US delisting trickle set to become a flood

While section 404 of the Sarbanes-Oxley Act finally kicked in for a large number of US companies last week, most will still be coming to terms with the sheer scale of what this means for their business.

It was always known that 404, which requires management to report on the internal controls of a company and for the auditor to make a judgement on that report, was going to be the most costly and resourceconsuming part of the controversial new rules. But many may still have underestimated the task.

While US companies may have little choice but to put up with the burden 404 places on them, those foreign companies with dual listings have a bit more choice. Unlike their US counterparts, they have until 15 July next year to comply with the Act.

But with the cost of compliance averaging around $2m (£1.07m) for a company, rather than using the extra time to get the right systems and controls in place, some are instead considering whether it is worth their while to stay listed on the US markets.

Already this year, UK internet travel company has withdrawn its Nasdaq listing. Tobacco company Swedish Match, Nordic telecom group TeliaSonera and German e-commerce software company Intershop Communications are also among a growing list of European companies getting out of the US market.

The cost of maintaining a listing, due to the increasing regulatory burdens, was the reason cited for all these withdrawals. For many companies, it seems this expense can no longer be justified compared to the benefits of a US listing.

Compliance with 404 is the major reason for a rise in costs, according to BDO Stoy Hayward partner David Anderson.

‘Fees in the US are upward of 30-40% of their audit fee,’ he says. ‘It’s much more expensive than originally expected. We’ve been working with UK subsidiaries of US parent companies and some of them are seeing compliance costs of over 50% of their audit fee.’

But the market may not yet have felt the true impact of 404. So far most of the companies abandoning US markets have had a relatively small presence in the US and their withdrawal is unlikely to make huge waves on the other side of the pond.

However, if the rumours flying around that German electronics giant Siemens is about to withdraw its listing from the New York Stock Exchange turn out to be true, it would represent a major change in the type of company pulling its financial muscle out of the US.

While Siemens has refused to comment on what it termed ‘speculation’, it looks to be only a matter of time before a large dual-listed company decides to jump ship.

‘People aren’t happy about the level of costs,’ says David Watts, partner at KPMG. ‘Many people in Europe would regard the problems, which resulted in the Sarbanes-Oxley Act, to be American in nature, reflecting the fact that the US hasn’t focused on corporate governance in recent years. As a result, foreign registrants feel that meeting US requirements goes beyond what they need to do.’

Watts adds that there are several companies ‘that have looked at, or are actively considering, delisting in the US’.

Should an exodus occur, other markets across the globe will be looking to pick up any of the spare business that might result. The London Stock Exchange, in particular, sees the changes brought about by Sarbanes-Oxley as an opportunity.

‘We think London has a more compelling case for companies than the NYSE or Nasdaq as it is,’ says Tracey Pierce, head of company services at the LSE. ‘We provide a high standard of regulation without all the extra burdens and in a more cost-effective way.’

She anticipates that the trend of US delisting will continue at an increased pace and that, in certain circumstances, the LSE would be looking to compete for this business.

For those that do decide to tough it out in the US, a lot of preparatory work needs to be done. UK petroleum giant BP, for instance, recently admitted that it had recruited a 20-strong team to prepare for compliance. The team would spend the whole of next year evaluating what needs to be done to comply with Sarbanes-Oxley and rectifying any issues that arise.

A spokeswoman says that, because the company had been filed in the US for a long time, the change required ‘should not be that enormous’. She adds: ‘It would be if we were a company that had just begun filing in the US.’

Many other companies are undoubtedly going through the same process as BP at the moment. Just how many reach the conclusion that it isn’t worth their while remains to be seen.

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