Get Ready for EuroSox - New Legislation on Corporate Accountability

Construction News - 24/04/2008

The collapse of high profile companies Enron and Worldcom, rocked the global financial markets and led the US to introduce the Sarbanes Oxley Act (SarbOx) in 2002, in a bid to prevent this kind of legerdemain and restore faith in the US financial system. In Europe, the response has been comparatively muted, but with potential legislation on the cards, UK businesses would do well to give early consideration to its impact. Greg Brownlee, Managing Director of commercial and contract management consultancy Blake Newport explains…

The scale of Enron and Worldcom’s accounting irregularities has had a major impact upon the way the US and the EU view their Corporate Governance – namely the system by which companies are directed and controlled. With the transparency and accountability of existing systems now under question, Europe has reacted with a revision to the European 8th Directive on Company Law – but what impact will ‘EuroSOX’ have on the UK construction industry?

The consultation period for the Directive is now complete and potential new legislation is now imminent. This will see Financial Directors under increasing pressure, something that will inevitably filter down to many of the departments within the company. Implemented correctly however, any legislation resulting from the Directive promises improved visibility, increased efficiency and profitability, and reduced risk.

The Directive will affect all construction companies that have a statutory audit namely those with over 50 employees; and/or a balance sheet of over 2.8 million; and/or a turnover of over £5.6 million. Overseas companies with offices in the EU or those who form part of a supply chain will also be affected and will need to be aware of the possible change. There are also additional requirements on companies classified as Public Interest Entity’s or PIE’s, which, within the UK, is essentially any construction company listed on the UK stock exchange.

Those companies wanting to stay ahead of the game should look to act now before the legislation hits. There will be clear requirements for office managers to improve their internal controls with respect to management, auditing and reporting. Implementation may also require a PIE company to establish an audit committee in order to ensure the effectiveness of their internal controls, internal audits (where applicable) and risk management systems – something that can only assist in making existing processes clearer, and more transparent.

Most importantly construction companies will need to have in place effective organisational control systems, fully integrated - via an appropriate model - into the business’ internal rules and processes. For this to be truly effective, and for construction companies to benefit from improved efficiency throughout their processes, all office based individuals will need to fully understand the rules, the control systems implemented and the processes that they need to follow.

In this respect all the departments within a construction company will be treated equally and their full participation will be critical. This Directive should not be shied away from but rather embraced. By pro-actively improving the way you do business, and ensuring these processes are in place ahead of any potential legislation, contractors have a real opportunity to lead the way in increasing efficiency, visibility and ultimately profitability.

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