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Accounting integration in Europe - still on track?

Queen Elizabeth spoke for many Europeans when she described 1992 as an "annus horribilis." The year was filled with political and economic developments that initially inspired great hope and optimism but later gave way to disappointment and pessimism.

The fallout from 1992 is all too obvious in a seemingly endless list of problems now facing European unity. A difficult debate continues on the ratification of the Maastricht Treaty. The people of Switzerland have chosen not to join the European Economic Area (EEA), which would extend most European Community benefits to the remaining European Free Trade Agreement countries (Austria, Finland, Iceland, Liechtenstein, Norway and Sweden). EC countries are unable to respond adequately to the terrible events taking place right on their doorstep in the former Yugoslavia. It has not yet been possible to find a compromise that would save the Uruguay Round of trade talks on the General Agreement on Tariffs and Trade (GATT), even though success would promote increased world trade and help Europe out of a recession.

Understandably, these uncertainties about the future have led to upheavals in European currency markets and made one of the most severe recessions in recent times even more difficult. This in turn has dampened enthusiasm for the freer competition that a single market implies.


Last year was difficult for the accounting profession, too. The economic downturn had an impact on the demand for accounting services and criticism of the profession's performance increased.

In spite of the political and economic uncertainties now prevailing, the Federation Experts Comptables Europeens (FEE) is optimistic about the future. As the representative organization for the accountancy profession in Europe, bringing together 33 bodies from 22 countries with a combined membership of approximately 300,000 individuals, FEE recognizes the solid consensus and achievements that are the keys to Europe's prospects for unity. The Treaty of Rome and the Single European Act are still in place, the ability of the EC Court of Justice to make further progress through its decisions remains unchanged, the EC continues make progress toward achieving ambitious single-market targets and the outcome of a summit meeting of EC leaders held in Edinburgh in December 1992 indicates solutions can be found for many of the problems raised by Maastricht.

Despite the absence of Switzerland, plans are proceeding for the creation of the EEA, new applications for EC membership are being considered, and the reconstruction of Central and Eastern European economies draws heavily on EC resources and models.

In short, there is no doubt the process of European integration will continue and more progress will be made in completing the single market. What is uncertain are the nature and speed of the developments and the roles and contributions of the various players involved.


European integration is of interest to the accounting profession not only because of the effect it will have on demand for accounting services, but also because of its influence on the way the profession in Europe is structured and regulated.

For accountants, freedom to establish a presence and provide services on a crossborder basis and mutual recognition of qualifications (for both individuals and firms) have been rights enshrined in the Treaty of Rome since 1957. However, barriers created by the complexity of 12 different sets of national regulations on providing professional services require detailed EC legislation to make the Treaty of Rome principles operative.

American CPAS should keep in mind there, is no such thing as a "European accountant." A tremendous range and diversity exist in European countries regarding the types of accounting services regulated; the scope of practice, education and training permitted; the legal forms allowed for the exercise of the profession; and ethical requirements. Therefore, any attempt to remove barriers through a process of harmonization is unrealistic and unworkable. Instead of removing differences, a way must be found to live with them. Legislation should facilitate the free movement of accounting services and their providers and, at the same time, maintain and improve accounting and auditing standards to protect the public interest. Until this is done, there can be no single European market in accounting services.

FEE has called for EC legislation to govern the temporary cross-border provision of accounting services by firms and individuals. The providers of such services should not be required to obtain local qualification as long as they already are appropriately authorized in another EC member state, provided a locally licensed firm or individual accepts responsibility. It is through local professionals that adherence to local requirements can be assured and the local public interest can be protected. At the same time, foreign providers are fee to move across borders. FEE believes its approach was confirmed by the EC Court of Justice and looks forward to legislation to enforce it.


The public debate on the Maastricht Treaty led to some severe criticism, much of which is misplaced, of a centralized, overly bureaucratic E C Commission in Brussels. This in turn caused renewed and additional emphasis on "subsidiarity" (somewhat akin to states' rights in the United States), whereby decision making is delegated to the lowest possible level in the EC. This may reduce the number of legislative initiatives from Brussels in the future and increase the number of decisions made by individual member states.

In the areas of most concern to the accounting profession, it is understood that a lower priority is now attached to the Company law harmonization program, including the proposed Fifth Directive, which threatens to introduce requirements for mandatory auditor rotation and similar provisions. New initiatives for separate EC legislation on auditor independence also are less likely.

Such developments promise to make discussions affecting the accounting profession in Europe much more complex. Greater autonomy, combined with a lower probability of EC-wide initiatives, may place individual member state governments under increased pressure to put forward specific national solutions to what are perceived to be national problems. Given the number of existing barriers stemming from the fact that the profession and its services are regulated in quite different ways in the different member states, changes leading to greater divergence should be avoided. Ensuring this will be a major challenge for FEE.


At the same time, efforts continue to reduce the constraints that arise from another area of divergence in Europe: differences in financial reporting requirements. Now that a solid core of EC accounting legislation is in place-primarily the well-known Fourth Directive on financial statements for individual companies and the Seventh Directive on consolidated financial statements, supplemented by specific provisions for banks and insurers - no further legislative initiatives are expected for the foreseeable future. Nor is there any prospect of European accounting standards. Instead, the emphasis will be on greater consultation between the EC Commission in Brussels, national standard setters, European representative organizations of various preparer and user groups and the accounting profession qs represented by FEE.

Despite the many differences that continue to exist within the EC, financial statement prepared in one member state must be accepted in all member states. Mutual recognition will soon expand to cover all EEA countries. This means the administrative burdens of being quoted on stock exchanges in several countries are less than would be the case if companies prepared accounts in accordance with local standards in each country where they are listed.

The position is much less favorable, however, for European companies seeking to raise capital in U.S. financial markets. The Securities and Exchange Commission requires financial statements to be prepared in conformity with generally accepted accounting principles in the United States. On the other hand, most European stock exchanges accept U.S. GAAP financial statement., listing purposes. Pressure from European industry is growing more intense for an agreement with the United States on mutual recognition of financial statements - a concept that FEE supports.


Regarding the profession itself, Europe will be assertive in seeking effective access for its accountants to foreign markets, such as the United States, especially through proper recognition of professional qualifications. For some years, many non-EC, professionals have enjoyed liberal access to several national markets in the Community; as the single market becomes a reality, we will seek similar treatment from others.

The accounting profession does not wish to see the expanded EEA become a "Fortress Europe." There is no reason why the freedom and opportunity of the new single market should not be made available to accountants and accounting services elsewhere in the world, provided equivalent treatment is given in return. This is consistent with the EC's external trade policy, and it is a position that FEE has consistently supported.

This is why the GATT Uruguay Round of services trade negotiations are of such interest and importance. It must be conceded that progress in GATT negotiations in, 1992 was not in line with expectations, but we hope that compromise proposals made late last year will get negotiations on services moving again in 1993.

In the meantime, additional communication channels should be exploited to continue discussions between Europe and North America on the many issues of common concern to accountants on both sides of the Atlantic. The areas covered by the EEA and the North American Free Trade Agreement will be the world's largest markets. The accounting profession has thrived and prospered by continuously adapting to the evolving needs of a changing marketplace. As the marketplaces in both Europe and North America become increasingly regional and less national, we should ensure that closer ties within our regions are not accompanied by a greater gulf between them. We should strengthen the translantic dialogue that always has been a positive feature of our profession, and we should maintain and augment our support for the international auditing standards of the International Federation of Accountant, and the international accounting standards of the International Accounting Standards Committee.

* EUROPEAN UNITY FACES A host of problems, including the Maastricht debate, the decision of Switzerland not to join the European Economic Area (EEA), turmoil in the former Yugoslavia and the stalled Uruguay Round of General Agreement on Tariffs and Trade talks. Despite this, progress continues toward the completion of a single European market. Plans are proceeding for the creation of the E E A without Switzerland, new applications for European Community membership are being considered and EC resources are being used to reconstruct Eastern European economies.

* EUROPEAN UNITY is important to EC accountants because it offers the best hope of overcoming barriers created by 12,' separate sets of national accounting regulations. The Federation des Experts Comptables Europeens (FEE) has I)proposed E C legislation to enable temporary cross-border accounting services.

* THE MAASTRICHT DEBATE could make it more difficult for EC accountants if it leads to lower priorities for EC legislative initiatives and greater reliance, on national solutions to the perceived problems associated with the profession.

* FINANCIAL STATEMENTS prepared in one EC member state must be accepted in all member states. This agreement soon will be extended to include all countries in the EEA.

* THE SINGLE EUROPEAN market should be made available to accountants and accounting services elsewhere in the world, provided EC accountants are given equivalent treatment in return. This FEE position is fully consistent with the EC's external trade policy.
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Author:Hegarty, John
Publication:Journal of Accountancy
Date:May 1, 1993
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