Uncertain times lie ahead as regulations are implemented that could have a negative effect on reported earnings.
Regulatory deadlines are coming up at last but already cracks are appearing from the pressure. From January 1, the 7000 listed companies in Europe must comply with the International Accounting Standards. Section 404 of the Sarbanes-Oxley Act took effect on November 16, meaning that publicly listed companies in the US or those with more than 300 US investors must have the means to log, record and process information relevant to financial results.
Concerns about the impact of regulations on the financial services industry have been mounting in the past few years and senior bankers have voiced their disquiet publicly. The issues have ranged from financial worries to concerns about increased workloads, unrealistic deadlines and last-minute alterations thrust on an industry still fighting back from the dotcom bust.
Service and system suppliers have been pressing the industry to obtain added value from this burden. They say the compliance process offers the opportunity for positive results if correctly managed – the internal checks, measures and balances increase banks’ resilience and this can only be positive. However, the effect appears more of a kill or cure than an inoculation.
The EU’s recent deletion of some IAS 39 text has led accountants and banks to warn of volatility in reported financial earnings during the first two quarters of 2005, reported earnings that will not reflect the underlying economics. There are warnings that trade in profitable complex products will drop off for up to two years because of their slowed profit recognition.
The promised returns of globalisation are being countered by the hydra of rules that entangles banks that wander from their national shores. German companies have expressed their displeasure at the cost of compliance with Sarbanes-Oxley, even leading the finance minister, Hans Eichel, to raise the problem with the chief executive of the New York Stock Exchange. German executives are not happy that the task of lobbying the US Securities Exchange Commission has been left in their hands.
Regulators in the US and Europe have reason to take note of the impact that these rules are having. It is not just financial companies but all companies that are suffering from the imposition of this wave of much anticipated regulation.
We will be sailing in choppy waters in the first half of next year until the impact of new rules becomes a known quantity.
