Balancing Financial Market Competitiveness with Investor Protection

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The U.S. Chamber of Commerce and others insist that SOX and accompanying regulations have gone too far. Earlier this year, a report commissioned by New York City Mayor Michael Bloomberg and U.S. Senator Charles Schumer, titled “Sustaining New York’s and the U.S.’s Global Financial Services Leadership,” cited “non-U.S. issuers’ concerns about compliance with Sarbanes-Oxley section 404 and operating in what they see as a complex and unpredictable legal and regulatory environment” as the reason for New York’s decline in attracting international capital. And in remarks before the Economic Club of New York on November 20, 2006, U.S. Treasury Secretary Henry Paulson posed the question, “Does the decline in initial public offerings in U.S. capital markets signal potentially broader challenges to our competitiveness?

A half-year later, worries that our regulatory environment might be scaring away foreign investment now look to be unfounded. According to Thomson Financial, data for the first quarter of this year shows U.S. financial markets are on track to add more foreign listings to U.S. exchanges than at any time since 1997.

A Shift in International Tides

While the SEC and others are trying to ease rules associated with SOX, the accounting profession’s international counterparts are stiffening their own regulations to compel stronger internal controls against fraud. The Financial Instruments and Exchange Law, the Japanese law commonly called J-SOX, is scheduled to be implemented for fiscal years beginning on or after April 1, 2008. These new requirements, which will affect approximately 3,800 listed companies and their subsidiaries on Japanese stock exchanges, are intended to ensure greater executive accountability and enhance investor protection through improved financial transparency. The J-SOX guidelines have four objectives:

• Effectiveness and efficiency of corporate operations;
• Reliability of financial reports;
• Compliance with laws and regulations related to business activities; and
• Safekeeping and maintenance of assets.

The Financial Services Agency (FSA), the Japanese counterpart of the SEC, is trying to avoid the problems and criticism encountered with the SOX provisions that opponents portray as vague and expensive. Therefore, the FSA is working on detailed guidelines so that companies will know how to comply with the new rules in a cost-efficient manner.

Proposed ISA 580, Written Representations

Another reflection of SOX appeared in an exposure draft released in December 2006 by the International Auditing and Assurances Standards Board (IAASB; www.ifac.org/IAASB/). Although members of the International Federation of Accountants’ (IFAC) board deny any similarities in the proposed revision of International Standard on Auditing (ISA) 580, Written Representations, with SOX section 404, some accounting representatives in the United Kingdom voiced concerns that IFAC was attempting to covertly introduce SOX-like rules by creating new obligations for corporate officials. The proposed exposure draft states that:

[I]ndividuals other than management or those charged with governance may have specialized knowledge about specific assertions in the financial statements. The proposed revised ISA therefore requires the auditor to determine relevant parties from whom written representations should be requested.

This approach allows an auditor to use professional judgment in planning and implementing the audit while supplementing other evidence.

Critics are concerned that this proposal may create mountains of extra paperwork. They contend that delays in the audit process may be inevitable when these written representations are vetted by company lawyers. The IAASB’s deadline for comments on this proposal was April 30, 2007. The effective date of the final ISA will not be before December 15, 2008.

Predictions

Sarbanes-Oxley’s effects are likely to spread beyond U.S. borders. Corporations that seek to raise capital in non-U.S. markets because the regulatory bar has been set lower elsewhere may find that this state of affairs will not last long. Because of SOX, the United States is setting the pace for financial markets, not falling behind. Investors around the globe are demanding greater protection from greedy, and sometimes crooked, corporate executives. SOX makes it clear that CEOs and CFOs may no longer use ignorance as an excuse to avoid their responsibilities. Furthermore, governments and not-for-profit organizations that use public funds are increasingly recognizing the benefits of SOX-like policies and voluntarily adopting them. Favorable public perception is only one benefit of meeting this higher standard.

As always, I welcome your comments and suggestions.

Mary-Jo Kranacher, MBA, CPA, CFE
Editor-in-Chief
mkranacher@nysscpa.org

©2008 The New York State Society of CPAs. Legal Notices