US threatens audit clash

Under a Bill currently passing through the US Senate, a new accountancy regulator would be able to demand audit working papers from any foreign accounting firm that helped prepare accounts for a US public company.

The Bill, sponsored by Democrat senator Paul Sarbanes, could bring all foreign firms, including those in the UK, under the jurisdiction of the US courts if they carried out work for a US firm auditing a US company’s accounts, including subsidiaries based overseas.

There is already a precedent. It was US regulators who forced the resignation two years ago of UK PricewaterhouseCoopers partner Geoff Westmore over conflicts of interest.A partner at one of the Big Four firms said: ‘It would be wise to prepare for a tough Bill.’

But the Department of Trade & Industry has adopted a ‘wait and see’ strategy. A DTI spokesman said: ‘We are well aware of the proposals, but they are one of a number of proposals being considered.’

He added that the department was waiting for the publication later this month of an interim report from the joint DTI/Treasury working party’s review of audit and accounting, which would address similar issues.

ICAEW president Peter Wyman said the ‘extra-territoriality’ of US regulation was ‘troubling’. He said this was ‘the latest worrisome trend’. The Financial Services Authority was unable to comment.

The Sarbanes Bill, ‘Public Accounting Reform and Investor Protection’, would, if passed by Congress, create a public oversight board similar to the UK’s Accountancy Foundation – Lord Borrie, chairman of the Foundation, this week attacked the large firms and UK accountancy institutes for ‘a knee-jerk reaction’ against the threat of audit firm rotation.

He added that he suspected the relationship between some auditors and their clients was ‘too cosy’.

Senator Sarbanes introduced his Bill after the collapse of energy trader Enron, and has gathered added impetus following revelations of accounting irregularities at WorldCom and pharmaceutical giant Merck.

Merck admitted this week that $12.4bn (£8bn) in reported revenues had never actually been collected.

The shock which greeted this latest scandal was only compounded when the former chief financial officer at WorldCom, Scott Sullivan, appeared before a Senate committee in the US on Monday but invoked his constitutional right to silence through the Fifth Amendment. WorldCom’s chief executive, Bernard Ebbers chose to take the same course of action.

President George Bush was expected to announce a raft of reforms for US corporate governance on Tuesday.

It is understood the Liberal Democrats will table questions in parliament later this month, asking the government to spell out its reaction to the Sarbanes Bill.

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