This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 PARIS 001800 
 
SIPDIS 
 
SENSITIVE 
 
STATE PASS FEDERAL RESERVE 
STATE PASS SEC (DONOLAISEN, BOONE) 
STATE FOR E, EB, AND EUR 
TREASURY FOR DO/IM SOBEL, RHARLOW, LHULL 
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER 
USDOC FOR 4212/MAC/EUR/OEURA 
 
E.O. 12958: N/A 
TAGS: EFIN ECON FR
SUBJECT: EUROPEAN CFO VIEWS ON SARBANES-OXLEY SECTION 404 
 
 
SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION 
 
 
SUMMARY 
------- 
 
¶1. (SBU) The Ambassador hosted a discussion on March 15 at 
the Embassy, led by the SEC's Chief Accountant, Donald 
Nicolaisen, with Chief Financial Officers of SEC-listed 
companies operating in France.  The CFOs expressed 
particular concerns about the high costs of complying with 
Section 404 of the Sarbanes-Oxley legislation, as well as 
the lack of specificity in SEC guidance and the extreme 
positions being taken by the PCAOB.  Most companies urge 
eventual SEC action to accept accounting statements 
conforming to new European standard IFRS accounts, rather 
than U.S. GAAP accounts.  END SUMMARY. 
 
OVERVIEW 
-------- 
 
¶2. (SBU) At the invitation of the Ambassador, Securities and 
Exchange Commission (SEC) officials Donald Nicolaisen, SEC 
Chief Accountant, Sherman Boone, International Affairs 
Assistant Director, and Erika Sulkowski, Special Advisor, 
led a discussion on March 15 at the Embassy among SEC-listed 
companies based in France (and one in Germany) about Section 
404 of the Sarbanes-Oxley legislation, dealing with 
management certification of internal financial controls. 
The discussion was the capstone to ongoing talks Embassy has 
been holding with interested parties, soliciting suggestions 
on Sarbanes-Oxley in order to facilitate continued 
investments in the U.S. capital markets.  Also participating 
in the meeting were representatives from several local law 
firms, accounting firms, auditors, and French government 
officials. 
 
¶3. (SBU) After Mr. Nicolaisen made opening remarks on the 
origins and implementation of Sarbanes-Oxley, company 
representatives spoke of the effects of Section 404.  One 
CFO noted that audits now have a freezing effect: at the end 
of the year, new projects tend to be put on hold until after 
internal controls are completed and signed off.  Another 
spoke of the chilling legal environment: whether or not a 
CFO discloses a material weakness, personal legal liability 
may still attach, but with disclosure the lifespan of the 
CFO with the company may be short.  Another spoke of the 
need for balance, and the need for specificity.  Questions 
were also raised questions about process (the SEC has 
delayed section 404 for a year, but not Section 302, so what 
happens?) and about progress toward U.S.-European mutual 
recognition (a question a GOF official also later took up). 
A number of firms made the observation that with the SEC 
extension, foreign issuers will undertake compliance with 
two years of International Financial Reporting Standards 
(IFRS) experience under their belt, and urged the SEC to 
consider mutual recognition of European and U.S. accounting 
standards. 
 
COSTS, AND PCAOB RULE-MAKING 
---------------------------- 
 
¶4. (SBU) A big question is one of cost, according to several 
company representatives.  One executive suggested that the 
SEC should have a procedure to take costs into account when 
setting compliance standards, and argued that costs are 
higher for foreign issuers.  Another pointed out that the 
underlying issue is the SEC role in relation to the Public 
Company Accounting Oversight Board (PCAOB).  Reacting to 
liability laws and pending U.S. court cases, PCAOB rules 
push private auditors to go beyond SEC rules.  The auditors 
in turn are forcing their rules upon issuers, creating 
something akin to Sarbanes-Oxley in extremis.  Some 
companies argued that PCAOB "excessiveness" constrains 
companies from creating or implementing what may be best 
practices.  This complaint was echoed by another CFO, who 
said the PCAOB is in effect pressuring companies to do 
things they would not reasonably do otherwise. 
 
¶5. (SBU) A number of firms urged the SEC to come up with 
guidance for Sarbanes-Oxley that would curb PCAOB excess, 
arguing that the PCAOB, in the absence of such guidance, is 
drafting rules for the worst-case scenario.  One major 
French firm told Econ MinCouns recently that the PCAOB is 
creating a situation where one "can't see the forest for the 
trees."  PCAOB rules are so detailed and resource-intensive 
that firms may lose sight of the overall "due diligence" 
oversight function in struggling to comply with the 
"arcania" of PCAOB rules.  In the end, according to this 
company, the costs of compliance may turn out to be higher 
than the potential frauds against which the legislation is 
designed to protect. 
 
CONVERGENCE/MUTUAL RECOGNITION OF ACCOUNTING STANDARDS 
--------------------------------------------- --------- 
 
¶6. (SBU) One CFO urged the SEC to get more input from 
investors.  Another remarked that it never gets any 
questions from potential U.S.-based investors about U.S. 
GAAP, implying that U.S. investors are comfortable with 
European accounting standards and have no requirement for 
reconciled (European-to-U.S. GAAP) accounts.  Several 
executives urged the SEC to continue work toward regulatory 
convergence regarding the European IFRS standard and U.S. 
GAAP. 
 
¶7.  (SBU) One large French company told Econ MinCouns in a 
separate conversation that European companies view PCAOB 
interpretations as overly onerous and rigid, touting form 
over substance, with no determination (or, meaningful 
definition) of materiality.  European issuers face 
additional problems reconciling differing demands from 
different regulators. 
 
THE "BIG 4" STIFLES COMPETITION 
------------------------------- 
 
¶8.  (SBU) Company executives also noted that the SEC might 
do more to encourage the creation of more than the four 
existing big auditing firms (which creates something of a 
oligopoly).  Yet another noted sardonically the suspicion 
that Sarbanes-Oxley is a plot to make auditors rich, citing 
an anecdote of an auditor who is charging in excess of USD 
1500 an hour for the services of the firms' partners.  The 
lack of competition among external auditing companies also 
poses potential conflict of interest problems, as firms must 
be careful to keep at least one of the Big 4 in reserve for 
potential auditing needs. 
 
WHERE TO GO FROM HERE? 
---------------------- 
 
¶9.  (SBU) The Ambassador and the SEC officials encouraged 
companies to participate in the April 13 roundtable in 
Washington organized by the SEC, which will be open to 
foreign issuers.  Companies were also offered the option of 
submitting additional comments directly to the SEC via 
letter or online submission, or via the U.S. Embassy. 
 
COMMENT 
------- 
 
¶10.  (SBU) Embassy greatly appreciates SEC participation in 
the March 15 event, which received well-deserved praise and 
appreciation from the private sector participants.  It was 
clear to participants that the SEC and the U.S. Government 
are interested in their views -- a number of executives 
commented on the fact that recent French legislation on new 
accounting rules was implemented with no such opportunity 
for input from French firms.  Turnout for the event was 
quite high (two-thirds of French firms listed in the U.S.), 
reflecting the strong local interest in making practical 
suggestions to alleviate the more costly and rigid of 
Section 404's requirements. 
LEACH