Sarbanes-Oxley was passed in 2002 with the aim of making
companies more financially transparent and better at handling
business risks – a reaction to the financial scandals at Enron and
WorldCom. Its application to all companies with a US listing – or
those contemplating a US listing – means that it impacts on
companies overseas.
Section 404 of the Act is the most burdensome provision for most
– and it is the enforcement of this provision that has been
delayed. It requires reports by an affected company's management
and its auditors on its internal control over financial
reporting.
The provisions were due to be implemented by July 2005, but with
European companies also spending huge amounts of time and money
managing the move to International Financial Reporting Standards
and the implementation of the EU Financial Services Action Plan,
the CBI and others argued that section 404's provisions were
placing a significant burden on European companies' resources,
particularly as many of these changes are having to be dealt with
by the same staff.
The extension of one year to July 2006 was announced just hours
after CBI Chief Sir Digby Jones and a delegation of UK business
leaders met with the SEC's commissioners and again emphasised the
resource problems that European companies were experiencing.
Sir Digby Jones said, "we are pleased that the SEC has granted a
meaningful extension", adding that he hopes this signifies "a new
mood of consultation and a desire to make Sarbanes-Oxley more
workable for non-US businesses."
The majority of UK companies have December year ends, with
another large number having April year ends. Accordingly, the 12
month extension will allow most UK companies a full financial year
to deal with IFRS, the EU's Financial Services Action Plan and the
new listing regime in the UK before full compliance with section
404.
In a letter to the Financial Times this week, Simon Lowe, Head
of Risk Management Services at accountancy firm Grant Thornton,
commented:
"Companies can now improve and embed their controls over
an extended period and promote a change in culture that will
contribute to good corporate governance and business improvement
rather than adopting a short-term focus on compliance for
compliance's sake."
