Implementation of supra-national policies: lessons from the Nordic countries' experiences of...

Introduction

During the final quarter of the twentieth century, harmonization of financial reporting between countries in the European Union (EU) was dominated by the European Directives on Company Law that had to be implemented in member states' national legislation. This article aims to demonstrate how cumbersome that form of supra-national legislation was and how it carried the risk of undermining the very harmonization it sought to promote. The increase in the number of EU member states has added a further level of complexity to this mechanism of regulation. The system of endorsing and requiring the use of International Financial Reporting Standards (IFRS) offers some simplification, insofar as changes to national laws are no longer required.

The process of negotiating and agreeing Directives has been explored in some detail in the literature (for example, Diggle & Nobes, 1994; Evans & Nobes, 1998a,b). The process of implementing the Dhectives in respect to certain topics (for example, the true and fair view [Nobes, 1993; Aisbitt & Nobes, 2001], auditing [Cooper et al., 19%; Loft & Jeppesen, 2001] or constituent lobbying in the implementation process [McLeay et al., 2000] has also been considered. This article contributes to the literature by examining the processes for a wider range of topics and by making non-English language sources available to a wider audience.

Many (for example, Hofstede, 1984) regard the Nordic countries (Denmark, Finland, Norway and Sweden) as being a cultural group discrete from others in continental Europe. These countries provide examples of implementing the Fourth and Seventh Directives on Company Law (the Accounting Directives) at different dates and under different circumstances Denmark had some involvement in the drafting of the Directives and was the first Member State to implement the Fourth Directive in its national law. Sweden and Finland joined the EU later and Norway became a member of the European Economic Area, and was therefore also obhged to implement the Dhectives These three countries implemented the Directives in the 1990s,1 some time after they had been agreed and without the benefit of any involvement in their formulation.

One way to examine the development of regulation is to measure lobbying activity and success during the regulatory process (with regard to the implementation of the Fourth Directive in Germany, see for example, McLeay et al., 2000). However, lobbying is often "invisible", neither providing the researcher with evidence nor making the roles of individuals unambiguous, leading to an overlap between, for example, state and profession (with regard to Denmark, see Loft & Jeppesen, 2001; see also Christiansen & Sidenius 1999). While not lending itself to an empirical approach to measuring lobbying, the nature of the legal system in the Nordic countries means that the process of implementing the Directives is reasonably well documented in papers in the public domain and that participants in the process were willing to discuss their experiences openly. Sources for this article therefore include preliminary drafts of the legislation, published papers of the committees and articles in professional journals published in a local language.2 These sources were supplemented with semi-structured interviews with individuals involved in or affected by the implementation of the Directives. Details of interviewees are summarized in the Appendix. Interviewees were selected and interviews structured differently from country to country to allow for confirmation of information in secondary sources (such as the professional literature)3 and for the exploration of apparent gaps in those sources Key informant interviewees were selected on the basis of their roles within accounting in their respective countries,4 in order to obtain information about the views of any accounting élite and the reactions of the major firms of auditors

Interviews were conducted over a one-year period (1998-9) close to the implementation of the Accounting Directives in Finland, Norway and Sweden, but some time after implementation in Denmark. It is recognized that distortions of memories could present a limitation of this work (for example, Smith, 2003, p.129), but triangulation with other interviews and/or sources should minimize the adverse effects of this. Where specific comments are referred to, the source will be acknowledged in the form (Interview <Name of interviewee>).

Background: accounting regulation in the Nordic countries

Although the corporate form was known in Sweden as far back as the thirteenth century (Bunowes & Nordstrom, 1999), the number of corporations in the Nordic countries remained small until the twentieth century (for example, Hansen & Sørensen, 2001; Näsi & Virtanen, 2001). The first law on limited liability companies was the Swedish Royal Ordinance of 1848 (Heurlin & Petersohn, 2001). As is also the case elsewhere, most companies were and are small and medium-sized. Until the industrial revolution, accounting developed largely independently in each of the Nordic countries Historical influences on accounting were mixed, but a number of common themes emerge. Early twentieth-century regulation was influenced by German legislation and theory. Danish legislation however also reflected Dutch and British influences (Christiansen, 1999; Hansen & Sørensen, 2001). There were possible mutual influences in the early twentieth century among the Nordic countries (see, for example, Christiansen, 1999)5 and, from the 1960s, formal attempts to harmonize legislation in these countries (Hansen & Sørensen, 2001; Johnsen & Eilifsen, 2001). Common features included a general clause that has similarities with the German "principles of orderly accounting" as well as the true and fair view of the European Directives (see, for example, Elling, 1994; NOU, 1995; Alexander and Christiansen, 1996); a historical emphasis on prudence (which was, however, less consistently applied than in Germany - for example revaluation of fixed assets was in principle permitted); and the requirement for a legal reserve (except Finland).

The Nordic countries shared (also with other continental European countries) a close association between taxation and financial accounting (Christiansen, 1999; Hansen & Sørensen, 2001; Johnsen & Eilifsen, 2001; Näsi & Virtanen, 2001). During the second half of the twentieth century international developments and Anglo-American influences including a move towards a greater focus on the information needs of external shareholders, increasingly affected regulation and practice. For example, many Finnish parent companies began voluntarily to provide two sets of financial statements (under Finnish rules and IAS) in the 1980s (Näsi & Virtanen, 2001).

In spite of a legal tradition nearer to Roman law than common law (David & Brierley, 1985), the Nordic countries' accounting regulation appears characterized by a liberal and flexible approach and, in particular in Finland, a strong influence of accounting theory (see, for example, Näsi & Virtanen, 2001).

Implementation of the fourth and seventh directives: timing

As has been mentioned, Denmark is a long-standing member of the European Community (from 1973) and was involved in the drafting of the Fourth and Seventh Directives, albeit as a late entrant to the discussions (first draft 1971; redraft 1974; final 1978). Nevertheless, due to the number of compromises with other countries involved in formulating the Directives, several adjustments to existing Danish practice were required. Denmark implemented the Fourth Directive in 1981 and the Seventh Directive in 1990. In both cases the legislation was designed purely to meet the demands of the Directives, leaving most of the options in the Dhectives to the discretion of compames in a similar way to the UK's implementation. Hasselager (interview) pointed out that legislative change can pass through the parliamentary process particularly quickly in Denmark because there is only a single chamber. Nevertheless a different process was adopted for the implementation of the Seventh Directive as compared to the Fourth:

the government wished to avoid bringing the technicalities of group accounting before Parliament and this led to a change in the regulatory framework. The majority of the disclosure rules and almost all of the measurement rules relating to group accounting were separated from the Financial Statements Act and incorporated in a special Financial Statements Order published by the Ministry of Industry through the Danish Commerce and Companies Agency. (Christiansen, 1999, p.58)

The remaining Nordic countries implemented the Directives as part of a more general review of company legislation.6 This meant that committees were attempting to reconcile more than one objective: satisfying the requirements of the Directives and ensuring that company law met the demands of the twenty-first century. This difference in approach, together with the passage of time since the adoption of the Directives, not to mention a lack of involvement in their formulation, clearly had an important effect on the resultant legislation in Finland, Norway and Sweden. At the same time as Norway (the last of the Nordic countries to implement the Directives) was preparing its implementing legislation, some EU countries, for example, UK and Denmark, were conducting reviews of their company laws that had implemented the Dhectives and others, for example, France and Germany, were introducing amendments to accounting requirements. This is important because it demonstrates that a straightforward implementation of the Dhectives in the format used by the countries in the first wave of implementation would probably not have been appropriate for Finland, Sweden and Norway. Nevertheless the underlying principle of the Directives (to promote harmonization) remained (and remains) constant.

Finland was the first Nordic country to begin implementing the Dhectives after Denmark. A "broadly based" committee was formed in 1989 to review company law and to bring it in line with international practice (Pirinen, 19%, pp.27-35) and new legislation was passed in 1992, before Finland joined the EU. Troberg (1992, p.27) argues that the Directives were used as the primary guides in preparing the draft legislation on the basis that Finnish companies' international activities are predominantly within Europe. The established Finnish Expenditure-Revenue Theory (Saario, 1959) was incorporated as far as this was possible, but certain items, for example, depreciation according to plan, had to be changed (Majala, 1994, pp.87-8). It had been hoped that this legislation would satisfy the European Commission, but this proved to be wrong (interview Räty). The Ministry of Trade and Industry set up a working party in March 1995 to chart the changes that would be necessary to meet the Commission's requirements The second stage of the implementation generated an extensive governmental committee report in April 1996, and legislation followed in 1997

In Sweden a committee was formed to look at the implementation of the Dhectives (as weU as the relationship between tax and accounting, the structure of laws governing bookkeeping and financial reporting, and the regulation of accounting) foUowing instructions from the Justice Department dated 22 August 1991. Its proposals for implementing the accounting Dhectives were put forward in 1994 (SOU, 1994).7 The draft biU was put to Parhament in September 1995 (Regeringens proposition 1995/96:10) and this was incorporated in law (with some minor amendments) by December 1995 to be effective from 1996.

The Swedes seem to have taken a pragmatic approach: they accepted that implementation was a major exercise and broke it down into more manageable units making proposals on each individual stage. Protracted consideration of the implementation of the Directives in Sweden was not in evidence in its published proposals However, the legislative procedures were criticized for being short on the usual consensus and due process of deliberation (Bunowes & Nordström, 1999; see also ThoreU, 1995).

The Swedish committee pointed out that financial reporting is constantly developing, both in Sweden and internationally, due to research and to social, economic and political factors The new law should therefore provide a framework with some flexibility to accommodate change. However this aim would be compromised to a certain extent by some of the more detailed provisions of the Dhectives (SOU, 1994,17:146).

The Norwegians, on the other hand, took longer over the process in order to explore the issues fully. A committee began reviewing the country's accounting laws in March 1990. In November 1991, it was instructed to give priority to the implementation of the Directives Proposals for the implementation of the accounting Directives were published in 1995 (NOU, 1995),8 further drafts were pubhshed in 1998 and the final Act was approved in June 1998.

The Norwegians seem to have used this exercise as an opportunity to address many of the difficulties facing accountants at the end of the twentieth century. The proposal documents provide evidence of extensive research into theory and practice throughout the world, with the text littered with comprehensive quotes from academic and practitioner journals. This approach seems to be going beyond that of the Directives themselves, where "there has never been any pretence that a coherent conceptual framework should be used in this context or that one is even implicit" (Diggle & Nobes, 1994, p.320).

There is evidence that discussions on these matters became heated and majority decisions had to be taken, although the minority's views were published (NOU, 1995,30:11). The practical difficulties encountered were also published: the minority points out that there were no meetings of the committee between October 1994 and May 1995 with only limited communication in that period. There were relatively short meetings in June, August and September before the final meeting in October 1995. The minority beheved that this prevented full discussion and perhaps even aUowed omission of central issues

The timescale for the implementation of the Directives is summarized in Table 1.

Participants in the process

Implementation of the EU requirements is influenced by the individuals involved in the process in the member states. This can affect both the time taken and the final product. Using the terminology of the behavioural sciences participants in the committees implementing the Directives would be expected to be 'rational actors' (see Allison, 1971), i.e., a group of people behaving logically in order to achieve a goal. However this seems to oversimplify the situation. In all the countries except Norway, the approach seems to have been reasonably pragmatic.

The role of élites in accounting has been discussed elsewhere (for example, Jönsson, 1984), but the role of individuals and groups in the committees implementing the Directives should not be underestimated. There are certain parallels with the current discussions regarding the composition of the International Accounting Standards Board (for example, Capron & Chiapello, 2005; Colasse, 2005; Tynall, 2005). People who held important positions in business and professional or regulatory accounting bodies were included in the committees. Because of their status, these would have included some strong characters, who were in a position to dominate proceedings For example, although nothing is documented, there is anecdotal evidence that the change in approach to whether the true and fah view should be overriding in Sweden was connected with the change in chairmanship of the committee.

The disagreements that seem to have taken place within the Norwegian committee (as evidenced by the publication of the views of the minority, discussed earlier) would suggest that members were not working to a common goal: individual members had their own agendas and therefore seem rather to have been following a "government politics model". The predominance of one firm of accountants on the Norwegian committee (Arthur Andersen) may have contributed to this. Consequently any conclusions drawn about the state of "Norwegian accounting" at the time on the basis of this committee's conclusions should be treated with caution. The personahties of those involved are clearly important and the attitudes of, or relationships between, individuals can affect the workings of the entire process There seems to be a subtext of disagreement in the Norwegian committee that goes beyond the purely professional.

The membership of the two committees involved in the two pieces of legislation in Finland was similar, yet the approach seems to have been quite different. It is not clear whether this was entirely due to the different remits of the two committees or whether the slight change in composition had a role to play. The first committee (which included some older members with a strong background in accounting theory) had wide-ranging discussions about the nature of accounting, while the second committee was much more concerned with ensuring that specific provisions of the Dhectives were implemented. Pirinen (19%) proposed an index of competence of the 1992 committee based on members' curricula vitae, which aimed to assess theh education, experience and technical ability. Comparable information is not readily available for the second committee, but a similar exercise for this committee and comparable ones in other countries might provide some useful insights

There also appears to be an international difference in approach in that the implementation process was dominated by lawyers and civil servants in Denmark, Finland and Sweden but by accountants in Norway. There does not appear to have been published discussion on the relative importance of these two groups The membership of the committees has been published in the proposals in Sweden and Norway (SOU, 1994,17: foreword; NOU, 1995,30:1.1), but it is not always possible to identify each individual's background from the title given, making a formal empirical investigation of the lobbying process difficult. For example, one member of the Norwegian committee is described as Statsautorisert revisor (State Authorised Auditor), which does not indicate that he is an academic with prior experience drafting legislation in government departments

On the basis of published titles, lawyers were not more highly represented on the Swedish committee than on the Norwegian. It would appear that the apparent bias must therefore come through influence. Interviewees from outside of Norway (for example, Hasselager) were of the opinion that accountants had dominated proceedings in the Norwegian committee. The extent of technical and academic accounting discussion in the published proposal would seem to bear this out. Those involved in the process in Sweden (interviews Heurlin; Wahlquist) felt that lawyers and bureaucrats were more significant in the process than accountants: the new law was a strict legal interpretation of the Dhectives. Although there was relatively little public discussion of the implementing legislation in Sweden before it was passed, it was considered unlikely that further discussion would have altered the result (interview Heurlin).

In Denmark (as in other Nordic countries) consensus among interest groups is traditionally important. However, the implementation of the Dhectives was affected by "[p]olitical polarisation, rather than consensus", with two political ideologies conservative and socio-protectionist views - reflected in parliament and in accounting rule making (Christiansen, 1999, pp.70-2). Hasselager (interview) referred to the contribution to the discussions that was made by industry representatives in Denmark, but an impression was generated that the contribution of members of the committee from outside of the government department was advisory: it was the bureaucrats who led the process9

Räty (interview) pointed out that, in Finland, the approaches for the 1992 and 1997 Acts were quite different: there were some highly theoretical discussions (for example, on the function of accounts, the link between tax and financial reporting and group accounts) prior to the first Act, but the second Act was a purely technical exercise dealing with the issues highlighted by the EU investigation into the differences between the 1992 Act and the Dhectives Pirinen (1996, p.197) points out that, in preparing for the 1997 Act, "the position of state administration in the field has been strengthened at the expense of the representatives of the theory and accounting profession".

Products of the implementation of the directives in the Nordic countries

The products of the implementation of the Directives in the Nordic countries have been discussed elsewhere. For example, Alexander and Schwencke (2003) have discussed accounting change in Norway, and Aisbitt and Nobes (2001) analysed issues sunounding the true and fair view (TFV). This article now examines further examples of how different elements of the Accounting Directives were implemented in the Nordic countries and considers some of the discussions sunounding those implementations.

Implementation of Article 31 of the Fourth Directive (general principles)

The valuation rules in the Fourth Directive begin with general principles:

(a) going concern;

(b) consistency;

(c) prudence;

(d) accruals (matching);

(e) components of asset and liability items to be determined separately; and

(f) opening balance sheet of financial year to conespond with closing balance sheet of previous year (congruence).

The Danish law lists these general principles using almost precisely the same wording as the Danish language version of the Dhective. The Swedish and Finnish laws follow the same pattern. The Swedes do not seem to have had a problem with the principles as they were already generaUy accepted and were part of the previous Accounting Act 1976 (Bokföringslagen), although not expressed specificaUy. There is also recognition of the reasonableness of permitting departures from these general principles in exceptional cases: this seems to provide reassurance that the Dhective does not lock states into regulations that cannot respond to new situations (SOU, 1994,7:363-5). More extensive discussions foUow on the valuation of specific account balances (for example, stock).

The Norwegian committee had lengthy discussions on the general principles and the new law contained the following fundamental principles:

1. Transactions should be accounted for at the value of the consideration at the time of the transaction.

2. Income should be taken to the profit and loss account when it is earned.

3. Expenses should be matched with income for the measurement of profit.

4. Unrealized losses should not be recognized in the profit and loss account (prudence principle).

5. With hedging, profits and losses must be recognized in the same period.

These are followed by sections dealing with:

* Accounting estimates - under uncertainty the best estimate should be used. Changes to the estimate should be recognized in the period in which the change takes place.

* Congruence principle - the effect of changes in accounting principles or the conection of enors in previous accounts should be taken directly to reserves

* Accounting principles - these should be applied consistently over time.

* Going concern

* Good accounting practice (GAP) - accounts should be prepared in accordance with GAP.

These appear to be broadly in line with the principles of the Directive, although separate determination of items is not mentioned specifically in the law. A problem with the GAP requirement is that some of the guidance on this, which existed in the form of guidelines (notably GRS 0 Assumptions and background for NSRF's GRS), had been withdrawn before the new law was finalized.

The minority in the Norwegian committee expressed concern over the transaction principle (see No.l above) (NOU, 1995,30:11.6). It was not sure whether it should be included in the law at all (since no EU country had done so), but if it was to be included there was a need for a definition. This was not provided in the Act. It was further argued that the validity of the transaction principle is compromised by exceptions to it in the law, for example, the revenue recognition method for longterm contracts The transaction principle may come into conflict with the realization principle. In such cases the minority beheved that the realization principle should prevail. This is in line with the comments on prudence (see later).

According to Schwencke (1996), the "omission" of prudence and the possibly "imprudent" use of expected values in the proposal caused great consternation among a minority of the committee and one member spoke out publicly on the issue. He argues that prudence should be retained to protect the interests of creditors. The existence of the concept in law would also be helpful to auditors in discussions with clients where overvaluations are suspected. He goes on to provide examples of valuation of specific assets included in the draft law, which seem to lead to the risk of violating the prudence principle (for example, compulsory capitalization of some development costs, goodwill and interest; and use of the percentage of completion method for contracts). This view seems not to be supported by a direct reading of the wording of the Fourth Directive as that allows for some of these things and does not prohibit the others.

The spirit of the Directive also accepts that there may be times when the general principles are in conflict: in such instances, the fundamental concept of the true and fah view (TFV) must come into play. It is difficult to imagine that GAP would always give priority to prudence (see Alexander, 1996; Ordelheide, 1996). It is interesting to note that the Swedish Act refers to reasonable prudence (2.4.3, emphasis added), which is then further explained. This seems to be a way of achieving a TFV without compromising the basic principle of prudence. The final version of the Norwegian Act seems to take account of this argument insofar as prudence is specifically mentioned and "expected values" (believed by Schwencke [interview] to lead to a lack of prudence) have been tempered to "best estimate". The valuation rules in the final Act also represent a more conservative approach.

Valuation rules

The Danish Accounting Act 1981 follows the Dhective closely and allows companies a certain amount of flexibility in choosing methods of valuation and revaluation. The Swedish Accounting Act 1995 is generally similar but does specifically prohibit the last-in first-out (LIFO) method of stock valuation. It permits the valuation of work-in-progress at an amount higher than cost if there are special circumstances and if that would give a TFV. The Norwegian Act specifies that first-in first-out (FIFO) and average cost (AVCO) are permitted.

Finnish accounting emphasizes historical cost, which is linked with the requirements of tax accounting. In the 1992 Act, revaluation was permitted only on an exceptional basis and all associated taxes had to be fully provided for. The 1997 Act takes a more liberal view. Revaluations of land, rights over water areas and securities are permitted within specified limits. The 1992 Act broke from the strict cost tradition by permitting the use of the percentage-of-completion method for contracts. There was a great deal of discussion on this matter, but it subsequently became accepted (interview Räty). In contrast, stocks were valued purely on direct production costs, with no allowance for overhead under the 1992 Act (Troberg, 1992, pp.29-31), although this changed with the 1997 legislation.

Implementation of sections 3 and 5 of the fourth directive (layout of the balance sheet and profit and loss account)

It is argued that the most successful area of harmonization achieved by the Dhectives has been in the layout of financial statements (for example, Walton, 1992, p.186). The Fourth Dhective offers two formats for the balance sheet and four formats for the profit and loss account. Member states are permitted to nanow the choice available to companies in theh countries The Danish Financial Statements Act 1981 permits aU the formats Nevertheless the standard formats present a more rigid approach and require greater disclosure of information than the previous Accounting Acts Denmark had the least detailed requhements of aU the Nordic countries in its 1973 Compames Acts The area of the Fourth Directive which had been expected to cause the greatest difficulty for Denmark was the presentation of the profit and loss account (Elling & Hansen, 1984, pp.33-4). During the preparation of the Dhective, Denmark had emphasized that all items in the profit and loss account should be given headings with Arabic rather than Roman numerals, which means that they can be reananged or taken to notes This was incorporated in the final version of the Dhective. Nonetheless, even the format analysing expenses by type of expenditure does not accommodate the former traditional contribution margin principle. Elling and Hansen (1984) point out that the format:

... requires that goods in the process of being manufactured and finished goods stocks be presented separately as an individual item in order thereby to reach an approximate calculation of the value of production.

Such a layout is extremely strange to Danish accounting practice, however it is obvious that it may have a certain information value to readers if the accounts are prepared according to the absorption costing principle. On the other hand, if the contribution margin principle is used, the information value is dubious ... (Elling & Hansen, 1984, p.34)

The Swedish committee refened to surveys of European practice that indicated that most companies used the horizontal (or account) format for the balance sheet. This format is also prescribed in a number of EU countries It was argued that the vertical format is mainly used in the UK and Ireland (SOU, 1994,7:186-7). The Swedish law therefore permits only the horizontal format of the balance sheet. The liquidity order in which items appear in the balance sheet represents a reversal of the previous format, with items now presented in order of increasing liquidity. Also the law requires further note information relating to a number of captions (for example, share premium and the reserve resulting from use of the equity method). The Swedish group felt that there was less consensus in Europe on the format of the profit and loss account than on the balance sheet. The vertical form is closest to the previous Swedish format and would therefore be adopted. The horizontal formats lead to the unnecessary splitting of items that would more naturaUy be presented together (SOU, 1994, 7:195). The committee was unable to decide whether items should be classified by function or by type, so the Act aUows companies the choice.

The Norwegian committee seems to have found the choice of layouts relatively uncontroversial, but its proposal specified that a single format should be specified in order to improve comparabUity (NOU, 1995, 30: 7.2.1). The horizontal balance sheet format was chosen, at least partly because it is closer to the previous balance sheet presentation, although, as in Sweden, the liquidity order of items had to be reversed (NOU, 1995,30: 72.3). The vertical profit and loss account was proposed, with presentation of items by type rather than by function. This form was felt to be the most practical for users and preparers of financial statements, as the tax and statistical reports were based on information by type (NOU, 1995, 30: 72.2). The Directive's formats by function are criticized for mixing the expenses by type and by function: in that finance items are not split by function (NOU, 1995,30:72.2).

The permitted layouts are summarized in Table 2. In practical terms this results in Nordic companies producing balance sheets that are of a single format but profit and loss accounts which may not be directly comparable without additional information to that provided in the report.

Funds/cash flow statement

In the 1970s the Nordic countries were ahead of other countries: all except Denmark required by law the publication of a funds flow statement by at least the largest companies (see Aisbitt, 2002). The Fourth Directive does not include a requirement for a funds (or cash) flow statement. This is probably a result of a number of factors, including the age of the Directive and the nature of the six countries that originally drafted it. Once funds (and cash) flow statements had become more widely accepted and supported by accounting standards, it is perhaps understandable that Sweden and Norway should continue to require the additional statement in the law although a pro forma layout was not included. The Swedish Financial Statements Act requires a finansieringsanlys to account for the company's financing and capital investments in the year, and the Norwegian Act requires a kontantstr0moppstilling (cash flow statement).

Tax

In Finland it was decided not to separate financial and tax accounting in unconsolidated statements but companies are permitted to eliminate tax-driven reserve movements from consolidated financial statements (Troberg, 1992, p.33). A similar approach was taken by the Swedish committee (SOU, 1994,17:136). This contrasts with Denmark and Norway where financial accounting and tax accounting had been separated. In Denmark the split came with the implementation of the Fourth Directive, but in Norway the tax and financial accounts were disconnected by the Companies Act revision of 1992 (Fagerstr0m & Schwencke, 1994; Kinserdal, 1995, p. 196; Nobes & Schwencke, 2006).

Group accounts

The Seventh Directive did not bring the level of change to the Nordic countries experienced in some parts of continental Europe. There was aheady a tradition of preparing at least a consohdated balance sheet with notes under the statutes of the 1970s (see for example, Aisbitt, 2002). Denmark implemented the Seventh Directive in 1990, which necessitated the preparation of a consohdated profit and loss account in addition to the consohdated balance sheet previously required. The 1990 legislation changed the calculation of goodwUl to that based on fair values rather than on book values According to Danish law, compames may eliminate goodwUl against reserves or capitalize and amortize. In practice most companies took the former approach. Merger accounting is permitted for appropriate business conditions and proportional consolidation is permitted for joint ventures (Christiansen, 1999).

In the Swedish Act, under the acquisition method, goodwill is also computed based on fair values and should then be accounted for under the rules for fixed assets, i.e., capitalize and amortize. There is no mention of immediate write off to reserves. The Norwegian Act is similar. The usual provisions for merger accounting and proportional consolidations apply in both countries. Schwencke (interview) had been concerned that the requirement to capitalize and amortize goodwill in the same way as tangible fixed assets could put Norwegian companies at a disadvantage in the global capital market in comparison with countries that then permitted immediate write off to reserves (for example, UK) or an extended amortization period (for example, USA). However, as both the UK and the USA subsequently altered their regulations, this line of argument became redundant.

The 1992 Act in Finland updated the Companies Act 1978 with respect to consolidated financial statements and closely follows the Seventh Directive: there were few changes in principles in the 1997 Act. The acquisition method continues to be required, with amortization of goodwill over a maximum of 20 years.

All the countries except Sweden offer exemptions to smaller groups from preparing consolidated statements Accounting for associated undertakings under the equity method in the investor company's financial statements as well as in the consolidated financial statements is permitted in Denmark and required in Norway. This represented a codification of practice in Denmark, but a change of practice in Norway. The issue of the unconsolidated statement is not addressed in the legislation in Sweden or Finland.

Initial reaction to implementation of the Directives

In the light of the extensive discussions of the implementing committees, it is worth considering wider responses to the new laws Hasselager (interview) pointed out that the volume of legislation arising from the implementation of the Fourth Directive was significant in Denmark, but it did not affect practice greatly. This seems to be a common theme for aU the Nordic countries Interviewees made positive comments about the new legislation. For example, Helenius (interview) described the new Finnish Act as "strong" and hoped that it would prevent scandals caused by bad financial reporting in future; Brandsâs (1998) is satisfied that the work on the Norwegian proposals resulted in a "good law" but pointed out areas where improvements could still be made to bring the Directives up to date.

In Denmark, the main concerns with the implementation of the Fourth Directive related to:

1. The valuation of stock at marginal cost. This was not encouraged by the Directive.

2. A special tax write off for scrapping used in Danish financial statements was not accepted by other countries.

3. Disclosing segmental information was seen as a potential problem in a small country, (interview Hasselager)

Nevertheless, the Danish objectors were academics and auditors rather than preparers (interview Hasselager). For Finland, the moves to permit the inclusion of indirect costs in stock and the capitalization of interest in the most recent legislation were seen to be positive steps by Tähtivaara (interview), who suggested that they might not have been acceptable without the Directives.

Tidström (1995) points out that, in aiming to harmonize financial reporting, the Directives had to help those countries with less well developed systems of accounting to catch up with the more highly developed, for example, the requhement for publication of consolidated financial statements was new for many countries As Sweden's accounting did not need to catch up in this way, and the Directives include a number of options, it is not surprising that the implementation of the Dhectives did not have a great effect in Sweden. This then raised the question "will the EU be an obstacle for the development of Swedish accounting?" (Tidström, 1995). This was an issue that was taken up by some of the interviewees Markborn and Näsman (interviews) felt that implementing the Directives had been a step backwards for financial reporting in Sweden, for example, Swedish companies had been used to marking financial instruments to market, but this was no longer permitted. This reduces the information content. Näsman (interview) was disappointed with the new Swedish Act. Although it is called a framework, he felt that it has too many rules on unimportant matters that might make it a straitjacket and prevent the evolution of accounting.

There was a mixed reaction to the increased disclosures required under the legislation implementing the Directives Wahlquist (interview) pointed out that they were unpopular with clients and created more work for accountants. Some of the information (for example, in respect of personnel and of group composition), which previously was filed, but not published, must now also be circulated in the annual report: this seems to be excessive (interview Näsman). However, in fairness, the government offered relief from disclosure of excessive personnel and group composition information by an amendment to the Act in 1999. The Finns initially had difficulty in seeing the reason for the levels of disclosure required in the notes to the accounts (interview Räty). Tähtivaara (interview) believed that companies did not mind being open with information, but objected to the extra work in producing what was perceived to be unnecessary. Kinnunen (interview) pointed out that Finns were disappointed that useful information had now been relegated from the primary financial statements to the notes In Finland, there was a strong awareness of the cost to companies of implementing new formats to comply with the new legislation (interview Räty). Roarsen (interview) was concerned that the first year under the new Norwegian Act was going to be resource intensive, particularly for the large companies, who would see themselves as obliged to go back and restate 10 years of figures Berg Jacobsen (interview) thought that some of the requirements for notes in Norway went too far, for example,

1. The requirement for a note if the fair value of assets is less than 90% of book value and there has been no impairment review.

2. Research and development - representations must be made that the expected benefits justify the cost.

Accounting standards subsequently addressed both these issues (interview Berg Jacobsen). In the case of research and development, the standard said that the requirement only applies to meeting the criteria for capitalization, i.e., it moved away from a strict interpretation of the law.

The formats for the presentation of financial statements did not always meet with approval. Christiansen (1984) suggested that, in Denmark, permission to analyse the profit and loss account by function reduced the information value of accounts Using the captions prescribed by the Dhectives means that less information is disclosed because amounts that had previously been shown separately (for example, bad debt write offs) are incorporated into one of the standard headings (for example, interest payable and similar charges). Räty (interview) said that Finnish companies had complained that the new profit and loss format is less useful because it provides less information. Markborn (interview) was aggrieved that the balance sheet is "upside down" and felt that it was ridiculous that this was different from the practice in the USA, the largest capital market. This comment was echoed in Finland (interview Räty).

In Norway, the main queries to Den norske Revisorforening (the auditors' professional body) regarding the implementation of the Directives centred on:

1. Mergers/demergers

2. Group accounts - when they are required and which companies should be included in the consolidation.

3. Equity method.

4. Transitional anangements. (interview Brandsås and Kjelløkken)

These queries seem to be purely technical, so as to ensure that the new regulations were followed, rather than criticisms of the legislation. Roarsen (interview) felt that the authorised auditors (NSRF) did not expect problems with putting the new Act into practice, but that the registered auditors (NRRF) were more pessimistic.

A new model for changing European accounting rules

While the Dhectives remain the framework for accounting regulation in Europe, the European Commission seems to have recognized that this is not a manageable model for ensuring that all countries are operating in an equivalent regulatory environment and that the regulations reflect the most up-to-date accounting thinking and/or practice. The case of the Nordic countries described earlier demonstrates that the timescale involved in producing Directives and having them implemented in the legislation of increasing numbers of member states means that this is not an effective way to control financial reporting in a dynamic business environment. This realization may already have influenced the change in the Danish implementation process between the Fourth and Seventh Directives. Moreover, the presence of Member State options within the Directives (along with the possibility for national interpretations) and the need for more detailed guidance than the Directives provide has given national legislators and/or standard-setters the opportunity to undermine the harmonizing effect of the Directives.

Regulation (EC) No. 1606/2002 (hereafter 'the IAS Regulation') presented an important change to the regulatory structure in terms of both the regulatory model and the level of detailed accounting regulation provided (indirectly) by the EU. These aspects will be discussed in turn in the light of experiences with implementing Dhectives

The IAS Regulation essentially requhed listed companies in the EU to apply International Accounting Standards (IAS)10 in their consolidated financial statements for accounting periods beginning on or after 1 January 2005. The use of a regulation is important because it became effective immediately in all member states without the need for national legislation. This represents a major improvement in the speed at which the European Commission's changes became effective and ensures that all member states are working to the same rules at the same time.

Nevertheless, the process of endorsement of the IASB's standards means that there is potential for delay in the system (although not to the same degree as in the development of Dhectives).11 This means that a new or revised IAS could have a different effective date inside and outside the EU. This is in addition to any differences between endorsed and non-endorsed standards Furthermore, issues hitherto dealt with at a national level in the implementation of Directives have been transfened to international bodies, for example, the European Financial Reporting Advisory Group (EFRAG). This raises concerns for the representation of member states' interests12

The existence of a single set of detailed accounting rules for the EU (in the form of EU-endorsed IAS) provides an increased level of detail in the accounting regulation imposed by the EU. This could lead to greater comparability of financial statements between companies in particular industries across national boundaries within the EU. On the other hand, as with member states exercising options and applying their own interpretations to dhectives it would be surprising if there were not similar choices being made with IAS. These might be explicit (for example, national standard setters advising or requiring compames to make a particular choice) or they might be implicit (for example, tax advantages from making a particular choice).

Conclusion

Experience of implementing the Accounting Directives in the Nordic countries suggests that the process and outcomes are influenced by the following factors:

1. The existing accounting tradition. Historically embedded theory and practices (such as creditor protection, prudence and a close connection between accounting and taxation) are likely to influence the implementation.

2. The legal tradition of the country, and its regulatory processes. This will affect the time taken for implementation and will determine which individuals are likely to be invited to participate in the process. For example, in Denmark, the process of implementing the Seventh Directive was different from that for the Fourth Directive. This did not result in faster implementation, but in fewer technical details debated in Parliament and included in the Financial Statements Act (Christiansen, 1999). In Sweden the process was criticized for being short on the customary consensus and due process (Bunowes & Nordstrom, 1999).

3. The technical skills and personal preferences of those involved in the process Members of committees implementing Directives have the opportunity to influence the outcomes, so their selection needs to be made with caution. They may also formally act as individuals, but in reality be representing specific interest groups, for example the accounting profession, which can lead to an "overlap" of influence between the state and the profession, making such influence difficult to identify or separate (Loft & Jeppesen, 2001).

4. The social, political and economic environment. There is bound to be an element of self-interest in the process: where member states can see the potential benefits of changes in legislation they are more likely to embrace them with enthusiasm. In addition, the implementation of international regulation can become the site for conflicts between the state and the profession (Cooper et al., 19%) and other interest groups Relations between the state and the professions "are both very complex and vary considerably from one socio-historical context to another" (Loft & Jeppesen, 2001, p.60) - as are theh relative involvement in the implementation processes - making the outcomes of such struggles difficult to anticipate on a supranational basis

In the short term, there is little that can be done to alter the legal systems and regulatory processes that have evolved over centuries in member states. It is therefore more important to make the best use of the systems as they cunently operate. The change in the model of regulatory structure from one dominated by directives to one based on regulations (and hence IAS) means that the factors involved in implementing directives become less important. The new model accelerates the process, but does not eliminate the scope for national variation. The role of national and supra-national enforcers will therefore be important if the new regulatory model is to continue the drive for harmonization of financial reporting.