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Baker Hears Views on Competition to U.S. Capital Markets

Rep. Richard Baker (R-LA) yesterday convened a hearing on the U.S. capital markets and ways to maintain the U.S. markets' standing in an increasingly competitive global market. In opening remarks, Baker said he believes there are three major reasons why companies choose to list abroad rather than on U.S. exchanges, starting with the costs of litigation. He also cited inefficiencies in regulation and the slow progress toward eliminating accounting complexity and converging with international accounting standards.

Donald Evans, the chief executive officer of the Financial Services Forum, shared the results of a recent survey of the Forum's members, which he said include the chief executive officers of the largest and most diversified financial institutions with U.S. operations. Based on the survey, Evans said that Congress has a lot of important work to do to keep the U.S. competitive in a global economy. He credited the Sarbanes-Oxley Act for its role in the impressive performance of the U.S. equity markets since 2002, but pointed to other areas of concern, including the drop in major initial public offerings being registered in the U.S.

Marshall Carter, chairman of the board of the NYSE Group, Inc., believes the loss of listings in the U.S. is largely due to concerns about the litigious environment. The U.S. has a reputation as an increasingly difficult place to do business, he advised. Carter also pointed to the lack of convergence with international accounting standards, which has become even more important since European companies are moving toward a common standard. Every year that convergence of accounting standards is delayed will make it more difficult for the U.S. to regain the market share that is lost to other countries, he warned. Carter added that the markets abroad are improving in quality and depth of equities, making them more attractive, while foreign companies remain concerned about the costs and burdens of U.S. regulation such as the Sarbanes-Oxley Act.

Carter believes that the SEC and the PCAOB can accomplish a great deal in reducing regulatory costs, starting with risk-based reviews under section 404. He explained that this would entail a company and its auditors annually reviewing the most material, significant income statement and balance sheet assertions where the risk of material misstatement could prove most harmful to investors. The PCAOB would have to provide explicit guidelines for the risk-based reviews, he said. The SEC and the PCAOB could then reduce the frequency of the annual baseline section 404 reviews to every third year.

The controls would be maintained and updated in the interim and auditors would continue to review the high risk areas during the intervening years working from the baseline section 404 audit, Carter said. Every third year, the audit firm would conduct another baseline review. A company would have to pass the annual audit of the specific risk-based materiality criteria established by the SEC and the PCAOB in order to be granted permission to undergo a full baseline audit every third year, Carter explained.

Former Speaker of the House Newt Gingrich called for a fundamental overhaul of Sarbanes-Oxley. "The good intentions of Congress have met with the law of unintended consequences," he said. Gingrich endorsed the views of Alex Pollock and Peter Wallison of the American Enterprise Institute who recommend the adoption of the provisions of H.R. 1641 introduced last year by Jeff Flake (R-AZ) that would make section 404 voluntary. If voluntary compliance is deemed politically impossible, Pollock and Wallison believe, at a minimum, that it should be voluntary for smaller public companies. They urge the PCAOB to change its review standard from "other than a remote likelihood" to "a material risk of loss or fraud."

Gingrich noted that Pollock and Wallison also support Congressional authority over the PCAOB which would subject it to appropriations, oversight and the appointments process. He submitted the Pollock and Wallison recommendations as an attachment to his prepared statement.