Intense debate has broken out among institutional shareholders over a demand by US regulators that auditors make a judgement about a company's internal controls.
Section 404 of the Sarbanes-Oxley Act requires companies under its remit to make a statement on the effectiveness of its internal controls, on which auditors then have to make a judgement.
With nearly half of FTSE100 companies having a US listing, the auditing profession is worried that investors will demand similar information for those that don’t have a listing and cause Sarbanes-Oxley 404 is adopted by default.
Within the investor community there are already calls for a greater provision of details on internal controls to be made available.
‘We would hope that the British tradition of adopting best practice would prevail in this situation,’ said Colin Melvin, director of corporate governance at fund manager Hermes.
‘Certainly more information on internal control should be required, whether this is from following Sarbanes-Oxley or not.’
But Melvin argued that the current Turnbull guidance on internal controls included in the combined code on corporate governance has been misinterpreted and much of what has been asked for in section 404 of the Sarbanes-Oxley Act should already be happening.
Other investors were happy with current arrangements and didn’t see the introduction of the rules drafted by senator Paul Sarbanes as a major issue.
‘I would have thought that investors are sufficiently astute not to get side-tracked by this issue,’ said David Gould, director of investment at the National Association of Pension Funds.
‘We actually already have a pretty robust framework that people seem quite happy with. It’s unlikely that we will ask for companies to do something that there is no compulsion for.’