US judge attacks ‘prescriptive mandates’ of corporate governance provisions

EP criticisms of an over-interventionist approach to corporate anti-fraud regulation have been fuelled by an attack by a senior American judge on the US legislative response to the Enron scandal.

At a time when the European Union is striving to harmonise its regulation of financial institutions with those of the US, an American judge has spoken out against the primary US law on corporate accountability, the Sarbanes-Oxley Act.

Speaking in London on 5 July 2005, at a meeting of the European Policy Forum, senior Delaware judge Leo Strine attacked the act, saying that it “stifles the wealth-creating potential of companies through costly mandates that not only do little to protect investors but also distract boards from their fundamental duties”.

Signs of a backlash against similar EU regulation, imposing mandatory independent corporate governance practices, are already being seen in the EU. Last month the Parliament voted against a proposal for mandatory audit committees to vet company accounts in the 8 company law directive (see EURACTIV 22 June 2005).

The Sarbanes-Oxley Act (the names of the senators who put forward the measure) was passed in the wake of the Enron scandal, which rocked the US financial markets. It aimed to enforce accounting standards through mandatory involvement of independent directors but in practice imposes heavy burdens on companies to give certified financial statements and compels chief executives to sign off on company accounts personally.

To date, the EU has not gone this far, but European companies active in the US are suffering the heavy costs of complying with the Sarbanes-Oxley requirements. 

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