Europe's Crackdown.(Brief Article)

Europeans love to tell Americans, "We told you so." But Bush's crackdown on corporate fraud produced more self-examination than self- satisfaction on the continent. The New Economy bubble that encouraged so many corporate high jinks in the United States did not leave Europe untouched. The bankruptcies and executive misdeeds that came to light after the Neuer Markt crash in 2000 made the average Nasdaq firm look almost conservative. And more recently, corporate debacles at the Dutch telecom KPNQwest, the German industrial conglomerate Babcock Borsig and French media giant Vivendi have made for gruesome headlines. As EC Internal Markets Commissioner Frits Bolkestein put it last week, "Only the very foolish would pretend that recent events in America could not or will not happen here."

Europe, like America, is determined to crack down on corporate accounting. The EU has passed new legislation that will harmonize accounting standards in member states by 2005, putting Europe onto an international system that may be safer and tougher to abuse than the U.S. system. This week, Britain will unveil its own major plan for reform, designed to revamp company laws that haven't been updated since the 19th century. The plan will include everything from clearer responsibilities for company directors to tougher penalties for those who try to hide crucial financial information.

As in the United States, much of the initial action has focused on accounting standards. European systems tend to be based on principles. Unlike the U.S. "rules" system, which offers a detailed rule for almost every accounting scenario, a principles system provides a series of guidelines, and lets companies decide how best to follow them. Advocates say this encourages common sense and honesty: if a particular asset or liability has any effect on business, you account for it. Too many rules, they argue, create loopholes.

But keeping the standards more general can be a problem. Most European systems don't account for financial vehicles like futures, swaps and derivatives. Yet they dislike the U.S. ...