When Bankers Keep Saying Non
But for some disagreeable French bankers, Scottish accountant Sir David Tweedie would be on the verge of fulfilling a decades-old dream of investors and regulators: establishing a set of credible corporate accounting standards accepted around the world. Tweedie, 59, is the first chairman of the London-based International Accounting Standards Board (IASB), an elite panel of 14 professionals with deep knowledge of accounting methods used in the most vibrant capital markets.
The move toward consistent accounting standards is potentially a huge development. With 91 countries lined up to use standards sanctioned by the IASB, investors worldwide would finally be able to compare -- and trade -- thousands more companies, be they brewers in Mannheim, Melbourne, or Milwaukee. That would lower the cost of capital for issuers and stimulate investment. Companies using IASB standards could even list their shares in the U.S. without having to switch their books to U.S. standards.
`FALSE VOLATILITY'. The European Commission has called for the 7,000 listed companies in its 15 member states to follow IASB standards by 2005. The U.S. Congress, appalled by Enron and other scandals, has directed U.S. regulators to work with the IASB to improve U.S. generally accepted accounting principles (GAAP). Tweedie's mission is further backed by an influential board of trustees led by Paul Volcker, ex-chairman of the Federal Reserve.
Now this holy grail of accountancy is in jeopardy. An all-out war has erupted over IASB rules requiring companies to record the gains and losses of various derivatives at fair market value. Derivatives are complex contracts whose value is based on something else -- for example, on changes in interest rates. European banks and insurers, which use derivatives mainly to hedge interest rate fluctuations, fear the rule will unnecessarily make them report huge swings in earnings. "This would create a false volatility," says Sylvie Grillet-Brossier of the French Banking Federation.
No one is protesting more than the French banks, which have enlisted President Jacques Chirac and European Central Bank chief Jean-Claude Trichet to their cause. The European Commission has said that unless the IASB gives in, it will exclude derivatives accounting when it requires local companies to follow the new standards. The IASB must settle on rules in March to give European companies time to adopt them come January. "It is an important juncture," says Volcker.
Alarm bells are jangling in the U.S. Officials at the Securities & Exchange Commission had hoped to accept the IASB standards as comparable to U.S. GAAP as early as 2007. Now, warns SEC chief accountant Donald T. Nicolaisen, "If Europe doesn't include these [derivatives] standards, that is a roadblock." Tweedie says the IASB is open to suggestions. But crafting one that satisfies everyone could take years.
Besides, the global switch to the new derivatives accounting is already well under way. For years all U.S.-listed companies and many European multinationals -- including Nokia, Nestlé, and Deutsche Bank -- have followed similar rules. U.S. banks griped in the '90s when regulators forced them to show the volatility of their derivatives. They have since learned to live with the standards. "It's surprising that those complaining the loudest are the ones who've yet to try them," says François Masquelier, chairman of the Euro-Association of Corporate Treasurers.
Some observers believe the French fear that the IASB is imposing Anglo-Saxon views of accounting on the world. Others suspect the motive might be to hide losses. "It's not that people can't calculate the numbers," says Roger Adams, executive director of the London-based Association of Chartered Certified Accountants. "It's more likely they won't like what they reveal." The banks and the credit analysts who track them adamantly deny this. Whatever the motives, Tweedie is right to worry. "If we lose this opportunity, it might never come back," he says. That would be a loss to investors worldwide.
By Kerry Capell in London and David Henry in New York, with bureau reports