dooley eu and sarbanes oxley

8/3/2019 Dooley Eu and Sarbanes Oxley

http://slidepdf.com/reader/full/dooley-eu-and-sarbanes-oxley 1/20

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’s

Securities Litigation Consulting practice.



2

The 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 material

accounting 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



3

the “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.



4

Recent major settlements of private securities litigation against European companies haveincluded: Daimlerchrysler AG ($300 million); Alcatel, SA ($75 million); Deutsche Bank-Bankers Trust ($58 million); Energy Holdings, Plc. ($48 million); and Baan N.V. ($32.5

million). SEC and/or DOJ investigations of some of these European companies or their directors, officers or employees have involved: A.C.L.N., Ahold, Allied Irish Banks,Elan, Learnout & Hauspie, Marconi, and Vivendi Universal.

In a recent speech, SEC Commissioner Paul S. Atkins stated:

“Much of the attention has focused on failures of U.S. corporations, such as, of course, Enron, WorldCom, Global Grossing, and now HealthSouth. Yet, U.S.investors are not alone in experiencing recent profound failures, some of whichwere caused by questionable accounting practices, bad management, and poor internal controls. Names like Robert Maxwell, Polly Peck, Royal Ahold, Swiss

Air, Phillip Holzmann, and Vivendi come to mind. Therefore, restoring investor confidence by strengthening corporate governance is of great importance to theworld's financial markets. It is not an issue unique to the U.S. or the EU”

2

These remarks of SEC Commissioner Atkins are not the only ones by SECrepresentatives to focus attention on European companies in connection with enforcementof Sarbanes-Oxley. In his remarks to the Conference of the Institute of CharteredAccountants of England and Wales, former SEC Chairman Harvey Pitt gave this view of the future of enforcement of Sarbanes-Oxley for European companies:

“Sarbanes-Oxley generally makes no distinction between U.S. and foreign privateissuers listed in the United States. It applies equally to all who seek to access U.S.capital markets. We are committed to implement the Act in a manner fullyconsistent with its purpose and intent. …Our mandate is to implement theSarbanes-Oxley Act fully for all companies, foreign and domestic. Foreigncompanies therefore can expect that many of our new rules will apply to them.” 3

This new legal and regulatory environment of Sarbanes-Oxley is here to stay for European registrants on U.S. exchanges. Beyond the U.S. capital markets, the spill-over effect of Sarbanes-Oxley already is occurring in the forms of: newly adopted, or proposed, public companies listing standards, bills, and regulatory acts in variousEuropean countries; increased activities by European regulators such as the FrenchCommission des Operations de Bourse (“COB”), the U.K. Financial Services Authority(“FSA”) and Financial Reporting Review Panel (“FRRP”), the German Securities

2 Speech to the International Financial Law Review (March 25, 2003) by SEC Commissioner , TheHonorable Paul S. Atkins, The Sarbanes-Oxley Act of 2002: Goals, Contents, and Status of Implementation.

3 Speech to the Institute of Chartered Accountants of England and Wales (October 10, 2002) byformer SEC Chairman, The Honorable Harvey L. Pitt, A Single Capital Market in Europe: Challenges for Gloabal Companies.



5

Commission (“BAWe”), and the Italian Securities Commission (“CONSOB”). There is anew zeitgeist of “financial transparency” that is sweeping the global capital markets. Asea change has happened. The paradigms of financial reporting, corporate governance,internal controlling and regulatory compliance have shifted. Welcome to the new world.

European Risk Environment

European companies accessing the U.S. capital markets that fail to recognize, or react to,these changes in securities laws, regulation, and corporate governance requirements proceed at great risk. Those companies that change with the times have much to consider,and much to do, to achieve and maintain compliance with such securities laws andregulations – particularly in respect of Sarbanes-Oxley. To manage the new or increasedrisks in the areas financial accounting and reporting, auditing, governance andcompliance risks requires: knowledge and understanding of the situation, appreciation of the paradigm shifts and what they mean, development of a prudent strategy for legal andregulatory compliance, and design and operation of adequate and effective control

structures and financial accounting and reporting controls. Some risks are inherent in particular elements of Sarbanes-Oxley and affect all companies – foreign and domestic – that are U.S. registrants. Other risks are unique to, or greater for, European companiesand their directors and officers; some of these kinds of risks are discussed below.

Governance Structures

In the U.S. the dichotomy of supervisory boards and executive boards generally does notexist. But, Sarbanes-Oxley was written by U.S. legislator who understand (at best) onlythe U.S. corporate board model. U.S. boards of directors, more so than Europeansupervisory boards, involve themselves in corporate strategy, executive decision-making,

and managerial aspects of financial accounting and reporting to a much greater degree.Audit committees of boards of directors have existed and operated for longer in U.S. publicly listed companies then in many European companies; and, the role of the typicalU.S. corporate audit committee (that is, its charter, relationships vis-à-vis independentauditors and management, audit committee duties and responsibilities, and auditcommittee programs and work agendas) has been well-developed and institutionalizedwithin the corporate governance culture in the U.S. Sarbanes-Oxley was modeled on“best practices” for U.S. audit committees – developed by the U.S. exchanges (e.g., NYSE), the SEC, the American Institute of Internal Auditors, and U.S. lawyers and public accountants. Little thought was given in the legislative history of Sarbanes-Oxleyto issues and environmental differences unique to foreign registrants, particularly

European companies.

Changing “GAAP”

Generally accepted accounting principles (“GAAP”) in the U.S. is substantially differentthan GAAP in use in many European countries. For that matter U.K. GAAP issubstantially different from Dutch GAAP or German GAAP; Dutch GAAP or SwedishGAAP is substantially different than French GAAP; Italian GAAP is substantially



6

different from German GAAP or Polish GAAP; and Irish GAAP is substantially differentfrom Belgian GAAP.

4But, one may rejoin, International Financial Reporting Standards

(“IFRS”) of the International Accounting Standards Board (“IASB”) are at hand andconvergence to IFRS is near (by the year 2005); and, the U.S. Financial AccountingStandards Board (“FASB”) and the IASB have agreed a plan of convergence of U.S. and

international GAAP.

5

D’accord. C’est une bonne idée! What could be more perfect … or more global?

4 It is an open question whether Northern Ireland GAAP ever will converge with Republic of Ireland GAAP, or whether Flemish Belgian GAAP ever will accord with Waloon Belgian GAAP; however,the Swiss are at peace with everyone’s GAAP in the Eurozone.

5 But, not so fast. Just because the IASB promulgates IFRS does not mean that either all Europeancountries will adopt such GAAP (there is an EU opt-out provision), or that any such IFRS GAAP willconform to U.S. GAAP – as understood by the various European countries, or as applied by the U.S. or theU.K. and the Eurozone. Just contemplate the “FAQ” section of the Deutsches Rechnungslegungs Standards

Committee e.V. (German Accounting Standards Committee, or “GASC”), regarding IFRS:

“Does GASC answer questions about IAS/IFRS?

Sorry, no.

Does GASC answer questions about US-GAAP/SEC?

Sorry, no.

Will accounting standards ever be complete?

Accounting standards need to keep abreast of changes in the law, business practice and users’expectations. Since these are constantly evolving, accounting standards probably will never becompleted.”

Or, consider the following news items reported in the latest edition of Accounting Age (London, October 30, 2003):

“IAS Training Crisis Looms

Half of UK accountants have still not received training in international accounting standards, ascomplacency threatens to undermine UK conversion to IAS. …

EU States Demand Standards Delay

A third of EU member states have joined forces to demand an extension to the EuropeanCommission's 2005 deadline for companies to comply with international financial reportingstandards. …

IASB Upsets European Bankers

A dispute over a new international accounting standard on derivatives could destabilise the role of the International Accounting Standards Board. …

EC Pushes for More Talks Between Banks and IASB

Talks should continue between European banks and the International Accounting Standards Boardfollowing the release of revised drafts on financial instruments, according to the EuropeanCommission.”



7

First, consider that the SEC still believes in “GAAP Americanus.”6 Now, consider that theFASB-IASB concordat is just an ambition (and not a contract). Finally, consider that“convergence” very well may mean adoption of U.S. style, rules-based GAAP in manyareas (such as revenue recognition, accounting for reserves and allowances, impairmentof goodwill and long-lived assets, accounting for derivatives and financial assets, fair

value accounting, etc.). Zut alors! Mein Gott!

More likely than not, the U.S. won’t abandon its approach to GAAP that combines both principles-based and rules-based standard-setting. As Sir David Tweedie, Chairman of the IASB, stated to the U.K. Parliament:

“Many of the international standards that the IASB inherited from our predecessor body are similar to their U.S. equivalents. Both international and U.S. standardsstrive to be principles-based, in that they both look to a body of accountingconcepts. U.S. standards tend, on the whole, to be more specific in their requirements and include much more detailed implementation guidance. In my

view, the U.S. approach is a product of the environment in which U.S. standardshave been set. Simply put, U.S. accounting standards are detailed and specific because the FASB’s constituents have asked for more detailed and specificstandards.”7

Equally likely is the strong probability that IFRS – notwithstanding the IASB’s professed preference for “principles-based” standard-setting – will become much more rules-based:(a) due to the accounting complexity of many of the issues on the IASB’s present agenda;(b) because principles-based standard-setting alone just won’t be acceptable to the SEC ;and (c) so as to achieve convergence with the FASB and the vast body of existing U.S.GAAP set forth in FASB Statements of Financial Accounting Standards (“SFAS”),FASB Emerging Issues Task Force authoritative pronouncements, and FASB FinancialInterpretations (“FIN”).This consequence of convergence already is manifest and playingout in connection with the proposed IAS 39 standards on derivatives and financialinstruments8

6 Based on data from the New York Stock Exchange (“NYSE”) for the year 2002, the total value of securities traded on global capital markets is approximately $20 trillion, of which approximately $16trillion is listed and traded on U.S. exchanges; the other $4 trillion is dispersed among the London Stock Exchange (“LSE”), various European exchanges, the Tokyo exchange and a number of other non-U.S.exchanges. What are the odds that the SEC (or the U.S. Congress) will relinquish primary GAAP authorityover three quarters of the world’s equity capital to any international standard-setting body? What are theodds that the SEC will co-opt the new IFRS-U.S. GAAP “convergence” and subject it to SEC interpretation

and SEC standard-setting?

7 The United Kingdom Parliament, Select Committee on Treasury (September 2, 2002),Memorandum of Sir David Tweedie, Chairman, International Accounting Standards Board.

8 See Financial Times (March 10, 2003), Companies & Financial International: Brussels Sticks toIts Guns, reporting Sir David Tweedie’s comments concerning a campaign by French banks and variousother European financial entities to block the implementation of International Accounting Standard (“IAS”)39, Financial Instruments: Recognition and Measurement :



8

Ultimately, IASB will out in the European arena of financial accounting and reportingstandard-setting, and convergence – more or less – will be achieved between U.S. GAAPand IASB GAAP.9 However, when convergence is achieved, it will produce a set of accounting standards that are far more rigorous, and much more rules-based, than nowexists for many European companies. As Sir Davis Tweedie assured the U.S. Congress:

“We [the IASB] have no intention to ‘water down’ existing standards in any jurisdiction. Instead, we plan to build a set of financial reporting standards that arethe ‘gold standard’ …”

10

In the meantime – as EU adoption of IFRS approaches in the year 2005, and indigestionover IAS 39 (or any other standards to be promulgated under the IASB’s agenda)subsides, and European accountants train-up on new IFRS standards, and EU countriesdecide to opt-in or opt-out (selectively, on a case-by-case, country-by-country basis)11 – the risks associated with changing GAAP to IFRS and convergence of IASB GAAP withU.S. GAAP are great. These risks include: misapplication; misinterpretation; confusion;

and, the possibility that adoption of IASB standards will expose prior accountingstandards used, and accounting treatments applied, to scrutiny by the SEC in respect of whether they ever were reconcilable to U.S. GAAP (or were, in fact, properly reconciledin the annual reports on Form 20-F filed by foreign registrants with the SEC). And then,there also is the reality that IASB standards – more akin to U.S. GAAP – will causefinancial accounting and reporting problems for some European companies. This may be

“Sir David Tweedie, IASB Chairman, signaled he would only consider limited, technical changes[to the exposure draft for IAS 39]. He defended the central thrust of IAS 39, including themeasurement of derivatives and certain other financial instruments at fair or market values. … Sir David said the IASB could not capitulate to pressure from companies and politicians. ‘If we dothat the whole ethos of our institution is gone,’ he said. ‘You have lost all respect. The Americans

would almost throw up.’ … He warned that the Securities and Exchange Commission, the chief U.S. financial regulator, would continue to insist on EU companies producing a separate set of accounts under U.S. accounting rules if they did not use the international standard [i.e., IAS 39] onfinancial instruments. … However, he accepted IAS 39 was not a perfect accounting standard because it is heavily based on U.S. financial reporting rules, rather than principles [emphasisadded ].

So much for “principles-based” purity in IASB GAAP.

9 The FASB and IASB agreed to use their “best efforts to (a) make their existing financial reportingstandards compatible as soon as is practicable and (b) to coordinate their future work programs to ensurethat once achieved, compatibility is maintained” in the “Norwalk Agreement” Memorandum of Understanding of the FASB and IASB (September 18, 2002). Sarbanes-Oxley, Section 108, “Accounting

Standards” encourages the same.

10 Senate of the U.S. Congress, Committee on Banking, Housing and Urban Affairs (February 14,2002), Statement of Sir David Tweedie, Chairman, International Accounting Standards Board.

11 See Le Monde (August 6, 2002), Accounting Standards at the Heart of Corporate Scandals,Frédéric Lemaître: “Europe keeps a key card: to become enforceable for European listed businesses,IASB's accounting rules must be ratified by the EU. They can be rejected if deemed incompatible with ‘the

European public interest’ . … ”



9

especially true for European financial institutions required to begin fair-valuing certainassets under the proposed IAS 39; and, such problems also may arise in the areas of:revenue recognition; impairments of goodwill and long-lived assets; accounting for leases; accounting for, and reporting of, “off-balance sheet” transactions andarrangements; and, accounting for business combinations.

Finally there is the risk that the SEC will interpret IASB GAAP by its own regulatorystandards and in its own fashion. Why not? For years the SEC staff have been doing thesame in respect of U.S. GAAP. Recent examples of this “GAAP-activism” by the SECstaff include: SEC Staff Accounting Bulletin (“SAB”) No. 99, Materiality; SAB No. 100, Restructuring and Impairment Charges; SAB No. 101, Revenue Recognition in Financial Statements; and SAB No. 102, Selected Loan Loss Methodology and Documentation

Issues. Under the Exchange Act the U.S. Congress conferred on the SEC the authority toestablish and enforce GAAP for companies listed on U.S. exchanges; this authority wasreconfirmed in Sarbanes-Oxley.

12In practice the SEC generally defers to the private

standard-setting bodies, such as the FASB and the American Institute of Certified Public

Accountants, in matters of promulgating U.S. GAAP. However, in respect of enforcement actions by the SEC, GAAP is what the SEC says GAAP is. Europeancompanies can expect the same when the SEC staff begins to dissect IASB GAAP.

U.S. and IASB “GAAP Gap”

And beside all this, between us and you there is a great gulf fixed .13

Until (if ever) U.S. GAAP and IASB GAAP truly do converge, European companiesregistered on U.S. exchanges must provide, in their financial statements filed with theSEC on Form 20-F, a reconciliation between any non-U.S. basis of GAAP used (e.g.,Dutch GAAP, U.K. GAAP, French GAAP, etc.) and the accounting for, and reporting of,results of operations that would occur under U.S. GAAP. Even when the EU implementsIFRS in 2005 there likely will remain significant differences between U.S. GAAP andIASB GAAP – at least for a while, and possibly still forever. These differences can besignificant.14 If the only risk involved in dealing with the “GAAP gap” through

12 See Sarbanes-Oxley, Section 108, “Accounting Standards.”

13 N.T. Luke 16: 19-31.

14 See Remarks to the American Council on Germany by former SEC Chairman, The Honorable

Arthur Levitt (October 7, 1999), Corporate Governance in a Global Arena: “If anyone doubts the disparate

effects that different accounting practices can have, consider again the case of Daimler-Benz. Under German accounting standards, Daimler reported a profit of 168 million Deutschmarks in 1993. Under U.S.GAAP standards, the company reported a loss of almost a billion Deutschmarks for the exact same period.You can just imagine an investor’s confusion and concern.” For a more current example, consider Note 38,“Reconciliation to U.S. GAAP” of the Consolidated Financial Statements of Alcatel, SA for the Year Ended December 31, 2002 as filed with the SEC on Form 20-F, which reflects the following (Euros inmillions): Net (loss) as reported in the Consolidated Income Statement – (4,575); Net (loss) according toU.S. GAAP – (11, 511). For Alcatel, SA between U.S. and French GAAP results of operations for the year 2002 there truly was “a great gulf fixed” … a gulf of Euro 6.9 billion in additional net loss.



10

reconciliation in the Form 20-F, this would be problem enough. But, this is only the tip of the iceberg. For many foreign companies that file financial statements with the SEC onForm 20-F the process of reconciling between their basis of GAAP and U.S. GAAP is performed at a “top-side,” consolidated level. This increases the risks that differences willgo unnoticed (hence unreconciled and unreported) between applicable GAAP that occur

at the level of subsidiaries, divisions, branches, affiliates (accounted for on the equitymethod), and partially consolidated ventures. Exacerbating this risk is the distinct possibility that local (i.e., subsidiaries, divisions, branches, etc.) controllers and chief accounting officers may lack the requisite U.S. GAAP knowledge to even know what, if any, GAAP differences might have been missed.

Accounting Cultural Differences

Rather than generalize about accounting practices more commonly found in Europe andamong some European companies, simply take heed of the following U.S. accountingcultural phenomena (particularly in respect of the SEC), and appreciate the possibilities

that there may be accounting and business cultural differences that may be veryimportant.

The SEC staff abhors “excess reserves” or provisions, any kind of unspecified or “general” reserves or allowances, and anything that smacks of “earningsmanagement” achieved by the manipulation of reserves or provisions.

In many European countries, their respective current GAAP (i.e., beforeimplementation of IFRS) provides little specific guidance on revenuerecognition, and more emphasis may be placed on the legal form (vicesubstance) of a revenue contract or arrangement in deciding when to recognizerevenue. In the U.S., rule-based GAAP consists of specific (one might sayminutely detailed) guidance on revenue recognition – for all kinds of commercial circumstances, in many different industries (e.g., software,construction, entertainment, health care, agriculture, oil & gas exploration and production, transportation, etc.), and under various types of contractingconditions (e.g., arrangements involving “up-front” fees, multiple-elementarrangements, revenue recognition when right of return exist, “bill-and-hold”arrangements, etc.). And, on top of a plethora of revenue recognition, rules- based U.S. GAAP, there is SEC SAB No. 101, Revenue Recognition in Financial Statements.

SEC SAB No. 100, Restructuring and Impairment Charges, stands for the proposition that no amount of documentation and support for restructuringcharges and reserves is ever enough (at least, it often seems, in the eyes of theSEC Division of Enforcement staff). Le chien a mangé ma documentation is notgenerally recognized as an excuse, by the SEC staff, for failing to have



11

competent and persuasive support for accounting measurements, estimates and projections of restructuring charges and reserves.

Under U.S. GAAP and SEC practice material accounting errors are just plain“errors;” the are no “fundamental errors” (such as are distinguished in Dutch

GAAP, or are treated in IFRS). Under U.S. GAAP errors are corrected by prior period adjustments (and restatement of the affected previously issued financialstatements); errors affecting prior financial statements are not corrected in thecurrent period financial statements (as such are treated under French GAAP,Dutch GAAP, etc., or are permitted to be treated under IFRS).15 Virtually all of the so-called “accounting melt-downs” involved in the major U.S. corporateaccounting scandals such as Enron, WorldCom, Adelphia, Health South, et al .resulted in: (a) identification of accounting errors (which included accounting

irregularities); (b) restatement of previously issued financial statements, by prior period adjustments; (c) almost immediate reaction of the capital markets in theform of substantial “stock price drops;” and (d) ensuing investigations by the

SEC and/or DOJ (and in the cases of Enron and WorldCom, by the U.S.Congress). In point of fact, the SEC Division of Enforcement automaticallyreviews all instances of restatements of prior period financial statements.

The SEC (and now the DOJ, and the U.S. Congress) are “on the warpath”against restatements of financial statements and resulting amendments of SECfilings (e.g., Form 20-F, Form 6-K). Separate studies of the issue of restatements – and their impact on shareholders’ stock investment values – were performed by the SEC (as mandated by Sarbanes-Oxley) and the U.S. General AccountingOffice (“GAO”), an investigative arm of Congress (at the request of the U.S.Senate Committee on Banking, Housing and Urban Affairs). Both studiesconcluded that restatements, due to material accounting errors and irregularities,have been on the rise. This issue, enflamed by the “accounting melt-downs” atEnron, WorldCom, et al ., was the driving force behind Sarbanes-Oxley. In theU.S., restatements due to material accounting errors and irregularities are brutal.

The SEC Division of Enforcement staff, with legions of lawyers and vast arraysof accountants, really (that means REALLY!) investigate suspected financialaccounting and reporting irregularities and potential violations of securities lawsand SEC regulations. They are tenacious, resourceful, and indefatigable. Oncethey open an investigation into a company’s accounting issues, SECinvestigators can put Inspector Javert to shame in making companies and their directors, officers and employees feel like Les Misérables. The SEC Division of Enforcement are “results oriented;” and, unfortunately, “results” are measured in

15 See FASB SFAS No. 16, Prior Period Adjustments, and Accounting Principles Board Opinion(“APB”) No. 20, Accounting Changes.



12

cases brought, “cease and desist orders” obtained, directors and officers bars andsanctions meted out, fines levied, and criminal referrals (to the DOJ) made.

16

Criminalizing Corporate Governance, Accounting and Reporting Infractions

European companies and their directors, officers and employees may not be able toappreciate just how far the pendulum has swung in the direction of criminal prosecution, by U.S. law enforcement agencies, of business misconduct. Parallel investigations andcriminal prosecutions by U.S. federal and state law enforcement authorities – on top of investigations and civil prosecutions by the SEC – now are common.17 Criminalconvictions and very long prison sentences for securities fraud are becoming morecommon. A central part of Sarbanes-Oxley is the new and increased (some would saydraconian) criminal penalties and sanctions, where just a single count (i.e., charge) canresult in a mandatory sentence for: destruction, alteration or falsification of corporatedocuments or record – 20 years; destruction or alteration of audit records or work papers – 10 years; securities fraud – 25 years; mail fraud or wire fraud – 20 years; and

intentional mis-certification (under Section 302 of Sarbanes-Oxley) of financialstatements – 20 years. Next, Amnesty International may be taking on the plight of “business tycoons” as a class of political prisoners rotting away in U.S. jails.

Consider just the following examples.

Dennis Kozlowski, former Chairman and CEO of Tyco International may go to jail over a “toga party” on the island of Sardinia (not to mention accusations that he looted $600million from Tyco). U.S. home and garden life-style maven Martha Stewart was indictedand faces trial over allegations of obstruction of justice in the Inclone Systems stock insider-trading case; and, former Imclone Chairman and CEO Sam Waksal already has pled guilty to insider-trading charges and is serving a seven year prison sentence. Former “star” investment banker and head of Credit Suisse First Boston’s Global TechnologyGroup, Frank Quattrone, just dodged a bullet on a deadlocked jury in his criminal trial, but he is likely to be re-tried on federal criminal charges of obstruction of justice inconnection with an SEC investigation of Credit Suisse First Boston.

Former Enron CFO Andrew Fastow has been indicted and charged with enough counts(109 in total) of securities fraud, mail fraud, and wire fraud to be imprisoned for life if convicted; the government even has indicted Fastow’s wife, Lea, on six counts of

16

As one former Assistant Director of the SEC Division of Enforcement (to remain anonymous)once quipped: “No one ever got promoted at the SEC by conducting investigations and then concludingthat nothing was wrong.”

17 Extraterritoriality concerns – expressed by certain countries, the EU and various Europeancompanies and commercial associations – over Sarbanes-Oxley takes on a whole new meaning whencontemplating: a criminal trial in a U.S. state court in Oklahoma, Idaho, Wyoming or Alaska (in theWinter); then, a federal criminal trial in, say, Chicago, Illinois; and then, an SEC civil proceeding inWashington, D.C.; and then, a consolidate private securities class action in Jackson, Mississippi.



13

conspiracy to commit mail fraud, money laundering and tax evasion.18 Former EnronTreasurer, Ben Glisan, already has pled guilty to securities fraud (for participation in thefalsification of Enron’s financial statements) and been sentenced to five years in prison.

Former WorldCom CEO, Bernie Ebbers, CFO Scott Sullivan, and four other former

executives await trail in Oklahoma state court on 15 counts of felony fraud in connectionwith the $11 billion financial fraud at WorldCom; if convicted on all counts, Ebbers,Sullivan and the other defendants each could be sentenced to 150 years in state prison.Meanwhile, Sullivan also awaits trial on similar federal government charges of criminaland securities fraud.19 Already having pled guilty to various criminal fraud charges areformer WorldCom executives: David Meyers, SVP and Controller; Buford Yates,Director of General Accounting; Troy Normand, Director of Legal Entity Accounting;and, Betty Vinson, Director of Management Reporting – they face prison sentencesranging from 10 to 25 years. One can see a pattern here.

The above list of criminal indictments, guilty pleas and convictions is just a small

sampling; similar fates have befallen former directors, officers, executives and employeesat, among others: Rite-Aid; McKesson HBOC; Adelphia; and Cendant.At present, theDOJ continues to investigate former senior executives at: Enron; WorldCom; HealthSouth; and Xerox; and, the DOJ is conducting investigations in other matters such asComputer Associates; Network Associates; and Sunbeam.

But, these are U.S. companies and U.S. citizens, so where is the risk to Europeancompanies or their directors, officers or employees. First, consider that the “revolution”against business misconduct just has gotten started in the U.S. – more heads will comeoff. If European companies become targets of U.S. criminal investigations, their fatescould be the same as those of Enron, WroldCom, Adelphia, Adelphia, et al. and their former directors, officers and employees. Next consider the plain language of Sarbanes-Oxley – it applies equally to U.S. domestic and foreign registrants on U.S. exchanges – all of Sarbanes-Oxley applies to such foreign registrants, including the criminal penaltiesset forth in Titles VIII and IX of the bill. Then consider where “extraterritoriality” beginsand domestic U.S. prosecution ends. In connection with the Enron matter, the former “Big Five” international accounting firm of Arthur Andersen and its former partner DavidDuncan (the engagement partner for the Enron audits) were convicted of obstruction of justice – the Arthur Andersen firm dissolved and Duncan was sentenced to prison. Arthur Anderson was a global firm, with major partnerships and operations in the U.K., France,Germany, Italy and throughout the EU. After being criminally convicted in the U.S.Arthur Andersen’s U.S firm did not just collapse and go out of business, Arthrur Andersen went out of business in the U.K., France, Germany, Italy, throughout the EU,throughout the world. Branded a criminal enterprise, barred from doing business in the

18 There is no word yet on whether U.S. federal prosecutors plan to indict the Fastow’s family pets.

19 The seven count federal indictment of Sullivan charges conspiracy to commit securities fraud andfiling fraudulent statements with the SEC; if convicted at trial in federal court, Sullivan possibly could besentenced to 70 or more years in federal prison, in addition to a maximum 150 years in state prison. Sincethe 42 year-old Sullivan is unlikely to live to be 262 years old, conviction on all state and federal criminalcharges could amount to a life sentence.



14

U.S., stripped of U.S. state licenses to practice, cut off from over 60 percent of its globalmarket (i.e., its U.S. market), and excluded by law from doing business with any U.S.government entities or agencies and many similar U.S. state governments – Arthur Andersen simply could not continue to exist, anywhere. Risks to European companies arecomplacency and the mistaken belief that U.S. criminal statutes simply cannot, or will

not, apply to them. The price for being wrong about this belief could be catastrophic.

Extraterritoriality and the “Long Arm” of Sarbanes-Oxley

Section 106 of Sarbanes-Oxley, “Foreign Public Accounting Firms” specifically extendsthe regulatory authorities of the PCAOB and the SEC to foreign public accounting firmsand foreign partnerships or affiliates of U.S. public accounting firms. In order to practiceauditing companies – U.S. or foreign that are registered on U.S. exchanges – foreign public accounting firms must consent: to produce their working papers to the PCAOBand/or SEC, accept the jurisdiction of U.S. courts in respect of subpoenas for suchrecords and documents, and abide the jurisdiction of the PCAOB and/or SEC in

disciplinary matters.

Section 301 of Sarbanes-Oxley, “Public Company Audit Committees” mandates that theSEC and U.S. exchanges de-list any company (U.S. domestic or foreign) that fails tocomply with the audit committee requirements and standards set forth in Titles II and IIIof Sarbanes-Oxley and as set forth by the SEC and the various U.S. exchanges. Sections304, “Forfeiture of Certain Bonuses and Profits” and 305, “Officers and Directors Barsand Penalties” apply equally to directors and officers of U.S. and foreign registrants. TheSEC can force disgorgement of certain bonuses or other payments received by persons,and bar a foreign company’s directors or officers from serving in such capacities for foreign registrants. Non-compliance with any such orders by the SEC could result in de-

listing of the company from U.S. exchanges, as well as civil penalties and sanctionsagainst the companies and the directors and/or officers. Section 602 of Sarbanes-Oxley,“Appearance and Practice Before the Commission,” allows the SEC to “deny,temporarily or permanently, the privilege of practice before the Commission, in anyway.” This includes serving as an accountant or financial officer or employee in anycompany, U.S. domestic or foreign, registered with the SEC.

The “Corporate Responsibility” Sections of Title III of Sarbanes-Oxley (e.g., Section 302Cerification) and “Enhanced Financial Disclosures” Sections of Title IV (e.g., Section404 Reporting on Internal Controls) apply equally to U.S. domestic and foreignregistrants on U.S. exchanges. Section 302 specifically states the authority of the SEC

extends to companies whether incorporated in the U.S. or foreign domiciled.

Titles VIII and IX of Sarbanes-Oxley, respectively “Corporate and Criminal FraudAccountability” and “White Collar Crime Penalty Enhancements,” as well as Title XI,“Corporate Fraud and Accountability” apply their penalties and sanctions – criminal andcivil – to all registrants on U.S. exchanges, and their directors and officers andemployees, whether U.S. domestic or foreign.



15

Mutual Legal Assistance in Criminal Matters Treaties

Mutual Legal Assistance in Criminal Matters Treaties (“MLATs”) are in force betweenthe U.S. and various foreign governments development. Under such MLATs, eachcountry designates a central authority, generally the U.S. DOJ and the justice departments

or ministry in the foreign country, for direct communication. These MLATs provide:reciprocal powers to: summon witnesses, to compel the production of documents andother real evidence, to issue search warrants, and to serve process. For Europe, therecurrently are in force seven such MLATs as follows:

20

U.S. - U.K. MLAT, signed 1/6/94; entered into force 12/2/96; 104th Cong., 1stSess., Treaty Doc. 104-2, Exec. Rpt. 104-23;

U.S. - Netherlands Treaty on Mutual Assistance in Criminal Matters, entered intoforce September 15, 1983, TIAS 10734;

U.S. - Italy Mutual Assistance Treaty, signed 11/9/82; entered into force November 13, 1985, 98th Cong., 2d Sess., Sen. Ex. 98-25, Exec. Rpt. 98-36; 24ILM 1539;

U.S. - Spain Treaty on Mutual Legal Assistance in Criminal Matters, entered intoforce June 30, 1993. Senate Treaty Doc. 102-21, 102nd Cong. 2d. RatifiedOctober 9, 1992;

U.S. - Switzerland Treaty on Mutual Assistance in Criminal Matters, entered intoforce January 23, 1977, 27 UST 2019, TIAS 8302;

U.S. - Hungary MLAT, signed December 1, 1994. entered into force 3/18/97;104th Cong., 1st Sess., Treaty Doc. 104-26; Exec. Rpt. 104-26.

U.S. - Turkey Treaty on Extradition and Mutual Assistance in Criminal Matters,entered into force January 1, 1981, 32 UST 3111; TIAS 9891.

Pending are MLATs negotiated and awaiting ratification in respect of: Austria; Belgium;Luxembourg; Poland; and, Sweden.

SEC International Agreements and Arrangements

The SEC has entered into various agreements and arrangements with foreigngovernments and their justice agencies, departments or ministries, and securitiesregulators to undertake investigations of non-U.S. companies and non-U.S citizens of such countries. These agreements and arrangements include Memoranda of Understanding (“MOU”), frameworks for cooperation, undertakings through “letters

20 Source: U.S. Department of State.



16

rogatory.”21 European countries covered by such agreements or arrangements with theSEC include: France, Germany, Hungary, Italy, Luxembourg, Netherlands, Norway,Spain, Switzerland, Sweden, and the United Kingdom. The SEC also has negotiated aJoint Statement of Cooperation with the European Union.22

Practical Realities, et Réalités Practiques, und Praktische Wirklichkeiten

According to the SEC, essentially all public accounting firms – both U.S. domestic andforeign – auditing registrants on U.S. exchanges have registered with the PCAOB. Suchregistration entails the undertakings by the firms and their U.S. partnerships or affiliatesset forth in Section 106 of Sarbanes-Oxley. The possibility that a foreign publicaccounting firm might still resist production of its working papers and records remains;however, in the matter of Learnout & Hauspie23 the SEC confronted a similar problemand solved it by proceeding directly against both KPMG’s Belgian firm and its U.S. firm – the subpoenaed working papers were produced. The SEC has fought and won similar battles in the cases of Montedison, SpA, Baker-Hughs, Inc – Indonesia, and Maxwell

Communications Corporation. The reality is that, for most auditors of internationalcompanies (including most European companies registered on U.S. exchanges), the public accounting firms have substantial partnerships and practices in the U.S.; the priceof non-resolution of SEC (and now PCAOB) demands for foreign firms working papersand records is SEC enforcement actions against these U.S. partnerships and affiliates,enforcement of SEC subpoenas through the use of letters rogatory, and grinding court battles – both in the U.S. and in foreign jurisdictions.

In the matter of Royal Ahold N.V., Ahold has voluntarily cooperated with the SEC andDOJ to produce documents and records, facilitate the taking of testimony of Companyofficers and employees, and otherwise comply with requests for information from theSEC and DOJ. Similar cooperation arrangements regularly are entered into by companieswith the SEC (and DOJ) in connection with investigations, because the consequences of non-cooperation can be severe. So, who cooperates? Elan, Plc., Sony, Vivendi, CreditSuisse, UBS, A.C.L.N., SmartForce, Plc, E.ON Ag – these are but a few of thosecompanies. Given U.S. Federal sentencing guidelines in criminal matters, and the SEC’sstated policies on cooperation, the practical realities are that companies and their directors, officers and employees may have little choice but to cooperate.

21 Letters rogatory are the customary method of obtaining assistance from abroad in the absence of atreaty or executive agreement. A letter rogatory is a request from a judge in the United States to the judiciary of a foreign country requesting the performance of an act which, if done without the sanction of

the foreign court, would constitute a violation of that country's sovereignty. Letters rogatory arecustomarily transmitted via the diplomatic channel, or by transmitting a copy of the request throughInterpol, or through pre-negotiated arrangements with the foreign country.

22 See Mann, Mari & Lavdas, International Agreements and Understands for the Production of Information and Other Mutual Assistance, The Int''l Law, Vol. 29, No. 4, 780, 838 (1995). See also U.S.Department of State, Office of the Legal Advisor, Treaty Affairs, “List of Treaties and Other InternationalAgreements of the United States In Force (January 1, 2003).

23 See Learnout & Hauspie Speech Products, NV (L.S.R. 17782, October 10, 2002).



17

Un Point de Vue Différent, und Ein Anderer Geseichtpunkt, and a Different PointOf View

Mais naturellement , there always will be a different point of view. Just imagine if the EUand the European Commission (“EC”) made rules and enforced regulations that affected

U.S. corporations doing business in Europe. Incroyable! Just consider what wouldhappen if the EC were to block a merger between two U.S. corporations, under Europeananti-monopoly rules. Unverschämt! What would the Americans think if the EU were toerect a barrier to trade like the one that Sarbanes-Oxley erects regarding EU publicaccounting firms?24 Infamia! What would the SEC and DOJ do if European countriesenforced their own laws and regulations on U.S. companies that registered securities onEU exchanges and bourses? Steady on, old chap!

Without starting a trade war perhaps a “thaw” in relations over Sarbanes-Oxley still is possible. There is no doubt that Sarbanes-Oxley was enacted in time of crisis (caused byEnron, WorldCom, et al ) that was almost entirely U.S. in fact, and that was – generally –

not the making of the EU or of European companies. The legislation was born out of politics in the U.S., a crisis of confidence among investors caused by the corporateaccounting and reporting scandals in the U.S., and pent-up frustrations over a number of accounting and financial reporting excesses, and a number of auditing failures, that hadoccurred during the 1990s and in 2000 through 2002. However, the basic propositions of Sarbanes-Oxley – and the objectives of good governance, better transparency in financialreporting, deterrence of material accounting errors and irregularities in financialstatements, less restatements, more auditor independence, better audits – these are goodthings that everyone (in the U.S. and Europe) can embrace and should espouse. The forceat work here is not the U.S. (imposing its idée on the EU and European companies);rather, the force is the idée, whose time is come … whose time is now. Perhaps Sarbanes-Oxley deserves a second look.

The SEC and PCAOB have stated that they will defer to enforcement regimes that areestablished and effective in other countries. Sarbanes-Oxley expressly provides the SECwith the authority to modify the elements of Sarnabes-Oxley in respect of other countriesand their particular securities laws and regulatory enforcement practices. The SEC hassignaled, in many ways, their keen interest in working with (and not at cross-purposes to)other countries’ regulators to achieve a common good and to implement Sarbanes-Oxleyin a way that recognizes – and accommodates – valid differences in securities laws andregulatory structures. There is at hand an opportunity to advance the cause of globalinvestors, international markets, and better U.S.-EU relations (in the areas of financialaffairs, capital markets and regulatory proceedings). This opportunity should not bemissed.

24 See Fédération des Experts Compatables Européens, Key European Developments: Implicationsof Sarbanes-Oxley (September 2002): “This [Sarbanes-Oxley] will de facto create an absolute prohibitionfor European public accounting firms to operate in the U.S. market and therefore should be considered andaddressed by the EU in terms of competition and barriers to trade.”



18

Crime and Punishment

C’est pire qu’un crime, c’est une faute25

Here is how it might happen.

A “whistle-blower” (perhaps a recently dismissed employee), will call one of the manySEC or DOJ “hot-lines,” or send an E-mail to the company’s general counsel, or write tothe company’s independent auditors. Or the auditors, in the ordinary course of their testing, will come across something that does not seem correct or proper. Aninvestigation is called for by the audit committee of the supervisory board of directors;special counsel and forensic accountants are called in. The investigation unearths more,and then even more, suspicious findings regarding the accounts – improper revenuerecognition, “side-letters” that conceal the true substance of arrangements, over-capitalization of expenditures that should have been expensed, misapplication of GAAP… . Until, suspicions become serious concerns, then concerns become problems, and

those problems multiply into accounting errors that are deemed to be irregularities.Eventually the SEC staff must be told; and too, the company’s independent auditors aretold – they take it badly. A formal SEC investigation ensues.

The company announces to the markets the existence of the investigation and its preliminary findings. The markets take this news badly; and, the company’s stock drops by over 43 percent in just one day of trading. Within several days, multiple U.S. privatesecurities class actions are filed against the company. And then, the company generalcounsel’s telephone rings … it is the U.S. Department of Justice. An official DOJinvestigation begins; a U.S. Federal Grand Jury is empanelled. The press and other financial news media, smelling blood in the water, begin to circle the company, its

directors and officers. Stories begin to “leak” from “unidentified” sources. Thecompany’s bankers begin to worry – they are taking all of this badly. The investigations – internal corporate, SEC and DOJ – grind on, finding more because of officers andmanagers and employees who begin to talk, and discoveries of incriminating E-mail, and productions of documents to the SEC and DOJ in response to subpoenas. Nowcompletely panicked and totally mistrustful of any management representations, theindependent auditors withdraw their previously issued opinions on the company’sfinancial statements. The company’s stock price continues its free-fall, losing another 30 percent of its value.

The internal corporate investigation by the special counsel and forensic accountants is

completed and the audit committee receives the bad news – hundreds of millions of Eurosin revenues and earnings have been misstated. Under U.S. GAAP and SEC rules, thecompany now must make prior period adjustments and restate its previously issuedfinancial statements and file a corrected and amended Form 20-F with the SEC. The SECdoes not consider the case closed; rather, it continues to investigate, and it believes thateven more adjustments and restatements are needed. The SEC and DOJ begin to take

25 Antoine Boulay de la Meurthe (1804)



19

depositions of the company’s independent auditors – who react very badly. The privatesecurities litigation plaintiffs amend their lawsuits to include the auditors. Press articles begin to ask, “Where were the auditors.” Under great pressure, out of fear of theunknown, bitter with company’s management whom they no longer trust, in self-defense – the independent auditors resign. In their comment letter to the SEC (regarding the

reason for their resignation), the former auditors state: “We no longer can rely on thetruthfulness of management’s representations.”

Senior management – the CEO, CFO, several division heads, and the controller – areforced to resign. The SEC files with the company a “Wells Notice” indicating that itintends to bring charges against the company and many of the company’s officers andsenior management for multiple violations of the anti-fraud provisions of Section 10(B)of the Exchange Act and SEC Rule 10(b)-5. A few days later, the DOJ notifies thecompany, and its former CEO, CFO and controller, that criminal indictments have beenhanded down by the Federal Grand Jury – arrests warrants are issued for the CEO, CFOand controller. The indictments make reference to “un-indicted coconspirators,” a

division vice president, the manager of revenue accounting; it soon is learned that they both have entered into “plea bargains” with the DOJ for reduced prison sentences – theywill testify against the company and its former senior management.

By now most of the directors have resigned. The stock price is less than 20 percent of what it had been on the day the investigation was disclosed to the markets. The banksthreaten to not renew the company’s revolving credit agreement. Years of privatesecurities litigation are ahead. The DOJ continues to “turn up the heat” on the indictedofficers and managers and continue preparing for a criminal trial, now only months away.The SEC staff and the company enter into negotiations – the price of settlement is toaccept a cease and desist order in respect of multiple securities fraud and “books andrecords” violations, and to make additional prior period adjustments for items that theSEC Division of Enforcement staff claim also to be accounting errors and irregularities. Now completely demoralized, and worn down by over eleven months of constant crisis,the company capitulates – a second corrected and amended Form 20-F is filed with re-restated financial statements. New independent auditors finally are convinced to acceptthe audit engagement; they advise that it will take over three months to audit the currentyears’ financial statements (now over nine months past-due) and re-audit the prior yearsfinancial statements (for which the predecessor auditors have withdrawn their opinions).

The DOJ announces that the CFO and controller have agreed to plead guilty in exchangefor a reduction in criminal charges – the CFO is sentenced to 10 years in prison, thecontroller receives an eight-year prison sentence. The CEO resolves to go to trial, andcontinues to protest his innocence. After tense negotiations, the bank syndicate finallyagrees to renew the company’s loan facility, but under much more onerous terms. Nowover a year later, the stock price still has not recovered. Business is off sharply, customershave been lost to competitors, key employees have left. New officers have taken over, butmanagement remains in disarray.

Quel dammage!



Conclusion

So much already has been said and written about Section 302 Certification, Section 404Internal Control Reporting, and other procedural elements of Sarbanes-Oxley. Muchremains to be explored when the PCAOB actually begins its work. And, the real impact

on European companies of SEC and DOJ enforcement has not yet been measured. Onecan speculate, but this is unproductive because the regulatory enforcement playing fieldcontinues to change in Europe and in the U.S. Better to wait and see – how the SEC andDOJ will interact with their regulatory and law enforcement counterparts in the EU, andhow the SEC and DOJ actually proceed with investigations involving Europeancompanies. In one recent example, Elan, Plc. ultimately adjusted its financial statementsreconciliation from Irish to U.S. GAAP for the year 2002 (that had not been audited or issued); this was done in response to SEC challenges of certain accounting treatments for R&D ventures and partnerships, that in turn arose in connection with an ongoinginvestigation of Elan by the SEC Division of Enforcement.26 In the case of Royal Ahold,the Company has cooperated with ongoing parallel investigations by the SEC and DOJ

and has conducted its own internal corporate investigations leading to restatements of prior year financial statements as reported in Ahold’s financial statements for fiscal year December 29, 2002.27 As more cases and more investigations occur, a clearer picture of how the SEC and DOJ will deal with European companies – in applying Sarbanes-Oxleyand enforcing its provisions - will emerge.

What cannot wait are compliance measures that need to be taken by European companiesregistered on U.S. exchanges. “Section 404 Readiness” reviews of accounting controlsand reporting procedures needs to start now – in order to be prepared for Section 404reporting next year. Governance procedures, especially those of companies’ auditcommittees, need to be reviewed and reevaluated in light of Sarbanes-Oxley.

Coordination between company management, the company’s audit committee, and thecompany’s independent auditors is essential. Company management, the company’sinternal audit function, and the company’s independent auditors should be taking a closer look at “critical accounting policies” and higher-risk areas where material accountingerrors or accounting irregularities could occur. Companies need to reassess theaccounting and reporting policies and procedures to be as sure as is reasonably possiblethat such comply with their basis of GAAP and are properly reconciled to U.S. GAAP.And IFRS is near – 2005 is just around the corner; therefore, companies should be preparing now for conversion. So much to do and so little time!

Finally, European companies should remember what Sarbanes-Oxley really is all about

… the deterrence of financial frauds and restatements of financial statements due tomaterial accounting errors and accounting irregularities. The surest way to comply withSarbanes-Oxley is to get the financial statements right the first time.

26 See Elan Corp. Plc. 2002 Annual Report, page 1, incorporated by reference in Form 20-F for Fiscal Year Ended December 31, 2002 (filed Sept. 4, 2003).

27 See Royal Ahold NV Form 20-F/A for Fiscal Year Ended December 29, 2002 (filed October 31,2003).

dooley eu and sarbanes oxley

Documents