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

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.’

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