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

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

McDonough's Key Backstage Role

Since June 2003, William McDonough, 69, has headed the newly established Public Company Accounting Oversight Board (PCAOB). A former president of the New York Federal Reserve Bank. McDonough became the "super diplomat" on the world financial stage when, in July 1998, as chairman of the Basel Committee on Banking Supervision, he began negotiating the new risk-adjusted bank capital accord called "Basel II," a centerpiece in reforming the international financial architecture. And at the outgoing EU Commission. Frits Bolkestein. Commissioner in charge of Internal Market and thus chief Brussels negotiator on matters such as auditing, accounting, corporate governance, and financial supervision, is a skilled negotiator, having played a key role in adjusting Europe's internal markets to the new challenges of globalization.

The tone between Brussels and Washington improved after William McDonough, in June of last year, took charge of the new U.S. oversight board.

As it turns out, after a bumpy start both McDonough and Bolkestein have been working closely together to dampen the extraterritorial shocks of Sarbanes-Oxley on EU member countries and corporate governance systems. Both are talking about a basic understanding (that might fall apart when both leave office this fall) along this line: That U.S. authorities will cooperate under the Sarbanes-Oxley Act with their European counterparts with a view to the emerging future oversight structures of EU member states. These oversight structures will be established under the Eighth Company Law Directive. In return, the EU Commission promises to speed up the passing and implementation of the new Directive on "statutory audit of annual accounts and consolidated accounts" in order to make sure that the reformed U.S. capital market laws will get their missing EU links in the form of the new oversight structures for EU audit firms, This way, the feared showdown between the post-Enron United States and the post-Parmalat European Union can be avoided.

Frits Bolkestein on Sarbanes-Oxley: "We in the European Union were faced with a simple choice: Either we could oppose tooth-and-nail the Sarbanes-Oxley Act and add vet another fiery dispute to our post-Iraq bilateral relations, or we could try to find a constructive, cooperative way forward, jointly respecting to the maximum degree possible our different legal traditions and cultures. We decided on the latter."

Alexander Schaub, Director General of the European Commission for Internal Markets, criticized Sarbanes-Oxley: "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."

David Devlin, president of the Brussels-based FEE, the Federation des Experts Comptables Europeens, can speak for more than half a million accountants in 41 professional institutions from 29 countries in Europe. He warns, "There is a risk of unseemly litigation between European firms or oversight bodies and the PCAOB."