Accounting Observer > Public Blog - Bloomberg & Schumer Vs. Sarbanes & Oxley

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Bloomberg & Schumer Vs. Sarbanes & Oxley

Location: Blogs AAO Weblog (Public)
Posted by: Jack Ciesielski	1/24/2007 5:30 AM
On top of the Paulson Committee recommendations comes another similar report on how miserable life has become in a world where accountability now matters. It's the report prepared at the request of New York Mayor Michael Bloomberg and Senator Charles Schumer, entitled "Sustaining New York's and the US' Global Financial Services Leadership." I haven't gotten to read the whole report yet, but a few things from the executive summary make me wonder. Like this for instance, regarding how the research for the report was done: "... a McKinsey team personally interviewed more than 50 financial services industry CEOs and business leaders. The team also captured the views of more than 30 other leading financial services CEOs through a survey and those of more than 275 additional global financial services senior executives through a separate on-line survey. To balance this business perspective with that of other constituencies, the team interviewed numerous representatives of leading investor, labor, and consumer groups." If you interview, through one means or another, 355 financial services industries CEOs, business leaders and other financial services senior executives, you can be pretty sure you're going to hear a consistent message: reduce regulation. How many investors were consulted "to balance this business perspective?" Can't tell from the above statement, and I couldn't find it anywhere in the document, but I'd suspect it wasn't enough to really "balance" things. Predictably, the report recommends that the SEC and PCAOB "provide clearer guidance for implementing the Sarbanes-Oxley Act." Never mind that they've been clarifying it over the last few years and a revised, lighter-weight Auditing Standard 2 is in the works. They also call for the SEC to consider letting small firms opt out of Sarbanes-Oxley requirements for real instead of the "de facto opting out" by stalling the implementation date - something they've been doing ever since the law was enacted. Ditto for foreign firms. Another predictable recommendation: "implement securities reform." There's concern that the auditing industry could not afford to lose another of the big auditing firms to litigation, and the report cites Arthur Andersen as an example. Fine to cite it as an example of a loss, but don't confuse it with losing it to litigation. Andersen didn't dissolve from the lawsuits; its flawed auditing was its first stumble and the indictment by the Department of Justice for obstruction of justice (remember the shredding of correspondence files?) was the deathblow. There's a lot of talk about limiting auditor liability right now, and it strikes me as a little contradictory. Often, companies' finance and accounting staffs bemoan the lack of slack on the part of outside auditors in the Sarbanes-Oxley era. If the audit environment truly has turned in favor of auditors - if they really have some power now and can perform higher quality audits - then their legal exposure should be diminished in an era of stricter controls. Why do they need a liability cap now? They don't. But going forward, maybe they'll need it in a wilder environment that could occur if the roll-back of Section 404 examinations actually happens. The entire thrust of the report is to preserve the jobs and output of the financial services industry. But it seems like it focuses only on the banking side of the financial services industry and the concern with listings. Everything that can be imputed to regulation is named - but there's little blame for one possible problem with listings. That's the fact that investment banking fees for floating an IPO in the US are about twice as high as in the UK. I don't think that's mentioned in the study. See the report entitled "The Cost of Capital: An International Comparison," prepared by Oxera Consulting at the London Stock Exchange's website.

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