BY PAUL QUIGLEY
When incumbent SEC Chairman Christopher Cox announced what amounts to a root and branch overhaul of reporting, dubbed ‘simplification’, one could be forgiven for concluding that the mass exodus of IPOs to foreign markets and director-level defections had anything to do with such frenetic Federal financial fire-fighting. Will another committee of ‘safe hands’ and a government public relations machine help Cox to bolster confidence in financial reporting? Paul Quigley reports.
“Inflexible, burdensome and wasteful” is how Securities and Exchange Commission chairman Christopher Cox characterised described Section 404 of the Sarbanes-Oxley Act. But it was never meant to be that way. “The objective of Section 404 is to provide meaningful disclosure to investors about the effectiveness of a company’s internal controls systems,’ said Cox, “without creating unnecessary compliance burdens or wasting shareholder resources.”
But the proof of the pudding has been in the eating. Hordes of listed companies are withdrawing from US capital markets, citing burdensome regulation and low market volumes Stateside to warrant keeping the trades open on Wall Street. The exodus has long since begun.
So, with major remedial action and bureaucratic Band-Aids at the ready, a new truth-and-reconciliation style committee, dubbed t he ‘Advisory Committee on Improvements to Financial Reporting’ is holding talks to head off the rush for the exits. But it may be too little, too late for Cox and the SEC.
Next month, in true jocular, comedic ‘it’s ok, we’re laughing’ fashion, the SEC is to play host to an Oxford Union-style debate with the motion: ‘This House believes that the Sarbanes-Oxley Act has made London the most competitive capital market in the world.” At its Washington D.C headquarters, the SEC’s joint conference with the European Corporate Governance Institute, will also see SEC Chairman Christopher Cox and his right-hand man Commissioner Harvey Goldschmid, opposing the motion.
The mere fact that such luminaries of the US financial sector are entertaining such a ‘tongue-in-cheek’ debate demonstrates the very reality that the SEC is acknowledging -–Sarbanes- Oxley has done as much to upset the Wall Street apple-cart as any economic or financial event since the collapse of Enron-. -The very instrument designed to bolster confidence in corporate fiduciary duty is driving players away from the table itself.
The corollary is a gold-plating of internal controls, external auditing, forcing pre-determined early material disclosures and draconian director obligations. This has -made Cox’s job one of ‘selling’, as well as regulating, US financial market all the more difficult.
For now, the very reputation of the US Securities and Exchange Commission is in the cross-hairs of financial scrutiny. Together with its PCAOB underling, the SEC has its work cut out.
The first meeting of the SEC’s ‘Advisory Committee on Improvements to Financial Reporting’ met just on August 2. Set to be the first of many, such softening and focus-group style open days have not been able to see off reporting defectors over recent months nor will have much effect over the short-term, despite the roll of honour that Cox has appointed to bolster confidence and credibility. The history this year alone speaks for itself.
British Airways exited the US stock market in May, with Chief Financial Officer Keith Williams commenting that it no longer made sense from a cost and administrative perspective to submit to the reporting obligations under the Exchange Act. ‘This decision is entirely consistent with our strategy of simplification, BA’s Williams said, ‘as it reduces cost and complexity without in any way detracting from the integrity of our governance and control processes.’
Then in June, UK defections alone included a trio of FTSE100 behemoths, ICI, International Power and United Utilities, while July saw BG Group leave the fold – each citing various reasons for skedaddling, but on the whole, their reasons amounting to the costs not justifying the returns anymore. None went too far on citing over-regulation, per se, but International Power described their delisting motivation included ‘reducing compliance costs’,
Alan Brown, ICI’s chief financial officer said it no longer made sense to submit to the reporting obligations under the US Exchange Act. ‘This decision is consistent with our strategy of improving our long-term cost effectiveness,’ he said, ‘as it reduces complexity without detracting from the integrity of our governance and control processes.’ According to ICI, delisting would to generate cost savings of at least £4m a year, based on the costs incurred using external suppliers and auditors to provide ongoing support to the Company’s Sarbanes-Oxley compliance, the company said.
BG Group’ Chief Financial Officer Ashley Almanza echoed ICI’s CFO almost verbatim: ‘This move,’ Almanza said, ‘will reduce costs and complexity without in any way detracting from our standards of governance and control.’ Almanza added that it ‘no longer makes sense from a cost and administrative perspective,’ he said, ‘to maintain our SEC registration and NYSE listing.
For International Power, their reason for delisting from the NYSE and deregistering was put down simply as ‘reducing compliance costs.’
Paradoxically, Cox’s retort echoes BA’s rationale of simplification, only in an entirely different type of simplification – that of the public sector regulator rather than the private sector corporation. Cox conceded that the US tide of regulation had become ‘unnecessarily complex for investors, companies and the markets generally.’
But the reality is, unless the world adopts Sarbanes-Oxley, an inherently rules-based set of legislation, then it was pretty self-evident that corporations would ebb away towards more lenient and relaxed deregulated markets. Unless the SEC repeals Sarbox completely, the rot will have set in for good. Until the OECD Principles are adopted as law, then the US will continue to suffer, at the expense of other financial markets around the world. No well-meaning panel of experts convening to dumb-down Sarbox will have any material effect on the hard-nosed, cost-conscious, risk averse, profit-motivated fund managers and boardrooms around the world.
XBRL: White knight or white elephant?
Cox is leaning heavily on XBRL – Extensible Business Reporting Language – to come to his aid as a catch-all vehicle for reporting simplification if ever there was one. However, as with all new systems and processes, the devil is always in the detail. Expecting a single technological development to ride into town like some white knight to save the day is pretty unlikely. XBRL will help Cox’s cause over a much longer time-frame than he needs to consider to bolster contentment with the current regulatory regime in the US financial sector. After all, Cox is already embroiled in other major inquiries and investigations into hedge fund frauds, private equity transparency, not to mention the iceberg of sub-prime mortgage credit wobbles. To add corporate reporting woes to this heady cocktail is enough to send Cox’s head spinning into a vortex of vague platitudes. No amount of corporate and accounting head honcho endorsement from the likes of Microsoft and Deloitte et al. on his new advisory committee will placate or ameliorate a very serious moment in Corporate America’s history.
Whether the IPOs and corporate capital hunters will return is hard to say. Much is changing in the political and economic backdrops, and to suggest that the post-Sarbox rigidity is the only financial bête noire would be, in Cox’s terminology, and over-simplification. The reality is perhaps rather more banal. With the rise of China , India and cheap labour abounding, organisations are finding cost cutting ever harder. Ten years ago, such well-meaning governance issues may have seen corporations weather them better.
But for the corporations, right now? The cost of compliance, wherever it happened, was just one bean too many.