***The European Sarbanes Oxley

By George Lekatis
The official guide to Risk Management

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After the passage of the European Union’s 8th Company Law Directive on Statutory Audit (Directive 2006/43/EC), European and non-European companies listed in any country of the European Economic Area have to comply with this directive.

The European Economic Area consists of the 27 member states ...After the passage of the European Union’s 8th Company Law Directive on Statutory Audit (Directive 2006/43/EC), European and non-European companies listed in any country of the European Economic Area have to comply with this directive.

The European Economic Area consists of the 27 member states of the European Union (EU) and three member states of European Free Trade Association (EFTA) - Iceland, Norway and Liechtenstein. The Member States of the EEA must comply before the 29th of June, 2008. The United States and many non-EU companies listed in Europe have to comply after 2010, but have to start working earlier on that, as we will have the opportunity to discuss today.

The 8th Company Law Directive is considered the European post Sarbanes-Oxley regulatory retaliation. And, like in the US SOX, there are extremely important extraterritorial consequences. Many Offshore Financial Centers for example, enact legislation to prove that they have an “equivalent level of regulation” with Europe.

But why? Do they have to comply? Yes, they can not avoid it! They have to protect their auditors that audit offshore companies with EU listings, from being subject to a tough European oversight regime. Otherwise, auditors and audit firms from non-European countries have to be registered in the EU and to be subject to the European oversight, quality assurance systems and sanctions.

Article 45, (4) of the directive is about the registration and oversight of third-country auditors and audit entities. Audit reports concerning annual accounts or consolidated accounts issued by third-country auditors or audit entities that are not registered in a Member States have no legal effect in that Member State of the European Economic Area .

The 8th company law directive is a real challenge. Companies listed in the European Economic Area are directly affected. From the changes in the audit committee and the role of the board of directors to the new internal controls requirements, professionals in companies listed in Europe face tough challenges. Sometimes, they have to do much more to comply with the European flavor of SOX. The European SOX (E-SOX) and the Japanese SOX (J-SOX) definitely create a new flat world in the financial markets.