The Impact of Sarbanes-Oxley Act on Non-U.S. Accounting Firms

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ABSTRACT

The Sarbanes-Oxley (Public Company Accounting Reform and Investor Protection) Act of 2002 is the most far reaching legislation to reform American business practices in recent time. This legislation changes the business landscape in the U.S. by creating a new oversight body, the Public Company Accounting Oversight Board, to oversee the corporate governance, accounting and auditing practices of all publicly held companies in the U.S. and to implement regulatory requirements for better corporate governance, accounting, and auditing practices.

Many of these new regulatory changes affect not only U.S. corporations and the U.S. accounting and auditing professions, but also have a far reaching impact on all of the non-U.S. corporations that seek capital in the U.S. security markets as well as those non-U. S. accounting/ auditing firms that service these foreign entities. While the intention of the Sarbanes-Oxley Act is to protect U.S. investors in general and the legitimacy of an U.S. oversight body to regulate publicly held companies in the U.S. is not being challenged, some of the specific requirements within the Act pose challenges for non-U.S. companies that are also subject to their home country's regulatory requirements that may be substantially different or in conflict with the requirements of this new act. Strong opposition also has been expressed by non-U.S. accounting firms that are fearful that implementation of this new Act may place them in a disadvantageous position compared to their U.S. counterparts and change the international market for auditing services. This study reviews the specific requirements of the Sarbanes-Oxley Act that are applicable to non-U.S. accounting firms and provides insight on how these requirements affect the global accounting and audit market.

INTRODUCTION

On July 30, 2002, President Bush signed the Sarbanes-Oxley Act of 2002 into law. This Act not only is applicable to all companies listed in the U.S., both domestic and foreign, Section 106 of the Act also subjects any non-U.S. accounting firms who "prepare or furnish" an audit report involving U.S. registrants or any foreign accounting firms whose audit opinion is relied upon by a registered U.S. accounting firm to be subject to the authority of the Act. This new Act not only imposes registration requirements with an U.S. oversight body on foreign accounting/auditing firms, it also redefines many aspects of accounting and auditing practices for foreign accounting firms that may or may not be practically feasible or legally possible in their home countries.

The main areas of the Sarbanes-Oxley Act that affect the accounting profession in general include (1) defining new roles for the corporate audit committee and its relationship with corporate external auditor in that auditors will report to and be overseen by a company's audit committee, not management, and the requirement of audit committees to pre-approve of all services (both audit and non-audit services) provided by its auditor, and (2) auditor independence requirements including audit partner rotation and employment restriction, specification of consulting services that are "unlawful" if provided to a publicly held company by its auditor, as well as (3) the requirement that every audit report attest to the assessment made by management of the company's internal control structures, including a specific notation about any significant defects or material noncompliance found. There are also specific provisions within the Act regarding preservation of audit or review working papers and the requirement of management assessment of internal controls.

As the U.S. accounting profession focuses on adapting to this new era of change, foreign accounting firms have expressed grave concerns that the new U.S. legislation may create an "unlevel playing field" that favors U.S. accounting firms over non-U.S. accounting firms because the non-U. …