Sarbanes-Oxley – The Impact on UK Subsidiaries

On 30 July 2002, the United States signed into law, the Sarbanes-Oxley Act. The Act mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud. It has effectively re-written the rules for corporate governance, disclosure and reporting. The overall aim of course, is to restore public confidence after the Enron and Worldcom scandals.

The Sarbanes-Oxley Act has created new requirements for public companies within the United States of America, which includes:

• To create tight internal controls over their financial reporting process and then to regularly assess their effectiveness
• Management to certify that they are responsible for establishing and maintaining adequate internal control over financial reporting for the company
• Management to assess the effectiveness of internal controls as of the company’s most recent fiscal year
• Management to identify the tools used to evaluate the effectives of internal controls of financial reporting
• Management to make a statement that the company’s independent auditors have issued an attestation report on managements assessment of the company’s internal controls over financial reporting

Traditionally, a great deal of this work would have been carried out by those company’s audit firms. However, as a result of the Sarbanes Oxley Act they are now unable to deal with compliance work relating to Section 404, neither can they prepare the basic accounting schedules that are required during audit work, including even such mundane matters as bank reconciliation’s, inter company account reconciliation’s or depreciation schedules.

This question of independence may also go as far as requiring independent preparation of the corporation tax computations

The position regarding subsidiaries of US parent companies
The Sarbanes-Oxley legislation and the auditing standards apply equally to subsidiaries of American companies situated overseas.

Many of the subsidiaries are within the United Kingdom and Europe.

In the absence of local internal audit functions, the financial directors and CEO’s of these companies are faced with having to comply with American legislation but are not able to call upon the services of their auditing firms. One such organization, which has moved to be able to offer European wide service in assisting subsidiaries of the United States quoted companies to comply with Sarbanes-Oxley and specifically with Section 404 is Integra International, a network of independent accounting firms across the globe who specialize in working with subsidiaries in their area. Integra’s European president Johan De Mey explains:

“One of the challenges that Integra has tackled is to co-ordinate the approach throughout Europe where local operating methodology may differ and companies situated in different countries are faced with the obligations imposed by Sarbanes-Oxley and Section 404, together with the need to comply with local legislation and standards.”

Equally there is a need to communicate effectively across Europe, not only with the finance directors and CEO’s of the companies based in Europe, but also with the holding companies within America. Integra is able to do this because each member in Europe commits to being able to communicate in English – the common language of the worldwide Integra organization, and equally because of their close links with Integra members of the United States of America. They are able to communicate within that country as effectively.

Fred Stroeken partner at Integra firm Globan Forward in Eindhoven, Netherlands and Colin Meager, partner at Integra firm, Meager Wood Locke, in Birmingham, have the responsibility for coordinating Integra’s Europe wide approach as leaders of the Integra Sarbanes-Oxley Compliance Group. They explained “Implementing this Act is a big effort but our methodology using a standardized and controlled approach will reduce costs, establish faster and more reliable closing and minimises the risks of incorrect or incomplete financial reporting, thus making our clients compliant. We don’t believe that overwhelming those of our clients who need to comply with Sarbanes Oxley with consultants will help them to implement the Act and comply, our methodology is based on empowering them to understand the Act, and it’s implications.

Following the Integra European conference held in Dusseldorf in June 2004, a further conference was held in London on 9 July. Mark Saunders, a partner of Wilder Coe, one of the appointed London representatives for Integra, who hosted the conference explains further.

“Partners from 15 firms situated throughout Europe attended to ensure that our approach was coordinated and that we could set and maintain high levels of technical and professional standards.

Experiences on existing assignments were shared and the whole group is co-operating in producing standard checklists, programs and working practices, which we are sharing through the Integra intranet. Technology obviously enables us to communicate very effectively and to keep completely up to date with developments in the field. The advantages of Integra are that each firm, although independent, is linked together through the organization and the closeness that its members have developed over the years. Every member brings their own local experience and knowledge to bear on dealing with the challenges set by Sarbanes-Oxley”.

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