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The 8th Company Law Directive of the European Union (European Sarbanes Oxley)
from the Sarbanes Oxley Compliance Professionals Association (SOXCPA)
the largest Association of Sarbanes Oxley professionals in the world
Which is the real reason behind the 8th Company Law Directive?
Sometimes it is difficult to learn the truth.
A. The need for better corporate governance and for more effective audits?
B. An effort to make the EU market more competitive and to attract more investors?
C. An effort to avoid some of the extraterritorial provisions of U.S. laws like Sarbanes-Oxley? For example, EU finance ministers have raised concerns about U.S. authorities’ access to a European firm’s audit work papers.
D. An effort to impose extraterritorial obligations just like Sarbanes-Oxley? For example, several non-EU companies now raise concerns about EU authorities’ access to their audit work papers.
E. A post Sarbanes-Oxley regulatory retaliation?
F. The competition with the Offshore Financial Centers which, one more time, try to enact new legislation to respond and to persuade the EU that they enforce the same or equivalent measures.
G. An opportunity to regulate the EU market (and all the foreign companies listed in EU) and to restore investor confidence?
Perhaps all the above!
It is difficult to learn the truth. Fortunately, there are persons like Frits Bolkestein.
He was commissioner in charge of Internal Market in the EU. There are a couple of years now I try to learn everything about him - what he has said and what he has written.
I remember the first time I read his article: "I cannot stand Switzerland cheating on Tax" (published in the Financial Times).
He was talking about one of my favourite subjects, the savings tax directive. And he was clear:
“I cannot stand cheats or free-riders. Nor can I stand those who make money from the often-lucrative custom of tax cheats”
This was not exactly the diplomatic language... I knew that I had found a person that was not hiding his thoughts. I collect speeches and bits of wisdom from persons like Frits Bolkestein like other people collect stamps.

Frits Bolkestein was very clear about the connection between the 8th Company Law Directive of the European Union and the Sarbanes-Oxley Act.
May 2003: Commissioner Bolkestein spoke against the proposed US oversight measures on foreign audit firms. "I do not accept the imposition of US standards on our firms and that is why the European Union strongly opposes registration of EU audit firms with the United States' Public Company Accounting Oversight Board. The EU will regulate its own businesses," he said.
One year after that, everything was different in the European Union.
March 2004: Speaking on 25 March at a meeting at the European Policy Center (EPC) Frits Bolkestein said:
"I think you are probably all already aware that we have been working very hard for nearly a year with our counterparts from the PCAOB to work out a cooperative way of regulating audit firms which audit listed companies in both the EU and the US.
Our objective has been to work constructively together to  define procedures and rationalise work across our different jurisdictions, in order to ensure international audit is as robust and sure as it can be.
There is no doubt that this is of vital economic importance. It is also crucial for building confidence in capital markets, for investors, for stability and for keeping the cost of capital as low as possible.
In essence, what we have to deal with here is a problem which is the epitome of globalism. Damage to one financial market, damages the other. Financial markets today are deeply interconnected."
Very very interesting.
What he said after that, was even more interesting
He continued:
"Once the US Congress had adopted the Sarbanes Oxley Act – at remarkable speed – reflecting the pressure congressmen and senators were under after the collapse of Enron, WorldCom etc., - but without consultation - we in the EU were faced with a simple choice:
Either – we could oppose tooth and nail the Sarbanes Oxley Act –and add yet another fiery dispute to our difficult post-Iraq bilateral relationship.
Or – we could try to find a constructive, cooperative way forward, jointly, respecting to the maximum degree possible our different legal traditions and cultures.
We decided on the latter."
This is what has happened.
I could not wait to read more:
"Within the EU we have taken parallel action. The Commission published its proposal for an 8th Directive aiming at regulating the EU audit profession last week, a proposal which sets out the framework for cooperation between competent authorities including with third countries.
We are now expecting a PCAOB rule change in the near future on the procedures the PCAOB will follow with third countries.
In substance our European approach to the regulation of the audit profession and that of the PCAOB are now quite convergent.
For example - we agree on:
- independent public oversight;
- audit quality assurance;
- more frequent rotation;
- and that auditors must have no conflicts of interest, e.g. in supplying certain non audit services."
So, instead of "opposing tooth and nail the Sarbanes Oxley Act", European Union chose to co-operate with the United States to build confidence in capital markets.
We will live in a flat financial world.
The 8th company law directive
The Directive is the key measure for the EU to rebuild trust in the audit function.
Although largely prepared well in advance of the Parmalat scandal, the proposal has been adjusted to take into account the specific implications of that case.
For example, it specifically addresses group audits and would strengthen public oversight.
Based upon the experience in the Ahold case, the proposal also clarifies the role of the audit committee in relation to the internal control of the company.

The Parmalat case has shown that it is unacceptable that group auditors should only be concerned with parts of the group's business when they are in fact responsible for the audit report concerning the group as a whole.
The proposal therefore clearly states that the group auditor bears the full responsibility for the audit report on the consolidated accounts.
The proposed common requirements for public oversight at Member State level would strengthen Member States' oversight systems and make them more robust.
Independence of the public oversight systems from the profession is important to restore public trust in statutory audits.
In response to issues raised in the Parmalat case, the proposed Directive would require that only non-audit practitioners can participate in the governance of the system of public oversight of auditors of "public interest entities" in other words listed companies, banks and insurance companies.
Following the Ahold case, the proposal now specifically states that in the case of public interest entities, the audit committee must monitor the effectiveness of the company's internal control, internal audit (where applicable) and risk management systems.
The following measures concern all statutory auditors and audit firms:
 - update of the educational curriculum for auditors, which must now also include knowledge of international accounting standards (IAS) and international auditing standards (ISA)
 - liberalisation of the ownership and the management of audit firms by opening up the ownership and the management to statutory auditors of all Member States
 - introduction of an electronic registration system for auditors and audit firms in all Member States, with a catalogue of registration information that has to be permanently updated
 - definition of basic principles of professional ethics
 - legal underpinning of principles of auditor independence including the duty of the statutory auditor or audit firm to document factors which may affect auditors' independence (such as performing other work for the companies they audit) and safeguards against these sorts of risks
- obligation for Member States to set rules for audit fees that ensure audit quality and prevent "low-balling" - in other words preventing audit firms from offering the audit service for a marginal fee and compensating this with the fee income from other non-audit services
 - requirement to use international auditing standards for all EU statutory audits once those standards have been endorsed under an EU procedure; Member States can only impose additional requirements in certain defined circumstances
 - possibility for the adoption of a common audit report for financial statements that have been prepared on the basis of International Accounting Standards (IAS). This would ensure that all audit reports for financial statements prepared on the basis of IAS are identical throughout the EU
 - introduction of a requirement for Member States to organise an audit quality assurance system that has to comply with clearly defined principles, such as the independence of reviewers and secure funding
- obligation for Member States to introduce effective investigative and disciplinary systems
 - adoption of common rules concerning the appointment and the resignation of statutory auditors and audit firms (for example, statutory auditors to be dismissed only if there is a significant reason why they cannot finalise the audit) and introduction of a requirement for companies to document their communication with the statutory auditor or audit firm
- disclosure by companies, in the notes to their financial statements, of the audit fee and other fees for non-audit services delivered by the auditor.

Third country auditors

Following extensive consultation the EC published a Decision on 29 July 2008 on the transitional period for third country (non-EU) auditors and audit entities auditing companies listed on EU markets.
The Decision establishes a transitional period from 29 June 2008 until 1 July 2010 for audit firms from a list of third countries specified in the annex to the Decision.
Although the Decision means that audit firms from these countries will benefit from not having to comply with the full registration requirements during the transitional period, they will still have to provide information on their legal structure, a description of the network they belong to, the applicable auditing standards and independence requirements, a description of the internal quality control system and information about the last quality assurance review.
Member States may still apply their investigations and penalties to the concerned entities and may establish cooperative arrangements with third country authorities, provided they meet certain criteria.
In the long-term the Directive foresees two possibilities:
1. Third country auditors register with an EU Member State(s) and are overseen by it (them)
2. The third country’s oversight system is judged as equivalent, thereby exempting the auditor from the need of EU registration and oversight.

Individual EU Member States may decide on such an exemption as long as a decision on the equivalence of a third country’s system has not already been adopted by the European Community – ie, the EC in cooperation with EU Member States through the comitology procedure.
Consequently, the EC has noted the merits of comitology-based reciprocal decisions as against decisions made by individual EU Member States.
It is also important to highlight that decisions on equivalence are required to be made on the basis of reciprocity with the third country.
Cooperation with third country competent authorities

Under Article 47 of the Directive, Member States may allow the transfer to the competent authorities of a third country of audit working papers or other documents held by the statutory auditors or audit firms approved by them.
There are, however, a number of legal and data protection issues to be addressed to ensure that information which European auditors receive from their client companies is kept confidential and does not get into the public domain of third countries where such companies are listed or where the parent company is incorporated.
The EC has communicated that there will be no EU level decision regarding 2008 financial statements – ie, audit firms will be subject to the legal requirements in the relevant Member State.
For financial statements following 2008, it is expected that the EC will consider a Decision on the matter, the objective of which would be to enable a Member State competent authority to conclude bilateral arrangements with a third country competent authority.
A possible route would be to propose an “adequacy test” to assess whether the competent authorities of the third countries concerned have adequate safeguards in place to maintain the confidentiality of information received.

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