US Heightens Regulatory Pressure On Foreign Auditors

by Glen Shapiro, LawAndTax-News.com, New York

04 March 2003

The attempts of US securities regulators to extend their powers to the foreign auditors of US-listed foreign companies are reaching crisis point. Historically, global accounting firms have denied the presentation of documents when requested from them on the grounds (amongst others) of client confidentiality, but Securities and Exchange Commission (SEC) lawyers are beginning to test the effectiveness of powers, sought for more than ten years and given by Congress last year in the Sarbanes-Oxley Act to obtain audit information.

The new investigative powers empower US officials to subpoena audit papers from overseas accountant's offices, and an upcoming investigation of the audit of Royal Ahold AV conducted by Deloitte Touche Tohmatsu will be an important test of the reach of the US law.

"This is a crucial change which will have an enormous impact," said Paul R. Berger SEC associate director of enforcement. "You need to be able to talk to auditors. They're a window into the company. If you don't have the papers you are at a disadvantage."

It's possible that the way forward will be through compromise on a case-by-case basis. The UK's Institute of Chartered Accountants and nearing an agreement over a dispute concerning auditor liability where the SEC objected to the conclusions of a Scottish court. The Bank of Scotland had successfully demonstrated that an accounting firm owed a duty of care to it in the absence of a disclaimer, which the SEC objected to on the grounds of US securities guidelines.

Whilst the SEC flex their new found muscle, the new Public Company Accounting Oversight Board set up under Sarbanes-Oxley is considering a plan this week that will require all audit firms wherever based, to register with the Board if the firms undertake work for clients that market securities in the US.

In a statement issued 3rd March by the PCAOB, businesses were advised "For publicly traded companies, today is the day they are federally required to start getting serious about their code of ethics. Today, the SEC requirements, instituted as a result of Sarbanes-Oxley, start becoming final. Companies are now required to disclose in annual reports for fiscal years ending on or after July 15, 2003 whether they have adopted a code of ethics that applies to the CEO, CFO and controller."

Rene Ricol, President of the International Federation of Accountants, said that the Federation had not decided whether its non-US member auditor firms should register with the new PCAOB.

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