Re-examining Sarbanes-Oxley: deadline for compliance with corporate governance mandates approaches.

U.S. corporations and their Mexican subsidiaries will soon be one step closer to a new era of corporate governance. On November 15, the Sarbanes-Oxley Act will go into effect for U.S. companies traded publicly in the United States and for their overseas operations.

The new law--written and signed by the U.S. Congress in 2002 following the corporate folly and malfeasance uncovered at the outset of the Bush administration--is designed to give investors and shareholders a new level of confidence in multinational corporations. Armed with a stronger magnifying glass, the U.S. Securities and Exchange Commission (SEC) now has greater authority to examine corporations and publicly expose the sometimes murky movements of money from shareholder to CEO.

"It's a huge deal," said Mario Rodriguez, a partner with Mancera, Ernst & Young, one of the leading auditing firms helping companies redesign their auditing process to comply with the law. "Among other things, the law calls for a new level of accuracy of financial statements and internal controls, and offers some pretty draconian penalties for lying."

Under Section 302 of the law, CEOs and CFOs of corporations will be forced to sign off on the accuracy of their quarterly and annual financial statements and affirm that they are a true representation of the company's financial situation.

If the statements are proved false, the top executives may be held criminally responsible for the financial behavior of the corporation.

Furthermore, Section 404 takes aim at the auditing firms hired to oversee the corporation's financial statements. Independent auditing firms will be forced not only to examine the accuracy of the company's financial declarations, but also to go one step further. They must assess the competence, reliability and tightness of the company's accounting systems.

"Auditing firms must now give a second opinion," Rodriguez said. "First, there will be an opinion on the company's finances. And then, an opinion on its system of internal controls."

In addition, to ensure the reliability of international auditors, the SEC will create the Public Company Accounting Oversight Board, which will audit the auditors.

While it is clear the new law places greater responsibility on U.S. corporations and their CEOs and CFOs, it remains unclear just how far the law will creep across the border into business dealings in Mexico.

Mexican companies that trade publicly in the United States--like Telmex and Cemex--will be subject to the new law, but have until December 2005 to comply.

But what about Mexican subsidiaries of U.S. corporations? Here things become a little murky.

"The parent company has to prove that its system of internal controls is adequate." Rodriguez said. "Any operation where financial error can arise and flow up into the financial statements is within the scope of the law. So I think most major U.S. multinationals and their Mexican operations are going to end up being material."

Even though only the elite Mexican companies will be forced to comply with Sarbanes-Oxley, many analysts believe the law will inspire a more codified book of ethics for Mexican business in general.

"Sarbanes-Oxley is not only an exercise in compliance, it is a new way of doing business," posted Pricewater-houseCoopers on its website. "Executives ought to anticipate risks and manage them opportunely." Sarbanes-Oxley also seems to be jumpstarting Mexico to update its legal code.

"It has been rumored that Mexico's Code for Better Corporate Practices may become an obligatory set of rules applicable to public companies in Mexico," said Juan Pablo Sanchez Delgado, a partner at Sanchez-DeVanny Eseverri, a business consultancy firm. Sanchez told BUSINESS MEXICO the Sarbanes-Oxley Act is seen as a template to modernize how business is done in Mexico.

While the implications of Sarbanes-Oxley in Mexico remain vague, some businesses are getting a head start offering technology and advice on how to conform to the law.

Microsoft has announced plans to release software to help companies ensure compliance.

"The Sarbanes-Oxley solution is a very simple toolset that can be built on Windows, facilitating the necessary administration to comply with the Sarbanes-Oxley Act," said Gerardo Rojas, product manager at Microsoft Mexico, in a press release.

Although compliance with the law may mean a multi-million dollar investment and overhaul in establishing "painful and arduous standards," says Mancera. Ernst & Young's Rodriguez, "it makes the audit process much sounder, reduces our risks and helps us understand the companies better."

RELATED ARTICLE: Bolsa May Replicate Law

Like other countries, Mexico is considering updating its Stock Market Law (Ley de Mercado de Valores) to incorporate many aspects of the Sarbanes-Oxley Act and to codify an ethic of corporate governance into Mexican law.

"In Congress, there is a proposal for a new law that will incorporate many aspects of Sarbanes-Oxley," said Octavio Pineda, a legal advisor at Mexico's Bolsa de Valores. "It's not an exact replica of the American law, but it will reform Mexico's current law to incorporate some parts of corporate governance that the current law doesn't have."

The new law, if passed, will incorporate elements from Mexico's Code for Better Corporate Practices, first published in 1999, to set a standard of corporate ethics and governance. With the vast majority of Mexican companies privately or family-owned, Mexico's stock market laws have lagged behind standards in the United States. The U.S. laws were devised to protect shareholders of public companies.

--Graham Gori 

RELATED ARTICLE: Impact on Subsidiaries Looms

With the Sarbanes-Oxley Act spreading its umbrella over many aspects of Mexican business, it remains unclear just how far the arm of the law may reach, and what the penalties may be for violators in Mexico.

"That's a question that hasn't been answered yet," said Mario Rodriguez of Mancera, Ernst & Young. "There may be criminal penalties, or civil action, or the ability of the SEC to delist you at the end of the day."

Mexican subsidiaries will be held responsible by their parent company in the United States for updating their accounting practices to reflect an honest assessment of the company's financial status overseas. If the subsidiaries fail to report accurately, it could reflect in the parent company's final statement.

It also appears that a separate branch of the SEC--the Public Company Accounting Oversight Board--will have the authority to audit a company's auditor overseas to determine the accuracy of its report.

--Graham Gori

Graham Gori is a freelance journalist based in Mexico City.