member states in their domestic legislation. It is a unique example of accounting har-
monization imposed through the law. Fifteen or so company law Directives were
drafted up until the end of the 1980s, but many of these remain stalled in the system.
For example, the Fifth Directive, which deals with, among other things, the mem-
bership of company boards and includes employee participation, provoked sufficient
opposition for it to remain blocked. The directives that had a major impact are the
Fourth and Seventh, as regards accounting, and the Eighth as regards the audit pro-
fession. The Fourth Company Law Directive (78/660/EEC) deals with the form of in-
dividual company accounts, valuation rules, and the need for audit. The Seventh
(83/349/EEC) addresses consolidated accounts.
The drafting of the Fourth Directive offers a fascinating case study in the difficulty
of harmonizing regulations across contrasting cultural contexts, and also a good ex-
ample of the incremental nature of much regulation drafting. In 1967, the Commis-
sion requested the accounting profession in the six member states to prepare a rec-
ommendation for a European company law for listed companies, with the stipulation
that this should be based on existing best practice within the member states (France,
Germany, Italy, Belgium, the Netherlands, and Luxembourg), rather than suggesting
any new basis. The profession nominated a committee chaired by W. Elmendorff, an
eminent German auditor, and its report, published in 1969, made a proposal based on
the German 1965 law on public companies, at the time the most advanced statute
within the six states.
The Elmendorff proposal reappeared in 1971as the first draft version of the Fourth
Directive, but with the substantial change that it was to apply to all companies, not
just publicly held companies. This rather draconian change, which involved applying
German listed company rules to small private companies, was mitigated a little by
recognizing that small (fewer than 50 employees) and medium-sized (fewer than 250
employees) companies could make slightly abbreviated disclosures. The size re-
quirements, articulated around thresholds of balance sheet total, annual turnover, and
average number of employees, have become a standard feature of European company
law. The directive also required that both medium-sized and large companies should
be subject to statutory audit, and left it to member states as to the audit status of small
companies.
The evolution of the Fourth Directive was soon forced into a different direction
because in 1973 Denmark, Ireland, and the United Kingdom joined the EU. These
countries did not have the same regulatory traditions as Germany and also had exist-
ing regulations that could be claimed to be at least as up to date as the German model
on which the first draft was based. What came to be a central conflict was that Ger-
man accounting regulation has, since the nineteenth century, stipulated that the over-
all requirement in producing accounts is that they should be in accordance with ac-
counting rules, while British and Irish regulation says that accounting rules can be set
aside in achieving the over-riding objective of giving a true and fair view of the com-
pany’s financial position.
There is evidence that the British position in the negotiations was partly a desire
not to change existing U.K. law, and partly a resistance to “foreign” accounting, ac-
companied by a belief that insistence on a true and fair override would enable U.K.
companies and their auditors to ignore German-style regulations, which they did not
like. The arguments are not perhaps important in themselves, other than as evidence
of the cultural and psychological obstacles to harmonization, but their effect was in
the end to weaken the Fourth Directive.
17 • 4 EUROPEAN HARMONIZATION