A review of the implementation of “true and fair” financial reporting in France from a sociohistorical perspective

A Review of the Implementation of “True and Fair” Financial Reporting in France from a Sociohistorical Perspective

Lawrence R. Hudack Larry L. Orsini

A review of the implementation of the European CommunityS Fourth Directive in France indicates that the French “true andfair”view is IargeIy dtfferentfrom the original (British) “true and fair” concept. The British place special emphasis upon the ‘fair” component. The French, on the other hand, stress the “true” component. This practice is consistent with a sociohistorical understanding of French financial reporting. Sociohistorical (in the context of this study) refers to a synthesis of Smith? (1973, 1976) modified (enlarged) exogenism and Tinker’s (1980) political economy of accounting. A sociohistorical understanding of French financial reporting indicates a traditional emphasis upon accuracy of content Vorm) rather than relevancy (substance)-a tradition that apparently is being upheld in France due to pluralist social relations.

The primary objective of the European Community’s Fourth Directive is to enhance the harmony of financial reporting among the 12 EC Nations by emphasizing a “true and fair” view. Justification for the Fourth Directive is best expressed in the Statement of Grounds that was published with the proposal for the Directive: Persons who intend to establish relations with companies in other Member States, or who have already done so, have the greatest interest in being able to obtain sufficient and comparable information concerning the assets, financial position and results of such companies. At present the annual accounts of companies established in different Member States are far from being comparable, partly because the nomenclature currently in use in the different Member States for the items in balance sheets and profit-and-loss accounts is often totally different. In most cases the reader of a balance sheet, while being quite Journal of International Accounting Auditing & Taxation, 2(2): 197-213 Copyright @ 1993 by JAI Press, Inc. All rights of reproduction Lawrence R. Hudack l Department of Accounting, Post Office Box University, St. Bonaventure, NY 14778. Larry L. Orsini l Department Office Box 65, St. Bonaventure University, St. Bonaventure, NY 14778.

ISSN: 1061-9518 in any form reserved.

67, St. Bonaventure of Accounting, Post

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familiar with the structure of the accounts and terminology employed in his own country, is not able to analyze the annual accounts of companies in other Member States. These circumstances might be enough to stop anyone from taking the risk of forming commercial ties with these companies.

Prior to such harmonization measures, companies were able to carry on cross-border commerce with different accounting and fiscal systems. However, they spent considerable time and expense standardizing the financial information into a form and content that was consistent with their domestic reports. France implemented the Fourth Directive through the enactment of the “Law of April 30, 1983” and related “Decree of November 29, 1983” (effective January I, 1984). Yet, a “true and fair” view was an unfamiliar focus for traditional French financial reporting, that is, an apparent cultural importation. Hamon (1979, p_ 95) contended that the implementation of a “true and fair” concept would be difficult in France because “such a concept may run counter to a prevailing sense of obligation to conform with a system of rigid rules and standard format.” In addition, Nobes (1989, p. 16) questioned the effectiveness of the implementation of a “true and fair” concept in France. The requirement of the EC’s Fourth Directive that true and fair should override detailed rules in all member states may lead to a mask of uniformity that conceals the unchanged old differences. For example, the requirement that French financial statements should give an image fidele from 1984 involved changes in thelaw and in audit reports, but French accounting seemed little altered.

This apparent cultural importation of a “true and fair” view should be evaluated from a sociohistorical perspective. Accordingly, the objective of this study is to examine the concept’s implementation within its socioeconomic context so as to provide an enhanced understanding of financial reporting under a “true and fair” view in France. Sociohistorical (in the context of this article) refers to a synthesis of Tinker’s (1980) theory of political economy of accounting and Smith’s (1973, 1976) modified (enlarged) exogenist methodology. A political economy of accounting theory will attempt to recognize both explicit and implicit purposes of financial reporting rather than simply accepting explicit objectives at face value. The theory attempts to capture both form and substance. Enlarged exogenism considers both internal and external influences on a process under study and provides an encompassing analytical framework. Furthermore, Hofstede (1987) suggested that an understanding of a nation’s (social~political/economi~) culture would enhance comprehension of its accounting practices. Accordingly, this study reviews France’s financial reporting process and then attempts to provide some insight about how socioeconomic factors may have impacted the adoption of the EC’s Fourth Directive in France.

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A necessary condition for understanding the European Community’s impact on financial reporting is to first become familiar with the EC’s membership and means of unification.

Membership. of Rome, Belgium, Republic countries: joined the

The EC was formed January 1, 1958, based on the Treaty which was signed on March 25, 1957, by six European Countries: The Netherlands, Luxembourg, France, Italy, and the Federal of Germany (West Germany). Over the next 30 years, six other Denmark, the United Kingdom, Ireland, Spain, Greece, and Portugal community.

Directives. The EC’s chief means by which unification or harmonization is brought about is through the issuance of Directives. The Directives are instructions to the member states to change their laws, if necessary, to achieve compliance. The issuance of a Directive is a long and complicated process, referred to as “the cooperation procedure,” that is, a system of proposals, acceptances, rejections, alterations, and finally publication. Once a Directive is published, each member state is given a period of time to bring its laws into compliance. The Fourth Directive. The Fourth Directive (adopted by the EC in 1978) is the major source document governing the form and content of annual financial statements and valuation methods used therein. The Directive primarily establishes the composition of the annual accounts (financial statements) to include a balance sheet, profit-and-loss account, and notes. Furthermore, the annual accounts shall give a “true and fair” view of the company’s assets, liabilities, financial position, and profit and loss. This directive is applicable to both public and private companies doing business in the EC. Bartholomew and Welchman (1979) described the Fourth Directive as a product of compromise involving two very different financial reporting orientations, that is, the British and the French/German. Traditionally, the United Kingdom’s financial reporting orientation advocated a more flexible approach in accordance with the Anglo-Saxon concept of “true and fair.” The Anglo-Saxon concept views financial statements as a composite whole where substantive information is of primary importance and form is secondary. France and Germany, on the other hand, advocate a prescriptive approach that emphasizes certainty and precision in financial statements. The French/ German approach attempts to ensure conformity of classification and valuation through the use of their respective national charts of accounts, that is, the French “Plan Compatable” and the German “Kontenrahmen.“’

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The Concept of “True and Fair. ” The “true and fair” concept, as adopted by the European Community, is found in Article 2 of the Fourth Directive, under which a company’s actual economic performance should be communicated, including disclosures of all relevant information (see also Bartholomew and Welchman, 1979, p. 95). In accordance with the Directive, a “true and fair” view requires that: the accounts reflect the economic events, activities and operations which they purport to describe. The essential requirement is that the information should be given in the form considered to be the most valid and best adapted to satisfying third parties’ needs without prejudicing the interests of the company.

At this point, caution must be exercised not to assume that the British “won” and the French/Germans “lost” simply because the Fourth Directive terminology calls for a “true and fair” view. Leeson (1979) described the prescriptive requirements of the Directive to be “more detailed, more precise and less flexible” than traditional British financial reporting practices. Such requirements specify a relatively rigid format for the mandated balance sheet and profit-and-loss account presentation. Hence, the Directive also requires more structure and precision than the Anglo-Saxon approach of informational usefulness, that is, the original, flexible “true and fair” view. Meanwhile, Hamon (1979) described the “true and fair” aspect of the Directive as a new concept to financial reporting in France. This overriding principle purports to add an additional dimension to the prescriptive reporting approach; the preparers should consider the fairness of the information from a users’ perspective. Accordingly, the contents of the financial report should now be considered as a composite whole when communicating a “true and fair” view of a company’s financial affairs. In addition, the French report is expanded to include notes on accounts that contain all relevant information for report users. Latitude exists to interpret a “true and fair” view differently by different countries, for example, the French versus the British. The Fourth Directive is not an attempt to dictate accounting standards; rather, it contains a number of alternatives with an overriding concept of “true and fair” view. In summary, a review of the Directive indicates a carefully constructed compromise, that is, a combination of the French/German structure and precision and British informational usefulness. The latter (true and fair view) insists upon providing all relevant information to communicate act&economic performance. Accordingly, an awareness of who (what) determines (influences) financial reporting relevancy in France is important. A SOCIOHISTORICAL REVIEW

Tinker applied financial accounting,

a classical political economy theoretical that is, a rebirth of Ricardian economic

foundation to thought.2 This

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NATION-SPECIFIC

FINANCIAL

in France

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PROCESS

Regulators

Users of Capital

II

GOVERNNENT

NATION-SPECIFIC

(Social

Key:

Features)

Suppliers of Capital

Facilitators (Accountants)

II

II

SOCIO-ECONOMIC

(Political

Traits)

LABOR

II

ENVIRONNENT

(Economic

Qualities)

Social systems to consider Intrasystem authoritative participants

Figure 1. A Nation-specific Neighboring Social Systems,

Financial Accounting and Environment

Illustration:

The Process, Its

Ricardian directive stresses the need to consider all the participants in the financial accounting process. A political economy’s emphasis upon social relations suggests that certain authoritative institutional representatives (who possess special interests) may influence the process of financial accounting. The theory attempts to recognize both explicit and implicit purposes of (nationspecific) financial accounting processes. Enlarged exogenism is a sociological method developed by Smith (1973, 1976) and applied to accounting by McKinnon (1986). Enlarged exogenism combines both endogenist and exogenist research methods. Endogenism focuses on internal elements of a subject. Exogenism emphasizes external aspects of a subject. This enlarged methodology recognizes a phenomenon under investigation, its neighboring phenomena, its environmental setting, and a potential for intrusive events. The subject (according to Smith’s blueprint) is a social system. This study assumes that the process of financial reporting is a social system.

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CORPORATIONS National Champions Patronat MIR Labor Relations

CAPITAL FUNDS Banking System Finance Ministry Securities Exchange

IIL TEE FINANCIAL

REPORTING

PROCESS

EC

c

II

1

Corporate Management

FRANCE'S

Independent Bureaucratic Stratified Elitist

Figure

2.

SOCIO-ECONOMIC

Government Bureaucracy

-

ENvIRONRENT (Economic)

(Political)

(Social)

Neighboring

The Ordre (Accounting) The Compagnie (Auditing)

Authoritarian Centralized Relatively Continuous

An Illustration of French Systems, and Environment

Interventionist Credit-Based Dual Capital Structure Social Welfare

Financial

Reporting:

The Process,

Enlarged exogenism provides an analytic structure for an exploratory investigation. This method focuses upon an open, dynamic social system (the process of financial accounting) and provides analysis reflecting four major areas (intra-system activity, trans-system activity, the environment, and intrusive events). Figure 1 illustrates a nation-specific financial accounting process, its neighboring social systems, and surrounding environment. The neighboring social systems are arbitrarily selected. In addition, the literature describing France supports the combining of the Government and Labor Sectors within the Corporate and Capital Funding Sectors in Figure 2.

The Implementation of “True and Fair” Financial Reporting in France

AN INTERPRETATIONOF FINANCIAL REPORTINGIN FRANCE Figure 2 illustrates the French financial reporting3 process’s internal elements (authorities), its neighboring social systems (capital funds and corporate sectors), and its socioeconomic environment in accordance with a political economy driven, enlarged exogenist approach. Furthermore, the “true and fair” component of the EC’s Fourth Directive is a primary example of an (external) intrusive event to the process of financial reporting in France, that is, a cultural importation. Authoritative institutional participants within the process of financial reporting and its neighboring systems are as follows. The financial reporting process consists of regulators (CNC, COB, EC), the facilitators (the Ordre and the Compagnie), the preparers (corporate management), and the users (the government bureaucracy). The capital funds sector includes the banking system, the Finance Ministry, and the Paris Bourse (stock exchange). The corporate sector consists of national champions (large corporations), the Patronat (a powerful organization for the collective interests of trade associations and large corporations), and the Ministry of Industrial Redeployment (MIR). Regulators. The Finance Ministry dominates the regulatory process. Numerous laws, legislated by the government bureaucracy, regulate financial reporting in France. Three consultative organizations influence French financial reporting: the Conseil National de la Compatilite (CNC), the Commission des Operations de Bourse (COB), and the European Community (EC). The first two are substantially agencies of the Finance Ministry. Facilitators. Two mutual organizations represent and direct the public accounting/ auditing profession in France. The Ordre des Experts Comptables et des Comptables Agrees organizes and guides public accounting procedures. The Compagnie Nationale des Commissaires aux Comptes organizes and administers auditing procedures. Both organizations are subject to direct government oversight. Government ordinances limit the privilege to practice public accounting and to conduct statutory audits to members of the Ordre and the Compagnie, respectively. Preparers. Corporate management is responsible for financial reporting. Management must prepare an annual financial report to meet its legal obligations. The Finance Ministry mandates uniform annual reports. The Plan Comptable General insists upon a uniform chart of accounts and tends to emphasize accuracy and precision. Managers respond to the letter of the law, that is, to provide uniform financial statements. Yet, managers have incentives to both under- and overstate reported profits. French laws and socioeconomic circumstances encourage a pessimistic

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reporting of short-term profits; while tantiemes (executive bonuses), corporate takeover threats, a forceful ultimatum, and a strong U.S. influence support an optimistic reporting of short-term profits. French managers have a personal incentive to maximize reported shortterm profits to receive annual profit-sharing bonuses (i.e., tantieme). Companies that appear to be understating earnings are also prime targets for foreign takeovers.4 The threat of nationalization presents another threat to senior management. Poor economic performance by major companies has frequently led to their nationalization. The managers of state-owned enterprises have been given an ultimatum by the MIR, to be profitable or be fired. The United States has had a significant influence since World War II. An important condition of U.S. economic aid to France under the Marshall Plan was the requirement to train managers to be “economically knowledgeable” (for a detailed discussion, see Boltanski, 1987). The U.S. government sponsored “productivity missions, ” which indoctrinated the French economic elite with a short-term profit orientation. In contrast, French law and macroeconomic practices deter an emphasis on reporting short-term profitability. Corporate officers may be held legally liable and even sent to jail for their firm’s financial failure (see Doost and Ligon, 1986, p. 38; Most, 1984, p. 307; Arpan and AlHashim, 1984, p. 27). Corporate income tax law essentially requires the financial report and tax return to be identical. Higher reported pretax profits cause a higher income tax expense. Both areas of the law encourage ultraconservative profit-reporting practices. Understating profit prevents capital from being distributed through dividends or taxes. Excessive distributions may jeopardize a company’s future existence. Furthermore, a strong social welfare sentiment curtails managerial motivation to report short-term profits. The greater its reported prosperity, the more a company has to contribute to social welfare programs. The poorer a company appears, the more it receives from the government. Hence, incentives also exist to underreport profits.

Users. The primary user of the uniform annual financial reports is the government, particularly, the Finance Ministry. The Finance Ministry requires corporate management to prepare a uniform annual financial report to obtain data for its macroeconomic, regression-based planning model. The Ministry of Industrial Redeployment (MIR), the country’s most dominant stockholder, relies upon the uniform annual report to monitor economic performance of individual (industrial) enterprises. The Ministry of Labor requires the financial report to include a social balance sheet (bilun social) that details a firm’s laborrelated statistics. These labor statistics are vital for this ministry to function effectively. Banks and institutional investors also use the reports, but government is the most significant user.

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The process of financial reporting in France Neighboring SocialSystems. interacts with many social systems involving varying degrees of influence. The capital funds and corporate sectors are probably two of the most interactive systems with respect to financial reporting. Both systems have government ministries as authoritative participants. Capital Fmds. An underdeveloped capital market and government intervention force a reluctant banking system to assume a capital creating role. Aggressive government intervention is evident through nationalization and encadrement.5 State intervention may establish a banking structure with a pretense of being an effective mechanism for funding state-sponsored capitalism; however, appearances may be deceiving. The banking system and Finance Minist~ cohabitate through a collusive interdependent partnership to generate capital funding for the corporate sector. This partnership is not always compatible. Conflict occurs because bankers favor immediate profits, low risk, and short-term investments. Meanwhile, economic bureaucrats strive to ensure adequate long-term financing for targeted growth oriented enterprises with a relatively high degree of risk. Banking System. A state-“controlled” banking system is the primary source of external capital funding for the corporate sector. The governor of the Banque de France (the central bank) is appointed by the nation’s president. Despite heavy governmental regulation and even nationalization, the bankers maintain a remarkable amount of independence. Ultraconservative bankers advocate “prudent banking” policies that often do not support entrepreneurial endeavors in accordance with the National Plan. Prudent banking stresses shortterm loans with guaranteed returns and low risks. F~~ce~~~try. The Economic, Finance and Budget Ministry (Finance Ministry) is a complex and powerful ministry. The Finance Ministry embraces the elite economic bureaucrats that join forces with top business executives to direct the French economy through a limited pluralism. The Finance Minister’s regulatory authority over economic matters is virtually absolute, courtesy of the Fifth Republic’s constitution. The Finance Ministry’s regulatory powers ensure that it has a prominent, authoritative status in the financial sector because French commercial law requires a law to be enacted before an activity is permissible. Aggressive government intervention was most evident after World War II when a number of large banks were nationalized and, more recently, when the 1982 “reforms” placed virtually the whole banking system under state ownership. This enabled the Finance Ministry to assume the role of a controlling stockholder. As a controlling stockholder, the Finance Minister appointed presidents for each bank and ordered the banks to purchase over $850 million

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of direct equity shares in nationalized industrial companies. This forced transfer drew vehement protests from the bankers. The bankers complained that these forced investments violated their prudent banking concept. State ownership of banks significantly reduced, but did not destroy, the autonomy of the bankers. Prudent bankers frequently objected to granting loans to “unworthy” debtors. The 1982 regulations have been modified by privatization and the termination of encadrement. Privatization refers to selling the banks back to the private sector. This action has resulted in mixed (state/private) ownership of the banking system. The Finance Ministry placed a significant block of shares (e.g., one-fourth to one-third) of the privatized banks’ capital into a “hard core” of institutional investors (noyau dur). The ministry’s selection of the institutional investors was compatible with its objective, that is, to change ownership but not control. However, the bankers have attained greater autonomy due to the switch to private ownership. Securities Exchange. The Paris Bourse (securities exchange) is very small by world standards and, until the mid-1980s was not been a reliable source of domestic capital funds. But, recent deregulations contribute to its growth. Yet, a shift from the banking system to the capital market does not necessarily mean that the role of government will be less prominent. The Finance Ministry, through the COB, regulates the Paris Bourse and code law ensures regulatory involvement in the securities market, since a financial instrument cannot be sold unless a law has been enacted to make the instrument legal. Corporate Sector. Two authoritative participants (large corporations and the government bureaucracy) control the French corporate sector. National champions and the Patronat represent the big corporations, while the Ministry of Industrial Redeployment (MIR) represents the government. Weak labor unions present few obstacles, but pro-labor (socialist) legislation prevents complete dominance of labor by employers. The French corporate sector displays a dual National Champions. dominate the numerous petites et structure. A few “national champions” moyennes entreprises (PMEs) and medium-sized entities.6 A national champion is a very large enterprise that functions as a monopoly or oligopoly within industrial divisions. French industry has one or two national champions within each major industrial category.7 The government has established national champions and generously supported them through subsidized loans and grants. Extraordinarily large mergers created the giants that dominate each industry in France. These mergers usually followed government blueprints for the structure of particular industries. During the late 1970s and early 1980s the government became more active and

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turned to nationalizations. Nationalizations facilitated concentration of a certain activity within a single company. Common state-ownership facilitated asset swapping and additional mergers.* The market niches strategy centralized power within targeted industries. Post-World War II and 1982 nationalizations placed approximately half of the industrial output of the large enterprises under state control. Recent developments (since 1986) have included the sell-back of nationalized entities to the private sector. These privatization plans included selective placement of a significant amount (approximately 20% to 30%) of ownership with stable, institutional investors. The selective placements enabled the government to maintain indirect control. P&on&. The Comite National du Patronat Francais (Patronat) is an “umbrella” organization for the collective interests of the French employers.g The Patronat (established in 1946, reorganized in 1969) is a coalition of trade associations and large-scale enterprises. An executive council that is dominated by the leaders of major industrial trade associations governs this coalition. The Patronat has widespread authority and legitimacy throughout the business circles. The Patronat openly opposed nationalizations, restrictive labor laws, price controls, high corporate income taxes, and social security increases during the 1980s. Its efforts have contributed to the recent privatizations, repeal of labor laws, removal of price controls, lowering of corporate income taxes, and an increase in employee social security contributions. The Patronat’s efforts also help to solicit generous government subsidies to big business. MIR. The Ministry of Industrial Redeployment’s prominence increased because of the nationalization of French industry. As a result of these nationalizations, the MIR has equity interests that control approximately half of France’s industrial output from national champions. State ownership allows the government to select the chairmen for nationalized companies. The MIR’s power to appoint and replace chairmen of national champions is important but does not guarantee the agency complete control.” An important mechanism for establishing and monitoring industrial policy for the MIR is the contracts de plan, that is, three-year contracts. The MIR and each public (industrial) enterprise negotiate separate three-year plans. These planning contracts involve three stages. Each public national champion formulates its company-specific three-year projections. Next, the MIR incorporates suggestions consistent with achieving the objectives of the National Plan. The MIR’s suggestions are not mandatory; but such suggestions do tend to influence corporate behavior. Finally, a financial budget is jointly agreed upon that establishes the state and company’s respective funding obligations. Once the contract is signed, the only state intervention is to provide funds and review management’s performance at the end of the contract.

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Labor Relations. French labor relations are primarily between the employers and government. State (socialist) intervention has aided the labor sector. Pro-labor legislation includes mandatory worker “participation” in management and profit-sharing plans. French law requires any company with 50 or more employees to establish a works council that consists of elected employees. The works council sends representatives to attend board of directors’ meetings, but their participation is limited to consultative status. French law also requires all companies with 100 or more employees to establish profitsharing plans in accordance with specified guidelines. The Socialist government’s recent labor reforms reduced the work week to 39 hours, increased vacation time to 5 weeks, and reduced retirement eligibility to age 60. The employers are responsible for funding all reforms. Socioeconomic Environment. A nation’s socioeconomic environment is very complex, that is, it consists of multiple dimensions or realms. To describe France’s complex socioeconomic environment, we extracted from the literature the recurring perceptions involving social, political and economic characteristics. Social Features. Crozier (1982), Vaughan, Kolinski, and Sheriff (1980) and Marceau (1977) have all described French society as being highly bureaucratic, stratified, and dominated by an elite bourgeoisie who possess a strong belief in individual independence. A passion for individual privileges and independence is very strong in France. The elite domination stems from its members occupying the top positions in the hierarchical bureaucracies of government and business. Crozier argues that government, the educational system, and business bureaucracies have pushed stratified, self-protective structures to the point where they are totally incapable of directing human relations. Political Traits. France’s political traits include an authoritarian, centralized structure that is relatively continuous. Traditionally, France has been governed by a strong centralized government; for example, Napoleon’s authoritarian bureaucratic structure is still evident today. A hierarchical bureaucratic structure governs the nation. The National Plan symbolizes centralized control. The president, key ministers, and top civil servants wield significant power. The Finance Ministry remains a focal point in France’s political and economic power structure. Select business leaders carry an abundance of clout through a collusive interdependence with elite economic bureaucrats, that is, key ministers and top civil servants. Economic Characteristics. France’s major economic characteristics include state intervention, a credit-based system, a dual capital structure, and

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a social welfare focus. The government assumes an active role in directing the economy. Traditional French mercantilism has evolved into state-sponsored capitalism. French corporations (both state owned and private) are heavily dependent upon debt financing which enables the powerful Finance Ministry to significantly influence corporate behavior. A dual capital structure refers to the select national champions’ dominance over the vast number of small, “typically French” firms. A social welfare focus is evidenced by government bailouts to troubled companies and pro-labor legislation. Summary. This sociohistorical case study suggests that the explicit structural purpose of financial reporting in France is significantly modified by implicit social relations’ objectives. The French structural purpose of financial reporting is to provide economic data to facilitate the National Plan in order to enhance the production and distribution of wealth. This explicit functional response attempts to service a paternalistic government’s bureaucratic decisionmaking model. Yet, the French authoritarian/ individualism dichotomy leads to compromise and an ineffective communication of economic performance. Conflict across authoritative institutional representatives (who possess incongruent interests) restricts the structural purpose, that is, communication of (relevant) economic data. Social relations among French authoritative institutions may be best described as the government versus the banking sector, the government versus the corporate sector, and the government versus itself. Hence, the existing (adverse) social relations may be contributing to a formover-substance financial report in France. Financial reporting in France is influenced by an authoritarian/ individualistic dichotomy. Crozier (1982) described France as traditionally an authoritarian state with independent subjects. There is a perpetual struggle between respect for authority and a pursuit of liberty. A paternalistic government bureaucracy attempts to orchestrate financial and corporate affairs, but is frequently challenged by independent subjects, for example, autonomous bankers and top corporate officers. The government bureaucracy, particularly the Finance Ministry and the Ministry of Industrial Redeployment (MIR), has aggressively pursued statesponsored capitalism through nationalization, encadrement (discriminatory credit rationing), and the construction of national champions (very large corporations). Nationalization has enabled the Finance Minister and the Minister of Industrial Redeployment to hire (and fire) bank presidents and top corporate officers, respectively. The government bureaucracy also has a social welfare orientation that redistributes the nation’s wealth. Financially troubled, state-owned companies have received government-ordered funding from state-owned banks despite objections from bankers that such loans were contrary to prudent banking practices. Pro-labor legislation has granted shorter work weeks, longer

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vacations, and earlier retirements that force companies to transfer wealth to their employees. Like many parents, the French government may be guilty of trying to do too much. The government attempts to direct both production and distribution which sometimes are mutually exclusive activities. The bureaucracy sends out mixed signals. For instance, managers should report immediate profits or be fired. Yet, financial bailouts are available for those in trouble and profitable companies must share their wealth with employees and fiscal agents. Onerous French laws mandate increased labor costs and then hold managers liable for financial failure. Corporate managers also face another constraint, that is, the threat of a corporate takeover. The corporate takeover threat requires a sensitivity to speculative (foreign) “investors” and to an inte~entionist government with a Such a threat may impede long-term tendency towards nationalization. investment objectives and force management to focus on short-term profit reporting. In summary, the French government’s dual economic objectives of production and distribution may influence corporate managers to smooth reported profits.” This smoothing of reported profits is incongruent with the “true and fair” component of the EC’s Fourth Directive. The Directive promulgates a “true and fair” view, under which a company’s “actual economic performance should be communicated.” Hence, circumstances indicate that actual economic performance may not be what is communicated in the French report. CONCLUDING

COMMENTS

The implementation of a “true and fair” view in France, with its traditional emphasis on regularity {strict conformity with accounting rules) and sincerity (management’s good faith in accurately preparing the financial statements), could have called for major changes but did not. The French apparently have made modifications to the Directive’s original (British) “true and fair”view and, “regularity and sincerity perspective.” thereby, preserved their traditional ~anagement’s prudent, good-faith compliance with the uniform chart of accounts, supplemented by footnote disclosures, fulfills the “true and fair” requirement in France. Furthermore, since footnote disclosure is not precisely defined, the traditional emphasis upon format and (quantitative) “accuracy” of the accounts remains prevalent. A review of the Directive indicates a carefully constructed compromise, that is. a combination of the French/ German structure and precision and British informational usefulness. However, the potential for member nations to place an overwhelming emphasis upon certain aspects may severely limit a move

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toward harmonious financial reporting among EC Nations. The French interpretation of “true and fair” is altered by an authoritarian/ individualistic dichotomy and a tradition of structure and precision. A “true and fair” presentation insists upon providing all relevant information to communicate actual economic performance. An agreement of financial reporting relevancy is a necessary condition for a “true and fair” presentation. In France, serious conflicts among and within authoritative institutions have severely limited the flow of relevant information that communicates actual economic performance. The authoritarian institutions’ lack of consensus on precisely defined objectives makes enforcement of “true and fair” financial reporting virtually impossible. The corporate sector and government are often in conflict. The government’s social welfare policies frequently contradict its statesponsored capitalism, that is, wealth distribution curtails production. Reporting profits enhances management’s profit sharing and job security, but profits increase a company’s social welfare obligations. Understating reported profits, on the other hand, enhances a company’s chances for state-subsidized funding, yet low profits or losses jeopardize management’s personal welfare. Hence, reported profits are likely to be smoothed. The smoothing of reported income is incongruent with the communication of actual economic performance. The failure to report economic reality is not unique to France. The key question here is, can a country profess to be requiring a “true and fair” view when such strong pressures exist to smooth reported earnings? In other words, should this “true and fair” proclamation be subject to explicitly stated, nationspecific socioeconomic factors? Philosophically, perhaps relevance to whom should be made explicit. The adoption of the Fourth Directive gives the impression that harmonized financial reporting exists throughout the European Community. However, a sociohistorical understanding suggests that substantive harmonization-that is, compatible financial reporting-has yet to occur across member nations, for example, between France and the United Kingdom. While the EC was cautious not to insist on standardization (uniformity), the latitude afforded in the Fourth Directive may be too much. The Directive, as a final product, is ineffective at achieving harmonization. Acknowledgments: The authors wish to express their appreciation to Dr. Mike Fischer, Dr. John McAllister, and the two unknown reviewers for their valuable suggestions and editorial comments.

NOTES 1.

The French “Plan Compatable” recommended guide to follow.

is madatory.

The German

“Kontenrahmen”

is merely a

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2. In the early nineteenth

3.

4.

5.

10.

11.

century, David Ricardo, in his major work On the Principles of Political Economy and Taxation (1817) emphasized an expanded economic coneptualization that recognized all participants in the socioeconomic process. This case study relies upon nation-specific sociological, political, economic, management, finance, and accounting literature. Primary sources include Adams and Stoffaes (1986), Balassa (1985), Bickerstaffe (1984), Castro (1986) Cox (1986) Crozier (1982), Dalamaide (1986), de Quillacq (1983) Driscoll and Behrman (1984), Ernst & Whinney (1989) Hamon (1979), Hayward (1986), Hough (1982) Hudack (1989), Lauber (1983), McCarthy (1987), Orsini, McAllister, and Parikh (1992), Roberts (1985) Sharp (1987), and Sjogren (1987). Business Week (September 28, 1987) reported that French shareholders were focusing on the bottom line and becoming responsive to corporate raiders who zero in on “inefficient” management. Encadrement refers to discriminatory credit rationing and restrictive banking, that is, providing loans and lower interest rates to corporations that were targeted by the national economic plan. Sjogren (1987) reported that PMEs intentionally maintain employment below 50 employees to avoid certain labor laws. About half of the French firms are PMEs. Stoffaes (1986) identified the dominant companies within major industries. Lagrange (1986) includes a description of asset swapping, with examples. The Comite National du Patronat Francais is also called the CNPF. Nausbaum (1985) reported that approximately 90% of French business enterprises are affiliated with the Patronat. During March 1983, the Minister of Industry (Chevenement) was replaced (by Fabius) because his “constant intervention” irritated many managers. Subsequent ministers have allowed managers greater autonomy. “Smoothing of reported profits” refers to reporting a gradual upward trend in reported profits rather than reporting actual, erratic increases and losses.

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