Growing European Resentment at Sarbanes-Oxley

A rising tide of resentment is building at the increasing pressure European companies are feeling to comply with the requirements of the Sarbanes-Oxley Act, with some European companies threatening to de-list from US stock exchanges. Sarbanes-Oxley (SOX) is legislation passed in the US in 2002 in response to a number of major corporate and accounting scandals (Enron and Worldcom). The legislation is wide ranging and establishes new or enhanced standards of corporate governance for the boards and management of all publicly-listed companies in the US as well as public accounting firms. The American Institute of Certified Public Accountants (more detailed information. The requirements of SOX also mean that many non-US companies listed in the US will have to comply with the new standards later this year. And as Section 404 of SOX came into effect (generally, having in place an adequate internal control structure and procedures for financial reporting, with corporate management accountable for any inadequate controls), the costs of compliance don't come cheap. In my November post, I quoted the article by Fran Howarth, a senior researcher at IT-Director.com yesterday, says that threats to de-list may not be a solution for European companies as firms with 300 or more shareholders in the US are also bound by the requirements of SOX. As rules governing shareholding by US individuals and firms have been loosened recently, companies no longer need to have an actual presence on US stock exchanges to generate a significant US shareholder base. What does this mean for such companies? Well, whether they de-list or not, they will still have to meet the requirements of SOX. Howarth's article quotes estimates from New York Stock Exchange alone, with a combined market capitalization of $3.8 trillion, or 30% of the total value of capitalization of all companies quoted on the exchange. Without question, SOX compliance costs are a huge issue. But costs aren't the only issue for Europeans. From Howarth's article: "It is not just the cost of complying with the regulations that is rankling with European companies, but also the prescriptive nature of the demands. In the UK, the combined code on corporate governance that was updated in 2003 uses a comply or explain' approach, realising that one set of rules cannot be universally applied across all companies. This is something that Europeans find much easier to swallow. In addition, strict data protection laws in Europe are making many worry that compliance with Sarbanes-Oxley will actually make them in breach of the [UK] Frits Bolkenstein, has put forward a number of proposals for improving corporate governance among European countries, including bolstering auditors' independence, tackling off-balance sheet financing, providing greater transparency into executive pay and forcing companies to make statements about the standards of corporate governance used in their firms. In the light of the money that companies have already spent on Sarbanes-Oxley compliance, this appears to be a better way to move forward." Neville Hobson is the author of the popular Crayon. Visit Neville Hobson's blog: