Another issue is the degree to which member states enforce harmonization. Ger-
many is often criticized as having opted for a “soft” adoption. In particular, medium-
sized companies, which prior to the Fourth Directive, were not audited in Germany,
were hit by the Fourth Directive which required them to make substantial public dis-
closures of what had previously been seen as private information and to have an
audit. However, the annual fine for not filing the accounts is trivial, so there is an es-
timated 90% noncompliance rate. Germany also uses a wider range of corporate legal
vehicles than most EU states, including limited partnerships and similar devices with
special tax implications. The Fourth Directive has been applied only to limited lia-
bility companies, however, so many small and medium-sized businesses that use
other vehicles escape from its requirements.
(c) The End of the First Cycle. When the Commission started its harmonization pro-
gram in the 1960s, internationalization of business was just beginning to gain mo-
mentum, and it was impossible to predict where this would lead. When the IASC was
created it was part of a sudden and wider preoccupation with international harmo-
nization in accounting which was also manifested at that time by the United Nations
and the Organization for Economic Cooporation and Development (OECD), but even
so, was not taken very seriously until at least 15 years later. However, the reality of
international pressures and the need of European multinationals to be listed on sev-
eral stock exchanges finally made it clear that the creation of a strong European re-
gional level of accounting regulation was simply adding an unnecessary third tier,
sandwiched between national regulations and the international capital markets. It
should be noted that not all European accountants actually accept this view, and
many still think strong EU accounting rules would effectively counter U.S. domi-
nance of the markets.
It had also come to be realized that harmonization of individual company accounts
is not necessarily very useful. On the one hand, the harmonization process is resisted
because changing the measurement rules would mean changing the taxable profit in
countries where the individual accounts are intimately involved in tax. On the other
hand, it is not clear what advantage there is in harmonization, since small companies
are not typically much involved in cross-border dealing, while large companies pre-
pare consolidated accounts. Consequently, there are heavy costs for small companies
associated with harmonization—EU measures affect at least 3 million small enter-
prises—and no obvious economic benefit.
The Commission, in a major policy announcement in November 1995 (“Account-
ing Harmonization: a New Strategy vis-à-vis International Harmonization”), recom-
mended to member states that they pursue harmonization of consolidated accounting
requirements through alignment on IASC standards, as far as that is compatible with
the Seventh Directive. At the same time, the Commission decided, after many years
of hesitation, to participate in IASC standard setting, although only as an observer.
This landmark decision more or less fixed the end of the Commission’s first program
of accounting harmonization, while at the same time endorsing what has come to be
an acceptance of a break of the link between individual company accounts and con-
solidated accounts, and in effect preparing the ground for the second cycle.
The Commission continued to work on accounting in a modest way. It issued in
March 1998 its “Interpretative Communication Concerning Certain Articles of the
Fourth and Seventh Council Directives on Accounting.” This document dealt with a
relatively large number of detailed points from the accounting directives “where au-
17.3 ACCOUNTING HARMONIZATION 17 • 7