Are Your Internal Controls Effective and Efficient?

This article examines the new reporting requirements for internal controls following the transcription of the 8th Directive into the legislation of some European countries. Compliance with the Directive may offer companies unaffected by the Sarbanes-Oxley Act the chance to benefit from  this cumbersome exercise. How should we carry out a review of internal controls? How can this undertaking be linked to ERM reports?

The 8th European Directive (2006/43/EC- 17 May 2006)

The 8th European Directive supplements its two sister Directives (the 4th and 7th Directives – 2006/46/EC) which dealt with corporate governance and reports on internal controls and risk management systems from a specifically accounting viewpoint. This Directive is of major importance for business finance professionals.

In particular, it describes aspects of the independence of financial experts sitting on supervisory boards and other audit committees; the broader obligations of auditors in terms of financial reporting; auditors’ recommendations to audit committees; and the requirement to set up audit committees. It also addresses the requirements for more specific monitoring of supervisory audit bodies (i.e., supervisory boards and audit committees).

These new measures, which are or should be internally adopted by EU State Members, require, inter alia, the supervisory board to monitor the effectiveness of the risk management and internal control systems currently in place. Companies therefore have to comply with these new requirements which have been laid down at European level [1].

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