Preventing European "Enronitis": how European regulators are handling the spillover effects of Sarbanes-Oxley

International Economy, The, Summer, 2004 by Klaus C. Engelen

There remain many other hotly contested legal issues on the EU Commission's list, including audit committee requirements, auditor independence, loans to directors and executive officers, certification of financial reports, and certification of internal control systems.

EUROPE'S ACCOUNTANT PROFESSION IN REVOLT

So it doesn't come as a surprise that Frits Bolkestein and Alexander Schaub, his Director General, can count on a wave of anger and frustration among European auditors, financial executives, regulators, and politicians when battling with the Americans. Schaub, who had a key role in communicating the European Union's problems with Sarbanes-Oxley to U.S. lawmakers, told the world's leading bankers gathered in London for the International Monetary Conference (IMC) in early June, "The Sarbanes-Oxley Act is the textbook case for regulatory spillovers, when decisions in one country may have direct and immediate consequences on economic operators or regulators operating primarily or even exclusively in another country." Schaub criticized that, "There was no dialogue and no attempt to take account of any extraterritorial consequences. Thanks to an effective mobilization of European interests and the pragmatic and open attitude of relevant U.S. authorities, these tensions have been effectively diffused."

But have they? Schaub continues: "As globalization intensifies, the risk of international financial contagion and regulatory spillovers will grow. There will be a need for a common understanding of the core prudential safeguards, and a clear assignment of responsibilities for oversight and enforcement."

Tom Lawton, senior audit partner at RSM Robson Rhodes, sums up the dominating European view: "Sarbanes-Oxley, enacted in haste, will be quite inhospitable to non-U.S. corporations, financial institutions, and audit firms."

On January 26, of this year, David Devlin, president of the Brussels-based FEE, the Federation des Experts Comptables Europeens, responded to the PCAOB roles relating to the oversight of non-U.S. public accounting firms with what some considered a "wake-up call" for the new U.S. oversight board to be more forthcoming and cooperative towards non-U.S. audit professionals.

As head of the European professional association, Devlin can speak for more than half a million accountants in 41 professional institutions from 29 countries in Europe. In his letter to the PCAOB secretary, he warned that "limited co-operation, based only on the PCAOB model, offers a difficult prospect." Said Devlin: "There is a risk of unseemly litigation between European firms or oversight bodies and the PCAOB." This may come about "by the imperatives of some future scandal and conflict between PCAOB rules and national law." There might also, in a particular cause, "be the risk of inconsistent findings between a national oversight system and the PCAOB." Overall, limited cooperation often ineffective solutions. "In such a scenario, the benefits of continuous development of existing systems could well be lost," warns Devlin.