EU Slaps Microsoft Again; British Audits; SWFs

European Union regulators have shown how tough they can be on companies that fail to comply with its decisions by hitting software giant Microsoft with a record $1.4 billion fine.

The fine stems from Microsoft’s failure to meet its obligations under a 2004 ruling from the European Commission that required the company to make information about its products available to other software companies.

The non-compliance fines imposed on the company now total more than double the penalty levied for its original offense. In its 2004 ruling, the Commission fined Microsoft $780 million for abusing its powerful market position. The Commission added another $440.2 million in July 2006, claiming the company had not complied with its ruling—the first time the EU had ever had to fine a company for non-compliance.

Kroes

Commenting on the latest penalty ruling, Neelie Kroes, European Commissioner for Competition Policy, said it reflected “a clear disregard by Microsoft of its legal obligations.” She added that the record fine was “a reasonable response to a series of quite unreasonable actions.”

The Commission’s original ruling found that Microsoft stifled innovation by charging prohibitive royalty rates for information that other companies needed to ensure their products worked on Microsoft’s Windows operating system. After that ruling, Microsoft offered to charge a royalty for the information; it has lately promised to provide it for a flat fee.

Microsoft recently promised to make interoperability information more available in the future, and Kroes said it appears as though the company has now come into compliance with its 2004 decision. EU regulators, however, are continuing with two other antitrust investigations into the company’s practices.

More widely, Kroes said, the non-compliance fines imposed on Microsoft were a lesson to companies contemplating similar illegal action. “Talk is cheap; flouting the rules is expensive,” she said. “We don’t want talk and promises. We want compliance.”

Some legal experts question the Commission’s stance. “Such a fine will no doubt do wonders for the Commission’s image as a tough regulator,” says Denis Waelbroeck, a partner at the Ashurst law firm in Brussels, “but some might consider it unfair, not least since the Commission refused to tell Microsoft what would be a ‘reasonable’ amount to charge for patent licenses despite being asked several times.”

A Microsoft spokesperson said that the company was reviewing the Commission’s action and added: “These fines are about past issues that have been resolved. As we demonstrated with our new interoperability principles and specific actions to increase the openness of our products, we are trying to focus on steps that will improve things for the future.”

Brits Debate Widening Audit Choice

The British Financial Reporting Council is planning to change the guidance it gives companies on how they select and appoint their external auditors, as part of the FRC’s efforts to improve choice in the audit market.

Under the new guidance, companies would have to disclose more information about how they select their external auditors and whether they have any contractual obligations—bank loan covenants, for example—that require them to appoint a certain type of firm. That would expose situations where, say, a bank demands that a company appoint a Big 4 auditor rather than one of the second-tier firms trying to break into the market. Companies would also have to consider the need to include the risk of the withdrawal of their auditor from the market in their risk evaluation and planning.

The proposed changes follow an FRC review of the Big 4 accounting firms’ dominance of the market for large, listed-company auditing. The FRC has been worried for some time about the damage to the corporate sector if one of these firms went bust (as Andersen did in 2002), leaving just three firms.

A special group of directors, investors, and auditors that the FRC created to find ways to encourage competition made 15 recommendations last October; the FRC’s latest proposals are aimed at implementing four of them.

Boyle

The proposals would amend the Smith Guidance on Audit Committees, which since 2003 has been an appendix to the Combined Code on Corporate Governance that all UK-listed companies are expected to follow. The guidance aims to help audit committees implement their Combined Code duties.

The FRC considers changing audit committee behavior an important step in opening the market to more competition. “Decisions made by audit committees exert an important influence on the audit market,” FRC Chief Executive Paul Boyle says.

Sovereign Fund Disclosure Call

The European Commission has published proposals aimed at making sovereign wealth funds disclose more information about their activities.

The behavior of such funds—the mammoth pools of investment cash mostly owned by Asian or Middle Eastern nations—has become a hot topic in recent months, with growing worries that SWFs might use their enormous financial power to achieve political rather than corporate goals.

SWFs already have trillions of dollars at their disposal, and some have used the recent credit crunch as an opportunity to buy significant stakes in Western financial institutions. The European Commission estimates that more than 30 countries, including China, Kuwait, Norway, and Singapore, have established wealth funds, and their assets could rise to $12 trillion by 2015.

Barroso

José Manuel Barroso, the Commission president, recently said that such funds were “not a big bad wolf at the door” and had helped to stabilize financial markets during the recent turmoil. But, he added: “There are real concerns over some aspects of the way some funds operate.” Barroso said European-based public and private investment funds were subject to stringent rules on governance and disclosure, and, “We cannot allow non-European funds to be run in an opaque manner or used as an implement of geopolitical strategy.”

The Commission’s proposals call on SWFs to issue clear investment policies that define their objectives, give fund managers operational autonomy so they can work without political influence, disclose their relationships with government authorities, and disclose their internal governance principles. On transparency, it wants funds to disclose their investment positions and asset allocations, how they exercise ownership rights, where they use leverage, the scale of their resources, and details of their home-country regulation.

The Commission has proposed a common European-level approach to disclosure, which it hopes will stop member states from producing their own rules. If endorsed by member states, the rules would not be a legal requirement, although the Commission has said it would legislate if they did not have the desired impact.

The Commission hopes that its disclosure principles will contribute to two other initiatives on SWF transparency: The International Monetary Fund is producing a code of conduct for funds and their owners, and the OECD is drafting principles for recipient countries to follow when dealing with such funds.