GATS talks aimed at enabling export of Andersen-style accounting?

Developing countries should tread cautiously in the ongoing services negotiations in the WTO by not rushing into new liberalization commitments and by ensuring adequate regulatory arrangements are in place beforehand. This need has become all the more urgent in light of the corporate follies exposed by the Enron bankruptcy.

by Chakravarthi Raghavan

GENEVA: The two-year-old round of negotiations on trade in services at the WTO, which has been rolled into and made a part of the “single undertaking” under the Doha work programme, has been recently (at the World Economic Forum in New York) described by Stuart Eizenstat, an Under-Secretary of State in the Clinton administration, as a “move to allow [Arthur] Andersen to export its accounting services to the world” (John Nichols, “Enron’s Global Crusade”, The Nation, 4 March 2002).

The “single undertaking” embraces several sectors and areas of ‘international trade’ covered by the WTO and others yet to be brought under its remit. It is a further effort at creating level playing fields for ‘liberalization’ to promote economic globalization by expanding the space of corporations and reducing the authority of governments of developing countries to pursue domestic economic policies to further their development strategies.

Among the four or five areas of immediate negotiations under the single undertaking, agriculture, it is generally agreed, will make no progress and will merely mark time until some elections in Europe, particularly in France, and the Congressional elections in the US perhaps are over this year.

Not so “development-friendly”

The negotiations on services, which are mandated under the WTO’s General Agreement on Trade in Services (GATS), have been viewed as “more promising” and less controversial, partly because of the management of information about the talks and partly because of the myth that has grown about GATS being a “development-friendly” agreement - a myth that is very prevalent among many developing countries as well as several international organizations.

There is in fact little to back up this view. The fact that liberalization need not be done at one stroke but gradually over several rounds of negotiations - in effect allowing domestic reforms and external openings to be in step - does not make it any more “development-friendly.” GATS is as friendly to development as the 17th- and 18th-century British Navigation Acts were to the American colonies which triggered the Boston Tea Party and the American Revolution.

No one with some grasp of development and development economics can view the flexibility in GATS for individual developing-country Members to open up fewer sectors, liberalize fewer types of transactions or progressively extend market access in line with their development situations, and the limitations that are possible in scheduling commitments in terms of national treatment or attaching accession conditions etc, as being in any way “development-friendly.”

The view that greater market access for goods exported can compensate for loss of domestic policy-making autonomy (through adoption of standards and norms set in the industrial world) in new areas is not borne out in real economics. As J. Michael Finger and Julio Nogues note in a World Bank research paper, the concessions given in new areas “could very likely bring economic costs - real costs.”

The right to liberalize progressively has to be weighed against the facts of the real economy, namely, that once an undertaking to liberalize has been entered into the country’s schedule of commitments, there is no retreat or scope for rethinking if the policy fails to achieve the expected objective, which is not unlikely since there are no data to enable the country to even make an assessment in mercantilist terms. Moreover, the entire process of market access negotiations is a bilateral one where the powerful countries, in promoting the interests of their corporations, can and do exercise considerable power, and the only option for  developing countries is  to yield domestic space and autonomy to industrialized nations and their corporations.

Push for accounting deregulation

One of the first sets of rules and disciplines on the rights of  WTO Members to regulate services, under Article IV of GATS, was initiated at Marrakesh in 1994, as a Ministerial Decision on Professional Services, for the establishment of a working party on professional services, directed to make recommendations as a matter of priority for the elaboration of multilateral disciplines in the accountancy sector.

While other Ministerial Decisions of Marrakesh (such as that on the Net Food-Importing and Least Developed Countries) have been languishing  without any serious actions and efforts to implement them, the Decision on Professional Services, and the priority under it for accountancy services, was pushed and the “Disciplines on Domestic Regulation in the Accountancy Sector” were adopted in December 1998 by the WTO Council for Trade in Services.

There are some differing views on what the disciplines mean and do. However, what they mean would probably be interpreted and decided on at some future point by the dispute settlement processes of the WTO (by the secretariat, its notes and files, and a three-member panel and a three-member appellate body), where the panel and appellate body have a tendency of bundling together various agreements to create cumulative obligations.

The disciplines do not address measures subject to scheduling under Art. XVI and XVII of GATS, which restrict access to domestic markets or limit the application of national treatment to foreign suppliers; “such measures are addressed in the GATS through the negotiation and scheduling of specific commitments.”

The disciplines lay out some requirements in respect of measures not subject to scheduling - general provisions, transparency requirements, licensing requirements and procedures, qualification requirements and procedures, and technical standards. They state that Members shall ensure that measures relating to licensing requirements and procedures, technical standards and qualification requirements and procedures “are not prepared, adopted or applied with a view to or with the effect of creating unnecessary barriers to trade in accountancy services.”

The current crop of services negotiators in Geneva, in particular those from developing countries, say that the push and pressure for the disciplines came from the US and the EC, and their service industries (and the WTO/GATS secretariat), and that they were adopted on the express understanding that they were applicable only to the accountancy profession.

(However, the same terms and norms are also being sought to be introduced under the four so-called “Singapore issues” (investment, competition policy, transparency in government procurement and trade facilitation), part of the mandate for further study under the Doha work programme, where they are sought to be presented as part of modalities for a “development dimension.”)

Some trade officials also say that the serious differences between the European, mainly UK, approach of laying out principles of auditing and accountancy and expecting auditors and accountants to obey the spirit of the rules, and the US approach of detailed regulations, had come in the way of harmonizing the standards for creating a “level playing field.”

Until the recent Enron scandal and revelations about the role played in it by the audit and accounts firm, Arthur Andersen, a major attempt in the new round of WTO services negotiations launched on 1 January 2000 was to harmonize the rules, though this was worded differently in some of the proposals put forward by Members.

A number of proposals from various countries in the area of accountancy services and professional services already want to attack as trade barriers a range of requirements on such issues as local equity, number of accountants that can be employed (by a foreign service provider), citizenship and residency, restrictions on electronic transmission of reports and accounting documents, as also regulatory issues.

Parallel to these are the moves of some of the international supervisory organizations, part public and part private, to impose their own standards on the world through the harmonization processes of the WTO, as well as the moves of the Bank for International Settlements (BIS), the international securities market supervisors and others to use the IMF and its Art. IV surveillance to force emerging markets to adopt such standards as a price for IMF assistance, etc.

In terms of the WTO talks, it is very unclear how these will now play out.

Capital(ist) transgressions

The US administration of George W. Bush, and many others linked directly or indirectly to Enron and its vast gravy train of funding, have been attempting to portray the Enron case as involving only a ‘rogue’ corporation. However, in the three months since the collapse of Enron and the revelations it has engendered, it has become clear that a whole gamut of institutions of late 20th century capitalism are involved.

Recourse to ‘creative accounting’, with the help of accountants, auditors and legal advisors, and attempts to talk up the markets (in order to keep up the value of stock options, a tax-free way of paying managements), appear to have been common practice among a large number of enterprises, banks (and their securities analysts) and Wall Street firms.

It is difficult to believe that the regulators in the US were unaware of these until the Enron crisis.

While European media like the Financial Times have been providing in-depth analyses of these US failings, the Wall Street Journal (weekend edition, 22-24 February) has brought out that while so far Europe has not produced its own Enron, “the old world has its share of ‘black boxes’: companies whose financial statements are hard to penetrate, that have items off the balance sheet or that use unorthodox accounting methods.” The WSJ has provided what it calls a case history of several European enterprises affected by public/shareholder doubts: British airplane-engine maker Rolls Royce, the telecom operator Cable & Wireless, Swedish insurer Skandia, France Telecom, insurer Aegon, engineering company Alstom, BAE Systems and Siemens.

Until its collapse, Enron was a big player (directly through the US government and indirectly via the Coalition of Service Industries and its lobbying with WTO officials and delegations).

The article by John Nichols in The Nation, “Enron’s Global Crusade”, says that while at the New York WEF meeting “the mandarins of corporate capital continued to preach the gospel of free markets and economic globalization, the Archbishop of Canterbury, Rev. George Carey, told the assembled CEOs and the politician hangers on, ‘There is a big question mark over capitalism today. It’s one word and it’s Enron. And what’s the challenge? Capitalism has to act within boundaries’.”

Felix Rohatyn, former Wall Street banker and former US ambassador to France, in an article in the New York Review of Books, “The Betrayal of Capitalism”, has said that “the events surrounding the bankruptcy of Enron go beyond the sordid situation of Enron itself and raise the larger question of the integrity of our financial markets.”

He cites the astonishing and reckless speculation that has been characteristic of the markets since the mid-1990s, the bankruptcy of the Long Term Capital Management hedge fund and its organized rescue by the US Federal Reserve, the dotcom bubble and its creative accounting. Rohatyn points out that financial regulators, whether at the US Treasury, the Federal Reserve, the Securities and Exchange Commission (SEC) or other agencies, were “either unwilling or unable to check this behaviour.” When the then Chairman of the SEC Arthur Levitt tried to adopt rules to prevent the more obvious conflicts of interest that were widespread among auditors, he was blocked from doing so by the accounting industry lobbying Congress. And the Federal Reserve, which could have raised margin requirements for stocks listed on NASDAQ and thus send a powerful signal to the rampant speculation on that market, chose not to do so.

Citing a number of ills that raise larger questions about the integrity of the financial markets, Rohatyn argues for serious reforms:

   *  Accounting firms should be required to act honestly and responsibly, and ensure full disclosure, accurately and coherently, of their clients’ profits, losses and assets.

   *  There should be close scrutiny of  the present system of self-regulation by the accounting industry, and it should be abolished or replaced by a new system of controls.

At present, Rohatyn notes, five accounting firms have a virtual monopoly on the audit of most of the US companies listed on the stock markets, and they had enough political clout to prevent Levitt from adopting rules to prohibit conflicts of interest. These firms often audit the accounts of companies while also acting as paid financial consultants.

Also, it is unsatisfactory for the accounting industry to rely on a system of “peer review” by which major firms are responsible for reviewing one another’s work. Rohatyn says that during the 40 years he has served on boards of directors and often of audit committees, he cannot recall a single instance of a negative peer review being brought to the attention of the audit committees.

A new regulatory system is necessary, he says, and companies should be required to periodically change their audit firms, thus forcing greater competition and encouraging new entrants.

The potential conflicts of interest go beyond audit firms and extend to securities analysts, the way investment banks allocate their underwritings of hot new issues among their clients, and the activities of banks themselves in acting simultaneously as lenders, underwriters and financial advisors and principal investors in some transactions.

In terms of the current GATS negotiations, a whole range of new regulatory issues, at both national and international levels, have sprung up. These need to be carefully looked at and satisfactory arrangements and agreements made, before developing countries blunder into making new commitments.

At the level of audit firms and regulations, for example, developing countries might well consider whether to institute a provision in their own national regulations akin to the Swiss requirement whereunder the auditors of banks have a primary responsibility to scrutinize whether banking regulations are being observed and, if not, report it to the Swiss National Bank.

In the late 1970s, it was this requirement that enabled the Swiss National Bank to catch a leading American bank which was violating the Swiss regulation against overnight holding (or lending and borrowing) of funds beyond a limit to avoid speculation. The US bank concerned had resorted to what was known in the trade as “parking” of funds, moving funds from one jurisdiction to another as one market closes and another opens in the global casino of financial markets. The bank was pulled up by the Swiss National Bank and threatened with withdrawal of licence. The US SEC, which had started proceedings, was forced to abandon them when the bank’s chief executive became an important member of the Reagan administration.

The developing countries might emulate the Swiss regulations of that time, and make it a responsibility of auditors of enterprises, more so the foreign corporations (whose executives do not reside in the country or can easily flee the country), to report any violations of law to the national authorities, securities market regulators or central banks. (SUNS5068)                                              

From TWE No. 275 (15-28 February 2002)