U.S. Sweeping Financial Reform Act Has Implications Around the Globe

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) passed in July is the single most sweeping financial regulatory reform in the United States since the securities acts of 1933 and 1934. Its scope is wide and broad but its implications are grey and murky. While American companies and industries sort through the 2,300 pages of the Dodd-Frank Act to find out what the new legislation means for them, the international implications have gone largely unexplored.

The Act significantly changes the U.S. federal regulatory framework as it relates to many types of financial services companies, especially banks and other deposit-taking institutions, both foreign and domestic. For example, it permits the Federal Reserve to terminate activities of U.S. branches, agencies or commercial lending subsidiaries of a non-U.S. entity if the Federal Reserve determines that the home country has not adopted appropriate systems to mitigate risk and if it may present a systemic risk to the U.S.

Added Responsibilities for SEC

The law also expands the scope of new responsibilities for the Securities and Exchange Commission (SEC). Congress has asked the SEC, among other things, to constantly monitor and oversee all domestic as well as international proposals and developments inclusive of the insurance industry and accounting profession. The SEC has to report back to Congress annually about all new proposals that affect the financial industry and how they affect the stability therein. These new requirements have increased some concern that coordinating everything on a global level may lead to a high margin of error.

Serious concerns were raised by the AICPA and others regarding government oversight of accounting standard-setting bodies in earlier stages of the legislation. Congress modified the original language to direct the Financial Stability Oversight Council to review and, as appropriate,  “submit comments” to the SEC and any standard-setting body with respect to an existing or proposed accounting principle, standard or procedure. In earlier versions, the Council was given increased power to directly influence standards. The AICPA successfully advocated for preserving an independent board to monitor these standards.  

PCAOB to Inspect Foreign Audit Firms

Additionally, Dodd-Frank amended the Sarbanes-Oxley Act (SOX), granting the authority for the Public Company Accounting Oversight Board (PCAOB) to now inspect foreign audit firms that practice in the U.S. or have U.S. clients. For example, any registered public accounting firm (domestic or foreign) that relies, in whole or in part, on the work of a foreign public accounting firm in issuing an audit report, performing audit work or conducting an interim review must:

• Produce the foreign firm’s audit work papers and all related documents if the SEC or PCAOB requests them; and
• Secure the foreign firm’s agreement to produce those documents as a condition of relying on the work of that firm.

The general international impact of Dodd-Frank is on external auditors and preparers who must comply with SOX, as amended by the Dodd-Frank Act, because they are employed or engaged by international/global public companies that list on U.S. exchanges. Read More