Canada should think twice about Sarbanes-Oxley, experts say

(September 8, 2003) The Sarbanes-Oxley Act came in for some harsh criticism today at a one-day corporate governance symposium in Toronto, attended by academics and regulators from around the world. The legislation, passed quickly by American politicians last year in the wake of a series of accounting scandals, imposes tough new regulations on U.S. corporations in an effort to restore investor confidence.

However, there’s concern that many of the reforms were unnecessary and may already be having an adverse impact on U.S. firms. “We have designed rules that will suppress risk-taking and impose unnecessary costs,” said Peter Wallison, chair of the American Enterprise Institute in Washington, D.C., and an outspoken critic of Sarbanes-Oxley.

Wallison says although the act maybe helpful in preventing “sudden loss” cases such as Enron, where share prices plunge overnight, it won’t do much to improve poor corporate governance, which many believe was at the heart of the U.S. scandals.

“If it’s sick in New York, it seems the world must find a cure,” observed Karen Hamilton of the Australian Stock Exchange. Australia bypassed Sarbanes-Oxley entirely, deciding instead to create a corporate governance council that recently released 10 core principles all firms must follow. “We didn’t embrace Sarbanes-Oxley, we focused on disclosure,” she said.

Closer to home, Sarbanes-Oxley provoked a lively debate on just how many of the rules, if any, should be implemented in Canada. Regulators, led by Ontario Securities Commission chair David Brown, decided that new rules on CEO certification of financial statements, audit committees and board independence were appropriate for Canada and released a draft proposal this summer.

But not everyone favours the regulators’ “made in Canada” response to Sarbanes-Oxley. “It’s not clear that importing U.S. solutions makes sense,” said University of Alberta finance professor Randall Morck at today’s Canadian Foundation for Investor Education symposium. “This is exactly the wrong time to look to the U.S. for leadership.”

Moreover, there are substantial differences in Canadian and U.S. markets, Morck added. The vast majority of U.S. firms are widely held, he said, while Canada has more family- and foreign-controlled companies.

Wallison also believes Canada should not adopt Sarbanes-Oxley style rules, a position supported by the British Columbia Securities Commission (BCSC), which has been advocating a more principles-based approach to securities regulation.

“We are not convinced that the Sarbanes-Oxley model is the way to go,” said BCSC economist Christina Wolf, adding that compliance costs for U.S. firms have increased dramatically since the legislation was implemented. “It may have a short-term effect, but people will be thinking about new ways to get around the rules.”

Despite the criticisms, it seems the Canadian response to Sarbanes-Oxley will eventually be adopted in most provinces, predicted Torys lawyer Richard Balfour. “Our system will still be substantially aligned with the U.S,” he said, adding, “There is enormous benefit to convergence, when it works.”

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca