Corporate governance issues: United States and the European Union.

(47.) See PUBLIC ACCOUNTING OVERSIGHT BOARD, AUDITING STANDARD NO. 2: AN AUDIT OF INTERNAL CONTROL OVER FINANCIAL REPORTING PERFORMED IN CONJUNCTION WITH AN AUDIT OF FINANCIAL STATEMENT 1, 55-59 app. (2004). It is also worth noting, under the new standards, auditors must not only perform an audit of internal controls and provide opinions for financial statement users, they can also be found liable as a matter of law for failure to disclose certain control irregularities and their effects on the auditor's substantive testing as well. See Lawrence A. Cunningham, Facilitating Auditing's New Early Warning System: Control Disclosure, Auditor Liability and Safe Harbors, 55 HASTINGS L.J. 1449, 1450 (2004). In the same vein, auditors, when giving such opinions on controls, are likely to become primary actors, exposed to liability to financial statement users when their disclosures concerning control effectiveness are materially misstated. Id.

(48.) Lawrence Cunningham, A New Product for the State Corporation Law Market: Audit Committee Certifications, 1 BERKELEY BUS. L.J. 327, 331 (2004) [hereinafter New Product].

(49.) Id.

(50.) Id.

(51.) Id.

(52.) Id.

(53.) New Product, supra note 48, at 331.

(54.) Id. at 332.

(55.) See id; see id at 331-34 (discussing how these problems may be addressed).

(56.) The SEC began advocating for audit committees comprised of independent directors as early as 1941, although it took no action on this idea until years later (in the 1970s), when it brought several enforcement cases in which there were consent injunctions ordering board restructuring that would reflect a board majority of independent directors. Karmel, supra note 9, at 870; see also SEC v. Killearn Props., No. TCA-75-67, 1977 U.S. Dist. LEXIS 16073, at * 4-5 (N.D. Fla. May 2, 1977); SEC v. Mattel, Inc., No. 74 Civ. 1185, 1974 U.S. Dist. LEXIS 6489, at * 12-15 (D.D.C. Oct. 1, 1974).

(57.) The SEC, under the mandate of the Act, indicates the required standard for this expert. The Act mandated that financial statement issuers maintain an audit committee comprised of at least one financial expert. It left the definition of "financial expert" to the SEC, but provided suggestions for the Commission to consider areas in which such expert should have understanding and experience. See Sarbanes-Oxley Act of 2002 [section] 407, 15 U.S.C.S. [section] 7265(a)-(b) (LexisNexis 2005).

The SEC considered its own requirements and suggestions from the Act and issued a proposed definition for financial expert by soliciting comments from the financial and corporate community. Based upon consideration of comments received by the SEC, the Commission concluded that its original proposed definition was more restrictive than necessary to satisfy Congressional intent. See Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002, 68 Fed. Reg. 5110, 5111, 5113 (Jan. 31, 2003). The Commission's final definition for the purpose of financial statement filing requirements is for an "audit committee financial expert" rather than a "financial expert," and requires of such an expert the following attributes:

[i] An understanding of generally accepted accounting principles and financial statements; [ii] The ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves; [iii] Experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the small business issuer's financial statements, or experience actively supervising one or more persons engaged in such activities; [iv] An understanding of internal control over financial reporting; and [v] An understanding of audit committee functions.

Integrated Disclosure System for Small Business Issuers, 17 C.F.R. [section] 228.407(d)(5)(ii)(A)-(E) (2005).

Further, the SEC mandates that such attributes be acquired through any of the following four areas:

[i] Education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor or experience in one or more positions that involve the performance of similar functions; [ii] Experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person performing similar functions; [iii] Experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements; or [iv] Other relevant experience.

Id. [section] 228.407(d)(5)(iii)(A)-(D).

(58.) Karmel, supra note 9, at 873.

(59.) Id. at 887-88.

(60.) Id.

(61.) See Ian P. Dewing & Peter O. Russell, Post-Enron Developments in UK Audit and Corporate Governance Regulation, 11 J. FIN. REG. & COMPLIANCE 309, 309 (2003). Some key recommendations of the DTI Report are that the independent regulator should have clear arrangements for accountability and transparency, and the recognition of professional supervisory bodies and qualifications should be delegated to an independent regulator and assumed by the Professional Oversight Board (POB). Id. at 312.

(62.) The Higgs Report was issued in January 2003 and dealt with the review of the role and effectiveness of nonexecutive directors. DEREK HIGGS, REVIEW OF THE ROLE AND EFFECTIVENESS OF NON-EXECUTIVE DIRECTORS 5-6 (Jan. 2003), http://www.dti.gov.uk/files/file23012.pdf. The Higgs Report has been criticized in the United Kingdom as a rulebook and a step too far toward the U.S.-style rulesbased approach to corporate governance. See Allison Dabbs Garrett, Themes and Variations: The Convergence of Corporate Governance Practices in Major World Markets, 32 DENV. J. INT'L L. POL'Y 147, 172 n.144 (2004) (citing Alexandra Johnson, Kelley Rejects Higgs Criticism as 'Disturbing Complacency,' ACCOUNTANCYAGE, Mar. 12, 2003, http://www.accountancyage.com/News/1132858.

(63.) The Combined Code Guidance, which is proposed by a Financial Reporting Council-appointed group chaired by Sir Robert Smith (the Smith Report), reviews the role and effectiveness of nonexecutive directors. ROBERT SMITH, FINANCIAL REPORTING COUNCIL, AUDIT COMMITTEES COMBINED GUIDANCE CODE [section] 3.1 (Jan. 2003), http://www.frc.org.uk/images/uploaded/documents/ACReport.pdf; see also Gregory Maassen et al., The Importance of Disclosure in Corporate Governance Self-Regulation Across Europe: A Review of the Winter Report and the EU Action Plan, 1 INT'I, J. DISCLOSURE & GOVERNANCE 146, 148, 151 (2004).

(64.) Dewing & Russell, supra note 61, at 310.

(65.) Id. at 311. For more specific recommendations concerning transparency of audit firms and enforcement of accounting standards, read regulation concerning post-Enron development in U.K. audit and corporate governance. Id. at 309-13.

(66.) Garrett, supra note 62, at 171.

(67.) This report was issued in 1998 and became the Combined Code on Corporate Governance (supplemented by the Turnbell Report), which applies to all listed companies in the United Kingdom and requires that nonexecutive directors comprise at least one half of the total number of members on each board of directors. See FINANCIAL REPORTING COUNCIL, THE COMBINED CODE ON CORPORATE GOVERNANCE 83 (July 2003), http://www.frc.org.uk/documents/pagemanager/frc/Web Optimised Combined Code 3rd proof.pdf.

(68.) See Garrett, supra note 62, at 171.

(69.) Karmel, supra note 9, at 890. Corporate governance issues are complicated in Canada, however, because of the lack of a single national agency regulating securities. Garrett, supra note 62, at 161. There are thirteen provincial and territorial agencies responsible for the regulation of securities in Canada, which may explain the lack of harmonization among the provinces; this factor is only further complicated by bickering amongst the many provincial securities regulators. Id. In British Columbia and Alberta, for example, regulators favor a principlebased regulatory scheme, while regulators in Ontario favor a rulesbased scheme patterned after SOX. Id.

(70.) See Garrett, supra note 62, at 163.

(71.) Maria Camilla Cardilli, Regulation Without Borders: The Impact of Sarbanes-Oxley on European Companies, 27 FORDHAM INT'L L.J. 785, 791 (2004). For example, Germany enacted the Transparency and Publicity Act (TransPUG) in 2002 covering disclosure, transparency and accounting issues. See Garrett, supra note 62, at 166. This became effective on January 1, 2003. Id.

(72.) See Cardilli, supra note 71, at 791-92 n.31 (citing Letter from Alexander Schaub, Director General of the European Commission, to Jonathan Katz, Secretary of the SEC (Feb. 18, 2003), available at http://www.sec.gov/rules/proposed/s70203/aschaubl.htm. The letter states, in part:

We request full recognition of equivalence of EU corporate

governance systems.... [T]he SEC should be aware that EU

companies and auditors are already subject to longstanding,

well developed [m]ember [s]tate corporate governance

requirements. These are tailored to their specific legal

environments and are in their different ways as effective and

efficient at providing investors protection as U.S. rules.

Additional requirement of the [Sarbanes-Oxley Act] applied

to EU companies and auditors would place on them an unnecessary

additional layer of requirements--taken from completely different