The Genesis of the 2007 Conseil National de la Comptabilité: A Case of Institutional Isomorphism?

Abstract

This article puts forward an interpretation of the reform of the French accounting standard-setter initiated by Decree no. 20076629 of 27 April 2007 relating to the national accounting standards board, the Conseil National de la Comptabilité (CNC). This reform, if it goes to term, will give birth to a French accounting standards authority, the Autorité des Normes Comptables (ANC). The proposed interpretation fits within a neo-institutionalist framework. In particular, it uses the notions of path dependency and institutional mimetism. The new CNC is first put into context as an institution in relation to its predecessors. It is then compared with two institutions, the architecture of which may have inspired its conception, the Financial Accounting Standards Board (FASB) and the Autorité des Marchés Financiers (AMF). It would appear that the new CNC clearly departs from the historical path traced by French accounting regulation and tends to mimic French autorités administratives indépendantes (independent administrative authorities) of the AMF type. However, such ‘authorities’ are strongly inspired by the American Securities and Exchange Commission (SEC). So paradoxically, the model of the new French Accounting Standards Authority would be a SEC rather than an FASB.

Acknowledgements

The authors would like to thank Mr Jean-François Lepetit for the long interview he was kind enough to grant them, Mr Jean-Paul Milot, former secretary general of the CNC, for his wise comments on the first version of this article, and lastly, the two anonymous reviewers for their extremely constructive suggestions for improvements.

Notes

Mr Jean-François Lepetit completed a career in banking (Indosuez and Paribas) before becoming President of the Conseil des Marchés Financiers then the Commission des Opérations de Bourse (COB). On 13 March 2007, the Minister of the Economy, Finance and Industry, Mr Thierry Breton, appointed him President of the CNC with the task of ‘preparing for changes in this institution’ and ‘making suggestions for modernising our [i.e. those of the public authorities] working methods as regards accounting’ (letter from the Minister dated 21 March 2007). No later than 6 April 2007, Mr Jean-François Lepetit handed the Minister his Report with an appendix concerning the draft Decree reforming the CNC.

The creation of the ANC is now enshrined in Article 42 of the Act on the modernisation of the economy: the details of its creation will be the subject of a Ruling.

The list of successive presidents of the French standard setting bodies is instructive in that it illustrates the evolution of the French accounting standards setter:

• Commission de normalisation des comptabilités (1946): Robert Lacoste, member of the National Assembly reporter to the Assembly's Finance Commission and former minister.

• Conseil Supérieur de la Comptabilité (1947): Francis-Louis Closon, Director General of the National Institute of Statistics and Economic Studies.

• First Conseil National de la Comptabilité (1957): Henri Montet, under-director of the Ministry of Finance and Economic Affairs; Jean Dupont, paymaster general, Yves Cotte, legal advisor to the Treasury.

• Second Conseil National de la Comptabilité (1996): George Barthès de Ruyter, former partner in Arthur Andersen and former President of the IASC; Antoine Bracchi, former partner and President of Ernst & Young France; Jean-François Lepetit, former banker (see Note 1).

The obligation demanded of its President to devote himself exclusively to the CNC was abolished by a Decree dated 13 March 2007 (No 2007-336).

The Minister for the Economy or his representative, president; the Minister of Justice or his representative, vice-president; the Minister in charge of the Budget or his representative; a member of the Council of State designated by its vice-president, a member of the Cour des Comptes (government accounting office) designated by its first president, and a member of the Cour de Cassation (court of appeal) designated by its first president and the state prosecutor.

The ‘professionalisation’ of the second CNC was symbolically marked by the appointment of Georges Barthès de Ruyer, former partner in Arthur Andersen and former president of the IASC, to its head.

The Ruling of the European Parliament and Council of 19 July 2002 (CE No 1606/2002) confirmed this choice by requiring European companies making a public offering to prepare their consolidated accounts in accordance with IASB standards from 2005 onwards.

An Order dated 19th November 2007 appointed the first nine members of the College as well as the members of the consultative committee.

New institutional economics has scarcely shown any interest in this question either, with the notable exception of North: one of his major contributions lies in the elaboration of a theory of institutional change.

‘An institution is a guiding idea or enterprise that is realised and endures juridically within a social milieu; for the realisation of this idea, a power is organised that equips it with organs; at the same time, among the members of the social group interested in the realisation of the idea, manifestations of communion occur that are directed by the organs of the power and regulated by procedures’ (Hauriou, 1925).

The FASB can, moreover, be considered from a dynamic point of view, as the product of the evolution of an institution that might more accurately be described as falling into the category of endo-regulation. The current structure of the FASB has come about through the successive reforms of the American accounting standards institution, and conforms to the technocratic independent regulator type (Zeff, 2003). A similar observation might be made concerning the evolution of the British accounting standards setter.

In other words, path dependency does not only mean that history matters but that institutions tend to reinforce themselves. The genesis of an institution can only be explained if we take into account institutions in the same field that have preceded it.

‘Any member of the college must inform the President:

• of the economic and financial duties he has carried out in the course of the previous two years preceding his appointment, that he is currently carrying out, or is about to carry out;

• of any direction, administration, supervisory or control mandate he has held within any legal entity in the two years preceding his appointment, that he currently holds or is preparing to hold.

This information, as well as that concerning the President, are held at the disposal of the members of the college.’

The Order of 19 November 2007 (JO No 277 of 29 November 2007, p. 19406) issued by the Minister for the Economy, Finance and Employment containing nominations to the college and the consultative committee of the new CNC reveals the interpretation that has been made of this article and at the same time, its limits (see Note 27).

To avoid any risk of conflicting interests linked to the obligation for companies to acquire the text of accounting standards, the Sarbanes-Oxley Act nonetheless required the FASB to put its Statements of Financial Accounting Standards and Concepts Statements online free of charge on its website (www.fasb.org).

We do not intend here to trace the troubled history of relations between the SEC and the FASB. It is interesting nonetheless to note that the SEC has retained significant influence over American accounting standards. As Cormier (2002) reminds us, the stock exchange regulator often enriches the work of the FASB. Its requirements often precede the FASB's standards and, in some cases, they have run directly counter to an FASB standard, forcing the latter to rethink.

In the same way, in the UK, cross-representation has been set up between the Financial Services Authority (FSA) and the Financial Reporting Council (FRC), institutions respectively charged with the regulation of the financial markets and corporate governance (including the rules relating to the financial information published by companies).

More accurately, within the AMF, it is the directors of the accounting department whose task it is to interact with the CNC and, in particular, its accounting doctrine department, responsible for defining the doctrinal positions of the AMF for the correct application of the accounting norms.

In French law, public establishments are organisations that are legal entities under the supervision of a ministry. From 2003 on, the legislator has chosen to endow independent authorities with the status of legal entities, that is to say free of any administrative supervisor. To do this it has had recourse to the new title of ‘independent public authority’ (Gélard Report, 2006).

The question of the attribution of legal entity status to the regulator, a choice that only concerns four cases out of a total of 339 AAIs listed in 2006, will also be mentioned.

It merges with the creation of the CNIL, the French Data Protection Authority.

There are traditionally two categories of AAI: economic regulators (Energy and Banking regulation committees, for example) and Authorities designed to protect public liberties and persons (Higher Audiovisual Council, High Authority of the Fight against Discrimination and for Equality).

From this point of view, the composition of the college of the renewed CNC, which might be thought to prefigure that of the ANC, leaves a great deal of room (nine out of 16 members) to ‘people designated, by virtue of their economic and accounting competence […], from whom the Minister for the Economy appoints the President’.

This is the case each time a public company exists in a sector open to competition or more generally, subject to regulation.

In this regard, see the call to reform the CNC launched by Les Echos (16 March 2007) by E. Boris and C. Lopater (member of the CNC), who issued this severe observation, ‘France has not measured the consequences of the new global intellectual competition, a determining factor in the choice of accounting regulation’ and ‘Only the creation of a permanent IFRS committee dedicated to this, and composed of active, competent members specialised in IFRS […] in a well-defined legal framework, together with appropriate governance, will meet these inadequacies’.

Financial autonomy is a direct consequence of legal entity status. However, it is possible to give an AAI financial autonomy without attributing legal entity status. This was the case with the COB (Gélard Report, 2006, p. 68).

The budget of the AMF is determined by the college from a proposal by the secretary general. The fees paid by the people it controls cover, for example, the examination of the obligation to file a public offer or the checking of an annual reference document. The fees and contributions received by the AMF are fixed by Decree, issued after an opinion from the college, within the limits fixed by the law (Articles L. 621-5-2 and L. 621-5-3 of the monetary and financial code).

The number of AMF employees working in the general secretariat was 360 in 2007.

The ASB is financed by the Financial Reporting Council (FRC) to which it is attached. In reality, it is the FRC that benefits from funding shared between the State, the corporate world and the accounting profession.

The nomination (Order of 19 November 2007) from amongst the eight ‘operational’ members of the College, of three leading professionals working in the big firms is obviously going to feed this suspicion of if not financial, at least doctrinal, dependence.

The hearings held by Congress after the Enron affair are instructive. For example, Arthur Levitt, former President of the SEC, stated that ‘the fact that the Board is funded by the very firms for whom they set standards, who often come back to them and say, “if you're going to set this standard, we're going to cut off your funding.” That's wrong. We've got to change their funding’. This statement is available at the following address: http//www.senate.gov/~gov_affairs/0120401witness.htm

If we take a closer look, accounting regulation is, in fact, shared, since the SEC exercises ultimate control over the standards produced by the FASB. However, this control has not always been of equal intensity. Moreover, the FASB is sometimes the object of intense political pressure on the part of Congress, tending the dissuade it from adopting standards that run counter to the interests of certain lobbies (for example, in 2004, when the FASB suggested counting stock-options as an expense).

From 1938 to 1972, the SEC delegated its power of standardisation to the profession (AICPA). In 1972, on the recommendation of a former member of the college of the SEC, Francis Wheat, who presided over the committee of the AICPA, the FASB was instituted within the FAF as an independent standard setter (Block, 2003).

This Act, passed on 14 June 1791 and which bears the name of the constituent who proposed it, limited Rights of Association and put an end to the guilds system.

It should be noted that the mimetic isomorphism mentioned here is not the only process involved in the tendency towards the homogenisation of public policies: coercive (for example the obligation of transposing a European directive into the national rights of member countries) and normative (via the diffusion of ‘good practices’ by certain professions) isomorphism are also elements in this evolution.