Europe, like America, is determined to crack down on corporate accounting. The EU has passed new legislation that will harmonize accounting standards in member states by 2005, putting Europe onto an international system that may be safer and tougher to abuse than the U.S. system. This week, Britain will unveil its own major plan for reform, designed to revamp company laws that haven’t been updated since the 19th century. The plan will include everything from clearer responsibilities for company directors to tougher penalties for those who try to hide crucial financial information.
As in the United States, much of the initial action has focused on accounting standards. European systems tend to be based on principles. Unlike the U.S. “rules” system, which offers a detailed rule for almost every accounting scenario, a principles system provides a series of guidelines, and lets companies decide how best to follow them. Advocates say this encourages common sense and honesty: if a particular asset or liability has any effect on business, you account for it. Too many rules, they argue, create loopholes.
But keeping the standards more general can be a problem. Most European systems don’t account for financial vehicles like futures, swaps and derivatives. Yet they dislike the U.S. solution–about 140 pages of detailed rules. As a middle ground, the London-based International Accounting Standards Board (IASB) is attempting to compile the best practices from around the world. The hope is that ultimately the United States and the EU will be able to agree on a global accounting standard.
Even if they do, accounting is only one piece of a larger problem; installing proper audit systems is just as important. There again, Europeans are cleaning house. The EC has recommended that auditors have a two-year “cooling off” period before joining a client for consulting work, and that key partners avoid auditing the same client for more than seven years in a row. The EC has also encouraged companies to forgo audits on major consulting clients. The French have gone further, proposing new laws that would bar auditors from consulting at all.
Beyond this, Europeans are rethinking their entire business culture. European managers who draw fat-cat salaries are now feeling the heat from shareholders; last week a coalition of powerful institutional investors protested Vodafone chief executive Sir Christopher Gent’s hefty proposed pay package, which includes a £1.2 million salary, plus a bonus and options that could be worth several million more. Investors and government officials are pushing for companies on both sides of the Atlantic to account for options packages in company balance sheets. Europeans also are considering ways to increase disclosure of financial information and hike penalties for corporate criminals. The EC will likely propose new disclosure legislation by the end of the year and, post-Enron, Germany has rewritten some of its laws, toughening sanctions against executives convicted of fraud. Europeans are hoping that all this reform, coupled with more skeptical markets, will help prevent further corporate scandal. But as their own companies take a beating, along with those in the United States, they are under no illusions that corporate misbehavior is a product made only in the U.S.A.
