Check yourself: U.S. accounting rules have Latin American companies scrambling to comply.

Fading headlines from the spate of bad-news global accounting scandals of the last few years--Enron, Vivendi, Ahold, Parmalat and so on--are still fresh ink for the world's chief financial officers. The latest to get caught up in belated enforcement activities among U.S. regulators, Mexican broadcaster TV Azteca, is a case in point.

The Securities and Exchange Commission (SEC), the U.S. stock-market regulator, alleges that TV Azteca executives helped Azteca Chairman Ricardo Salinas Pliego conceal US$109 million in profits in a complicated scheme. The SEC says TV Aztecas U.S. legal counsel resigned after advising the board that it had violated the Sarbanes-Oxley Act.

TV Azteca declined to comment. It has maintained its innocence in official communications. "It's absurd for the SEC to use a Mexican company and Mexican citizens to try to impose U.S. regulations in an extraterritorial manner, unilaterally ignoring international laws and the Mexican legal framework. In my view they are trying to politically compensate their deficiencies in supervising U.S. companies in the past," Salinas said in a statement.

TV Azteca, if not the first to fall victim to the tougher rules, is certainly the highest-profile foreign company so far to tangle with the SEC over Sarbanes-Oxley. Meeting the requirements of Sarbanes-Oxley--designed to give investors the same information insiders have--is tough. The U.S. law creates rules to protect auditor independence, and it settles conflicts of interest facing securities analysts. The act also increases penalties for financial fraud and institutes safeguards that require company executives to certify financial statements. Auditors, meanwhile, must certify the adequacy of a company's internal controls.

Overseas companies that trade shares in U.S. capital markets are required to abide by the same rules as companies that are based in the United States, and that includes providing information that investors need, says John Nestor, an SEC spokesman. "TV Azteca is charged with failure to disclose information that a reasonable person would have wanted to know," he says.

Nestor says that the regulator realizes that the new procedures can be difficult, but he stresses that the new rules balance the playing field. Nevertheless, some international companies have told the SEC that it's hard to follow the regulations. "The commission staff is aware that there are sometimes differences between the home country's rules and the United States' rules," Nestor says. "There might be situations where we treat a foreign issuer differently than a United States issuer but not at the expense of the protection the law provides."

In fact, the SEC gave smaller U.S. companies extra time to adhere to the so-called Section 404 provision of Sarbanes-Oxley. Section 404 requires companies to audit their internal controls. In one country of operations, a company's internal controls--tracking flows of money through the company--might be well documented, an auditor's dream, says Nestor. In other countries, information can be spotty at best, which makes it difficult for a company to begin reporting information almost from scratch. "That does impose on some companies an additional burden," says Nestor. However, Sarbanes-Oxley should not discourage risk-taking and entrepreneurial spirit in business, he says. "There's not a big game of 'gotcha' going on," Nestor says.

Some companies in Latin America are taking the new legislation in stride. Fernando Gardeweg, domestic finance manager at Chilean utility holding company Enersis, says that the rules have not affected his company's financing plans of its strategies--only the workload has gone up. Filing and reporting requirements have changed, and that means more paperwork. For example, Enersis now does not transfer one peso in assets without consulting a U.S. lawyer first, Gardeweg says.

Sarbanes-Oxley notwithstanding, the company is more concerned about an age-old problem for Latin American businesses--perception abroad. "What worries us more are risk ratings," Gardeweg says. Unfavorable ratings from Moody's, Standard & Poor's of Fitch can hurt a company's chances to get money, more so than new filing and reporting rules. Nor is Chile insulated from economic shockwaves that could come from other parts of Latin America, Gardeweg says.

Senior executives aren't the only ones who have been affected by Sarbanes-Oxley. Lawyers that assist foreign companies with cross-border financing have more on their plates. In the past, lawyers were required to notify the board of directors if laws were broken. The Sarbanes-Oxley law now gives those lawyers permission to notify the SEC if the board doesn't take legal advice and disclose necessary information. If the board doesn't act, the lawyers must then resign or risk assisting a company in making an inaccurate filing, says Fernando Alonso, a partner at the Hunton & Williams law firm in Miami. "What the law is really focusing on is that we have clear and better disclosure," he says.

According to Alonso, companies have no excuse for not adhering to SEC rules if they want to finance themselves in U.S. markets, pointing out that TV Azteca is an unusual case. Even if accounting practices are different in the home country than in the United States, companies should just disclose what U.S. authorities ask for. "For the responsible companies Sarbanes-Oxley is not likely to be an impediment.... It's not going to help you to say 'Under my local law I don't have to do this,'" Alonso says.

Euro market. The one thing that the legislation does for sure is add work for companies looking to raise money in the United States. While not impossible, it is a hassle.

"It's not an insurmountable burden but for most foreign issuers, it requires significant changes in corporate governance issues," says Bowman Brown, chairman of the executive committee and the financial services industry practice group at Shutts & Bowen in Miami. The new law could turn off companies interested in going to U.S. capital markets in the future, although the SEC has made some conciliatory gestures to corporations worldwide. "It could push issuers into the euro market," Brown says.

For foreign companies looking for global financing, the Sarbanes-Oxley Act is serious business. SEC Chairman William H. Donaldson said in a speech in London in January that nearly half of all the world's stocks, measured by market capitalization, trade in the United States. He also said that investors outside the United States have $4.5 trillion invested in U.S. stock markets.

To keep some companies from going to other international markets, the SEC is willing to accommodate them. For example, Sarbanes-Oxley requires that a company's audit committee be independent, which means it cannot be made up of employees. German law, however, requires a labor representative to sit on such a committee.

After talks with European regulators, the SEC concluded that the labor representative could be a member. The SEC also is willing to consider helping foreign companies that can't comply with Sarbanes-Oxley to de-list shares traded on U.S. capital markets. "While the rules were designed to protect investors," Donaldson said in the speech, "we should seek a solution that will preserve investor protections without inappropriately designing the U.S. capital market as one with no exit."

COMPLY OR DIE

Brazilian and Mexican companies lead the way in U.S. capital markets.

                        Number of
                   depository receipts

        Brazil             89
        Mexico             80
         Chile             27
     Argentina             26
     Venezuela             15
          Peru              9
      Colombia              9
       Bolivia              4
       Jamaica              3
       Ecuador              3
        Panama              2
Dominican Rep.              1

Note: Table made from bar graph.

SOURCE: JPMorgan