British firms under US rules

In July I wrote about the onerous American business regulations being imposed on British companies.  Now,  two months after the Sarbanes-Oxley compliance deadline,  American regulators have begun their surprise inspections of British companies.  The FT reports:

US inspectors have swooped on the London offices of Ernst & Young as they began scrutinising the work of the UK's big-four audit firms in the latest case of US regulatory "creep".

The inspections stem from a contentious requirement of the Sarbanes-Oxley Act and a new example of its "extra-territorial" reach beyond the US.

So why has there been so little about this in the media?  The TV stations have not covered it and outside the business press, so far only the Scotsman has run the story.

If you substitute EU for US,  imagine the outcry.  If EU inspectors were launching lightning inspections of UK companies to check their compliance with EU regulations there would be hell to pay.  So why haven't we heard from those who claim that they want to protect British business from red-tape and uphold British sovereignty?

A foreign legislature in which Britain has no representation has imposed burdensome regulations on British businesses.  Its inspectors demand the right to scrutinise companies on British soil and could potentially bring criminal charges against British executives for non-compliance.  If you are concerned about sovereignty and red-tape, shouldn't that worry you just a little bit?

Yet those who usually express concern about such things have said very little about this story.  So far, there is nothing in the Telegraph or the Times.  There is no comment either from the Business,  which you might expect to have at least a passing interest in the story.  As for the golf-club bores in the so-called UK Independence Party,  they don't seem to be at all concerned about foreign regulators imposing rules on British firms.

So why is there such outrage about every minor piece of EU regulation,  over which we have at least some democratic control,  yet hardly any reaction to Sarbanes-Oxley, which has been imposed on British business by a foreign government?

More UK firms are expecting Sarbanes-Oxley inspections soon and there are fears that a takeover of the London Stock Exchange by Nasdaq could lead to further US regulation of British companies.  The proposal by Ed Balls to introduce legislation protecting UK firms from American directives has already been criticised as  'turf protection'  by a former head of the Securities and Exchange Commission.

The outcome of this argument will determine how far British business is governed by American rules in future.  It will also tell us something about the real extent of the UK's independence.

Comments

[Toby Lucich]

How can one get too excited about the continuing march of the global economy? It seems only reasonable (to a capitalist) that equivalent risks should be assessed consistently. If LSE is to be deemed a mature marketplace, standards of practice are a natural cost.

Oddly, many global markets (i.e Korea, Austrailia, China) are adopting elements of the Sarbanes Oxley (SOX) Act in an effort to encourage investments abroad. Rather than trying to dodge the transparency requirements driven by SOX, evolving markets view this as a way to accelerate the maturity of their markets, decreasing their access cost to foreign capital.

FT.com readers should find it entertaining that,
"The prospect of inspections has unnerved some UK accountants as they could be criticised publicly if slipshod audit work is discovered." While the PCAOB shouldn't be the global watchdog for market integrity around the globe, it does give some small comfort that standards of practice are being considered without regard to geographic boundaries - an approach consistent with most investments styles in the 21st century.

[Steve]

Toby - I'm not trying to defend accountants who want to cover up sloppy audit work. There is room for business regulation in the UK to be tightened up in some areas.

That said, the jury is still out on whether SOX is actually effective or just a tick-box exercise that enables the US government to show that it is taking action. Even in the USA, many people think it will simply create jobs for accountants while having very little impact on corporate malpractice.

And even if SOX does prove to be an effective regulatory framework, regulating British business is the job of our elected representatives, not those of the USA.

[M.D. Fatwa]

This isn't at all about "US regulators overseeing" UK firms. It's about US regulators overseeing accounting firms auditing the books of companies that list on US stock exchanges. It's just that these firms happen to be located in the UK. They can easily get out from under these US inspections--they just don't have to audit US-listed companies. But, if you are going to tell American investors that you've reviewed the financials of a US firm and that these financials are up to snuff, don't you think you should expect the US regulator to come in to make sure you are up to snuff?

And as for how the Americans would think if UK regulators came in to a US firm to inspect it, they already do as part of the Consolidated Supervision Directive.

[Toby Lucich]

Having exposure to managing and reporting under the Turnbull Act, my hope is that investors will find assurance through increasingly sophisticated risk management efforts in all companies (not just financial, insurance and commodity trading organizations, as is largely the case in the US).

Oversight of risk management practices in the most mature capital markets in the world seems like the appropriate way to work toward transparent capital markets on a global basis. Until we see effective international bodies supported by capital markets and legal enforcement, I will place my retirement chips on a bit of excess with the PCAOB.

[Rastaman]

UK independence? You'll have to show that one to me. Get the hell back out of the EU and I'll start to believe it again.

Rastaman
www.islamanazi.com

[G. Tingey]

Sarbanes-Oxley is a box-ticking exercise (mostly) that takes a lot of time and trouble to implement.

There is also, as sais, the problem of extraterratoriality.

Not good enough.
And no, the Stock Excahnge won't allow S-O to operate hee.
I think they will just blackmail the so-called government - "Ban S-O here, or we'll sut up shop, and then where will your tax revenues be?"
Oops.