Eurosox: Advantage and Difficulties

European Union is striving for improved corporate transparency and accountability. Europe has not been devoid of its own finance scandals – like the Swedish Skandia, Spanish Afinsa, Italy’s Parmalat and German Siemens. What these scandals have done is forced companies and the EU to put the regulatory machinery in right order with the aim to restoring investor confidence in the EU. European corporate pundits are increasingly in favour of a well structured Compliance Implementation Program. This has led to the proposal of European Union’s equivalent to The Investor Protection Act of USA (SOX). The EU directives commonly referred to as EuroSox® comes in to force from 2008/9. Unlike the quick enactment of Sarbanes-Oxley in the U.S. in 2002, EuroSOX has taken time. Beginning as a 10-point plan in an early draft of the European Union’s Eighth Directive in 2003, it was adopted for local implementation in 2006. Like Sarbanes-Oxley, however, it will address several things. EuroSox® consists of 7 significant directives, however the 4th, 7th and the 8th directives are the most important when discussing EuroSox.

Major points are:

• 4th directive - deals with The Annual Accounts of specific types of companies
• 7th directive - focuses around risk management systems and elements in implementing-internal controls initiatives regarding consolidated accounts
• 8th directive emphasizes on the auditor and audit committee requirements

All together, the 3 major directives have these following responsibilities and requirements:

• Ensure effective corporate governance, internal controls and risk management
• Measures that safeguard shareholders' investments
• Increased Financial disclosure requirements
• Improved corporate governance standards and codex
• Establish audit committees

Advantages of EuroSox

The advantages of EuroSox are clearly illustrated in the above points. After a successful implementation it will have the ability to provide increased protection to investors and establish corporate governance requirements. EuroSox will also help in setting up independent audit committees and expand corporate disclosure requirements.

Difficulties

Nonetheless, like any other major implementation there is a boatload of difficulties as well. Starting with the latest difficulty: Information Security Forum (ISF) recently cited that EuroSox may present additional challenges to multinational companies as a result of translation into 25 different languages. ISF is an independent membership organisation that includes over 300 of the largest companies and organisations from Europe and around the world. "EuroSox is intended to harmonise existing laws but a lack of clarity compounded by 25 translated versions and different interpretations of auditing rules could confuse the true meaning of the legislation and jeopardise its positive effect on internal risks and controls," says Andy Jones, senior research consultant at the ISF. Mr. Jones also added it unclear to what degree these laws will be enforced by EU Member states for the deadline this summer. "But an aggressive approach to auditing and compliance could put a lot of pressure on information security departments and budgets," said Mr. Jones.

Comparison with SOX

There is a certain amount of confusion with regards to the interpretation of the EuroSox primarily because of comparison with Sarbanes-Oxley Act. At first glance, of course, there are similarities, but there are also significant differences. For instance, Sarbanes-Oxley enforces greater corporate governance responsibilities, creates whistle-blowing processes, addresses identity fraud and sets high penalties for breaches.

Conclusion

Beyond the entire spectrum of difficulties one thing seems certain. EU has displayed tremendous determination to anticipate and avoid as many unintended consequences as possible. This is proven by the fact that the directives have taken so long to come into force. Also, there are many lessons that can be learnt from previous SOX and J-SOX (Japan's equivalent of SOX) implementations. This should effectively provide a framework for companies to take good care of important factors in the implementation like - employee training, mapping of processes, quality management systems, integrated internal control framework etc. As the clock ticks towards full implementation, all players involved are waiting with bated breath to confirm that the cure is actually not worse than the disease.