US regulators have come down hard on companies to avoid a repeat of multi-billion dollar disasters like Enron, Andersen and Worldcom. But European companies are now getting caught up in US red tape too.
By Gavin Stamp
BBC News Online business reporter
Kenneth Lay, ex-chairman of Enron, faces a trial
The shadow of Enron may slowly have begun to lift from corporate America.
However, the after-effects of its collapse and other financial scandals of recent years have reached across the Atlantic.
Senior executives of Europe's largest companies face the prospect of huge fines and lengthy jail sentences if their firms do not comply with tough new US laws designed to prevent a repeat of the corporate scandals that this week saw former Enron boss Kenneth Lay indicted.
US legislation passed in 2002 controversially covers any foreign company whose shares are traded on US stock markets or whose securities are registered there.
Sentences of up to 20 years await those found guilty of fraudulent behaviour resulting in the disclosure of inaccurate financial information.
Post-Enron, we saw and understood why steps needed to be taken but maybe the pendulum has swung too far in the other direction
Stephen Whitehead, Allied Domecq
Chief executives must now certify in writing that company accounts and other financial statements fairly represent their firm's financial position.
They are legally responsible for the actions of their employees, some of whom have to attest to the robustness of their company's internal financial controls.
Foreign companies have less than a year to get in line with the Sarbanes-Oxley Act, which comes into force in June 2005. US companies have to comply already.
Corporate governance experts believe this gives firms precious little time to make the major investment in IT systems needed and to introduce new internal accounting procedures.
The legislation is already having an impact in Europe.
Bernie Ebbers, former Worldcom chief executive, has been indicted
Adecco, the Swiss recruitment company, is currently being investigated by the US Securities and Exchange Commission after it revealed that it had discovered "material weaknesses" in the internal controls of its North American subsidiary.
The Shell effect?
Mike Davis, senior research analyst at Butler Group, an IT research consultancy, believes many British companies have just woken up to the dangers involved in non-compliance.
He says the controversy surrounding Shell was a timely lesson to companies about the need for tighter internal controls; in January the Anglo-Dutch oil giant revealed that it had overstated its proven oil reserves by 20%.
He says: "Sarbanes-Oxley wasn't seen as a big priority initially but events at Shell have changed things. If Shell had met the requirements of Sarbanes-Oxley, their figures would have become apparent much earlier."
'Box ticker's paradise'
What firms must and must not do
Financial disclosures must be complete and fairly present financial position
Internal controls must be adequate and any deficiencies reported
Store e-mails and other electronic data for at least five years
Ban on extending personal loans and most forms of credit to executives
All off-balance sheet transactions must be reported
Audit committees must be set up and chief auditor rotated every five years
Auditors must register with new regulatory body
Others believe businesses are taking the challenge in their stride. Clive Edrupt, deputy head of company and commercial law at the business lobby group CBI, is critical of the legislation, describing it as a "box ticker's paradise".
However, he says: "British firms have to make sure they are doing it properly and they are managing to comply. The requirements can be costly and can take up top management time but it does not mean companies are going to walk away from such a major market."
Precisely how costly is difficult to determine.
Drinks company Allied Domecq, which generates half its profits from the US, has been one of the few companies prepared to disclose the costs involved.
Allied, producer of liqueurs like Tia Maria and Malibu, set aside £1m in the first half of this financial year to meet US compliance costs.
Stephen Whitehead, its group director of corporate affairs, said that this figure was expected to rise:
"It has added significantly to the burden of regulation and, in our view, not always appropriately."
"Post-Enron, we saw and understood why steps needed to be taken but maybe the pendulum has swung too far in the other direction."
The new legislation has had a mixed reaction across continental Europe.
Some leading companies, such as German electronics firm Siemens, have few reservations about it.
Siemens has set up a committee to approve all financial information before it is published. It says that it is already compliant with Sarbanes-Oxley, "with a few minor exceptions".
French companies, on the other hand, are concerned that aspects of the legislation differ markedly from domestic corporate governance guidelines.
Serge Castillon, a partner with French auditing firm Mazars, says there is no requirement in French law for companies to evaluate the efficiency of their internal financial controls, meaning that different firms will inevitably end up meeting different standards.
He says: "A majority of companies are not happy[with the legislation]. They consider that the costs are significant and the benefits are not always very clear."