Financial Times Editorial - Regulatory creep from across the Atlantic

Financial Times Editorial - Regulatory creep from across the Atlantic
Copyright The Financial Times Limited 2006
Published: September 20 2006 03:00 | Last updated: September 20 2006 03:00



The Sarbanes-Oxley Act is like dropping a glass vase from a great height: the main impact is clearly felt where it falls, but shards and splinters can cause damage at some distance. Recent visits by US audit inspectors to the London offices of Ernst & Young will confirm the worst fears of those who believe US regulators have sweeping international ambitions. A new approach is needed if national watchdogs are to co-operate in regulating international companies efficiently and effectively.

Unhappiness about the inspection should not be directed at the staff from the Public Company Accounting Oversight Board. Indeed, the fact that they and their UK counterparts are still on speaking terms suggests that they carried out their mission sensitively. The act requires them to produce reports every so often on foreign audit firms with US-listed clients: in the current regulatory climate, it would have been an unenviable task for the PCAOB to explain why it had relied exclusively on the work of others.

UK accountants have expressed two broad objections to the US inspections. First, they duplicate the work of the UK audit watchdog. Second, in contrast to the UK audit inspection arrangements, individual firms could be criticised publicly if the inspectors find slipshod work. The second deserves little sympathy, but the first is worth serious examination.

Having US inspectors trawling through foreign audit firms must mean wasteful activity. Even where there is a high degree of co-operation, some repetition is bound to occur. And achieving this co-operation will not be possible without large amounts of time and effort that could have been directed elsewhere.

Extending the US writ in this way is offensive at a deeper level. This requirement of Sarbox amounts to telling audit regulators throughout the rest of the world that the US authorities do not believe they will do a proper job. Behaving as though you have a monopoly of virtue is rarely attractive and in this case is also misplaced, since Sarbox falls far short of a regulatory ideal. Even more fundamentally, it is unacceptable that legislators in one country can declare unilaterally that their law should run outside their -jurisdiction.

The way ahead is not straightforward but the need to find one is pressing. As globalisation marches on, more businesses will have operations spread more widely around the world and thus become subject to more different regulatory regimes. If this issue is not addressed, it could lead to a significant increase in the costs of doing international business. Financial watchdogs are already making some - largely unsung - progress in co-operating, but deeper co-operation is needed.

The response to the Sarbox audit inspection regime should be to fight fire with fire. The European Union audit directive, which is due to take effect in 2008, requires member states to ensure that non-EU companies listed in the region be registered with a European audit regulator and regularly inspected. The requirement can be lifted only where a non-EU regime is reckoned to be broadly similar and both parties agree to accept the other's regulatory system. This should concentrate the minds of US legislators and encourage them to adopt a more reciprocal stance. Unless they do they will face a nasty surprise, when European audit inspectors arrive on US territory and demand to see the books.