Europeans must be held to account

THE moment last year when French President Jacques Chirac phoned his German opposite number Chancellor Gerhard Schroder to try to get a united front against the latest Anglo-American outrage - International Accounting Standards - instantly passed into accounting folklore.

Never in living memory had a politician shown the slightest interest in accounting issues of any description, let alone sought to lobby against a proposed rule.

The amusement soon passed, however, because as the Financial Services Authority's John Tiner was saying in a speech today to the annual meeting of the Institute of Chartered Accountants, there is an important principle at stake.

French ire was specifically aroused by IAS 39, a proposal to oblige companies to account for the economic activities of the derivatives they hold - in accordance with the surely acceptable principle that if a financial instrument has an economic effect, that needs to be shown in the accounts.

Given that there are now thought to be in excess of $3 trillion (£1.64 trillion) worth of derivatives in use worldwide, which as a figure quite dwarfs the equity markets on which most attention is focused, common prudence would suggest that people should be told what these things are worth or could cost.

But the French banks did not like what it did to their balance sheets and wound up their President. Now at Ecofin yesterday and at another meeting on Friday French resistance is continuing and things are coming to a head.

The accountants and the Commission need to hold firm against French blocking because, as Tiner says, the whole point of international accounting standards is that they should apply equally to all European Union companies.

If they do, it will be a giant step towards completion of the financial market in financial services because it will be possible to make valid comparisons between firms, to allocate capital more efficiently between them.

Once exceptions are allowed for powerful lobbyists or countries that find application difficult, the whole exercise loses its credibility and its point. It would also kill off the long-mooted possibility that the Americans might accept accounts prepared to international accounting standards and no longer insist that everything be translated into American accounting principles before it can be released in the United States.

Arcane though it sounds, there is a lot at stake, and with the standard scheduled for introduction for accounting periods from next January, time really is running out. With all the effort that has gone into bringing international standards this far, the Commission and the politicians should not lose their nerve now.

Ruled out

TALKING of European legislation, the Commission has been taking soundings in the last few weeks on what it should do next in the financial arena now that most of the legislation on the Financial Services Action Plan is in place.

The view of Britain's Financial Services Authority is that it should do nothing - and most certainly should not embark upon a FSAP Mark 2 for the retail investment community as some have suggested.

Unfortunately, there is a perception problem. As far as Brussels is concerned, its programme of work has been completed because it has passed the legislation.

Its staff fail to grasp that the real issues arising from its implementation still have to be tackled in most of the member countries and will cause practitioners huge dislocation and cost as they go through.

What is really needed is a Financial Services Commissioner who would be dedicated to implementation and enforcement of the existing rules right across the European Union so that there really would be a level playing field.

Only when that is fully in place should there be any thought given to further rule-making.

Hedge hopping

NEWS that Man group has lost one of its hedge fund clients is interesting for what it says about the growing restiveness among some of the longer-serving hedge fund clients.

Many of those with serious private wealth were early into the business, and happy to pay their 2%-to-4% annual charges and a further performance fee of 20% of the upside when the fund manager was making money for them. But with hedge funds going through a difficult period and either losing money or not making much, the attitude is changing.

When the capital is no longer growing those annual fees soon begin to bite. This means even better performance is needed in years to come to make up the ground lost.

It is interesting that the smart money is beginning to move out, just as hedge funds start to tap in to the mass market via pension schemes.