The Key to Compliance
by Michael Burling - EMEA Managing Director of Thor Technologies - Monday, 13 June 2005.
In the wake of the Enron and Worldcom accounting scandals, the regulations an enterprise implements to ensure its integrity are open to increasing scrutiny. This has given rise to a growing number of initiatives such as Basel II, the Sarbanes-Oxley Act and the new Companies Act, all designed to ensure that high-standards of corporate governance become part of day-to-day business culture.

Basel II

Basel II, the forthcoming protocol for the financial sector, is designed to replace the 1988 Capital Accord. It recognises that managing and controlling financial risk and operational risk, such as IT, is an integral part of corporate governance and, as such, obligates companies to assess their vulnerability and make it public.

Basel II is based on three main areas that allow banks to effectively evaluate the risks financial institutions face: minimum capital requirements, supervisory review of an institution’s capital adequacy, and internal assessment process and market discipline through effective disclosure to encourage safe and sound banking practices.

Financial organisations that do not provide appropriate details must set a side 20 per cent of their revenue in order to cover loses or risk being prevented from trading. The first phase of Basel II will come into effect at the end of 2006, with the more advanced elements planned for implementation at the end of 2007.

Sarbanes-Oxley Act

The furthest reaching of these regulations is the Sarbanes-Oxley Act, which requires companies to comply with challenging new standards for the accuracy, completeness and timeliness of financial reporting, while increasing penalties for misleading investors. The Act, which applies to all companies (and their subsidiaries) on the US public markets, protects the interests of investors and serves the wider public interest by outlawing practices that have proved damaging, such as overly close relationships between auditors and managers. The law includes stiff penalties for executives of companies that are non-compliant including fines of $5m dollars, and up to 20 years in prison per violation.

Companies Act

The forthcoming Companies (Audit, Investigations and Community Enterprise) Act is designed to help UK firms avoid the much-publicised accounting and auditing problems experienced by companies such as Enron, Worldcom and Parmalat. The Bill, which made mention in this year’s Queen’s speech and will be debated in this session of Parliament in order to come into force early next year, will impose new measures to ensure that data relating to trades, transactions and accounting throughout an organisation is fully auditable.

With reference to the Companies Act, Department for Trade and Industry minister Jacqui Smith has said: “We want the UK to have the best system of corporate governance in the world. There is no denying that financial markets around the world have been badly shaken by the corporate failures of the last few years.

“This Bill completes a comprehensive package of measures aimed at restoring investor confidence in corporate governance, company accounting and auditing practices here in Britain. Its aim is to raise corporate performance across the board and beyond.

“The Bill tightens the independent regulation of the audit profession and strengthens the enforcement of company accounting, both concerns highlighted by the Enron and Worldcom scandals. It gives auditors greater powers to get the information they need to do a proper job, and increases company investigators’ powers to uncover misconduct.”

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