Europe Attacks GAAP, Bars Auditors' Legal Services

Europe’s highest court recently backed a Dutch ban on bundling auditing with legal services, thereby dampening the hopes of U.S. accounting firms who seek to provide legal services as part of "one-stop shopping" for clients. Separately, the head of the European Commission spoke out against U.S. accounting principles and said he will ask the Securities and Exchange Commission (SEC) to recognize International Accounting Standards (IAS) as an alternative to U.S. generally accepted accounting principles (GAAP).

Auditors’ Legal Services

According to the Wall Street Journal, the case before the European court dates back to 1995. It involves the Dutch offices of PricewaterhouseCoopers and Andersen Legal. Together, these two firms sued the General Council of the Netherlands, the Dutch bar association. The firms say the Council’s ban on lawyers and accountants selling services together is a violation of the rules of the European Union. ("European Court Rules Accounting Firms Can’t Bundle Legal and Auditing Services," February 20, 2002.)

Andersen Legal says it will continue to fight against the ruling in lower courts. "This will not stop us from practicing law in the Netherlands, in Europe or anywhere else around the world," the firm said in a statement. Nevertherless, the European Court’s decision represents a set-back for U.S. accounting firms who have lobbied the American Bar Association for over a decade to drop a similar ban in the U.S.

Just a few short months ago, this initiative seemed to be gaining ground. In November, New York became the first state in the country to enact multidisciplinary practice (MDP) rules that permit law firms to establish contractual relationships with nonlegal professions. The Trusted Professional, the newsletter of the New York State Society of CPAs (NYSSCPA), said it was widely believed that the CPA profession would be among the nonlegal professions eligible for these cooperative business arrangements. NYSSCPA maintains a Multidisciplinary Practice Center that provides additional information on MDPs.

GAAP Attack

Separately, in an interview with the Financial Times, Frits Bolkestein, European internal market commissioner, said the Enron scandal had been partly facilitated by the "cookery book" approach of U.S. accounting rules. He is expected to ask SEC Chairman Harvey Pitt to either abandon U.S. GAAP altogether or to at least accept IAS for European registrants. Currently, European registrants must provide a reconciliation to U.S. GAAP in their filings. Most European companies are required to use IAS by 2005, but approximately 300 companies that use U.S. GAAP were given an extension until 2007.

Mr. Bolkestein also said the European Commission is working on a code of conduct for auditors and added, "I am not very comfortable with the fact there are only five big accounting firms in the world. Collusion among five is easier than collusion among 25."

-Rosemary Schlank