, which brings together national standard-setters as well as preparers and users of accounts. The history of the forum from 1990 to 1993 would provide useful material for a European political soap opera. Since last October, however, it has acted as a technical discussion forum.

Whatever the outcome of the current discussions, it is clear that Europe is moving towards greater economic integration. How should accounting standard-setters react to this? Should they continue to promulgate local standards? Should Europe embrace the International Accounting Standards framework?

It is important that the standard-setters focus on the realities of global markets. If they fail to do so, multiple accounting standards could fragment the great resources of the European capital markets. And this could push many European companies towards the integrated capital market of the US.

The author is director of professional standards for Price Waterhouse in Europe.

(Photograph omitted)

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