Foreign groups face Sox deadline

Foreign companies listed in New York are entering a crunch period this week as a Sarbanes-Oxley deadline passes and time constraints force some into compliance short cuts, according to auditors and advisers.

Companies whose financial years end on or after this Saturday must ensure their next annual filings comply with the Sarbanes-Oxley accounting and governance law, including its notorious section 404.

Sarbanes-Oxley was designed to crack down on corporate wrongdoing and restore investor confidence after the Enron scandal but its costly and cumbersome provisions have made it unpopular. Under section 404, directors must certify the effectiveness of internal controls on spending and the use of company assets, and report on weaknesses.

Jon Rowden, technical director for Sarbanes-Oxley at PwC, the accountancy firm, said many companies with December year-ends would not have time to remedy every weakness. “The juncture is fast approaching where companies have to ask: ‘Can we put in an ideal fix, a Band-aid, or can we do nothing about this?’ ” he said. Some 1,200 non-US companies must comply.

HSBC spent $28.4m on section 404 advisory work in its most recent financial year while GlaxoSmithKline paid £2.4m ($4.4m). In France, Lafarge spent €10m ($12.8m) last year and Veolia has spent €20-€25m in three years.

The July 15 activation date, which applies to companies capitalised at more than $75m, will not itself create extra work but its arrival, after two postponements is likely to concentrate the minds of managers.

The Securities and Exchange Commission, the chief US regulator, will not impose penalties on companies that report “material weaknesses” in their controls. But companies are required to disclose how they are addressing them, and the discovery of many weaknesses could dent investor confidence.In the first year of Sarbanes-Oxley reporting in the US, in November 2004, almost 16 per cent of companies reported one or more material weakness, according to PwC.

The progress of compliance projects does not appear to have dimmed resentment over the costs. Jérôme Chauvin of Unice, the European employers’ federation, said: “For European companies the costs are disproportionate and there is a need to reform the framework so the objectives are met at a reasonable cost.”

But a survey by Mazars, the professional services firm, indicated European companies were more hostile than those from Asia and Latin America, which saw compliance as a means of winning investors’ trust.

Additional reporting by Sophie Pilgrim in Paris