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While the EU countries haven’t been able to agree on a “federal” policy for taxing corporations, they have found accord on another critical business issue — accounting standards. It’s a subject that’s gotten a lot more intriguing since Enron Corp. imploded, and the world’s investors realized that a company could comply with accounting rules and still hide a mess of debt, invisible partnerships, and other financial chicanery. This new interest in corporate bookkeeping takes many forms. In international circles, the flame has been turned up on a long simmering debate: Which accounting system is better? Is it America’s Financial Accounting Standard Board rules, which until recently were viewed as the gold standard? Or is it the system used by many countries in Asia and South America, the International Accounting Standards? The debate is more than academic. The European Union is poised to adopt IAS. The 15 member states are expected to finalize a law requiring all publicly listed EU companies to use IAS for quarterly and annual filings this year. There are some exceptions, but most businesses must use the new system by 2005. (American-based companies are exempt unless they own publicly traded EU subsidiaries.) NO ENRON IN OUR BACKYARD This accounting change is essential if the EU nations are to function as a single capital market. And the prospect of all EU public companies using IAS pleases many Europeans — particularly in the wake of the Enron debacle. The European press has been crowing that the energy giant’s collapse reveals the limits of America’s accounting principles. And many European accountants, investors, and business executives insist that “Enron could never have happened here.” Critics say that the FASB standards are so detailed that clever accountants can meet the “letter” of the rules, but evade their “spirit.” An editorial in London’s Financial Times deems them “prescriptive.” To comply, auditors need only adhere to FASB’s 150 highly specific rules. In contrast, IAS lays out 41 broad, comprehensive principles that must be met. The result? According to critics, FASB rules let accountants engineer their way around the rigid guidelines. In contrast, the FT claims, IAS demands that auditors “pass professional judgment on how far the accounts reflect economic reality.” That’s certainly how David Tweedie sees it. He is chairman of the International Accounting Standards Board, the London-based organization that produced the IAS. In February, at the height of the Enron media feeding frenzy, he testified before Congress. “The IASB has concluded that a body of detailed guidance [such as the FASB rules] encourages a rule-book mentality,” he explained. “Put simply, adding detailed guidance may obscure, rather than highlight, the underlying principle.” PRINCIPLES VS. PROCESS The Americans defend their system, saying that it embodies both rules and principles. Carrie Bloomer, a senior staffer at the Norwalk, Conn.-based Federal Accounting Standards Board, says that FASB is more precise than IAS, but that’s because American companies have demanded explicit guidelines, not because FASB eschews principles. Neither system is foolproof, says Bikki Jaggi, a professor of accounting at Rutgers University School of Business in New Brunswick, N.J. Broad or detailed accounting standards alone cannot prevent another Enron, he argues. “You can misuse the best rules in the world.”

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