EU-US pledge to relieve transatlantic auditing pain

By Anna McLauchlin

Date: 19/05/05

The EU and the US have stepped up their efforts to make life easier for transatlantic audit activities.

The US Securities and Exchange Commission (SEC) announced on 16 May that it was still studying the impact of its Sarbanes-Oxley Act (SOX) on foreign firms, as well as on smaller US businesses.

While it did not say what action might be taken, the SEC is plainly alive to complaints about the demands made by the act, passed in the wake of US corporate governance scandals.

The same day, the SEC moved to make it cheaper for US companies to implement SOX rules on internal financial controls by clarifying some of the implementation measures.

The SEC also issued a report asking auditors to use their common sense to reduce the number of checks needed to validate controls, which it estimates will lead to significantly reduced costs.

US businesses had complained about the cost of compliance with the rules, which some have estimated at up to 1% of overall turnover.

On 5 April, companies from outside the US won a major reprieve when the SEC granted them an extra year - until 15 July 2006 - to comply with Section 404 of SOX. This takes into account the fact that EU companies would already have the burden of publishing accounts under International Accounting Standards (IAS) in 2005.

Section 404 forces stock market-listed companies and their accountants to provide a yearly evaluation of their financial reporting controls, which poses problems of language, accounting methods, culture and currency.

The SEC's chairman, William Donaldson, met EU Internal Market Commissioner Charlie McCreevy last month to discuss an SEC 'roadmap' to exempt EU firms reporting under IAS but listed on US stock markets from complying with US Generally Accepted Accounting Principles (GAAP).

The SEC estimates that this will apply to 300 foreign companies filing statements after the new 2006 SOX deadline.

The roadmap's path could be a rocky one, not least because it relies partly on good implementation of IAS across Europe. The EU has already compromised on a controversial banking standard, IAS39, allowing companies to opt out of some parts of it that could make their share price more volatile.

The SEC's chief accountant, Donald Nicolaisen, has said that the US will not accept accounts from companies that have taken advantage of the opt-out.

Success will also depend on the continued progression towards the ultimate 'Holy Grail' of converged IAS and GAAP standards. The International Accounting Standards Board and the US Financial Accounting Standards Board (FASB) also met on 21 April and have said that they are trying to reach consensus on broad convergence possibilities.

McCreevy admitted that there was "clearly much to do all around", but hailed the fact that the "bandwagon has started".

The Commission has so far had less success convincing the US to back down on other obligations imposed by SOX but Donaldson has made some concessions. He will issue plans later this year to make it easier for companies affected by SOX to delist from US markets.

Article reports that the EU and the United States increased their efforts to facilitate transatlantic audit activities. The US Securities and Exchange Commission (SEC) announced on 16 May 2005 that it was still studying the impact of its Sarbanes-Oxley Act (SOX) on foreign firms, as well as on smaller US businesses, as a reaction to complaints passed in the wake of US corporate governance scandals.