The European Sarbanes Oxley - Presentation to the Board 2557

  • February 2008, Somewhere in the Caribbean%0AOn the 8th of July 2008 at 9 AM, I was looking out of the window of the board room of the bank. As the soft white sand and the crystal-clear waters were not far, and it was a clear day, the view was amazing. I was prepared to give a presentation to the board of directors of one of the biggest banks of the island, a place where you could enjoy deep-sea fishing, good food, relaxation, investing, privacy and banking.%0AAfter ten minutes we were all ready to start. I listened to the introduction of the organizer of the meeting, and I started my presentation:%0AThank you very much for the introduction, and good morning ladies and gentlemen. May I add my own warm welcome to you all here today. We are here to discuss a new challenge for the bank, which has a strange name: It is called The European Sarbanes-Oxley. It consists of the 8th Company Law Directive, the Market Abuse Directive and the Transparency Directive of the European Union. I hope that you will discuss with me, and raise questions about the key issues of concern to you. We are here to try to answer those questions in as straight forward and open manner%0AWell, I had their attention but I didn’t have their interest. I continued:%0AAfter the passage of the US Sarbanes-Oxley Act in 2002, US and non-US companies listed in a US stock exchange had the difficult task to comply with the Act. The Public Company Accounting Oversight Board PCAOB was established to oversee the audits of public companies. All public accounting firms, from every corner of the world, that prepare, or issue, or who participate in the preparation or issuance of any audit report with respect to an issuer listed in the USA, should be registered with the Board.%0AThe PCAOB has established auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers. It has conducted inspections of accounting firms, investigations and disciplinary proceedings, and has imposed and continues to impose appropriate sanctions.%0AThe external auditors have the obligation to report to the audit committee of the board of directors all critical accounting policies and practices that are used by the firm they audit. They must form an opinion about the quality of the risk management and the controls of the firm, and must provide evidence which is sufficient to support their opinion.%0AIn each annual and quarterly financial report, firms must disclose all material off-balance sheet transactions and relationships with unconsolidated entities that may have a material current or future effect on the financial condition of the issuer. %0AThe CEO and the CFO of listed firms accept the responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting, and sign an assessment of the effectiveness of the internal control structure and procedures of the issuer for financial reporting. Each issuer’s auditor must attest to, and report on, the assessment made by the management of the issuer. %0AIt is a felony to knowingly destroy or create documents to impede, obstruct or influence any existing or contemplated federal investigation. It is a crime for any person to corruptly alter, destroy, mutilate, or conceal any document with the intent to impair the object’s integrity or availability for use in an official proceeding or to otherwise obstruct, influence or impede any official proceeding.%0ACould things be worse for corporate officers and the boards of directors?%0AThey laughed politely. I saw that they were aware of all these issues. Now I had neither their attention not their interest, but I knew that it was going to change very soon. I answered my question:%0AYes, things can be worse. I see that you do not want to hear more about the American Sarbanes-Oxley, because you believe that you have spent adequate time and money on controls, auditors and consultants. But I am sure you do not know that you have to work harder and smarter now, to comply with the European Sarbanes-Oxley. %0AAfter 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. %0AThe 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.%0AThe 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. %0ABut 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. %0AAre you ready for more bad news? 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 .%0AYour auditors are not statutory auditors for Europe. They don’t exist. You have two options. First, to persuade your external auditors to be registered in Europe, according to the 8th company law directive. Second, to persuade your country to enact a similar law and to provide evidence to the European Commission that they have developed an equivalent. There is not a third option. You can not avoid the problem.%0A The European Union has come a long way since its formation under the Treaty of Rome in 1957 as a basic customs union. It has become an empire, and acts like and empire. It is the world’s largest trading bloc, with a consumer market greater than that of Canada, Japan and the United States of America combined. No, there is not a single market yet in Europe, but they already have their European Parliament, their Court of Justice, their external borders, their common European currency and the European citizenship. And these nice directives.%0AThe European Union is different from any other area of the world. European governments spend and tax heavily, over regulate their markets and maintain excessively costly social programs. All major countries of the world have laws and regulations, but Europe’s plethora of directives, rules, regulations, laws, and ordinances is unmatched. %0AThe 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.%0AWhat about you, the board of directors of a bank? You have to do much more. For example, the Audit Committee of the board has now the additional obligation to review and monitor the independence of the statutory auditors or audit firm, and to scrutinize the provision of additional services to the bank by the audit firm.%0A The European SOX is much more complex than the American one. For the US SOX, you can comply as a bank. For the E-SOX you have to comply as a country first, and as a bank after that.%0AWhat are you talking about? a director interrupted me. I don’t believe it. We don’t have to comply as a country with a European directive. he said angrily.%0AYou will not avoid it. I will give you an example I continued.%0ADo you remember what happened with the Savings Tax Directive? The European Union, on the 3rd of June 2003, adopted the Directive 2003/48/EC on the Taxation of Savings Income in the form of interest payments. It was a small document, 11 pages, consisting of 20 Articles. A very clever and a very interesting approach to extraterritorial taxation and extraterritorial application of European law. It was about a new system of information sharing between tax authorities that should take effect from July 2005. %0AThe concept was simple: The directive obliged financial institutions to establish the identity and residence of all individuals to whom they make interest payments. Let’s suppose that you have a client, a citizen of Ireland which is member of the European Union, and he deposits some money in your bank. After this directive, you have two options:%0A1. The automatic exchange of information. You agree to exchange information with the tax authorities of Ireland about your client, who is their citizen. You don’t like it. So, there is only one option left.%0A2. The withholding tax. You will deduct the tax of the deposit, and you will send a part of the tax to Ireland. This means that individuals with offshore bank accounts, fixed rate deposits and certain investment funds which are located in the offshore jurisdictions, will be subject to automatic taxation at a rate of 15%, rising incrementally to 35% by 2011.%0AAll offshore financial centers said: No way. We are not EU countries. We don’t have to do it. We will never do it. What happened next? Countries like Jersey, Guernsey and the Isle of Man chose the withholding tax option to avoid the automatic exchange of information. Other Offshore Financial Centers, like Anguilla, Cayman Islands, Montserrat and Aruba agreed to exchange information. The European countries are receiving hundreds of millions of Euros every year because of this directive. Not bad for a 11-pages document%0AI stopped speaking for almost a minute. Nobody wanted to break the silence, but somebody had to, and that somebody was the chair of the risk committee.%0A So we have to comply first as a country and second as a bank? he asked.%0AAccording to the decisions of the European union, the European Commission is required under Article 462 of Directive 2006/43/EC to assess the equivalence of third country oversight, quality assurance and investigation and penalties systems in cooperation with Member States and make a determine on it. If those systems are recognized as equivalent, Member States may exempt third country auditors and audit entities from the requirements of Article 45 of the Directive on the basis of reciprocity Article 45 is about the registration and oversight of third-country auditors and audit entities.%0AThe Commission has already carried out a preliminary assessment of audit regulation in relevant third countries with the assistance of the European Group of Auditors’ Oversight Bodies. However, the assessments have not allowed final equivalence decisions to be taken but have provided an initial view of the state of audit regulation in the third countries concerned. %0AFor the European Commission there are 3 groups of countries:%0AGroup 1: Australia, Canada, Japan, Singapore, South Africa, South Korea, Switzerland and the United States have a system of public oversight in place, although for the time being the information about the systems is not sufficient for final equivalence decisions to be taken. %0AGroup 2: Brazil, China, Croatia, Guernsey, Jersey, the Isle of Man, Hong Kong, India, Indonesia, Israel, Morocco, New Zealand, Pakistan, Russia, Taiwan, Thailand, Turkey and Ukraine, does not have such systems of public oversight but appears to offer a perspective of moving towards them within a reasonable timeframe. %0AGroup 3: Argentina, Bahamas, Bermudas, Chile, Colombia, Kazakhastan, Mauritius, Mexico, Philippines, United Arab Emirates and Zambia, has in place an audit regulatory framework offering a perspective of moving towards a system of public oversight in a longer timeframe.%0AFor Group 1: The European Commission has the intention to carry out further assessments of the audit regulation in place in order to take final equivalence decisions%0AFor Groups 2 and 3: The European Commission has the intention to carry out further assessments later, once each of such third countries has made a public commitment to comply with equivalence criteria. %0ADo you see that you have to comply as a country first, and as a bank after that? Otherwise, your country’s external auditors will not be recognized as statutory auditors in the European Union.%0AWe continued our discussion. Now I had their attention and their interest. But, we don’t have to stay with them. We will embark on our own journey to understand the European flavor of Sarbanes-Oxley and its extraterritorial application. %0AWelcome to the 8th company law directive of the European Union. It’s not going to be an easy journey.

  • Hi, you really attracted me to read this presentation to the end. I see your reasonable thought explicated this presentation to the right way. So how is your journey going?
    micky Simulation pret [/URL]

  • I travel more. US SOX, E-SOX, C-SOX (China.), J-SOX. The world becomes flat, but the boards live in a more complex environment.
    Although the countries are different, the hotels look so similar. It is like staying ‘home’.

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