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Back to the bad old days

No matter what European bureaucrats think, standardised financial reporting rules are vital to harmonise global accounting.

Where better for a love affair to flourish, and where better for it to turn to bitterness as it hits the seven-year itch. Paris, of course.

In October 1997, the World Accounting Congress was held in Paris. On the last day, its organisers, the International Federation of Accountants, produced a spectacular coup. President Chirac addressed the session, urging harmonised accounting and financial reporting around the world.

But now, Chirac has changed his tune. He considers some of the financial reporting rules which the European Union is committed to follow from 2005 onwards to be “a disaster”. This has not come about because the good President has been using some of his spare time to trawl through the minutes of the latest meetings of the International Accounting Standards Board (IASB), the independent body charged with producing and revising a full body of global financial reporting rules. Chirac has not concluded from his research that some aspects of the IASB’s conceptual framework are flawed. His view that a disaster has come to pass has come about because global rules, being global, will apply to banks in France.

No one has explained what would happen if French banks came under the same disclosure rules as the rest of the banking world. And the technical details, dealing as they do with the arcane world of financial instruments, hedging and core deposits, should not concern us. The point is the wider issue of financial reporting rules.

It reminds me of the early days of accounting standards setting, when such rules were set by a committee of the six UK accounting bodies and only one veto was needed in the final stages of the approval of any new rule to scupper the whole effort. The veto turned the whole process on its head. If it was held by an accounting body, then industry groups could simply sidestep measured arguments and lobby one of the accounting bodies instead. In other words, politics was more important than practical sense in the process of creating financial reporting rules.

This is where we now are in Europe. A process was set up under the aegis of the European Commission, which would endorse the new rules as they appeared from the IASB. It was supposed to be there as a safety net. It would normally be a formality but if something cropped up which was against European interests then it would be examined and a decision taken.

But instead of the process working that way it has become the conduit for political lobbying. If the French banks don’t like the new rules, even though they have been following the arguments and offering their technical input for almost a decade, then they simply don’t accept them.

They march into the offices of the nearest politician and demand action. So Chirac takes up the cudgels. It takes the whole process of setting financial reporting rules back by over a decade. All the knockabout stuff from the days when bullying was more important than transparency and disclosure seems set to return on the European stage.

And, as if that were not bad enough, the European process can be used to slow everything up. The whole nonsense about translating each highly technical standard into every community language before it can be considered for the endorsement process cranks into action. There is nothing wrong with this. It is a serious part of due process. But it also shows that Brussels is still pretending that one of the great changes across European business in the past 30 years has not happened. English has become the universal language of business. Stout German businesses that have become dominant global players conduct their board meetings in English, for example.

Only the European Commission still continues with this stultifying throwback to the days when decisions were thought to be better if they took decades rather than a mere year or so to produce.

The result, should this regressive attitude win out, will be a Europe deserted by global business. The dream of a pan-European capital market will be lost. European companies with global ambitions will change domicile and use US generally accepted accounting principles. The whole idea of a world where businesses in emerging nations can gain a listing on US stock markets by filing accounts that comply with international financial reporting standards will be lost. The US stock markets will become the global stock markets. We’ll be left with a Europe that operates under, as a speaker at a seminar which I chaired recently put it, Bureaucracy GAAP.

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