Analysis - European Union - Enlargement or transformation?

Martin Manuzi outlines the challenges for Europe and for the accountancy profession as 10 new member states prepare to join the EU on 1 May.

Everyone is calling it an enlargement but are we instead witnessing a profound and irreversible transformation of the European Union? As if not a challenging enough question in itself, the aim here is to address the impact on the European accountancy profession as it defines itself for the 21st century.

To pose the question 'enlargement or transformation' is absolutely not to criticise the 10 countries joining the European Union in May, less still to argue that the EU should remain a closed shop. On the contrary, there really was - and is - no option but to follow the current course, and the potential for the world's largest developed internal market of 450m citizens is huge. Still, the signs that we are stepping into a far more complex EU are there for everyone to see: just think of the European constitution and the EU budget.

If the accessions in May were the end point, then there would be a case for arguing that we are experiencing just an enlargement. However, the picture is necessarily more complex given that Bulgaria and Romania are set for EU membership in 2007 while Turkey and others are aiming to start accession negotiations soon. Quite conceivably, in less than a decade, all the current EU member states could be outnumbered by member states that had entered in the new millennium. However, more important still than the steep rise in numbers is the considerable diversity of cultures and traditions as well as economic and political circumstances which the post-May 2004 EU will straddle.

Leaving politics to the politicians, what are the implications for the accountancy profession? Well, we must recognise that new consumers in the internal market are only part of the enlargement equation: there will also be new participants and influences in the EU regulatory environment - which is, of course, our regulatory environment. The EU is our first and principal reference point in the simultaneous process of 'de-nationalisation' and 'internationalisation' of regulation which we see all around. The prospect of 're-nationalising' regulatory environments is fantasy: standing still, or more to the point standing alone, is not an option either.

Today, the European accountancy profession reflects the overall diversity across the EU regulatory environment - beginning with the critical fault line separating common law and civil law traditions. To start with, there is no common definition in Europe of the term 'accountant'. National institutes in some cases are professional bodies with regulatory functions and responsibilities for education and training; others are nearer the trades association model.

Some countries have distinct accounting and auditing institutes - often a source for proposals to separate audit and non-audit services - where members of the profession cease to be such when they leave public practice.

Others, such as the UK and Ireland, have a far broader definition of the profession. Which model will take centre-stage in the new Europe and beyond?

Inevitable attention

With or without Parmalat, further attention on our profession from the European Commission was inevitable as it strives to achieve a true internal market and to act as an interlocutor on the stage of the international regulatory community. Fortunately, despite some strong criticisms in the European parliament recently on the Parmalat affair, we will not see knee-jerk policies towards the profession and in the corporate governance sphere as a whole.

However, we do now have before us a major piece of legislation concerning the regulation of the auditors. Through the new Eighth Directive, the EC is not seeking to alter the fundamental mechanics of the relationship between auditors and the market - but to ensure that these mechanics are based on high international standards, are more transparent and are subject to greater external oversight. The aim is to roll out existing best international practice across the whole of the EU in a consistent way. And this is the real challenge: translating what is agreed on paper into a reality of uniform outcomes across very diversified business and professional environments.

A major preoccupation in recent years has been the lack of consistency in the implementation of EU legislation: there are currently 1,500 internal market infringement cases on-going. The Brussels regulatory machine well recognises that it cannot approach lawmaking as if under Stalinist production plans. The practical outcome of lawmaking is everything but, equally, lawmaking arises from the environment to which it applies. In order to maintain a sensible, market-friendly approach to regulation, the EC needs a greater sense of reassurance than exists today about the cultures of implementation and, most importantly, of compliance at member state level.

All policy areas are concerned, whether it is environmental protection or the use of International Accounting Standards.

Major challenge

With its 'enforcement' resources already considerably stretched, the EU faces a major challenge as this community expands from 15 towards 30 member states. Quite correctly, increasing emphasis is being placed on the role of national authorities in enforcing EU legislation. However, the key to an efficient internal market in Europe is not ever bigger 'police forces' for the implementation of EU legislation but more uniform cultures of compliance. It is in this context that the EU commissioner for the internal market, Frits Bolkestein, stated recently at the ICAEW annual banquet that legislators and professions need to work hand in hand.

Without progress in the sphere of compliance, we are at risk of seeing greater fragmentation of regulation across the EU. This could entail the use of more rigid measures in some countries where compliance is recognised as being weaker than designed and result in a patchwork quilt of business environments. The EC's current policy on audit rotation - where EU member states have an option between firm and partner rotation - could be read in this light. From an internal market perspective, it is hardly conducive: for trans-national audits, the confusion and complexity can only be imagined.

The next area where the issue could arise relates to prohibitions on non-audit services, which will be the subject of an EC study shortly.

There is another scenario of course and it leaps out of the qualified majority regime governing EU internal market legislation: there could form a majority in favour of more rigid rules across the board for all EU member states. Ultimately this would impact on the structure of all the industries and professions concerned. Where the regulation of audit is concerned, the negative repercussions for the broader-based professions in the EU are self-evident.

The weakest link

For obvious reasons, the accountancy profession has a particular stake in the compliance challenge which the expanded EU poses. Uniform standards across borders is the very business of the international accounting networks.

However, as events over recent years have shown, a network is only as strong as its weakest link. Meanwhile, national professional bodies are no less immune to over-spill where reputational damage is concerned.

All the more reason therefore for the UK profession to work very closely with our counterparts across the existing and soon to be enlarged EU.

At stake is the shape of the European accountancy profession in the 21st century and the degree to which regulators will wish to work hand in hand with the profession.

Countries joining the EU on 1 May - Czech Republic - Cyprus - Estonia - Hungary - Latvia - Lithuania - Malta - Poland - Slovakia - Slovenia
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