EU Federalism and the Governance of Financial Reporting: Cost and Benefits of Centralized Standard Setting

Abstract

The European Union (EU) is constructed under the federalist principle of subsidiarity, which this paper con-siders in the policy field of financial reporting. We attempt to answer the question whether the current governance level of accounting regulation in Europe is balanced between centralised and decentralised decision making. In order to identify "local needs", which are crucial for being able to decide upon the importance of decentralised coordination, our analysis applies insights from comparative accounting research. Following the extant literature we focus on three criteria: a) the member states' legal systems, b) the micro and macro-structure of European capital markets, and c) taxation. Using the federalist framework, we conclude that local solutions in accounting currently remain preferable for small and medium sized companies, while big listed firms rather need a central solution as currently implemented by the EU. Large groups are mostly international themselves and face an increasingly integrated capital market (both globally and across the Union); small and medium sized companies operate still in locally different business environments with strong national peculiarities and preferences. For them, a centralised solution would result in additional costs for at least some member states and their residents. Recent changes in corporate finance may change this situation, however, by aligning local preferences on accountancy.

Keywords: Comparative Accounting, Accounting Harmonisation, Federalism, Subsidiarity, European Union, SME

JEL Classification: G10, M40, M41, M44, M47, M48