Is the 8th Company Law Directive of the European Union (EU) very similar to Sarbanes-Oxley?

No. 

It is true that there are many similarities:

·        Both want to restore investor confidence in capital markets after the spate of corporate scandals.

·        Both set an independent audit oversight entity, responsible for inspections and investigations. In EU the European Group of Auditors’ Oversight Bodies (EGAOB) has a similar role with the US Public Company Accounting Oversight Board (PCAOB) created by the Sarbanes-Oxley Act

·        Both try to ensure that auditors are independent. Auditors must refuse non-audit engagements that might compromise their independence

·        Both believe in the lead audit partner rotation.

·        Both try to ensure that auditors will be liable. In EU it this is not so clear as in the USA.

·        Both stress the need of a responsible Board of Directors 

So, why they are different? 

Even when the 8th Company Law Directive and the Sarbanes-Oxley Act look similar, they are different.  

For example, both require enhanced powers of the audit committees. Every listed company must have an audit committee at group level, with will be responsible for the appointment (and the fees) of the external auditors. One member of the audit committee must be a competent in accounting or auditing. The auditors must report material weaknesses to the audit committee. So similar, but… 

In Sarbanes-Oxley, companies need to disclose material weakness to the market, not simply to the audit committee! In the European Union, there is an opportunity to fix the weakness internally without any disclosure.

Any other differences?

The 8th Company Law Directive is a framework, not an Act.  

The Sarbanes-Oxley implementation, as interpreted by the SEC and the PCAOB, especially in the Auditing Standard 2, is based on the US Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework. There is nothing like that in the EU, and it is a source of serious implementation problems. 

In the USA there is a clear definition of a “significant deficiency” and a “material weakness” (Auditing Standard 2). There is no such commonly agreed definition in Europe. 

On the other hand, Sarbanes-Oxley is not flexible. There are not so many choices:

1. You comply.

2. You do not comply and you explain it to the public.

3. You do not comply and you try to hide it. They learn it (whisteblowers are everywhere and they are protected) and you go to prison.

The 8th Company Law Directive is very flexible.

In the USA they have a real problem to understand what Europeans  mean with the words “left to member states to add their own national requirements”. They have a real problem to understand what exactly they have to do in their European subsidiaries in order to comply. 

Is there a fear that some member states of the EU will do less? 

Perhaps they will do more! 

For example, Italy did not wait for E-SOX. There was already in place national law with provisions very similar to the Sarbanes-Oxley Act.  But, some rules are unique – like the need for approval of the external auditor by Consob, the securities regulator. 

The 8th Company Law is a great beginning. Nobody can figure out where is the end

Return to Index

Our Web Sites