Growing European resentment at Sarbanes-Oxley

A rising tide of resentment is building at the increasing pressure European companies are feeling to comply with the requirements of the Sarbanes-Oxley Act, with some European companies threatening to de-list from US stock exchanges.

Sarbanes-Oxley (SOX) is legislation passed in the US in 2002 in response to a number of major corporate and accounting scandals (Enron and Worldcom). The legislation is wide ranging and establishes new or enhanced standards of corporate governance for the boards and management of all publicly-listed companies in the US as well as public accounting firms. The American Institute of Certified Public Accountants (AICPA) has more detailed information.

The requirements of SOX also mean that many non-US companies listed in the US will have to comply with the new standards later this year. And as I commented in November when Section 404 of SOX came into effect (generally, having in place an adequate internal control structure and procedures for financial reporting, with corporate management accountable for any inadequate controls), the costs of compliance don’t come cheap.

In my November post, I quoted the Financial Time saying that SOX compliance costs had risen to $5.1 million for the average large US company, with a further $3.7 million in ongoing compliance bills. Some very large companies such as General Electric say they have spent $30 million on SOX compliance, the FT reported at that time.

An article by Fran Howarth, a senior researcher at Bloor Research, published in yesterday, says that threats to de-list may not be a solution for European companies as firms with 300 or more shareholders in the US are also bound by the requirements of SOX. As rules governing shareholding by US individuals and firms have been loosened recently, companies no longer need to have an actual presence on US stock exchanges to generate a significant US shareholder base.

What does this mean for such companies?

Well, whether they de-list or not, they will still have to meet the requirements of SOX.

Howarth’s article quotes estimates from PricewaterhouseCoopers that there are 470 non-US companies listed on the New York Stock Exchange
alone, with a combined market capitalization of $3.8 trillion, or 30%
of the total value of capitalization of all companies quoted on the

Without question, SOX compliance costs are a huge issue. But costs aren’t the only issue for Europeans. From Howarth’s article:

It is not just the cost of complying with the regulations that is
rankling with European companies, but also the prescriptive nature of
the demands. In the UK, the combined code on corporate governance that
was updated in 2003 uses a ‘comply or explain’ approach, realising that
one set of rules cannot be universally applied across all companies.
This is something that Europeans find much easier to swallow. In
addition, strict data protection laws in Europe are making many worry
that compliance with Sarbanes-Oxley will actually make them in breach
of the [UK] Data Protection Act 1998.

[…] The EU appears to have stepped back from imposing a blanket
form of Sarbanes-Oxley across all member states and prefers to let
individual countries put their own legislation in place. However, the
EU Commissioner for the Internal Market, Frits Bolkenstein,
has put forward a number of proposals for improving corporate
governance among European countries, including bolstering auditors’
independence, tackling off-balance sheet financing, providing greater
transparency into executive pay and forcing companies to make
statements about the standards of corporate governance used in their
firms. In the light of the money that companies have already spent on
Sarbanes-Oxley compliance, this appears to be a better way to move

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