Necessary evil, or just an evil?

Mar 12 2008 by Paul Tognarelli, The Journal

MENTION the words ‘Sarbanes- Oxley’ to any American business executive, and you’re likely to get a response akin to the one you would elicit from a turkey if you asked it about its plans for the Christmas holidays.

The Sarbanes-Oxley regulations were introduced in 2002 in the aftermath of scandals such as Enron and Worldcom to finally put a check on the free-wheeling bandwagon that the US corporate market had become.

As always, when something happens in the US, it swiftly makes its way across the pond, and the subject of corporate regulation soon became (and still is) a hot topic in the UK. How likely was a repeat of the US scandals over here? Were there enough checks and balances in place to prevent them? And what further measures were required to make sure they didn’t?

Measures such as the International Financial Reporting Standards (IFRS) became obligatory for FTSE firms in 2005, and for AIM-listed firms this year – and the likelihood is that more accounting standards that apply to a wider and wider selection of UK companies will come into effect over the next few years.

As the extent and impact of such regulations has become clearer, there have continued to be mutterings from corporate UK to the effect they have not especially been necessary in the UK marketplace, and that instead of being a necessary evil, they are simply an evil.

It’s easy to see where this viewpoint comes from – whenever surveys are carried out into the biggest issues facing businesspeople, red tape and regulations can usually be found at or near the top of the list.

It’s hard to make a case for reducing the scrutiny to which companies’ financial reporting is subjected, but there is a strong argument for taking a different view of such regulations and making them a commercial, rather than a compliance issue.