The Impact of The

General Agreement

on Trade in Services (GATS)

on the Accountancy Profession

UNCTAD/UNDP

Group of Arab Experts’ Meeting

Manama, State of Bahrain

March 16-18, 1996

The accountancy profession is already a global one but nationally imposed barriers exist which divide the world profession. The purpose of the GATT UruguayRound of Negotiations was to remove or reduce these obstacles and liberalize world trade in professional services.

My speech will cover some of the provisions of the General Agreement on Trade in Services (GATS) and assess its likely impact on the accounting profession. Public accounting is a client driven business and we in the profession wish to see less trade barriers to serving our clients wherever they are geographically located.

I would first like to discuss the history and background of the UruguayRound Services Negotiations form the perspective of the professions. In the last 50 years, services have come to dominate the major economies of the world, and became central to their economic growth. Services account for the largest share of employment and production in all developed countries (about two–thirds of the GDP in the US and Europe), and in a number of developing countries. Services have not grown at the expense of manufacturing, but their growth resulted from improved efficiency, marketing, and post sales services.

During the 1980’s the value of trade in services grew two and a half times the rate for goods. Their total value exceeded world trade in textiles and clothing, and more than double the exports of iron and steel. However, since professional services are highly regulated, and since many are not tradable, ways need to be found for removing restrictions on services.

The export of professional consultancy services probably dates back to some 130 years. UK engineers pioneered this trend, mainly in today’s Commonwealth countries, and provided a model which other European and North American firms followed. “English capital poured into every quarter of the globe, and chartered accountants followed” said their president in 1904. This pattern was repeated by American capital, accountants, lawyers and advertising agents after the First World War, and accelerated sharply after the Second World War.

The past surge in mergers of international accounting firms was caused by the need to offer a wider range of services to build up perceived prestige for government and multinational clients, and improve the spread of clients by type and location. Management consultancy and tax advice combined is a leading consultancy practice in its own right, specializing in the provision of the advisory services to the tourism, hotel, and leisure–related industries.

The General Agreement on Tariffs and Trade (GATT) is still the only multilateral instrument that lays down agreed rules for international trade, and it has functioned as the principal international body for trade relations and negotiations or reductions of trade barriers. GATT is both a code of rules and a forum for discussion on how to overcome trade problems and to negotiate the enlargement of world trade opportunities.

The key to liberalizing world trade of accounting services are as follows.

  1. Transparency. This requires that relevant information on laws, regulations, and administrative practices relating to trade in services be made available. For example, the role and authority of national professional associations regulating the use of titles and practice need to be known.
  2. Non–discrimination / most favored nation treatment. This means that restrictions or benefits conferred upon some members must be extended to all.
  3. National treatment. This requires that non–domestic services products and the providers of these services be accorded treatment no less favorable than those accorded to domestic services providers.
  4. Market Access. This has to be granted on a basis consistent with the services agreement and should permit services to be supplied according to the preferred mode of delivery of the provider (e.g. use of international firms’ names, access of licensing procedures, and recruitment of local staff). In addition, liberalization has to be progressive and there should be increasing participation by the developing countries which will no doubt be seeking to ensure that they benefit from on-the-job training of their nationals and from the transfer of know–how , as well as setting conditions on investment aimed at furthering their national development objectives.

In 1986 a veteran US trade official had taken a look at how a service agreement might cover a wide range of professional services including service accounting, law, consulting, engineering, and the like. He foresaw that any breakthrough in liberalizing barriers would come only in the context of agreements negotiated among smaller groups of like–minded countries. He wrote “such agreements will probably have to be negotiated by those most directly involved in the accreditation of professionals, and the respective professional associations”. A model of what such agreements could look like it is provided by the reciprocity agreement negotiated by the American Institute of Chartered Accountants following the US/Canada Free Trade Agreement that was signed in 1989.

Under the services agreement at GATT, a system of mutual recognition will have to be developed. This would at least require minimal harmonization of education, training and supervised practice of professionals, and rules governing these achievements, so that non–domestic standards be recognized by a country as equivalent to its own. There would also have to be a sufficient degree of trust for the difference to be accepted. There also has to be awareness of the imperatives of immigration and employment policy and awareness of cultural sensitivities.

For the European Community perspective on the UruguayRound, an official from the Commission of the European Communities stated that liberalization needs more than just rules; concrete moves were required. The EC favored a standstill in order to establish a benchmark for liberalization, followed by a roll–back of barriers.Care should be exercised, however, in assuming that the EC model would also be appropriate at the worldwide level. It was unrealistic to expect the same freedom globally as within the European community.

The EC recognizes that the accounting profession is already highly internationalized, being in the vanguard of all the professions. Accountancy can act as an example for other more conservative professions. The EC feels that a distinction should be made between those salutary services required by law (e.g. statutory audits) and those more voluntary services which are more advisory in nature. The commitments entered under the General Agreement of Trade in Services (GATS) would have to apply to all regulations affecting the accounting profession, whether imposed by governments or on a self–regulatory basis. At the same time, it should be appreciated that liberalization is not necessarily the same as deregulation, and that some new regulations in certain areas might actually be positive.

Business experience in the EC shows that international trade in accountancy services promotes development. Local delivery of services requires local staff using the best worldwide standards, and these services in turn assist in improving efficiency and the integration of the local economy into the global economy.

The US private sector’s perspective on the UruguayRound is very similar to the EC perspective. They wish to see a comprehensive and effective agreement which achieves genuine liberalization. By comprehensive, it is meant that the agreement should cover the maximum possible number of countries, sectors, and problems. Regarding countries, coverage should extend beyond the members of the OECD. In relation to sectors, the agreement should address current and future tradableissues.These should include government restrictions on trade and investment, the transfer of key personnel, exchange control regulations and other restrictions on international payments, monopolies and subsidies, professional accreditation and licensing for both firms and individuals, access to local laws and regulations, and discrimination between local and foreign service providers.

To be effective, the agreement should have clear and tough rules. It should require the removal of barriers and should get the regulatory situation under control. Similar to the EC perspective, the agreement should not just contain procedures and objectives, but achieve genuine liberalization. Genuine liberalization will require commitments entered into country by country, barrier by barrier, with clear lists of those barriers to be removed. In the United States, work on the liberalization of international trade in services has been ongoing for over 15 years with the private sector taking the lead in solving problems. The US private sector even put forward to the government a draft of a model GATS agreement. Similar private sector input is required in other countries in order for GATS to succeed. There are great similarities between the EC and US position, which makes it easier to develop an agreement.

Ernest and Young performed a research study in 1990 on the obstacles to trade in services in the accountancy profession. The obstacles they documented fall into two categories: cross-sector obstacles and sector-specific obstacles.

  1. Cross-sector obstacles are of a general type and include restrictions on international payments such as foreign exchange controls, and restrictions on mobility such as visa and work permit requirements. Some countries also make a distinction between the taxation treatment of local providers and that of non-locals, usually to the detriment of the latter.
  2. Sector-specific obstacles are more explicit and are the ones that place greater emphasis on gaining access to market. There are restrictions on access to a market and they range from outright prohibition as in Austria and India to minor obstacles like licensing procedures such as obtaining government permission to offer accountancy services in Pakistan. Other countries limit the scope of accountancy services: Australia has restrictions on the number of partners in a firm and Canada had discriminatory government procurement policies.

Restrictions also exist in the area of professional qualification and associations’ requirements. The typical obstacle here is that some countries require local membership in their professional societies or local qualifications and discriminate against non-national companies by recognizing some foreign qualifications or associations but not others. Nationality requirements are still a major obstacle for service firms established by non-citizens or for the participation of foreign nationals in local partnerships.

Regulations are a distinctive feature of the service sector. They relate to the provider of services, rather than to the product itself. Regulations apply to market access and commercial behaviors as mentioned earlier. The multilateral negotiations on trade in services are a major challenge to the traditional regulatory pattern. Unlike the manufacturing sector where trade is subject to border controls, tariffs and quantitative restrictions, internal regulations tend to be a major instrument for controlling and limiting trade in services. There are powerful motives for the regulation of service activities. The main one being the crucial role of many services for development and their character as economic infrastructure. One argument often advanced in favor of regulation is consumer protection. In some areas, such as professional services, regulations are rooted in tradition and are defined by powerful interest groups and some believe that the quality and integrity of professional services would decline if the market for such services were based on open competition.

Regulations controlling services transactions are not always imposed directly by governments. In the accountancy profession, governments have often delegated regulatory powers to professional bodies, which may raise problems to the extent that those bodies pursue their own interest rather than users’ interests.

In September of 1989 the Group of Negotiation on Services (GNS), a division of GATT, performed a customized testing exercise on the impact of the UruguayRound Services Negotiations on the accountancy profession.

It was determined that eight trade policy concepts and principles are relevant to establishing a multilateral framework for trade in services. I briefly mentioned some of them earlier but have to expand on them and discuss their relevance to the international trade of accountancy.

  1. The first is Transparency in which there appears to be agreement that it should cover laws, regulations and administrative guidelines including those pertaining to temporary international mobility, taxation, and accreditation as well as norms and measures imposed by private professional associations. This reflects the awareness that in many cases there is a delegation of public regulatory powers to professional associations, but the degree to which these powers are delegated vary widely across professions and countries.
  2. Second, is Progressive Liberalization which is generally seen as the process of reducing or eliminating those regulations affecting professional services which constitute barriers to trade and are protectionist in nature, while at the same time respecting national policy objectives which may make some types of access where certain professions have statutory functions. In the case of professional qualifications, there has to be some means of ensuring that foreign practitioners adhere to national standards. A solution to this problem would be the advancement of internationally accepted standards. Keeping in mind that in the accountancy profession there exists international training and ethical standards, it is necessary to reflect on how best to promote the development of international services quality standards. The US has also proposed an idea of having a protocol, which is an arrangement among a smaller number of countries than those participating in the framework to enter into harmonization or mutual recognition understandings of professional standards. Such a proposal would be open to any signatory of the framework agreement that will meet the requirements that were established under this mutual recognition understanding.
  3. Third, isMost Favored Nation status/ Non-Discrimination, but the main problem in applying MFN to the accountancy sector concerns the question about how far it is possible to build on exchange of mutual recognition between any two countries and extending them to third countries.
  4. Fourth, is Market Access and this has to do with whether or not an exporter is prevented from selling in any market by any government measure beyond market conditions. The main access problems, namely restrictions related to nationality and qualifications, have already been discussed.
  5. Fifth, is National Treatment, which is closely related to market access. They are not identical conceptually but sometimes the barriers are very similar and a single barrier can have an effect on access and on national treatment. In accounting and tax services, national treatment requires that foreign nationals qualified for local accounting and tax services be treated in the same way as domestic nationals.
  6. The sixth is the need for Safeguards and Exceptions. There is wide disparity of views on the need for safeguards, which range from being able to invoke them in certain situation such as balance of payments problems, to objection of any safeguards.
  7. Seventh, is the Regulatory Situation which should be noted, will not be eliminated by a services agreement. The GNS is about progressive liberalization and not deregulation. One question that has been raised in the GNS concerns the issue of how far governments can affect the private associations and make them adhere to whatever parameters might be decided in the framework agreement.
  8. The eighth and the last principle is for the Increasing Participation of Developing Countries. Increasing the participation of developing countries in international services trade is a major negotiating priority. Developing countries require access to the most efficiently traded services to promote their indigenous development. The main problem is that the benefits of liberalization are not always evident to developing countries and this explains why developing countries are interested in having framework provisions that are directly supportive of development.

Allow me now to provide some information on the experience gained from liberalization within the European Community. The eighth EC directive is the “Approval of persons responsible for carrying out the statutory audits harmonization of company law” and is not intended to achieve a single harmonized accountancy profession. It deals only with statutory auditing and lays down minimum requirements for auditors’ qualifications. It is however clear that the accountancy profession is interested in the implementation of the eighth directive which should accomplish a harmonization of the development of statutory auditing.

The mutual recognition directive, on the other hand, does provide for greater liberalization but, being a general directive applicable to all professions, it does not take into account some of the specifications of the accountancy profession:

First, it applies only to natural persons, and not to firms. Secondly, it deals only with the right of the establishment and does to cover cross–border provision of services. This is the case with the accountancy profession where the range of services is very large and many of which are non–regulated. Furthermore, the scope of practice of accountants can vary greatly from one member state to another.

As a result, the European accountancy profession (Federation des Experts Compatibles Europeans) recommended that the following steps be taken in order to assist in the liberalization within the EC, of the activities carried out by the accountancy profession:

  • Introduction of a functional title relating to statutory auditing;
  • Requiring an aptitude test, as the only barrier would be the knowledge of laws and rules of the host country; and
  • Bilateral agreements which would liberalize the other activities carried on by the accountancy profession.

It was agreed that a system for the mutual recognition of professional qualifications was essential to ensure the liberalization of trade in services by an accredited profession such as accountancy.

In 1989, the Federation des Experts Compatibles European (FEE) submitted to the Commission of the European Communities (CEC) their views of the European accountancy profession on the negotiations that were taking place on liberalizing international trade in services. Their submission to the CEC was virtually similar in principle to the GNS tailored testing exercise that was earlier discussed.