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Securities commission chief signals possible Sarbanes-Oxley changes

LONDON, England - 01/27/05 - Non-US firms that list their stock in the US could receive additional time to comply with comprehensive accounting and reporting standards mandated by the Sarbanes-Oxley Act of 2002, Securities and Exchange Commission (SEC) Chairman William Donaldson says.

Speaking earlier this week in an address at the London School of Economics, Donaldson said the SEC is also considering changes that would make it easier for firms to "de-list" if they do not feel prepared to meet US requirements under Sarbanes-Oxley reforms.

"We should seek a solution that will preserve investor protections without inappropriately designing the US capital market as one with no exit," Donaldson said.

Congress passed the Sarbanes-Oxley reforms following a series of high-profile US corporate accounting scandals. 

Some US and foreign businesses have criticized certain new requirements as burdensome and costly.  In addition, a number of foreign firms have said that some Sarbanes-Oxley rules conflict with accepted practices in their own countries.

Donaldson said that the SEC has welcomed input from foreign firms and jurisdictions, and has moved to address their concerns wherever possible. 

To illustrate, he cited the SEC's final rule on the composition of corporate audit committees. 

Although the Sarbanes-Oxley law requires members of audit committees to be independent directors, the SEC, after dialogue with the European Union (EU), decided to include an exception for jurisdictions that require such committees to include a labor representative, he said.

"We will continue to be sensitive to the need to accommodate unique foreign structures and requirements," Donaldson said.

The SEC chief said that within the next few months, the commission would likely approve changes that would make it easier for new users of the EU accounting rules - the International Financial Reporting Standards (IFRS) - to list on US stock exchanges. 

The SEC has long permitted companies to use IFRS provided that the figures representing their companies' operations were reconciled with the US' Generally Approved Accounting Practices (GAAP) over a three-year period. 

Under the proposed rule, first-time users of IFRS would need to reconcile their financial statements for only two years, Donaldson said.

"I am of the firm view that this would be a step in the right direction," he said.

The SEC also is considering whether to extend the deadline for foreign firms' compliance with Section 404 of Sarbanes-Oxley, which requires companies to report annually on the adequacy and effectiveness of their internal financial controls.

"Of all the reforms contained in [Sarbanes-Oxley], getting these processes right is likely to have the greatest long-term impact on enhancing the reliability of financial reporting," Donaldson said.

Many European companies face burdens "above and beyond" those of US-based companies as the EU moves to adopt international financial reporting standards for the first time in 2005, Donaldson said.

"To address these burdens, I have asked the staff of the Commission to consider whether to recommend we delay the effective date of the internal control on financial reporting requirements for non-US companies," he said. 

According to news reports, Donaldson said the SEC could delay Section 404 compliance for non-US firms by four or five months.

The commission in November 2004 gave small US companies additional time to verify their internal controls after finding they were overwhelmed trying to meet the mid-2005 deadline for domestic firms.

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