by rick telberg
june 21, 2000 (smartpros) — it may seem far away, but the european commission has unveiled an ambitious plan to mandate that companies throughout europe follow a common set of accounting standards.
slated to take effect in the european union by 2005, the brussels-based commission said ‘urgent’ changes were needed to allow the development of a single european securities market. the proposal must yet get approval by a majority of eu countries and the european parliament.
the commission says widely varying and conflicting rules cause companies reporting even in the same country and even on the same stock exchange to use different accounting standards. the ec wants companies to follow the international accounting standards committee, a body set up by the accounting profession in 1973 to devise a set of global rules. the ec holds 6,700 public companies, but only 275 currently follow international standards.
“today europe has a single currency but not an integrated financial market,” said frits bolkestein, the european union commissioner for a single market, said. “unless the european union moves rapidly it risks losing the benefits of the euro and will be unable to keep up with change in global markets.”
the move goes a long way to protecting european capital markets at a time when the united states markets are fighting fiercely for listings and offshore and virtual global markets are fast developing in the digital ether.
“the stock market capitalization of eu member states is about half that of the us,” bolkestein noted. “less than 0.2 per cent of life assurance in the eu is traded cross border. europe’s private savings — 20 per cent of gross domestic product — are not invested efficiently. furthermore, there are still big differences in the cost of financial products between member states. so far it is the u.s. that is reaping the benefits of market consolidation.”
but the ec plan is flawed in at least one respect because it sets up a two-tier “endorsement mechanism,” or supervisory agency of politicians and administrators. in effect, the system adds friction to the work of the iasc. the reluctance to give way to the iasc follows a major victory by the iasc to reform itself in the mold of the united states’ financial accounting standards board. this could, in effect, give the commission a veto on politically contentious iasc standards.
perhaps the ec was bowing to the political realities of often-factional constituent countries, some of which have a long way to go to bring their financial reporting and commercial practices to the level of transparency taken for granted by u.s. accountants.
eventually, the world will bow to a single standard. and if history and the american experience of standards setting is guide, the global standard will be based on the fullest, fairest and quickest disclosure possible. the fact is, the markets will demand no less.