Economy: Accounting

Regarding charges that Russian businesses engage in dishonest book-keeping, Steve Torok says: What maybe at fault is GAAP, generally accepted accounting practices, changing both in Russia and the US. In reality, GAAP stands for generally accepted accounting principles that have not changed since Pacioli and should be the basis of business accounting. Tax accounting is not always based on it. RH: This opens up a horrible can of worms. Scandals such as the Enron case have involved book-keeping, and accountants have been under great pressure from the law and Congress. It is a worldwide problem about which I know little.  Here is a background note:
In 1994, accountants from around the world gathered in an Italian village called San Sepulcro to celebrate the 500th anniversary of the first book written on double-entry accounting. The book was written by an Italian monk, Luca Pacioli,  The first accounting book actually was one of five sections in Pacioli's mathematics book titled "Everything about Arithmetic, Geometry, and Proportions." This section on accounting served as the world's only accounting textbook until well into the 16th century. A new Eglish interpretation of Pacioli's treatise was published recently and can be ordered from the Pacioli Society, Albers School of Business and Economics, Seattle University, Seattle, WA 98122. (Phone: 206.296.5690 Fax: 206.296.2464). In addition, the Society has a 30-minute video of Pacioli's life. While Brother Luca is often called the "Father of Accounting," he did not invent the system. Instead, he simply described a method used by merchants in Venice during the Italian Renaissance period. His system included most of the accounting cycle as we know it today. For example, he described the use journals and ledgers, and he warned that a person should not go to sleep at night until the debits equaled the credits! His ledger included assets (including receivables and inventories), liabilities, capital, income, and expense accounts. He demonstrated year-end closing entries and proposed that a trial balance be used to prove a balanced ledger. Also, his treatise alludes to a wide range of topics from accounting ethics to cost accounting.

RH: The big question for us is how far there are global accounting standards. My understanding is that European and American standards are different. What about Russia?

I said: Scandals such as the Enron case have involved book-keeping, and accountants have been under great pressure from the law and Congress. It is a worldwide problem ,  Christopher Jones comments:  Accounting standards are different around the world, and in order to be listed on the NYSE, SEC standards for accounting must be adopted.  This is why so few foreign companies and in particular the godzilla-sized Japanese companies like Mitsubishi have ever been listed on the NYSE.  Only a handful like Sony have made the change. Most foreign companies get around this by listing the with ADR (American depositary receipts) Most Japanese corporations remain clouded by their mysterious, unfathomable accounting methods.  A good example is Keisei Electric Railway, which appeared throughout the heyday of the Japanese stock market as a hot investment;  the actual railroad was bankrupt, but it did own a portion of real estate where Tokyo Disneyland was eventually built.  Accounting standards alone will not stop an intrepid gangster from trying any trick imaginable.

Randy Black sends these facts about foreign firms and their being listed on the NYSE: Sony Corp. was the first Japanese company to list on the New York Stock Exchange in 1970. Japanese firms list on U.S. stock markets to raise their overseas profiles and attract a wider range of investors. When Japanese companies go public in the U.S., American Depository Receipts (ADRs) are usually issued by U.S. financial institutions. The ADRs are backed by Japanese shares, which are held in trust by the issuers. Currently, about 470 foreign companies are listed on the NYSE. In the past, many foreign companies listed on the exchange were Canadian, Brazilian and U.K. firms. Since the 1990s, however, Chinese, South Korean and other Asian companies have increasingly listed on the U.S. exchange. A total of 17 Japanese firms are listed on the NYSE, and more than 10 more are considering the move.

Christopher Jones writes: A total of 17 firms out of the 1200+ listed on the TSE (Tokyo Stock Exchange) (first section) are listed on the US exchange because they comply with SEC standards. They get around the SEC standards required for outright listing on the NYSE by going through the ADR route which allows them to circumvent the SEC accounting standards.

Randy Black says: There are today, according to the NYSE, 19 Japanese firms listed on the NYSE. ADRs have nothing to do with this matter of GAAP and GAAS (generally accepted accounting standards) rules as it relates to NYSE listing of foreign firms. The SEC has two conditions under which a Japanese (or any other foreign firm) may be listed on the NYSE. 1) That firm must produce a series of financial statements covering a set number of years that meet US GAAS rules, OR, their financial statements must meet the accounting standards of its own country, BUT, if that firm uses its native country’s standards, those financial reports MUST be reconciled to the US GAAS and GAAP standards.
Finally, there is no circumventing of SEC accounting standards, to use Christopher Jones’ words, when it comes to NYSE listings, with one exception that deals with Canadian accounting rules. But this exception does not apply to Japan, or other nations’ firms that are listed on the NYSE.
To see the exact total wording of the rule:
Here is an excerpt:
Among other things, the rule states: …
foreign companies may prepare their financial statements using a comprehensive body of generally accepted accounting principles (GAAP) other than U.S. GAAP. Foreign companies that present their financial information in accordance with the GAAP of their home country or International Accounting Standards must include a reconciliation of significant variations from U.S. GAAP….
… Item 8 of Form 20-F requires the annual financial statements to be audited "in accordance with a comprehensive body of auditing standards." An instruction clarifies that in SEC filings the financial statements must be audited in accordance with US generally accepted auditing standards (US GAAS). This instruction changes the staff's practice of accepting audit reports that state the audit was conducted in accordance with local auditing standards that are "substantially similar" or "similar in all material respects" to US GAAS. That practice was originally adopted to accommodate audit report styles in different jurisdictions that differ from the audit report wording specified by US GAAS. The practice was not intended to relieve the auditor of the responsibility to perform all auditing procedures necessary under US GAAS….


Ronald Hilton 2005


last updated: April 13, 2005