Standards Focus: Emerging Economies - Politics and IT drive changes

While many emerging economies in Europe, like the Czech Republic, don’t have advanced financial structures, they arguably are in a good position to leapfrog some of the problems experienced elsewhere in the move towards harmonisation.

Deloitte & Touche has established a programme for European countries which are operating out of its Prague office.

As Andrew Simmons, technical partner at Deloitte & Touche London, explains: ‘Most countries don’t have standard setting bodies. So we’re going from no regime to having something at a European level. For most countries we are bringing them to somewhere.’

Many Eastern European countries did not have existing national standards before 1995, so the push towards adopting IASs is timely in that instead of dedicating time to establishing a domestic standard-setter and national rules, they can move straight into using international standards.

The period of change from Communism to the market economy in the early 1990s meant that former Eastern bloc countries required a new accounting and reporting framework. In the case of Poland, the focus on its application for European Community membership determined its direction of changes.

While many multinationals are listed or seek a listing on US stock exchanges use US GAAP, it has been a difficult time for these countries to marry their need for external investment and desire to be a part of the European Community.

For most non-member states the choice was made since to obtain membership the EC would undoubtedly look more kindly on countries using IAS than those demanding US GAAP. One of the driving forces behind the swift development of IAS was the apparent threat of US GAAP becoming the norm.

Miroslaw Szmigielski, director at PwC Poland, confirmed earlier this year Poland’s determination to convert to IAS. He did however say there were still many decisions to be weighed up as to how Poland would go about it.

‘There’s a lack of consensus as to the need for full implementation and compliance between authorities and accounting bodies,’ he said.

This is a common symptom in emerging economies.

Nevertheless Marcela Zarova, deputy director of the Ministry of Finance in Prague, was very motivated on the drive to IAS.

‘We’re doing a great deal of work on IASs at the moment,’ she said, admitting that little was previously known about international standards or IASC in the Czech Republic.

But, despite Simmons’ upbeat view of how things are progressing as far as the transition to IASs, he admits that there is a tough path to tread.

‘Trying to get people to devote time to learning about international standards as well as doing their jobs is going to be hard. It’s difficult getting people to learn about something that will come along in a few years time.’

But despite enthusiasm in Europe’s emerging economies, established companies in western Europe are still fighting the cause.

Willem van der Loos, vice president of Philips International, Holland, was one of the more vociferous opponents of the move to IASs.

‘We already have a perfect set of accounting standards in US GAAP. Why should we change to a lesser set of accounting standards when US GAAP is better!’ says van der Loos. ‘Even Karel van Hulle admitted IASs weren’t as good.’

Whichever side European companies and countries are fighting for the decision has been made for Europe. And ultimately by resisting the use of one set of accounting standards, more confusion and complexity is generated and prolonged. Globalisation inevitably means standardisation. At the end of the day it is the investors’ call.

Internal Market Commissioner Frits Bolkestein sums it up.

‘The costs of differences in financial reporting methods can be extremely onerous for investors and other stakeholders. Adoption of the (European) proposals should result in the removal of the fragmentation in financial reporting that prevails in Europe today.

‘It signals Europe’s firm intention to remove accounting differences as a step forward towards developing integrated, deep and liquid capital and financial services markets to improve capital raising efficiency while preserving investor protection.’