PCAOB’s Chairman On Costs Of Regulation

Last Friday, Mark Olson the PCAOB’s chairman, delivered a speech at the Tax Council Policy Institute’s 8th Annual Tax Policy & Practice Symposium in Washington, D.C. Plenty of information about the birthright of the PCAOB to examine the audits of non-U.S. firms that register their securities in our country and the importance of coordination with other regulators in foreign countries.

What might be more interesting to most people are Mr. Olson’s thoughts on the costs of regulation, however.

“… Sarbanes-Oxley has been the focus of intense discussion. It has now been over four years since the corporate scandals rocked investor confidence and led to the passage of Sarbanes-Oxley. We are now starting to evaluate the extent to which investors are recognizing improvement in the reliability of financial reporting by U.S. public companies. That is, today we are in a better position to reflect on the impact of the Act and whether we are on the right track in achieving its objectives. I believe we have seen a restoration of investor confidence in financial reporting. We are also seeing audit firms realign their business models to focus on quality audit services, ethics, and appropriate levels of independence. These are all positive benefits.
He then mentions the December release of the proposal to replace Auditing Standard 2 with a more flexible model, citing it as a response to the numerous cost concerns. He goes on to say:

“Recent reports have criticized U.S. financial regulations as moving companies away from U.S. markets. To be sure, the position of the U.S. in relation to other financial markets has changed since the early 1990s.

In short, he views the glass as half-full, not half-empty. And he raises a few good points that are often glossed-over by the critics of Section 404 who’ve been ginned-up into “a grassroots uproar:” notably that 1) U.S. listings still command a valuation premium, 2) markets outside the U.S. are different and more sophisticated than they were in the early 1990’s, making them more competitive anyway, and 3) non-U.S. companies have raised more capital here since internal controls reporting began than they did after the accounting scandals.

With regard to Sarbanes-Oxley, particularly Section 404 which addresses internal control over financial reporting, the PCAOB understands that these milestones have not been reached without cost. For example, we continue to hear concern that the costs associated with Section 404 have weakened U.S. markets, pointing to recent growth in non-U.S. markets.”

For one, many markets outside of the United States have grown to become global players, due to a number of factors, including ease of information exchange and the reduction of certain barriers to cross-border transactions. As a result, companies today are presented with more options when they are determining where to raise capital.

Regulatory regimes as well as local political and cultural influences are often factored into this decision. We should welcome competition among markets around the globe but not support a competition that is based on cost alone. I still believe that having the right balance of oversight and regulation protects the reliability, stability and depth of U.S. capital markets, so they can continue to attract investors and issuers worldwide.

We should not lose sight of the fact that listings on U.S. markets continue to command a valuation premium. Indeed, in the two years since companies have been reporting and obtaining audits on their internal control, the amount of capital raised by non-U.S. companies on U.S. exchanges has grown, not shrunk as it did in the years directly after the scandals. Even with the expansion of equity markets in other countries, I expect that we will see a continued dominance of U.S. capital markets, particularly in the long term. However, this does not mean that there is no cause for action. It is healthy and appropriate for financial regulators, policy makers, and others to enhance our debate over the appropriate level and nature of financial supervision and regulation in the United States and other factors that may affect the decision to list on U.S. financial markets.”

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