Globalisation won’t guarantee universal regulatory assurance
The Financial Reporting Council has dipped its toe into the sensitive topic of third-country audit firms and co-operation with regulators from countries outside the EU
The council issued a consultation document in response to the European
Commission’s Eighth Directive requirement, which states that auditors of
companies issuing securities in the UK must comply with the UK and EU audit
regulations.
The directive does excuse auditors already subject to equivalent home-country
systems of public oversight and quality assurance. But what constitutes an
‘equivalent’ regulator is still to be decided, which is where things become
complicated.
The consultation will throw the spotlight on the large and growing number of
non-EU listings from countries such as China, Brazil, Russia and India, as well
as politically unstable regions such as Lebanon.
Concerns have been raised about what would happen if the regulators in these
countries are found to be ‘less sophisticated’. Could it mean that, for example,
the FRC would have to pick up bags and head for faraway locations to conduct
audit inspections? Would these inspections be welcome, or even legally allowed,
by the governments of those countries? But, more importantly, can the financial
information already emanating from these markets be trusted?
What makes this move by the European Commission so controversial is that the
act of imposing rules and regulations on the rest of the world all sounds a bit
too like Sarbanes-Oxley and the Securities and Exchange Commission.
FRC chief executive Paul Boyle has already sounded warning bells about this,
saying the proposed rules may cause companies to avoid London and other European
markets, in the same way they avoid the US because of its stringent rules. Of
course, the EC may be looking at things with a reciprocal approach.
So, when assessing the 63 countries cited by the commission, the obvious
ones, such as Canada, the US, Australia and Japan, will more likely be ticked
off as having equivalent assurance and quality oversight bodies. But what of
countries such as China, where delicate political sensitivities will need to be
considered?
Should a nation whose GDP is up 10.7% year-on-year be listening to Europe on
how to do business? Similarly should Shanghai, home of one of the oldest stock
markets in the world, be dictated to by European concerns? Tim Bush of Hermes
argues that globalisation does not mean everyone has to do everything the same
way.
Money may not be flowing to the US the way it did a decade ago, but that
doesn’t mean it is automatically flowing into London, either.