Preventing European "Enronitis": how European regulators are handling the spillover effects of Sarbanes-Oxley

International Economy, The, Summer, 2004 by Klaus C. Engelen

In spite of the fact that large segments of Europe's internationally active accountants are drowning in the spillovers of Sarbanes-Oxley these days, the most recent assessment by the profession's top spokesman in Brussels seems like a light at the end of a tunnel. "The recent European Commission's proposal to revise the Eighth Company Law Directive, together with the PCAOB's 'Final Rules Relating to the Oversight of Non-U.S. Public Accounting Firms,' provide a pragmatic way forward for the oversight and inspection of auditors," says David Devlin, president of FEE. "It is early in the process, the PCAOB is a relatively new organization, hence its inspection programs are still at an early stage, and in Europe, established public oversight arrangements may need to be adapted to conform with the revised Eighth Company Law Directive." Commenting on the coordination of public oversight in Europe, Devlin adds: "The Eighth Company Law Directive proposes that national oversight bodies should cooperate with each other and with foreign counterparts, such as the PCAOB. FEE believes that the Eighth Company Law Directive could be strengthened to provide for a separate body to effect the cooperation between national public oversight systems. This body would work to ensure that public oversight is equally effective in each EU member state." In Devlin's view, the Eighth Company Law Directive provides for a strong element of reciprocity. "Taken together with the PCAOB's final ruling, there is a clear incentive for cooperation on the oversight and inspection of auditors."

How fast can the European Union get what Devlin calls a "separate body to effect the cooperation between national public oversight systems"? According to Grant Kirkpatrick of the OECD Corporate Affairs Division, sooner rather than later. Kirkpatrick prepared the recently released "Corporate Governance Survey of OECD Countries." In his view, there is no need to load the Eighth Company Law Directive with establishing a new PCAOB structure on the EU level. Instead the European Union should place audit oversight with the "Committee of European Securities Regulators" that has been operating since June 2001. This Paris-based Committee of EU regulators is part of the so-called "Lamfalussy Process." That is the EU framework to make regulatory and supervisory structures more efficient. It was introduced following proposals made by Baron Alexandre Lamfalussy, former Belgian central banker and president of the European Monetary Institute, the forerunner of the European Central Bank.

CESR's mandate, however, is focused on securities market regulation--a realm much narrower than that needed for the supervision of Europe's auditors whose clients are predominantly unlisted. The EU Commission points to the fact that "there are more than a million audits but only about 7,000 listed companies in EU member states. As a result, Kirkpatrick's proposal does not come without problems. "Such a CESR proposal, says Devlin, chief lobbyist for Europe's accountants, "wouldn't be such a good idea. Our alternative is a much better one."