EUROPEAN CFO VIEWS ON SARBANES-OXLEY SECTION 404

UNCLAS SECTION 01 OF 02 PARIS 001800

SIPDIS

SENSITIVE

STATE PASS FEDERAL RESERVE
STATE PASS SEC (DONOLAISEN, BOONE)
STATE FOR E, EB, AND EUR
TREASURY FOR DO/IM SOBEL, RHARLOW, LHULL
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER
USDOC FOR 4212/MAC/EUR/OEURA

E.O. 12958: N/A
TAGS: EFIN ECON FR
SUBJECT: EUROPEAN CFO VIEWS ON SARBANES-OXLEY SECTION 404


SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION


SUMMARY
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1. (SBU) The Ambassador hosted a discussion on March 15 at
the Embassy, led by the SEC's Chief Accountant, Donald
Nicolaisen, with Chief Financial Officers of SEC-listed
companies operating in France. The CFOs expressed
particular concerns about the high costs of complying with
Section 404 of the Sarbanes-Oxley legislation, as well as
the lack of specificity in SEC guidance and the extreme
positions being taken by the PCAOB. Most companies urge
eventual SEC action to accept accounting statements
conforming to new European standard IFRS accounts, rather
than U.S. GAAP accounts. END SUMMARY.

OVERVIEW
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2. (SBU) At the invitation of the Ambassador, Securities and
Exchange Commission (SEC) officials Donald Nicolaisen, SEC
Chief Accountant, Sherman Boone, International Affairs
Assistant Director, and Erika Sulkowski, Special Advisor,
led a discussion on March 15 at the Embassy among SEC-listed
companies based in France (and one in Germany) about Section
404 of the Sarbanes-Oxley legislation, dealing with
management certification of internal financial controls.
The discussion was the capstone to ongoing talks Embassy has
been holding with interested parties, soliciting suggestions
on Sarbanes-Oxley in order to facilitate continued
investments in the U.S. capital markets. Also participating
in the meeting were representatives from several local law
firms, accounting firms, auditors, and French government
officials.


3. (SBU) After Mr. Nicolaisen made opening remarks on the
origins and implementation of Sarbanes-Oxley, company
representatives spoke of the effects of Section 404. One
CFO noted that audits now have a freezing effect: at the end
of the year, new projects tend to be put on hold until after
internal controls are completed and signed off. Another
spoke of the chilling legal environment: whether or not a
CFO discloses a material weakness, personal legal liability
may still attach, but with disclosure the lifespan of the
CFO with the company may be short. Another spoke of the
need for balance, and the need for specificity. Questions
were also raised questions about process (the SEC has
delayed section 404 for a year, but not Section 302, so what
happens?) and about progress toward U.S.-European mutual
recognition (a question a GOF official also later took up).
A number of firms made the observation that with the SEC
extension, foreign issuers will undertake compliance with
two years of International Financial Reporting Standards
(IFRS) experience under their belt, and urged the SEC to
consider mutual recognition of European and U.S. accounting
standards.

COSTS, AND PCAOB RULE-MAKING
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4. (SBU) A big question is one of cost, according to several
company representatives. One executive suggested that the
SEC should have a procedure to take costs into account when
setting compliance standards, and argued that costs are
higher for foreign issuers. Another pointed out that the
underlying issue is the SEC role in relation to the Public
Company Accounting Oversight Board (PCAOB). Reacting to
liability laws and pending U.S. court cases, PCAOB rules
push private auditors to go beyond SEC rules. The auditors
in turn are forcing their rules upon issuers, creating
something akin to Sarbanes-Oxley in extremis. Some
companies argued that PCAOB "excessiveness" constrains
companies from creating or implementing what may be best
practices. This complaint was echoed by another CFO, who
said the PCAOB is in effect pressuring companies to do
things they would not reasonably do otherwise.


5. (SBU) A number of firms urged the SEC to come up with
guidance for Sarbanes-Oxley that would curb PCAOB excess,
arguing that the PCAOB, in the absence of such guidance, is
drafting rules for the worst-case scenario. One major
French firm told Econ MinCouns recently that the PCAOB is
creating a situation where one "can't see the forest for the
trees." PCAOB rules are so detailed and resource-intensive
that firms may lose sight of the overall "due diligence"
oversight function in struggling to comply with the
"arcania" of PCAOB rules. In the end, according to this
company, the costs of compliance may turn out to be higher
than the potential frauds against which the legislation is
designed to protect.

CONVERGENCE/MUTUAL RECOGNITION OF ACCOUNTING STANDARDS
-------------- --------------


6. (SBU) One CFO urged the SEC to get more input from
investors. Another remarked that it never gets any
questions from potential U.S.-based investors about U.S.
GAAP, implying that U.S. investors are comfortable with
European accounting standards and have no requirement for
reconciled (European-to-U.S. GAAP) accounts. Several
executives urged the SEC to continue work toward regulatory
convergence regarding the European IFRS standard and U.S.
GAAP.


7. (SBU) One large French company told Econ MinCouns in a
separate conversation that European companies view PCAOB
interpretations as overly onerous and rigid, touting form
over substance, with no determination (or, meaningful
definition) of materiality. European issuers face
additional problems reconciling differing demands from
different regulators.

THE "BIG 4" STIFLES COMPETITION
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8. (SBU) Company executives also noted that the SEC might
do more to encourage the creation of more than the four
existing big auditing firms (which creates something of a
oligopoly). Yet another noted sardonically the suspicion
that Sarbanes-Oxley is a plot to make auditors rich, citing
an anecdote of an auditor who is charging in excess of USD
1500 an hour for the services of the firms' partners. The
lack of competition among external auditing companies also
poses potential conflict of interest problems, as firms must
be careful to keep at least one of the Big 4 in reserve for
potential auditing needs.

WHERE TO GO FROM HERE?
--------------


9. (SBU) The Ambassador and the SEC officials encouraged
companies to participate in the April 13 roundtable in
Washington organized by the SEC, which will be open to
foreign issuers. Companies were also offered the option of
submitting additional comments directly to the SEC via
letter or online submission, or via the U.S. Embassy.

COMMENT
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10. (SBU) Embassy greatly appreciates SEC participation in
the March 15 event, which received well-deserved praise and
appreciation from the private sector participants. It was
clear to participants that the SEC and the U.S. Government
are interested in their views -- a number of executives
commented on the fact that recent French legislation on new
accounting rules was implemented with no such opportunity
for input from French firms. Turnout for the event was
quite high (two-thirds of French firms listed in the U.S.),
reflecting the strong local interest in making practical
suggestions to alleviate the more costly and rigid of
Section 404's requirements.
LEACH