EU and IASB Efforts to Harmonize International Accounting

Introduction

Several organizations have been involved in efforts to harmonize accounting practices both regionally and internationally. The most important players in this effort are the European Union (regionally) and the International Accounting Standards Committee (IASC) — now called the International Accounting Standards Board (IASB) — at the international level.

There have been a series of efforts during recent years aimed at developing a common agenda of accounting standards. The existence of several alternative accounting practices, for example, makes it difficult for influential bodies to reach common ground on the matter. Institutions such as the European Union and the IASB have played significant roles in emphasizing the importance of international accounting standards.

Background to Accounting Diversity

With society composed of distinct national economies, there has historically been little need for common accounting practices. However, as the global economy has come to dominate international affairs, people have become increasingly demanding of a standard language they can use in accounting. Contemporary corporations maintain headquarters in many parts of the globe and thus require governments to implement policies that can harmonize accounting practices. It is widely believed that harmonization is the most effective solution to this problem.

Accounting diversity is largely perceived as a consequence of the accounting practices of the country in which a company is located — a factor that typically determines a firm's accounting practices. Even so, matters are more complex in particular situations. Regulations and location are certainly important, but one must also consider the circumstances in which a business process takes place. Alternative accounting practices are sometimes the only solution available to companies that need to effectively close deals in circumstances that demand such approaches.

Depending on the body that addresses the issue of common accounting laws, the process can be perceived differently by the general public. Some regard the term "standardization" as being more aggressive in comparison to "harmonization" and thus prefer to use the latter. As Alexander and Nobes observe, "Harmonization is a word that tends to be associated with the supranational legislation promulgated in the European Union, while standardization is a word often associated with the International Accounting Standards Board" (2007, p. 80).

EU Involvement in Harmonizing Accounting Practices

The European Union has seen a slow process in its efforts to make accounting harmonization possible. "The EU Directives have highlighted European accounting diversity, which is rooted in different legal systems (code vs. common law), different capital market structures (debt vs. equity orientation), and different roles of accounting (macro- versus micro-user)" (Saudagaran 2009, p. 57). The EU had to adopt directives from member countries, which further complicated matters, as political compromise has been the only means for the union to prevent serious problems.

Harmonizing objectives are being addressed within the EU through directives that are being introduced into the legislation of the community's member states. The EU has directed its attention toward harmonizing accounting practices throughout the second half of the twentieth century. The 1970s and 1980s were filled with a variety of actions undertaken with the intention of harmonizing accounting practices. Directives were generally accepted throughout the EU as an effective method of reaching standardization.

One example is the EU's Fourth Directive, adopted in 1978, which addressed the formats and rules of accounting. Directives were generally designed to work alongside laws passed by local legislatures. The Fourth Directive directly relates to this matter by emphasizing that member states are responsible for requiring or permitting companies to perform particular actions. By examining how the Fourth Directive's draft evolved during the 1970s, one can gain a more complex understanding of how EU members influence accounting practices. The initial draft was published in 1971, at a time when the UK, Ireland, and Denmark had not yet joined the union. As a consequence, the document was heavily influenced by German thinking, and many of its provisions were conservative. Conditions changed as the three previously mentioned countries joined the EU and brought Anglo-Saxon thinking strategies that came to be reflected in how the Fourth Directive's draft developed. "This introduced the concept of the 'true and fair view'" (Alexander & Nobes 2007, p. 81).

The EU attempted to address a series of problems with accounting diversity during the 1990s. The periods 1991–1992, 1994–1995, and 1998–1999 saw the union initiate significant harmonization strategies. While experiencing limited effectiveness, these initiatives emphasized the fact that practices characteristic to particular companies and situations need to be taken into account before devising a common set of accounting strategies (McLeay & Jaafar 2003, p. 23). "During the 1990s, the EU began to take more notice of international standards, leading to a Regulation of 2002 requiring IFRSs for the consolidated statements of listed companies" (Alexander & Nobes 2007, p. 80).

The idea of a "true and fair view" became an integral part of the EU's struggle to reach common ground regarding the relationship between a generalized system of accounting and national laws. The EU financial system largely promotes the idea that financial statements need to be in agreement with the facts and must not be misleading (Alexander & Nobes 2007, p. 83). There is considerable controversy surrounding the "true and fair view" as a result of the different perspectives EU members appear to hold on the topic.

The fact that the EU contains both common law and code-law nations means that these respective communities are likely to express different opinions regarding harmonizing accounting practices. On the one hand, the UK is a common law country and thus has a legal environment directed toward protecting public investors. On the other hand, countries like France and Germany have designed legal environments that are more supportive of institutions such as banks and labor unions — favoring "insiders rather than outsiders due in part to the closely held ownership of companies found in those countries" (Wilkins 2010, p. 4).

Common law countries tend to be more conservative with regard to accounting in comparison to code-law countries. Insider investors in code-law countries have access to more information concerning gains and losses they are likely to experience, given that insiders control firm ownership in these communities. As a consequence, code-law communities are more likely to express hesitation about employing conservative strategies, while common law nations tend to favor conservative accounting practices (Wilkins 2010, p. 4).

Even though a great deal of progress was made across the second half of the twentieth century in harmonizing accounting practices, many expressed a lack of enthusiasm about how some of these actions had only limited influence:

"At a Conference which the Commission organised in 1990 on the future of harmonisation of accounting standards in the EU, a clear preference was expressed for not reducing the number of options in the Directives, for not adopting new legislation in the near future and for the need to take into account the harmonisation efforts at a broader international level." (Accounting Harmonisation: A New Strategy vis-à-vis International Harmonisation, p. 3)

In response to accounting issues within the European Union, the European Commission created the Accounting Advisory Forum. National standard-setting bodies and European organizations of accountants work together in this forum to devise solutions to problems that had not previously been addressed through Directives or other means. Although it had a problematic start, the Forum achieved some success by helping the European community acknowledge several general ideas concerning accounting. The absence of a clear mandate to support this progress is, however, very significant, meaning that the data produced is not sufficient to meaningfully influence the evolution of accounting within the union (Accounting Harmonisation: A New Strategy vis-à-vis International Harmonisation, p. 3).

One of the most urgent problems regarding harmonization involves European companies experiencing difficulties at the international level as a result of their tendency to focus on more local accounting ideas. As these companies concentrate on acting in accordance with national legislation while also complying with Accounting Directives, they often fail to devise strategies that can be considered acceptable from an international capital market perspective. "These companies are therefore obliged to prepare two sets of accounts, one set which is in conformity with the Accounting Directives and another set which is required by the international capital markets" (Accounting Harmonisation: A New Strategy vis-à-vis International Harmonisation, p. 3).

Conclusion

The problem with accounting standards goes back several decades, and even centuries when considering the big picture. Even so, it was not until the post-World War II period that the international public acknowledged the need for harmonizing international accounting standards. This meant that institutions like the EU and the IASB needed to become actively involved in addressing the problem and in seeking solutions that would prevent companies from incurring unnecessary expenditure. While some strategies proved successful, experience has shown that there is still a great deal to accomplish before harmonization is fully achieved. A large number of institutions remain either hesitant about change — feeling safer continuing to perform accounting practices they are accustomed to — or consider it inefficient to restructure their operations around accounting standards that have yet to prove themselves as the definitive solution to contemporary accounting challenges.