Is accounting becoming the first truly international profession?

Harmonization of international accounting standards is making new inroads into Eastern Europe, the former Soviet Union and even the Peoples Republic of China, say IFAC leaders.

As far back as the 1962 World Congress of Accountants, held in New York City, Frederic G. Donner, then chairman and chief executive officer of General Motors, called accounting "the most international of all the professions." Since that time, the profession has gone to great lengths to fit that description. International standard-setting organizations, such as the International Federation of Accountants and the International Accounting Standards Committee, were formed and issued international accounting, auditing and ethical standards that have gained wider acceptance with each passing year.

In a Journal interview conducted shortly before the 1992 World Congress of Accountants convened in Washington, D.C., this month, Bertil Edlund, outgoing president of the International Federation of Accountants (IFAC), said, "The global accounting profession is becoming a reality." Edlund, new IFAC President Peter Agars and Director General John Gruner spoke of progress toward harmonization of accounting standards in many areas of the globe, including the EC, Eastern Europe, China and the Pacific Rim.

EC UNION SLOWED BUT NOT HALTED

The IFAC leaders agreed that CPAs with clients or companies involved in European Community (EC) markets need not attach too much significance to the Danish rejection of the Maastricht treaty (which will take effect only after it has been ratified by all 12 members) on European political and monetary union.

For example, Edlund viewed the treaty rejection as a "political, not an economic or business, issue." He did not foresee any impact on the gradual dismantling of customs and trade barriers between EC countries. "The EC business communities already have taken the steps necessary to increase trade between members. Even companies in my country, Sweden--still outside the EC--have prepared for it. To them, a single European market is already a fact of life." He added Sweden will join the EC whether the Maastricht treaty is ratified or not.

Agars seconded the view that the issues raised by Denmark's Maastricht vote are political rather than a roadblock for business. "As I understand it," he said, "Maastricht was an attempt to speed up the process of creating a political and monetary union at a time when it was lagging in some areas. I don't think the Danish vote will change the direction or slow the pace of the EC movement dramatically. If there is an impact, it will be largely in the political arena, and business and trade don't always recognize national borders/

A TEMPORARY MERGER SLOWDOWN

It appears that U.S. CPA clients or companies that have postponed merger or joint venture negotiations are not alone. Mergers in EC nations also have slowed. Edlund and Agars expressed the belief that a recent decline in the number of such negotiations between EC countries and the United States was primarily due to recessions in Europe and the United States rather than evidence of a lack of interest. Edlund looks for a quick recovery in merger activity between U.S. and EC companies. He said, "I know of merger discussions now going on between substantial international companies to enable them to compete in the single European market. After all, it's a market of 340 million people and, with new members, will shortly grow to 400 million, making it the largest market in the world. And that's a reality all U.S. business owners and CPAs must face up to."

Agars suggested postrecession international business combinations might take on a different cast from those consummated before the recession. He said, "Companies that have been belt tightening and slimming down during the recession are not likely to want to return to former work force levels when the economy turns up again. Rather, they are looking for smarter ways of growing. In that climate, international partnerships in technology, in which one partner usually contributes technological expertise and the other marketing skills, become very important. I see this happening now in my country, Australia, where joint ventures in major development projects requiring sizable capital contributions are not as numerous as technology partnerships."

The Far East is promising. John Gruner, IFAC executive director, mentioned Asia as the next place for foreign U.S. investment, since U.S. companies that have committed sizable investments and established their presence in the EC market now are looking for new international partnerships. He said, "I was in Europe in 1987 when the rush was on. The cry then was, 'Move to Europe before 1992 comes along.' Now I see U.S. business owners looking more to the Pacific Rim. Investments are up in Singapore, Malaysia and Thailand, and joint ventures with the Japanese are on the rise."

A WORD Of CAUTION

IFAC leaders agreed CPAs should caution their clients and companies against making sizable investments in Eastern European countries, which are generally at an early stage in their conversion to market economies. Agars warned, "Businesses shouldn't put a sizable investment in Eastern Europe until it is more stable politically. As things stand now, the risks are far too high." Edlund observed, "It depends on the country but, by and large, there are not many opportunities yet. Eastern European countries are not ready for substantial foreign investment at this time."

Gruner added, "It is not certain that the first companies to enter those markets will reap the greatest rewards. It all depends on how well a project is managed; right now good managers are at a premium in that area of Europe."

CPAs HAVE AN IMPORTANT ROLE

While IFAC leaders had reservations about companies moving into Eastern Europe, they fully supported CPA firms' entry there. Edlund said, "The profession has an important role to play in the transition from a socialist to a market economy." In Agars's view, accounting firms are there "as much to give to their communities as to get new business. To establish a position in the market, they often find they must first contribute help and services. They also are investing quite heavily in training local managers, trying to create the nucleus of an accounting profession in Eastern European countries." Gruner recalled accounting firms first went into Eastern European countries "because that's where their clients were." But now, he said, "they are there contributing their services and expertise as an investment for the future in the business community."

The speed with which the transition to a market economy is taking place has surprised the IFAC leaders. Edlund spoke of one office in Budapest, Hungary, with close to 100 professionals, many of them local citizens. Agars told of Australian chartered accountants with some understanding of Eastern European culture going to serve in offices in that area. Edlund observed, "This all happened over a relatively short period of time. It is moving much faster than most people believe. One Eastern European country, Poland, is already a member of IFAC, and Hungary will also become a member shortly."

Gruner said the conversion to a market economy has also begun in Russia. A major accounting firm developed a model auditing law for the Russian republic, and the Russian government formed a task force to develop accounting and professional standards; its goal: to have standards in place by the end of 1993. IFAC will join the task force to monitor progress toward that goal. Gruner contrasted this with his own experience on a visit to Russia just before the breakup of the old Soviet Union. At that time, he said, "no real progress toward establishing a functioning accounting profession was expected for 5 to 10 years."

OVERTURES FROM CHINESE CPAs

CPAs with interests in the Far East may soon be able to keep in touch with local customs and practice through new professional contacts. The IFAC's membership rolls could be augmented by the Chinese Institute of CPAs (CICPA), the professional accounting body of the Peoples Republic of China. At present the CICPA has 8,000 to 9,000 members, with another 25,000 accounting students in various stages of training. Edlund said, "We believe the accounting organization of mainland China will become a member of IFAC very soon."

Agars said, "There has been a very strong dialogue between the accounting professions in mainland China and Hong Kong. Hong Kong will probably be a major influence in Chinese development of the profession as we know it in the Western world." Edlund added, "The Chinese have more interest than is generally supposed in Western auditing, accounting and ethical rules." Gruner found the Chinese finance minister to be "really quite knowledgeable about accounting details, something you wouldn't expect in someone at that high level. Usually, higher-placed officials are concerned mostly with concepts and leave the details to assistants."

The CICPA translated international accounting and auditing standards into Chinese and urged government departments to take them into consideration when drawing up Chinese accounting rules. It is also drawing up a uniform CPA examination covering accounting, financial management, auditing and economic laws.

GRADUAL ACCEPTANCE FOR HARMONIZATION

CPAs involved in international capital markets and their regulation have long recognized harmonized accounting and auditing standards are necessary for efficient operations. Edlund pointed out that IFAC's ethical and auditing standards are now widely accepted even though true harmonization is not possible because of differences in cultures and regulations of various countries.

However, Agars added, "we have a long way to go in securing worldwide compliance with our standards. Both IFAC and the International Accounting Standards Committee are organizing seminars and other activities to encourage adopting our standards. That's a long and arduous task. It's quite easy to communicate with professional organizations in developed countries, but it's another task entirely in undeveloped countries, particularly those where accounting and auditing standards are entrenched in legislation. So, it's a slow process, but we're gaining ground."

Agars added, "The acceptance of international accounting standards cannot come too soon. As the competition for capital in international markets intensifies, the role of the accountant will become more important. To do the job correctly, accountants need a level playing field. International standards provide that level field."

Gene R. Barrett is a news editor on the Journal.

Mr. Barrett is an employee of the American Institute of CPAs and his views, as expressed in this article, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation.