This harmonization can be achieved by having one set of rules; however, with different social and economic institutions and with different cultures, laws, business practices, and business ethics, one wonders whether a single set of accounting rules truly harmonizes anything. Even if it could, significant differences exist across countries with respect to enforcement. Harmonization doesn't mean much when U.S. companies are held to higher standards by the regulators and other business enterprises can lie with no repercussions.

This issue surfaced recently when the IASB proposed a particular set of directives for accounting for certain derivatives. The European Union erupted with jeers and taunts and refusals to follow such tenets. While this appears much ado about very little, since the two proposed rules cover such a small part of the accounting universe, clearly it reveals a fundamental difference in how different countries view the purpose of accounting principles.

The U.S. society promotes widespread participation in the stock markets to reap the advantages of competition. While encouraging participation, this system also discourages untrustworthy managers from expropriating resources from the investors to themselves. In Europe business leaders view accounting as a tool to support the wishes of managers -- smoothing earnings and hiding losses until some gains can cover them.

Financial accounting and national securities regulation fortify U.S. stock and debt markets. The Securities and Exchange Commission (SEC) prescribes disclosures, including accounting data, which allow investors and creditors to make informed judgments about a stock's valuation and about the ability of an entity to repay its liabilities. Since widespread investor participation is a major policy goal, the U.S. promotes more disclosure than other countries do. When managers don't toe the line, the SEC investigates the misdeeds and can issue civil judgments; it might even pass the case on to federal prosecutors who might initiate criminal proceedings. Courts also entertain lawsuits from aggrieved investors and creditors, who attempt to find justice one way or another when companies cook the books. Compared to the American system of justice, other countries and the international community do very little.

On December 15, 2003, the FASB issued four exposure drafts that would move a few steps closer to this goal of global harmonization. One replaces APB Opinion 20, which deals with accounting changes. The old rule required the effects of most changes to appear as a separate line on the income statement; the proposed rule would entail the retrospective recognition of these financial effects. The proposal would also require changes in depreciation methods to be accounted for as changes in estimates. These amendments appear innocuous enough.

A second proposal changes the accounting for exchanges of productive assets. You will recall that APB Opinion 29 distinguished between similar and dissimilar assets. When the assets were dissimilar, the firm would recognize the new asset at its fair value and record any gain or loss. When the assets were similar, the company would book the new asset at the book value of the old asset, thereby obviating any gain or loss. The proposal would record all such exchanges at the fair value of the new asset, necessitating the recognition of the gain or loss. This seems a step in the right direction, since the accounting for dissimilar assets seemed rather arbitrary and perhaps invented by some tax accountant. (My only concern is whether any creative accountants will have the opportunity to display their skills, as did the bookkeepers for those telecom companies which proposed the broadband swaps. The proposal requires the transaction to possess "commercial substance," I presume to avoid such entanglements. Let's hope the auditors in fact compel business enterprises to meet this commercial substance criterion.)

A third exposure draft addresses inventory costs. This proposal would require the expensing of certain things like excessive spoilage and abnormal logistical costs. This proposal involves rather minor edits.

The remaining proposal amends the computation of earnings per share. When a manditorily convertible security becomes mandatory, then the number of shares that will be issued is added to the denominator (in weighted average form). The exposure draft also includes a few other minor items.

On the whole, these four proposals do not change much and so aren't worth fretting over. More substantive issues like pension accounting will prove more entertaining.

Having said that, I don't think the benefits of global harmonization will amount to much until enforcement efforts across the globe match that of the SEC. Whatever the form and the content, accounting standards don't matter if managers don't have to follow them.

J. EDWARD KETZ is accounting professor at The Pennsylvania State University. Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals, and columnist of The Accounting Cycle for SmartPros.com.