After the passage of the US Sarbanes-Oxley Act in 2002, US and non-US companies listed in a US stock exchange have the difficult task to comply with the Sarbanes-Oxley Act.
 
After 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 EU have to comply with the 8th company law directive.
 
The 8th directive is considered the European post Sarbanes-Oxley regulatory retaliation. And, like in the US SOX, there are extremely important extraterritorial consequences.

The Offshore Financial Centers (OFCs) for example must immediately enact legislation to prove that they have an "equivalent level of regulation", 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 "third countries" have to be registered in the EU and to be subject to oversight, quality assurance and sanctions.
 
Under Article 45(1) of Directive 2006/43/EC the competent authorities of the Member States are required to register third-country auditors and audit entities that conduct a statutory audit on certain companies incorporated outwith the Community whose transferable securities are admitted to trading on a market regulated within the Community.

 

Article 45(3) of Directive 2006/43/EC requires Member States to subject such registered third-country auditors and audit entities to their systems of oversight, quality assurance systems and systems of investigations and penalties.

The European Commission is required under Article 46(2) 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 recognised as equivalent, Member States may exempt third country auditors and audit entities from requirements of Article 45 of the Directive on the basis of reciprocity.

 

But...

 

The European Commission has carried out a preliminary assessment of audit regulation in relevant third countries. The assessments have not allowed final equivalence decisions to be taken

 

GROUP 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.

 

GROUP 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.

 

GROUP 3: Argentina, Bahamas, Bermudas, Chile, Colombia, Kazakhastan, Mauritius, Mexico, Philippines, United Arab Emirates and Zambia, has in place an audit regulatory framework offering also a perspective of moving towards a system of public oversight in a longer timeframe.

For the second and third groups of third countries, further equivalence assessments WILL take place once each of such third countries has made a public commitment to comply with equivalence criteria.

 

Auditors and audit entities from the third countries should be able to continue their activities in relation to audit reports concerning annual or consolidated accounts for financial years starting during the period from 29 June 2008 to 1 January 2011.

 

REGULATORY ARBITRAGE OPPORTUNITIES - The environment

ARTICLE 45.4. DIRECTIVE 2006/43/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 17 May 2006

"Audit reports concerning annual accounts or consolidated accounts issued by third-country auditors or audit entities that are not registered in the Member State shall have no legal effect in that Member State".

Have a look at companies incorporated in Guernsey, Jersey, the Isle of Man - countries that have NOT equivalent system.

There are several firms incorporated in countries from Group 2 and 3 and listed in Europe. The European regulators have a surprise for them: Their auditors are not recognized in Europe, and their opinion has no legal effect in Europe.

Here the excitements starts...  Just an example:

A. How shareholders react when something has happened (they never understand what) and we can not have consolidated financial statements?

B. What about the Basel ii obligation - the home country is responsible for the consolidated financial statements - when the home country is non-European and the host country is European?