Tuesday, September 19, 2006
U S extraterritoriality: Balls to Sarbox!!!
In the good old days before the UK became a remote US state, it used to be that Parliament was sovereign, and was the ultimate law maker. Increasingly this role in the international finance scene is being performed by the US legislature. Although we are not US citizens in the fully fledged sense ( cheap petrol, trips to Vegas, dunkin' doughnuts) financial services personnel are increasingly subject to US law. This is called extraterritoriality. Let me explain. Imagine the US passes a law that says it is a criminal offence to fart in the US. That's fine if you live in the US, you commit the offence of farting in the US. Now imagine that the same law is extended to make farting by persons working in US listed companies or companies with US ties abroad. So if you fart in the UK and do not comply with US flatulence laws you maybe committing an offence for which you will could be extradited or prosecuted in the US, even though you farted in London UK, not New London Connecticut. Strange isn't it. The truly smart readers will have realised by now that if you substitute the example of Sarbox for farting the whole thing becomes much clearer. The issue of extraterritoriality is more important now than ever, for example what happens if Nasdaq does eventually take over the LSE. Will UK companies have to comply with US listing and regulatory and compliance requirements. The answer seemed to come from Ed Balls, the economic secretary to the the Treasury ( UK that is). The proposed legislation effectively ring fences the LSE from the effects of US compliance should it be taken over. This seems very sensible, given that one of the main and presumably
unintended effects of Sarbox has been to put off companies listing in the US, instead companies have listed on non-US exchanges like AIM. The response from Harvey Pitt a former Head of the SEC was he couldn't understand why Balls has gone down this road,
he told the Financial Times: "What we need now is not unilateral turf-protecting activity but really collaborative discussions between regulators to figure out what the right solutions are to protect investors."
The fact he doesn't get it is the problem.Is he a bit thick ? Exporting legislation in a seemingly benign manner is the most insidious form of extraterritoriality, we need world class solutions but Sarbox heavy handedness was never the answer, nor is it business friendly, it's true we do need to protect investors, but lets just recap. Sarbanes- Oxley came as response to a number of firms involved in misdemeanours on an epic scale. Here are some of them - Enron, Worldcom, Global Crossing, HealthSouth, Tyco and the banks involved were Citibank, JP Morgan,Merrill Lynch and others. Last time I looked they were all US firms. So why Sarbox needs to be exported is anyone's guess. It came about in response to the poor corporate governance in America, not the rest of the world. It is a was a poor piece of legislation to begin with. The thing Mr Pitt doesn't get is corruption is part of the capitalist process, it's at the heart of the US corporate framework. Firms are still fiddling stock options accounting, faking inventory, re-stating financial statements. No accounting information coming out of any large corporate will ever be reliable. We can't trust the auditors or the advisors either. They themselves have either colluded in cooking the books ( Andersen's) or are being investigated for their own lack of ethical conduct in regard to things like tax avoidance scams ( KPMG , E&Y ).The Lawyers were at it too. So what do you do? I have no idea but more corporate governance and tighter internal controls are not the answer. If all the information is wrong and faked to begin with, having tighter internal controls is like auditing the contents of your dustbin. Now you know exactly what the rubbish is made up of, but it's still rubbish.
unintended effects of Sarbox has been to put off companies listing in the US, instead companies have listed on non-US exchanges like AIM. The response from Harvey Pitt a former Head of the SEC was he couldn't understand why Balls has gone down this road,
he told the Financial Times: "What we need now is not unilateral turf-protecting activity but really collaborative discussions between regulators to figure out what the right solutions are to protect investors."
The fact he doesn't get it is the problem.Is he a bit thick ? Exporting legislation in a seemingly benign manner is the most insidious form of extraterritoriality, we need world class solutions but Sarbox heavy handedness was never the answer, nor is it business friendly, it's true we do need to protect investors, but lets just recap. Sarbanes- Oxley came as response to a number of firms involved in misdemeanours on an epic scale. Here are some of them - Enron, Worldcom, Global Crossing, HealthSouth, Tyco and the banks involved were Citibank, JP Morgan,Merrill Lynch and others. Last time I looked they were all US firms. So why Sarbox needs to be exported is anyone's guess. It came about in response to the poor corporate governance in America, not the rest of the world. It is a was a poor piece of legislation to begin with. The thing Mr Pitt doesn't get is corruption is part of the capitalist process, it's at the heart of the US corporate framework. Firms are still fiddling stock options accounting, faking inventory, re-stating financial statements. No accounting information coming out of any large corporate will ever be reliable. We can't trust the auditors or the advisors either. They themselves have either colluded in cooking the books ( Andersen's) or are being investigated for their own lack of ethical conduct in regard to things like tax avoidance scams ( KPMG , E&Y ).The Lawyers were at it too. So what do you do? I have no idea but more corporate governance and tighter internal controls are not the answer. If all the information is wrong and faked to begin with, having tighter internal controls is like auditing the contents of your dustbin. Now you know exactly what the rubbish is made up of, but it's still rubbish.
