Tom Feeney at Yahoo! News has an interesting analysis of the impact of Section 404 Sarbanes-Oxley Act on US businesses and points to the US investment cash drain that’s resulting from the LSE casting itself as a ‘SOX-Free Zone.’ I leave capital markets analysis to others but a fraud-related thought struck me about how IFRS and other factors might encourage US legislators to rethink their approach to compliance.
Recent commentary has suggested the idea of convergence between US GAAP and IFRS won’t happen until hell freezes over. I’ve long held the view that the rules based US GAAP system is primarily responsible for many of the problems US based companies have experienced.
It is the structural defect of being rules driven. Any time there are rules in place, companies and individuals will seek to find ways around them. It allowed CA and PeopleSoft to engage in creative accounting practices, which, in the case of CA, have been deemed fraudulent. And which eventually led to the corporate nose bleed that is SOX.
Under IFRS in the UK, the notion of true and fair plays far greater prominence. So while there is a framework around which accounts are presented, there is less of a temptation to engage in fraudulent activity. There is greater scope for understanding how assets and liabilities should be categorised for instance. This has a direct, positive impact on business. Even our tax system, which I admit, is crumbling under fresh regulation, is essentially interpretive.
Note – I do not say IFRS and the British legislative framework is superior or mutually exclusive. I say it has distinct advantages. So while non-SOX status continues to attract smaller US companies, it introduces those same companies to the advantages of the IFRS code.
I realise this analysis only examines the potential impact from one angle. I could equally (and cynically) argue that a drift in ethical standards among the Big Four might, of itself, be an attraction to certain corporations that are looking for a particularly favourable treatment.
As an aside, I can never understand why Wall Street analysts didn’t seize upon CA. In the late 1990s, I’d field a half dozen calls each quarter asking me if I could make sense of CAs results. I never could.
Similarly, I recall only one Wall Street analyst calling out Lernout & Hauspie, years before its eventual collapse. In the end, it took a concerted effort by the WSJ to finally expose the extent and nature of the fraud. I recall being in Korea with L&H and realised the so-called top line customers were spending a fraction of what was being claimed. But no-one wanted to believe that.
IFRS should encourage greater transparency and so reduce the requirement for heavy handed compliance legislation. The growing ubiquity of unfiltered information flowing from the blog commentators now makes it very difficult for companies to hide.
Whether a move towards IFRS – which calls for judgment in a number of areas – will serve as a better protection for investors than SOX and rules-driven reporting systems has yet to be tested. I think the answer is a 0.7 probable ‘yes.’ But only as part of a practical and cost effective regulatory regime. The US doesn’t have that today. Regulars won’t be surprised to find that I think the blogerati will be at the centre. Not SOX. Which also changes the nature of investment analysis.
Technorati Tags: IFRS, Sarbanes_Oxley, SOX
