Financial Market Competitiveness with Investor Protection
MAY 2007 - Newspaper
headlines are filled with warnings that “the sky is falling”
when it comes to competition for foreign capital in the U.S. markets.
Many people are primarily blaming the Sarbanes-Oxley Act (SOX),
because they claim its requirements discourage international companies
from choosing to list on U.S. stock exchanges.
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.
Shift in International Tides
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:
and efficiency of corporate operations;
of financial reports;
with laws and regulations related to business activities; and
and maintenance of assets.
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
ISA 580, Written Representations
of SOX appeared in an exposure draft released in December 2006
by the International Auditing and Assurances Standards Board (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:
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.
allows an auditor to use professional judgment in planning and
implementing the audit while supplementing other evidence.
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.
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
I welcome your comments and suggestions.
Kranacher, MBA, CPA, CFE