SEC to propose adopting foreign accounting rules

Critics say move would weaken US oversight

WASHINGTON - Federal officials say they are preparing to propose a series of regulatory changes to enhance American competitiveness overseas, attract foreign investment, and give American investors a broader selection of foreign stocks.

But critics say the changes appear to be a last-ditch push by appointees of President Bush to dilute securities rules passed after the collapse of Enron and other large companies - measures meant to forestall corrupt practices that led to those corporate failures.

Legal experts, some regulators, and Democratic lawmakers are concerned that the changes would put American investors at the mercy of overseas regulators who enforce weaker rules and may treat investment losses as a low priority.

Foreign regulators are beyond the reach of Congress, which oversees American securities regulation through confirmation proceedings, enforcement hearings, and approval of the Securities and Exchange Commission's budget.

The commission is preparing a timetable that will permit American companies to shift to the international rules, which give companies greater latitude in reporting earnings. Companies that have used both domestic and overseas rules have, on average, been able to report revenues and earnings that were 6 percent to 8 percent higher under the international standards, according to accounting experts.

Though foreign accounting standards are stronger in some ways than American ones, they are weaker in some important areas. They enable companies, for example, to provide fewer details about mortgage-backed securities, derivatives, and other financial instruments that have troubled many Wall Street firms, including Bear Stearns.

The shift to international standards could also wind up eliminating the conflict-of-interest rules, adopted after the collapse of Arthur Andersen and Enron, that have limited auditors from performing both accounting work and consulting for the same client.

James D. Cox, a securities law expert at Duke Law School who returned this week from teaching corporate law in Europe, said the shift to international rules amounted to "outsourcing safety standards."

"We would not for a moment tolerate having American auto safety standards set by China or India," he said. "Why should we do it for financial safety standards? There has to be some accountability."

The SEC also plans to disclose details of a pilot program that would enable foreign brokers to deal directly with American investors, while continuing to be largely regulated by the foreign country. The first country in the program will be Australia, although officials hope to eventually include others. In a third move, the Public Company Accounting Oversight Board, which works under the supervision of the SEC, is preparing a rule that would allow it to defer to foreign regulators for inspections of some of the 800 foreign auditors of overseas companies that sell stock in the United States.

The oversight board was created by the Sarbanes-Oxley Act of 2002 in response to the accounting scandals at Enron and other large companies. The law requires the board to inspect regularly all accounting firms that certify the financial results of companies whose shares are sold in the United States.

Officials say the proposed changes reflect the decades-long push toward global markets. They say the changes are necessary to attract capital from abroad and will protect Americans as they increasingly look to invest overseas.

In the decade ended last November, American holdings of foreign stock increased to $4.3 trillion from $1.2 trillion.

But the SEC would not enforce many investor-protection laws involving issues ranging from the quiet period before a stock offering to market manipulation, financial disclosures and abusive trading tactics. Nor would foreign officials apply a panoply of American securities rules that are unique in that they are intended to protect minority shareholders.

Instead, the commission would rely on its Australian counterpart to enforce its securities regulations, which often involve different standards.

In a speech earlier this year, Christopher Cox, the agency's chairman, said that working on the transition to international accounting standards and reaching enforcement agreements with foreign countries like the Australians were two of the most important items on his agenda as his term comes to a close.

"It is no longer possible for the SEC to do its work in the United States without a truly global strategy - because, in large measure due to today's instant communications and technology, what goes on in other markets and jurisdictions is now intimately bound up with what happens here," he said.

But critics say that the move toward harmonizing rules and enforcement practices is fraught with problems and would dilute US securities laws, generally considered to be the most protective of investors in the world.

"The impetus for these changes has been a generalized concern about competitiveness but the results could very well be a weakening of rules," said Senator Jack Reed, the Rhode Island Democrat who heads the Senate banking subcommittee on securities and investment, which has jurisdiction over the SEC. "The notion that we're becoming rapidly globalized is clear. There is a need for harmonized rules. But the real question is, are the foreign rules any good?"

"We've heard this argument about competitiveness for the last two years," he added. "But guess what? There are a lot of lost jobs on Wall Street not because of competitiveness issues but because our regulators have actually not been up to the task."