A new study of accounting-related fraud in Western Europe has found substantial differences in the approach taken to International Financial Reporting Standards by different countries and companies.
Financial research firm Audit Integrity has begun evaluating European companies and rating them based upon their perceived level of accounting and governance risk (see Audit Watchdog Group Warns About Starbucks). The firm is now compiling its AGR ratings for more than 4,000 publicly traded companies in 17 European countries, representing over 80 percent of total European market capitalization, along with about 8,000 companies based in North America.
The firms examination revealed that the riskiest countries in Western Europe, from an accounting and governance standpoint, are Greece and the Netherlands, while corporations based in Luxembourg, Austria and Switzerland demonstrate the most transparent accounting practices and best corporate governance. European banks with large capitalization were found to practice very aggressive accounting and poor governance standards.
Stakeholders in a great many European corporations have sustained significant losses over the past two years and are understandably angered by the lack of transparency, said Audit Integrity CEO Jack Zwingli in a statement. These losses could have been prevented if they would have steered clear of corporations that were hiding losses.
In conjunction with the new European ratings, Audit Integrity also undertook a study comparing IFRS with U.S. GAAP, examining whether IFRS is an acceptable alternative to GAAP for financial reporting and risk analysis. The SEC is currently considering a roadmap that would have the U.S. transition from GAAP to IFRS in the next few years.
The study found discrepancies in the depth of reporting, frequency of filings and required governance disclosures between IFRS and U.S. GAAP, but the analysis also showed that IFRS has greatly improved the consistency of financial reporting in Europe and is comparable for the purpose of calculating the firms AGR ratings.
Yet despite IFRSs promise of providing a single set of high-quality accounting standards, Audit Integrity found discrepancies in various countries, and not just when the European Commission sought to carve out exceptions to the international standards, as it has in the past with the IAS 39 standards on the fair value of financial instruments.
While IFRS implementation in Europe, where it has received the strongest backing by regulatory agencies, has been widespread since 2005, there are notable exceptions across countries in IFRS adoption rates, financial reporting frequency and timeliness of filings, said the report. Adoption rates have varied by country, with numerous exceptions given to companies based on size, primary exchange and other country-by-country criteria. Reporting frequency remains inconsistent across countries, with several countries allowing for semi-annual, rather than quarterly, reporting periods. Timeliness of financial statement filing varied widely by country and was significantly slower in Europe than in the U.S.
While Audit Integrity noted that IFRS has improved the consistency and comparability of financial statements across Europe, anomalies and inconsistencies remained within and across borders. Certain countries, such as Greece, France and Italy, showed the most variance when comparing key financial ratios.
The firm also found that IFRS has no noticeable advantage over U.S. GAAP based on the measures used in the study. U.S. GAAP filers have more metrics and greater depth of reporting, according to the report, and U.S. corporations file more frequently and in a more timely manner than do European corporations, as a whole. In addition, the report noted, some governance data, such as executive compensation and board composition, are reported in much less detail in Europe than in the U.S.
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