The Accounting Systems of the United States and France
Nowadays, because the world is becoming more globalized and harmonized, standard-setters feel the need to report their accounting in a uniform way. The International Accounting Standards Board [IASB] was formed as a non-for-profit corporation to incorporate, monitor and assess International Accounting Standards for all countries in the world, producing what we know as International Financial Reporting Standards [IFRS]. IASB provides insight on potential amendments to current accounting standards.
Furthermore, this paper will provide a description of the accounting systems in the countries of the United States and France and provide a comparison of the two systems. United States “Britain’s American colonies broke with the mother country in 1776 and were recognized as the new nation of the United States of America following the Treaty of Paris in 1783. During the 19th and 20th centuries, 37 new states were added to the original 13 as the nation expanded across the North American continent and acquired a number of overseas possessions” (CIA World Fact Book, 2004).
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The history and background of the United States serves as a basis to the way accounting is reported in the US. The earliest method of accounting in the United States includes the “Dutch style” and the “method of Venice” (Secord, PowerPoint, 2006). In addition, accounting in the US highly influenced by the United Kingdom (UK); thus, their accounting development and systems were originally exported from the UK system. This British influence initially brought professionalism to accounting in the United States.
In addition, the founding fathers of US accounting and early accounting societies were of expatriate Britons, in particular, Arthur Young of Ernst & Young and James Marwick of KPMG (Nobes, 2006, p143). “The United States is a federation of individual states, each of which has its own legislative body with extensive powers to control business activity and levy taxes within its own boundaries” (Nobes, 2006, p144). Due to this, the right to practice as a Public Accountant and the requirements of a PA differs from state to state.
Furthermore, it is not a requirement for every state to be a member of the national body the American Institute of Certified Public Accountants (AICPA). By definition, the AICPA is a national association for all Certified Public Accountants (CPA) whose mission is to provide accounting professionals with uniform certification and licensing standards, establishing professional standards, and enforcing current requirements” (Definition of AICPA). Any firm that wishes to be audited by the AICPA must follow Generally Accepted Accounting Principles (GAAP will be discussed later in this paper).
The AICPA served as a main standard-setter in the United States for several years. The AICPA’s history dates back to 1887 with the formation of American Association of Public Accountants (AAPA), also known as the American Institute of Accountants, with voluntary committees to help the Institute to maintain high quality standards of the PA profession, promote interest as a CPA, act as a spokesperson for the profession, and providing any necessary services to their members (AICPA, 2006-2007).
Although the AICPA gave up its role as the main standard-setter, it still issues detailed guidance called Statements of Position, concentrating from 2003 on industry-specific guidance (Nobes, 2006, p148). The United States’ “federal securities established a Securities and Exchange Commission (SEC) in 1934 to administer the securities regulations” (Nobes, 2006, p144). The accounting system in the US was strongly influenced by the SEC as opposed to a governmental influence.
The SEC sells, exchanges and trades securities, protects investors while maintaining fair, orderly and efficient markets and ultimately facilitates capital formation (Pereira, 1992, p17). The US has the largest and one of the most important, stock exchanges in the world – the New York Stock Exchange located on Wall Street in New York City. This makes the US a huge market for investors world-wide. All investors would like to have access to certain facts about an investment before buying it and while holding it.
In order to achieve this, the SEC requires all public firms and companies to disclose meaningful financial and other information to the public, to follow GAAP (SEC, 2007). Thus, any company that wishes to be a market in the SEC’s securities must register with the SEC. For those companies with foreign registrants, the SEC requires them to either report under US GAAP or to provide reconciliations to US GAAP (Nobes, p146, 2006). The SEC also requires public firms to follow GAAP in order to be audited. It is quite evident that most of American accounting is rule based, not government based.
According to Nobes’ textbook, Comparative International Accounting, the commission since its inception has intended to limit the exercise of its accounting standard-setting authority to a supervisory role, permitting and encouraging the private sector, currently through the FASB, to maintain leadership in the standard-setting process (p145). The Financial Accounting Standards Board, in short, FASB, has been the ultimate standard-setter of financial accounting and reporting in the US since the early 1970’s.
The FASB is entirely financed voluntarily by the sales and contributions from PA firms, investor and creditor organizations and contributions made to the Financial Accounting Foundation (FAF). It consists of seven Board members; but for a proposed accounting standard to pass, it must obtain five out of seven votes of the members on the Board. “In drafting its standards, the FASB adopted a distinctive style: they are very detailed, prescriptive, and proscriptive. With definitions and examples, a FASB standard can be a few hundred pages long! ” (Pereira, 1992, p21).
The FASB established a conceptual framework regarding objectives and concepts that the FASB uses in developing standards of financial reporting that consists of four framework levels: 1. )objectives of financial reporting by business enterprises, 2. )qualitative characteristics of accounting information, 3. )recognition and measurement in financial statement of business enterprises, 4. )elements of financial statements. The framework acts as a fundamental guide to provide consistent standards, showing the function and limits of financial accounting and statements, and dentifies the goals and purposes of accounting (Nobes, 2006, p151). “Generally accepted accounting principles, commonly abbreviated as US GAAP or simply GAAP, are accounting rules used to prepare, present, and report financial statements for publicly-traded companies and many privately-held companies. Similar to many other countries practicing under the common law system, the United States government does not directly set accounting standards, in the belief that the private sector has better knowledge and resources” (Wikipedia, US GAAP).
The conceptual framework is a fundamental basis of accounting whereas GAAP are the rules that public companies use to prepare their financial statements. Companies’ financial information is presented in financial statements that are viewable by the public, mainly for the interest of investors. Accounting information is extremely important and thus, has to be understandable to the users, reliant and relevant. “Information is not worth presenting unless it has some minimal level of both relevance and reliability” (Nobes, 2006, p153).
Relevance refers to the value and quality of the information and its timeliness availability to users; reliability means that the information is free from bias, represents what its purpose is, and should be verifiable. The consolidated financial statements were originated in the United States (as discussed in class). The statements consist of the Balance Sheet, Income Statement and Statement of Cash Flows. The elements of the financial statements are assets, liabilities, equity, revenues, expenses, gains, losses, and other comprehensive income.
In addition, conventions such as historical cost, revenue recognition, matching principle, and so forth are the fundamental basis for income measurement. Thus, US accounting focuses on the measurement of income. The income statement comprises of either income from continuing operations or income from the discontinued operations, including any gains or losses that may have happened during the accounting year. For the most part, if there is a disposal of one operation, there should be a [net of tax] gain or loss on that disposal recorded under the income from discontinued operations.
The Statement of Other Comprehensive Income appears sometimes in the financial statements. It can be presented as a note, as a part of the income statement under ‘other comprehensive income’, or as a separate income statement. Also, any gains realized through the reevaluation of investments should be included in the other comprehensive income statement. (Nobes, 2006, p155) Moreover, as mentioned in the textbook, “a further difference from nearly all other countries is that three years of figures are presented; that is, the two preceding years’ comparative figures. This is the SEC requirement” (Nobes, 2006, p155).
The US balance sheet is quite standard in North America. It has two sides – the left side shows the assets and the liabilities and shareholders’ equity are shown on the right side. As learned in accounting courses, the total amount of assets should be equal to the sum of liabilities and shareholders’ equity. It is worth mentioning that under the United States balance sheet format, current assets precede the long-term assets (fixed assets). This order is different from the order under European national laws. Thus, the US formats are not usually well-adopted by non-technical shareholders for reading (Nobes, 2006, p154).
See Appendix A for sample balance sheet. The final statement is the Cash Flow Statement. It is a more recent statement than the other two and it is a SEC requirement. It focuses on cash movements and needs the balance sheet and income statement to derive the movements in cash. Moreover, like the income statement, it is also required to show three years’ figures in the cash flow statement (Nobes, 2006, p156). The cash flow statement is comprised of three categories: cash from operating activities, cash from investing activities, and cash from financing activities.
A comparison of, for example, two years’ figures from the balance sheet and income statement will provide an analysis on the sources and uses of cash, and ultimately showing the change in the beginning cash balance from the ending balance. All three statements, however, can become confusing between countries because of the variety of terminology used. Using the example used in Nobes’ textbook, the UK term ‘shareholders’ funds’ has several expressions in the US – shareholders’ equity, shareowners’ equity, or common stockholders’ equity to name a few.
Another example would be the term inventory; “the most usual meanings of the UK terms ‘stock’ and ‘shares’are translated into the US term ‘inventory’ and ‘stock’ respectively” (Nobes, 2006, p156). This may lead to misunderstanding when other countries’ investors review US companies’ financial statement. Therefore, we need to recognize the terminology problem and try to translate some terms to the correct meanings. In addition to the consolidated financial statements, there are extensive notes and management discussion and analysis section.
Furthermore, there is an Auditor’s Report that explains what the independent auditors have done to provide reasonable assurance that the financial statements are free from material misstatement and that the statements are in context of generally accepted accounting principles. One accounting firm is sufficient to perform the audit and sign off on the Auditor’s Report. In short, the US accounting rules are extensive and detailed. The financial statements are prepared under generally accepted accounting principles and are made extremely useful for investors to. However, there are indeed some weaknesses in the US accounting system.
For example, there is no major body, like the Government, to control the accounting process; many boards can make decisions about the accounting rules that they set. Moreover, the accounting rules and principles are complicated and the accounting system lacks harmonization. A famous example of the lack of accounting system in the United States is the Enron scandal back in 2001. Enron lied about their profits, especially when they started to suddenly see a huge drop in their market share. Their accounting firm, Arthur Anderson covered up their loss and manipulated the financial statements.
They ultimately destroyed any evidence with Enron, thus when the word got out, both companies’ reputation went under because of the fraud they committed. This example lead to a new, updated version of the independence standards for PA’s and had an overall affect to the way accounting was performed in the US. It is required that all firms world-wide accept and adopt IFRS within the next couple of years. Firms and companies are already preparing for the new change instead of waiting for the deadline date. France Financial reporting in France was influenced by the common law system in the late seventeenth century.
As cited by Nobes, Howard says “Colbert’s Ordonnance de Commerce of 1673 during the reign of Louis XIV formed the basis for the Napoleonic Commercial Code of 1807, a Code which has spread throughout continental Europe” (Nobes, 1992, p217). During the past century, France has been increasingly impacted by global capital markets dominated by Anglo-Saxon countries, particularly the United States. Because of this, France has been able to produce a dualism in accounting on the basis of international and US standards between the financial statements of individual business enterprises and those of groups (Nobes, 1992, p217).
The accounting system in France was influenced minutely by the French government but it was driven immensely by the tax law. According to Nobes, France’s rules originated from a variety of sources such as the French state, the European Union, the national accounting council (Conseil National de la Comptabilite, CNC), and the accounting regulation committee and are codified in a Commercial Code (Code de Commerce) and a national accounting plan (Plan Comptable General, PCG) (Nobes, 1992, p217). The PCG was established mainly with macroeconomic aims and little input from the accountancy profession.
The French national accounting plan is the most distinctive part of French accounting regulation. “The PCG was amended and made mandatory for all companies in 1983, when France adopted the 4th and 7th Directives of the European Union” (As discussed in class, Secord, 2006). It was the start of French accounting standardization. The purpose of implementing PCG was to be the basis of the accounting legislation in France (??????????? , 2005). It is administrated by the CNC (the national Accounting Council) that consists of a mix of public and private sector regulatory and standard-setting bodies. The PCG is not merely a chart or classified list of ledger accounts but a very detailed manual on financial accounting. Included within it are definitions of accounting terms, valuation and measurement rules, and model financial statements” (Nobes, 2006, p281). 1984 was a period of globalization, deregulation, and privatization in which the accounting profession in France was reorganized and international standards emerged as a strong opponent to national standards (Nobes, 1992, p216).
In the 1990’s, more large listed French companies published their consolidated financial statements in accordance with IFRS because there were an increasing number of French companies entering international markets (Nobes, 1992, p225). Accounting laws in France apply to all public and private businesses with the primary focus to report to owners and creditors. France has a unified accounting system as opposed to a flexible system. Furthermore, their accountancy is based on tax and legal framework. Appendix 13. in the textbook shows the classification of expenses and revenues; they are classified by nature, not by function; thus enabling the PCG to be applied in a similar way regarding all business enterprises instead of just companies. The PCG mainly focuses on ‘inventory’ meaning that France accounting’s focal point is the balance sheet rather than the income statement [income measurement] (Discussed in class). As a result, the PCG asked to keep daily accounting records such as a journal and a ledger in order to prepare the balance sheet in annual financial statements.
The balance sheet is most often presented in two-sided form, with assets on one side and liabilities and capital on the other. It is noted that the capital section is broken into several different accounts, tax being the most common. There is more detail on the face of the balance sheet than there is disclosed in the notes. See Appendix B for sample balance sheet. Ultimately, the PCG’s goal is to provide a true and fair view of the financial statements (Discussed in class). The income statement becomes the product of changing in balance sheet accounts.
It also asks to show the financial statements to the taxation authorities as well as reporting to owners and creditors (Discussed in class). The cash flow statement is recommended by the CNC but it is not mandatory for individual companies. In addition, notes to the financial statements were only required by law in 1983 (Nobes, 1992, p222). An Audit Report is provided in addition to the consolidated financial statements. All companies are audited by members of the CNCC (Compagnie Nationale des Commissaires aux Comptes).
An auditor is appointed for a six-year term and each audit is required to have two auditors from two separate firms to sign off on the financial statements (Nobes, 1992, p226). Accounting principles for the individual company level in France differ significantly than from the United States. Examples include the following: 1. ) Formation costs may be capitalized and amortized rather than being written off as incurred. 2. ) Depreciation rates are usually those laid down for tax purposes. French companies do not use residual values. 3. ) Weighted average cost and FIFO are used to value inventory.
LIFO is not allowed because it provides too much of a tax benefit. 4. ) The percentage of completion method is the preferred method for long-term contracts according to the PCG, but the completed contract method id permissible and common (Extracted from Nobes, 1992, p224). These examples show the differences in accounting practices from one country to another. It is evident that terminology and the base of accounting, whether rule-based or government-based, affect the way countries report financial accounting. Unlike the US, tax rules in France generally take over accounting rules.
Thus, tax law is compatible with the PCG. It is the most important influence on the financial statements of individual business enterprises. The Commercial Code and the Companies Act are also compatible with the PCG although they do not refer to it. Moreover, the French accountancy profession is increasingly influential but has never issued accounting standards (Nobes, 2006, p292). Because IASB has established IFRS to try and unify financial reporting across the globe, France will be reporting their financial statements in accordance with IFRS.
In short, French accounting system is highly uniformed. French government can regulate and control the accounting system and government financing can go to the French companies. The focus on the country’s macroeconomic plan is one of the bases for setting up the accounting system. (??????????? , 2005). Accounting in France is highly influenced by tax laws with financing generally provided by banks, government, and family interests. Comparison of United States and France The United States and France have different approaches as to financial reporting.
The US accounting is rule based whereas the French accounting system is governmental based. The accounting rules in the US only apply to the public companies that are required to register with SEC. However, the accounting rules in France are highly uniformed and apply to all the companies. Moreover, the French accounting standards are highly influenced by tax and legal laws; in the US, accounting and tax have completely different method of reporting. In France, there is only one accounting regulation to be the basis of the accounting system – the national accounting plan (PCG).
Most companies in France obey the rules set in PCG. However, in the US, there are two regulations to guide the accounting work – the SEC, and is Generally Accepted Accounting Principle (GAAP). All the financial statements of the public companies in the US must follow the rules set in the conceptual framework and GAAP. Furthermore, the US accounting rules are more detailed whereas French rules tend to be more general. In short, the French accounting system is not only influenced by the government and tax law, but also related to the country’s macroeconomic plan.
In contrast, the US accounting system is more related to the public companies and the US accounting rules always used to standardize the public companies’ financial accounting work (microeconomic). The financial statements in the US are prepared for the investors to aid in making investment decisions. However, the financial statements in the France are prepared for creditors, owners, and tax authorities. The US also has the largest stock exchange in the world. France has four stock exchanges but it is not nearly at the level of the US. After examining the financial statements of companies in the US and France, several differences exist.
Overall, in the US, the accounting system focuses on income measurement reported on the income statement. Principles and elements, such as matching, revenue recognition, expense, and revenue are set in the conceptual framework to be the base of financial reporting. The word ‘inventory’ in the US refers to how much merchandise, raw materials and finished goods a company has in stock. On the other hand, in France, they focus on the balance sheet. They do not have many rules for the income measurement. Instead, the income statement is the product of changing in the balance sheet accounts.
France focuses on inventory, which in contrast is a broader term for ‘everything’ the company has, and items on the balance sheet to provide their income. On a more detailed level, France capitalizes and amortizes its formation costs whereas the US writes them off as they are incurred. The US uses residual values for the calculation of depreciation whereas in France, residual values are not used. Moreover, for the treatment of inventories, LIFO is allowed and commonly practiced for inventory valuation in the US, as well as the weighted average cost method and FIFO.
Because using of LIFO causes large reductions in balance sheet figures and the accounting in France need to obey the tax rules, LIFO is not allowed in France. As we know, the terminology for the financial reporting (for example, the term inventory or shareholder’s equity) may be a problem as a result of different language in different countries. Therefore, when looking at other countries’ financial statement, the reader should read up on the accounting system in the specific country to understand the underlying meanings of the terminologies.
With respect to the auditors and the auditor’s report, there are two differences between the US and France. First, there is only one auditor required to audit the US financial statements, but in France, two auditors are required to audit the financial statements and sign off on the Auditor’s Report. Second, in the US, the key words the auditor use “in the opinion in the last paragraph are ‘present fairly…in conformity with generally accepted accounting principles’. Those words contrast with the words used in other countries, which note compliance with company law and that ‘the accounts give a true and fair view’”(Nobes, 2006).
Furthermore, as we know, making rules is conceptually distinct from enforcing them but the roles may sometimes be combined in practice. (Nobes, 2006) The strictest and best-resourced enforcement regime in the US is the Securities and Exchange Commission in the US. Auditors in the US are supervised by the Public Company Accounting Oversight Board, and thus follow suggested rule depicted by FASB, in accordance with US GAAP. In France, the enforcement body is the stock exchange regulator, the Aurorite des Marches Financiers, which is proactive and uses advance clearance as one its operating procedures.
It has delegated review of audit quality to the Comie de l’Examen National des Activites of the Compagnie Nationale des Commissaires aus Comptes. The latter body is responsible for the registration of auditors and is supervised by the Haut Conseil des Commissaires aus Comptes. (Nobes, 2006, ) In conclusion, the United States and France have different influences on accounting. Their history affects the way accounting is reported in each country. Rules within the country and governmental influences play a huge factor in the way accounting is performed.
The United States is more individualistic where Public Accountants tend to display their professional ability to maintain occupational self-control in their accounting practice. France is more centralized where the accounting system is fully influenced by the government and tax laws. However, accounting is always changing. Accounting ideas move from one country to another through transfer of technology. Ultimately, in the next couple years, both countries will have adopted IFRS, along with other countries around the globe to aid in the uniformity of financial reporting. Appendix A