Holier Than Thou European sanctimony over American accounting scandals is misplaced

EVER since the bankruptcy of Enron, European accountants have been quietly congratulating themselves. It couldn't have happened here, they say. American rules on accounting and auditing are clearly not all they were cracked up to be. Some officials even hint that Europeans have better morals. American businessmen, they believe, with their corporate jets and stock options, are simply greedier.

However, now that the Sarbanes-Oxley act has reformed America's accounting regime, Europe's systems for ensuring the accuracy of company accounts look full of holes. Accounting firms in America are now banned from undertaking many types of non-audit work for audit clients. In Europe, by and large, there are few such restrictions. America has a new, independent body to oversee auditors. In Europe, many countries leave accountants largely to regulate themselves, and auditors' work is seldom checked independently. Only rarely are companies forced to restate their accounts after they have flouted accounting standards. Chief executives with compliant auditors can get away with publishing questionable numbers.

Britain is trying hardest to catch up. Yet, whereas America's Securities and Exchange Commission (SEC) has made 1,200 companies correct their audited accounts in the past five years, Britain's equivalent, the Financial Reporting Review Panel, has demanded only 15 restatements in the past dozen. It has just one full-time accountant and investigates only if there is a complaint about a company's figures. In most of its 67 inquiries since 1991 it has let companies off in return for promises not to sin again. Now die main financial regulator, the Financial Services Authority (FSA), says it will start searching actively for dodgy accounting, although the panel will remain in nominal charge.

The government has also announced plans for a more independent regulator of auditors. However, its measures stop short of an outright ban on non-audit work, leaving the decision to the new regulator. British auditors have taken to adding disclaimers to their opinions, saying, in effect, that only shareholders (not banks or other creditors) can rely on their work. The SEC is said to be considering prohibiting such weasel words from the accounts of British firms listed in America.

In German accounts, says Liesel Knorr, secretary-general of the German Accounting Standards Committee, "there is quite a bit of small-time cheating and there might be big cheating as well." Because nobody checks, she says, you cannot tell. On a visit to the SEC in 1999, Hans Havermann, the committee's chairman, complained that German companies and their auditors were ignoring domestic standards. When the companies listed in America, he asked plaintively, could the SEC please try to get them to behave?

The SEC did its best. It refused to accept the accounts of Deutsche Bank before it listed on the New York Stock Exchange in 2001. It said that the way Deutsche treated some of its stakes in other companies disobeyed international accounting standards (IAS), which the bank claimed to follow. Rather than suffer the embarrassment of correcting its LAS figures, Deutsche listed in New York using American GAAP. In six European Union countries, there is no enforcement of accounting rules at all, says the European Federation of Accountants. Only Britain, France and Italy are thought to have effective scrutiny.