Auditors fear 'back door' regulation from Europe

Auditors are warning that Europe could bring in onerous US-style section 404 regulation ‘by the back door’ if proposals to be put forward later this year fail to be drafted carefully.

The European Commission’s proposals for the fourth accounting directive covering an annual corporate governance statement are planned for release in September and could include measures that would have similar effects on auditors as s404 of the Sarbanes-Oxley Act had in the US.

The proposals seek to introduce a corporate governance statement in the annual report that would include a description of the company’s internal control and risk management system.

‘If the new corporate governance statement appears in the annual report, then we will have to audit it,’ said Jeremy Jennings, global director for regulatory and government relations at Ernst & Young. ‘Some, including FEE (the European Federation of Accountants) are suggesting such a statement should sit alongside the financial report, not in it. We don’t want to see 404 by the back door.’

Others however, are less concerned by the proposals as they currently stand, as long as European politicians avoid including requirements that resemble s404 as a means of bringing parity with US governance law.

‘The common sense reading of the proposals is that they are nothing like what is coming out of the US and are not too dissimilar to the disclosures already being given out by many companies in the UK,’ said Tim Copnell, director of corporate governance at KPMG.

‘I’m sure at a political level it is being thought whether we need an equivalent piece of law, but one has to balance the political desire for harmonisation with the fact that the business community aren’t happy with the costs involved with Sarbanes-Oxley.’