A new realignment of U.S. corporate accounting standards with Europe could halt the hemorrhage of companies now filing elsewhere. For the U.S.-based international investor, this adds up to enhanced profit.
Early this week, President Bush met with European leaders to discuss the establishment of a transatlantic “economic council” with the goal of harmonizing standards for doing business. They spoke of regulatory convergence in 40 areas, including intellectual property rights, financial services regulations, and restrictions on cross-border mergers and acquisitions.
But this process was already underway in international accounting circles.
As you probably know, one of the few things that actually got done during Congress’s marathon three-day workweeks these past several years was the passing of the Sarbanes-Oxley (Sarbox) legislation on corporate reporting.
After Enron, a shock wave of outrage sent a twitch through the American public, which led to a spastic knee-jerk on Capitol Hill and a predictably disastrous result. Section 404 of Sarbanes-Oxley states that management has to provide “an adequate internal control structure and procedures for financial reporting.”
For some, this has meant accounting for every trinket and cheeseburger bought on the company credit card. Others have not changed their habits much, instead hiring teams of the best accountants to make the books look right.
In the end, though, the simplest calculation is that time = money, and Sarbox is taking away from the bottom line.
Sarbox compliance is reckoned to cost tens of thousands of man-hours per year to public companies, with a total cost in the tens of billions of dollars across the industry.
But the solution to bad bookkeeping and corporate fraud is not more bookkeeping.
Bridging the Gap
There are 17,000 public (listed) companies in the United States. 1,200 of them are based outside the country, with 500 in Canada and 300 in the European Union.
In 2005, those European companies were required by the Council of the European Union to ditch national reporting standards and bring themselves in line with International Financial Reporting Standards, or IFRS.
This set of guidelines, established by the International Accounting Standards Board, is at variance with the U.S. standard, the Generally Accepted Accounting Principles or GAAP.
GAAP is going the way of the foot and the pound, and unlike the world of measurements (where Yankee-doodle stubbornness has saddled me with constant headaches in my travels), we are starting to give in.
In late April, the Securities and Exchange Commission announced that it would issue a ruling this summer to give those 1,200 foreign issuers a choice between IFRS and GAAP.
Also this summer, we expect a change in SEC rules that don’t allow foreign companies to de-list if more than 5% of their trading volume over the past year stemmed from the States. SEC commissioner Roel Campos added on the day of that ruling that about 60% of the European companies listed in the United States would be able to leave under the provision.
With the dreaded Section 404 filing deadline coming in June, firms from far and wide will have to turn in their paperwork on “internal controls.” Some European companies may also be tempted to turn in their ticker symbols.
But those who can wait until 2009 see a pot of gold at the end of the rainbow, where a thinner herd of international competitors will compete for increasing liquidity on US trading floors.
Over the past year, there has been a net change of precisely one in the number of non-US listings on the New York Stock Exchange. That’s not an exodus, but it’s clear that foreign companies aren’t flocking to Wall Street anymore. Instead, they know that Hong Kong will likely raise more IPO capital in 2007 than New York and London combined.
But if they no longer have to double-report everything they do, the cost of staying Stateside comes down substantially, and US-based investors will benefit from a return to competitiveness through a convergence of reporting standards.
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