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Dooley Eu and Sarbanes Oxley

Dooley Eu and Sarbanes Oxley

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Published by: len_starn on Feb 06, 2012
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 1
European Focus On Sarbanes-Oxley
Daniel V. Dooley*
Introduction
On July 30, 2002 The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley” or “Act”) becameU.S. law; it applies to both U.S. companies and foreign registrants listed on U.S.exchanges. Sarbanes-Oxley has created new legal and regulatory enforcement powers for the U.S. Department of Justice (“DOJ”) and U.S. Securities and Exchange Commission(“SEC” or “Commission”), as well as establishing a new regulatory body, the PublicCompanies Accounting Oversight Board (“PCAOB”), to oversee independent accountingfirms. The eventual “reach” of Sarbanes-Oxley, as to foreign registrants and their auditors, is still to be seen; however, European companies that list their securities on U.S.exchanges already have been affected and must expect more to come – more legal andregulatory enforcement actions, more risk of private securities litigation and SECregulatory actions, and more rule-making and standard-setting by U.S. regulators.European companies need to focus now on what Sarbanes-Oxley means to them, andwhat they must do in response to it. This monograph addresses the practical implicationsfor European companies of Sarbanes-Oxley and some key changes in the U.S. securitieslitigation and regulatory environment.
Overview
 
Sarbanes-Oxley: expands independence requirements for independent auditors andincreases the duties and responsibilities of audit committees (of supervisory boards and boards of directors). The Act mandates new “certification” requirements for senior officers, regarding financial statements and other financial information, requires thatmanagement report annually on the adequacy and effectiveness of internal controls, andalso requires that companies’ independent auditors attest to managements’ assertions insuch reports. Sarbanes-Oxley promulgates specific accounting treatments and financialdisclosures. And, the Act creates new protections for “whistleblowers” and newobligations for legal counsel regarding potential securities law violations or irregularities.Finally, Sarbanes-Oxley enacts many new or increased civil and criminal penalties andsanctions – applicable to companies and their directors, officers and employees – for various violations of securities laws and regulations. From Sarbanes-Oxley proceed newregulations by the SEC and more vigorous enforcement of U.S. securities laws andregulations, by both the SEC and the DOJ. The Act represents a sea change in securitieslaw and regulation; and, Sarbanes-Oxley will have a profound effect on Europeancompanies that access U.S. capital markets and register on U.S. exchanges.
*
Daniel V. Dooley, CPA is a partner in the firm of PricewaterhouseCoopers and leads the firm’sSecurities Litigation Consulting practice.
 
 2The purpose of Sarbanes-Oxley is to deter financial frauds and financial accounting andreporting irregularities of the kind that caused some of the recent U.S. corporate scandals,such as Enron, WorldCom, Adelphia, and Health South. The objective is to reduce thenumber and severity of restatements of financial statements caused by materialaccounting errors and irregularities. The Act was designed to achieve this objective by:expanding the enforcement powers of the SEC and DOJ; holding directors andmanagement more accountable for the fairness and accuracy of financial statements;increasing pressure on independent auditors to perform better audits and to focus ondetecting frauds; emphasizing the need for more effective internal controls and controlstructures; and, providing new and much more severe criminal and civil penalties andsanctions to punish violators of U.S. securities laws and SEC regulations.The U.S. Congress also conferred on the SEC new regulatory and rule-making authority,and the Act created the PCAOB to oversee independent auditors and their firms. Inaddition, Sarbanes-Oxley requires that the SEC conduct at least tri-annual reviews of each SEC registrant’s financial statement filings with the Commission (and more oftenunder certain circumstances). Just prior to the enactment of Sarbanes-Oxley, a Joint Anti-fraud Task Force of the SEC and DOJ was created by Executive Order of the President of the United States, for the purpose of more effectively investigating and prosecutingcorporations and their directors, officers and employees that are suspected of violatingU.S. securities laws. The clear intent of Congress and the Executive Branch is for theSEC and DOJ to be more aggressive and vigilant in the area of financial frauds andaccounting irregularities – involving U.S. or foreign companies listed on U.S. exchanges.
 Rechnungswesenpolizeistaat 
 The consequences of being investigated or prosecuted by the SEC and/or DOJ in respectof accounting irregularities, financial fraud, and violations of U.S. securities laws andregulations are almost always disastrous. Investigations can be costly – in terms of timeand resources spent, loss of reputation, and economic damage to the company and itsstock price. The possibilities of being investigated or prosecuted have increased greatly.The SEC is in the process of nearly doubling its accounting staff and Division of Enforcement personnel (the
 Rechnungswesenpolizei
). The DOJ has shifted substantialresources to the areas of corporate and “white-collar” crime. The newly minted PCAOB(the
Wirdschaftprüferpolizei
) soon will begin a regular program of review of independentaudits and the audit quality of independent auditing firms. Public accounting firms of independent auditors, primarily international firms such as “The Big Four,” havestrengthened their audit methodologies in the wake of the demise of Arthur Andersen (inre. Enron) and in response to demands – by Congress, the SEC, and the investing public – for better audits, designed to prevent future “Enrons,” or “WorldComs.” And, Sarbanes-Oxley as much as invites “whistle-blowers” (
 Anzeige Erstatter 
)
 
to denounce their current(or former) employers over perceived or suspected financial accounting and reportingissues. Thus, more scrutiny – from every quarter – on U.S. registrants, both domestic andforeign, virtually guarantees that more companies will fall foul of Sarbanes-Oxley, or of 
 
 3the “Anti-fraud” provisions of the Securities Exchange Act of 1934 (“Exchange Act”) or the Securities Act of 1933, or of any number of other SEC rules and regulations.Only A U.S. Problem?
 
Lest foreign registrants believe that this is only a problem for U.S. (i.e., domestic)corporations who cannot seem to get their numbers right, consider that since passage of the Private Securities Litigation Reform Act of 1995 (“PSLRA”) over 100 foreigncompanies have been sued in private securities litigation and/or litigation brought by theSEC or DOJ. In the year 2002 a record high 22 foreign registrants on U.S. exchangeswere named in securities actions (more than 75 percent of such cases involvingallegations of accounting irregularities), and through July 2003 another seven foreigncompanies have been sued.
1
Among foreign registrants European companies are the onesmost often involved in such securities litigation. Recent examples in 2003 and 2000-2002include the following European registrants on U.S. exchanges:Country Accounting RestatementCompany Headqtrd. Issues Raised Involved Year A.C.L.N. Belgium
 
2001Aegon NV Netherlands
 
2003Ahold (Royal Ahold NV) Netherlands
 
2003Alcatel, SA France
2002Allied Irish Banks, Plc Ireland
 
2002Alstom, SA France
2003Bayer AG Germany 2003Cable & Wireless PlC United Kingdom 2002Core Laboratories NV Netherlands
 
2003Daimlerchrysler AG Germany 2000Deutche Telekom AG Germany 2000Elan, Plc Ireland
 
2002Energy Holdings, Plc United Kingdom
2000Hugo Boss AG Germany
2002Intershop Communications Germany
2001Imperial Chemicals, Plc United Kingdom 2003KPN Quest NV Netherlands
2002Learnout & Hauspie NV Belgium
 
2000Marconi, Plc United Kingdom 2001SmartForce, Plc Ireland
 
2002Sportsline.com, Inc Finland
 
2003Turkcell, AS Turkey 2000Van der Moolen Holding NV Netherlands
2003Vivendi Universal, SA France
2002Vodafone, Plc. United Kingdom
2002
1
Source: PricewaterhouseCoopers 2002 Securities Litigation Study, PricewaterhouseCoopers 2003Mid-year Securities Litigation Report, and the PricewaterhouseCoopers Securities Litigation Database.

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