The paper evaluates the adaptation of national accounting systems with respect to institutional and regulatory changes on the one hand and financial reporting changes on the other. 1. Introduction Accounting regulation In Europe Is undergoing a period of major changes. The Introduction of International Financial Reporting Standards (FIRS) for financial reporting has added further Impetus to the goal of convergence of international accounting rules. Since 1 January 2005, more than 7,000 listed companies are required to prepare their consolidated accounts using FIRS.
Pressures to integrate UAPITA markets in Europe have prompted the European Commission to introduce uniform financial reporting standards for listed EX. companies (van Hulled, 2003). Recognizing the advantages of international financial reporting harmonistic for EX. companies with listings outside the E and admitting that no European Accounting in Europe, volt. 2, 2005 Correspondence Address: Upscale Delegable, ESP.-EPA, 79 avenue De la Re oblique, 75543 Paris, Ceded 1 1, France. E-mail: [email protected] Net; Gab Beers, Lillian GAG, OK” analysts. 28, 80802 Mum niche, Germany.
E-mail: Gab. [email protected] De; Chair Canon, unilateral; Ca’ Focal ODL Venezuela, Adolescents ODL Economical e Direction Kendall, San Gibe – 30123 Venetian, Italy. E-mail: [email protected] It 0963-8180 print-05=010137-28 # 2005 European Accounting Association published for the European Accounting Association by Taylor & Francis DOI: 10. 1080=096381805003791 03 Downloaded by [Manchuria University] at 05:59 12 October 2014 accounting standards could be used for this purpose, FIRS were introduced as mandatory standards (van Hellmann and Sloop, 2002).
The legal instrument of an EX. Regulation (No. 1606/2002)1 was adopted by the European Commission in order to eave a direct effect on listed companies. However, member state options were permitted for the application of FIRS In Individual company accounts and In the consolidated accounts of non-listed companies. When comparing developments and the approaches used to Integrate current accounting reforms In France, Germany and Italy, it becomes evident, that although the internationalization process of the impacts are different and the processes vary in speed in each of the countries.
Research in comparative international accounting developed a contingency perspective on accounting system differences which suggests that accounting is influenced by its environment (Hoped, 1991). Among the factors that are suggested as influencing financial reporting, comparative studies usually refer to the capital market and the role of finance, the impact of the state and the role of the accounting profession as well as the influence of commercial and tax law.
Taking these different factors into account contingency studies suggest systematic differences in national accounting frameworks and, for Europe, typically distinguish the Anglo-Saxon from Continental Europe group (Nobles and Parker, 2000). Whilst the Anglo-Saxon group is hairdresser by a capital market and shareholder orientation with a strong accountancy profession, the Continental Europe group is characterized by a tax and legal orientation and creditor protection. The countries selected for this paper are generally categorized as belonging to the Continental Europe accounting group (Choc and Mueller, 1992; Nobles, 1998).
However, whilst France and Italy are suggested to be more influenced by tax law, Germany is suggested to be dominated by commercial law (Nobles and Parker, 2000). But all three countries are suggested as being opposite from the Anglo- Saxon approach to accounting and it seems therefore interesting to analyses how these countries adapt to the EX. strategy of convergence to FIRS and the integration of capital markets in Europe, in particular as current FIRS have been predominantly established by the Anglo-Saxons (Flower and Beers, 2002, p. 6). Meek and Quadrants (1997) suggest that for companies competing for capital in international capital markets, the pressures for convergence build a counterweight to the causes of accounting diversity at national level and they predict these would be a primary cause for mitigating accounting differences. In Germany, whilst the traditional national approach to financial reporting is fundamentally different to FIRS, companies are playing a leading role in the globalization of the world economy.
Notably, the merger between Daimler-Benz and Chrysler had a particularly important impact on German financial reporting. German corporations realized that the traditional German approach to financial reporting is inadequate in the face of the demands of globalization and this was a driving factor for accounting reforms (Burns, 2001). Out of the top 50 multinational enterprises (MEN) in Europe, 12 are based in France, 2 are based in Germany and 4 are based in Italy. Furthermore, Germany, France and Italy rank among the countries with the largest stock exchanges in Europe, after London.
The purpose of the paper is firstly to describe the regulatory accounting changes that are taking place in the three countries which are the focus of this paper. Secondly, it is to evaluate the impact of those changes on reporting practice based on an empirical research of accounting rules applied in consolidated financial statements of major listed companies in Germany (ADDAX 30), France (CA 40) and Italy (S/MIB) in he financial years 2002 and 2003. Thirdly the paper analyses the environmental factors for change and the motives for differences and similarities in the French, German and Italian approach of convergence to FIRS.
Since the mid-sass, the French financial reporting system has been constantly developing with a view to improving transparency of published information, in response to market pressure. In particular, the larger French enterprises that were able to use some options opened by the 1986 decree on consolidated accounts, enabling them to converge towards internationally accepted accounting standards, ere lobbying the government for permission to draw up their accounts directly in accordance with these standards.
The government finally agreed to this demand and passed the law of 6 April 1998, by which French listed enterprises were no longer obliged to follow French law for the preparation of their consolidated accounts. However, the necessary decree for application prepared by the Commit; De la Re ‘ agglomeration Computable (CAR, French Accounting Regulation Committee) was not published prior to 2005 which coincided with the application of the EX. Regulation. 2. 1 .
Recent Changes to the French Accounting Regulation Framework In 2003, the publication of the LOL De Se ;Currie; Finance ‘re (LSI 2003-706, Law on Financial Security) introduced a number of important changes. This law resulted not only from changes introduced by the European Commission but also as the consequence of the American Serbians Solely Act, since it implemented new procedures for the regulation of financial markets, the audit profession and financial information, in order to improve transparency and control over financial reporting and securities transactions.
The LSI comprises 140 clauses under three sections, comprising: . Section l: modernization of control and supervisory authorities for insurance, banks and investment companies; . Section II: investor protection; and International Financial Reporting Convergence 139 Downloaded by [Manchuria University] at 05:59 12 October 2014 . Section Ill: modernization of financial statements, legal control and transparency. The main changes for companies and auditors are first, the creation of a new financial markets oversight body, the Authority’ des Marcher ‘s Financiers (MAP,
Financial Markets Authority); second, the creation of the Haute Console du Commissariat auk compete (HACK, Audit Supervisory Board), under the authority of ‘Garden des Access’ (Ministry of Justice); and third, a new obligation is to improve transparency in terms of corporate governance and financial reporting. 2. 2. Accounting Regulation Committees The CAR plays a central role in the French accounting system. It was created in 1998 to provide government endorsement of the pronouncements of the Console National De la Comparability’ (CNN, National Accounting Council).
Its 12 members include two government ministers Justice, Economy and Finance), two senior Judges, and the heads of the CNN, the MAP (formerly the Commission des Pop ‘ rations De Bourse, COB), the Companion National des Commissaries auk Compete (CNN) and the Order des Experts Computable (EEOC). The principal function of the CAR is to issue all government decrees relating to accountancy and financial reporting. The aim of creating the CAR was to concentrate the power to issue financial reporting decrees in a single body, so as to achieve better coordination of the government’s actions.
Given the eminence of its members, its decrees carry great authority (Ge ‘ lard, 2001, p. Accelerate the necessary accounting reforms. In fact, the rules on group accounts have significantly evolved since 1999, in particular through new regulations and interpretations not only of the CAR, but also the CNN and its Commit ‘ adherence (Urgent Issues Committee). The reform process has in most cases integrated international accounting rules into French law.
The principle of ‘substance over form’ for example has been adopted in the Re ‘ clement CAR 99-02 on consolidated counts, even if its application is not yet compulsory for all significant measurement items (Glee et al. , 2001, p. 472; Richard, 2001, p. 1147). The LSI requires companies to provide a report on the organization of the board and on the internal control procedures it has implemented. The LSI makes it compulsory to consolidate ad hoc vehicles (SPED) in group accounts when exclusive control exists, even if no shares are held. This provision is the application of the modified 7th Directive (Directive 2003/51 ICE, 18 June 2003) which is intended to eliminate the incompatibility with FIRS, in applying SIS 27 and SIC 12. This new requirement permits the same accounting treatment as US GAP for French groups listed on an American stock exchange. In contrast, French rules for individual accounts will probably not change so significantly until tax accounts can be disconnected from financial reporting accounts. A current debate forces the different actors to slow down their 140 P.
Detailed et al. Downloaded by [Manchuria University] at 05:59 12 October 2014 efforts for convergence in France (Tally and Lubber, 2003). The problem identified by the authorities, and especially by the tax authorities, at the beginning of 2003 was that no impact studies on the consequences of new accounting rules on tax returns have been made. A report on the tax impact of FIRS was published recently by the CNN. 3 It describes in detail the main differences between tax rules and FIRS, for example, the use of fair value and leasing contracts.
In France, it will be necessary to obtain the acceptance of the tax authorities before publishing any revised accounting standard for individual entity accounts. In order to achieve this objective, two working groups (one on ‘accounting and taxation’ and one on ‘accounting and law) must give their pinion before the adoption of any new rules. 4 2. 3. Securities Regulation and the MAP Another change to the regulatory framework is the institution of the MAP. Until the end of 2003, the COB regulated the securities market in France and sought to improve the quality of accounts by issuing recommendations on financial reporting for listed companies.
The recommendations of the MAP are generally in alignment with the standards that are accepted in international capital markets (Locator, 2002). For example, in its recommendation for the preparation of annual consolidated counts for the year to 31 December 2003, the MAP asked companies to provide information on the transition project to FIRS with commentaries on the main differences between FIRS and French GAP as well as an opening balance sheet under FIRS as soon as possible.