A shift in US foreign policy

When George W Bush was inaugurated as US president for another four years, there was much talk about a change in foreign policy.

While the current administration was still keen on spreading freedom and democracy to the rest of the world, there was to be greater emphasis on the use of diplomacy rather than the sheer force prevalent in Bush’s first term.

While a change in foreign policy may have little direct impact on the regulatory environment that sprang up in the US following Enron’s collapse, this softer approach does seem to be rubbing off on corporate rulemakers.

Last week, William Donaldson, chairman of the Securities and Exchange Commission, offered some hope to companies outside the US over what many had come to see as its draconian response to the Enron affair.

During a speech at the London School of Economics, he made several concessions to UK and European companies listed in the US that are currently struggling with the rather heavy burden of the Sarbanes-Oxley Act. Companies are having particular problems with the section relating to internal controls, dubbed 404 section, which is proving to be an enormous drain on resources.

Although US law does not allow any additional exemptions for non-US registrants, Donaldson was able to say that a delay in the deadline for compliance was likely. A figure of ‘four or five months’ beyond the current date of 15 July would give dual-listed entities roughly until the end of the year to have their systems in place.

This change will provide breathing space for European businesses already struggling with huge IFRS conversion projects. Donaldson provided further relief for IFRS users when he said that the SEC is to ease the requirement for companies using IFRS to reconcile three previous years of accounts to US GAAP.

‘Within the next few months, I fully expect the commission will consider adopting a proposal to allow first-time users of IFRS to reconcile their financial statements to US GAAP for only two years, and I am of the firm view that this would be a step in the right direction,’ says Donaldson.

But for many, these small steps are just not enough. The benefits associated with being listed on a US stock exchange simply do not justify the costs now associated with compliance.

‘Sarbanes-Oxley has all the hallmarks of using a sledgehammer to crack a nut,’ AstraZeneca finance director Jon Symonds told Accountancy Age. ‘The costs of complying with it clearly outweigh the benefits for many companies.’ Similarly derisive comments have been made by BT chairman Sir Christopher Bland.

Astrazeneca and BT, however, will not be looking for a way out of the US, due to their large American presence, but many others are. Already a number of companies have departed the US because of Sarbox. TeliaSonera (a Nordic telecoms group), tobacco company Swedish Match and, most notably, have now pulled out of their American listings.

Other larger companies have also said they would consider deregistering from the SEC, if it was easier to do so. Up to 25 UK companies are looking at this, according to CBI supremo Sir Digby Jones. Unfortunately, at the moment companies need to have less than 300 US-based shareholders to do so, an almost impossible situation to achieve for most larger corporates.

But Donaldson offered a glimpse of hope in his speech. ‘I expect the SEC to consider whether there should be a new approach to the deregistration process for foreign private issuers if they do not feel prepared to meet US requirements,’ he said.

Such a move would be welcomed by many, including gaming and entertainment company Rank, which said it would be an option if it was easier and there was a clear commercial benefit. This relaxation, if it comes, could well result in an exodus of companies that feel the US stock market has become uncompetitive.

Former Financial Services Authority chairman and director of the LSE, Howard Davies, believes small companies with a small US shareholding may find it advantageous to leave.

There are still no details of when a change is likely or what that change would be. Concerns have already been raised by SEC officials over the link between acting on this because of Sarbox. Some want the deregistration topic to be discussed in the cold light of day, once Sarbox has bedded in.

For many, this may be too late. The most costly element of compliance is putting the initial processes in place.

But in this era of diplomacy and open dialogue, perhaps, just perhaps, companies drowning in red tape will have something to look forward to.

20 August 2004: delists from Nasdaq

15 November 2004: Section 404 comes into force for US registrants

23 November 2004: BT chairman says the US has ‘gone too far’ with Sarbox, but ‘we will grit our teeth and get on with it’

24 November 2004: CBI chief Sir Digby Jones says 20 UK companies are considering delisting

25 January 2005: William Donaldson says that SEC will consider relaxing the rules on registration

15 July 2005: Deadline for foreign SEC registrants to comply with section 404

November/December 2005: Possible extended section 404 compliance deadline.

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