When it comes to arguments over the value or iniquity of Sarbanes-Oxley, there is only one point to bear in mind above all. It’s the culture, stupid.
It is no wonder that people in the UK are frustrated with the implementation of Sarbanes-Oxley legislation. Audience members at a conference held in London recently – featuring a panoply of US lawyers, regulators and chief accounting officers – could only listen in amazement. If anyone ever wanted a stark example of how very different, both culturally and operationally, UK and US business is, this conference was it.
The biggest difference was starkly laid out; in essence, the idea that US business adores process. And when things go wrong, the only solution is more process.
Process is, you see, demonstrable, but it doesn’t stop failures such as Enron. It may make it harder, simply because there is more process, which is supposedly there to protect things from escaping scrutiny. But ego-driven fraudsters know ways around it.
It is also about American culture, where accountants are the process people – the beancounters. That is what American accountancy is for. Any serious business advisory services are provided by lawyers, and this is the fundamental difference between US practice and UK practice. If anything – though continental Europeans would be horrified at the mere suggestion – the US law-dominated business model is much closer culturally to the continental European business system, which likewise prefers legal process to principle-based clarity.
Part of the problem is legal. As Tim Bush of Hermes Focus Asset Management pointed out at a recent LexisNexis conference on corporate governance, the very wording of the companies legislation in the UK and the US creates a yawning cultural chasm. “True and fair,” says Bush, “is not equivalent to ‘fairly presents’ in material respects. Truth implies completeness. ‘Fairly presents’ is more suggestive of basic compliance.”
This is why Sarbanes-Oxley, with its insistence that chairmen and CEOs sign off the accounts as being correct, has come as such a shock to senior US business people. And it is also why it makes it harder, within the UK context, for useful work to be done by auditors.
At the great American roadshow conference, Jon Rowden of PricewaterhouseCoopers in London made a succinct point in his presentation. He pointed to a potential shift in the audit relationship. “In the past,” he said, “auditors have helped management out of year-end predicaments to ensure high-quality reporting.” Under Section 404 of Sarbanes-Oxley, that has now changed. “Now the predicament could be a reportable control breakdown.” In other words, auditors can no longer help their clients.
He also pointed to another downside. He produced a hypothetical example of a registrant company operating out of 20 significant locations. He showed how the end result would be 2,000 controls to be tested by selecting 30,000 events. And this would only be the Sarbanes-Oxley work. Then the auditors would start their own work.
To UK eyes, it is laughable. But his presentation was then followed by a speaker – the corporate vice president and chief accounting officer of Xerox Corporation – and the difference became clear. In an astonishing presentation he showed the staggering blizzard of beancounting process he was implementing. The cultural difference was stark.
And in the midst of this, no one was paying attention to the real cultural villains who had brought the US to its Sarbanes-Oxley knees – the lawyers. In the aftermath of Enron and the rest of the American corporate skulduggery “the accounting profession has been contrite, while the legal profession has not progressed as much”, said Charlie Niemeier of the US Public Company Accounting Oversight Board. And it was clear that the lawyers, having reinforced their dominance over the beancounters, were as complacent as ever. “Sarbanes-Oxley addresses the investment bankers and lawyers,” said Niemeier. “The accounting profession is working with it, but other professions are more resistant.”
None of this, while true, is terribly helpful to the FD of a UK-based company which is an SEC registrant and has to comply with Sarbanes-Oxley. To know that the legislation is nonsense-based on a process-driven culture egged on by the corrupting motivation of a hugely complacent US legal profession, while amusing, is little comfort. They will simply have to rationalise it as yet another cost of playing in the game at the highest level.
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