Bermuda-based companies listed on European Union (EU) stock exchanges will have to show their auditors are up to European standards from the middle of next year.

The requirement is the result of an EU directive on “third-country” auditors, which will affect all countries in which EU-listed companies are incorporated.

EU member states must implement the directive by June 29, 2008, and it could result in financial regulators from Europe scrutinising the practices of the Island’s audit companies.

The directive will affect companies like reinsurer Hiscox, which is listed on the London Stock Exchange, but is incorporated on the Island and whose accounts are audited by a local accountancy firm.

Just how the directive is going to work is still unclear and the EU is now welcoming suggestions from regulators and the audit industry.

Tom Conyers, chairman of the Institute of Chartered Accountants of Bermuda (ICAB), said the body had already been contacted on the issue by the UK’s auditing regulatory authority.

Many Bermuda-based funds, as well as some insurance and reinsurance companies, are listed in London, as well as other EU exchanges like Milan and Frankfurt, Mr. Conyers said.

Craig Bridgewater, a partner at the Bermuda office of accountancy firm KPMG and chairman of ICAB’s Professional Practice Committee, said: “Basically it’s about oversight. For US-listed companies we have to be registered with the Public Company Accounting Oversight Board (PCOAB) and in Canada, with the Canadian Public Accountability Board (CPAB). The EU is trying to do a similar thing.

“I guess now everyone is trying to see how we’re going to get there. There’s a lot of research going on, involving the larger auditing firms and the Bermuda Government.”

Mr. Conyers said local firms’ experience, working with the PCOAB, meant they should be well prepared to deal with oversight from Europe.

In addition, the rigorous auditing controls imposed on US public companies by the Sarbanes-Oxley legislation — introduced in the wake of corporate scandals involving the likes of Enron and WorldCom — also mean Bermuda auditors are no strangers to world-class standards.

There is a feeling among local auditors that nothing the EU will introduce could be more stringent than the US rules they are already coping with.

Also, ICAB is an affiliate of the Canada Institute of Chartered Accountants (CICA), a link which has helped to bolster international standards of auditing here.

“What remains to be seen is how it’s going to work,” Mr. Conyers said. “Firms will have to register and then it is a question of whether there will be direct inspections, or whether they will use the third country’s own inspection system if it is up to their standards.

“In all the time our four big firms have been registered with the PCOAB, there has never been a large inspection.

“The EU may be asking whether, in a small country, they can be comfortable having such a small group of people regulate themselves, or do they need to have direct oversight.

“This should not be a major problem for auditors in Bermuda, unless the Europeans do something very different from the Americans have done.”

Mr. Conyers felt Cayman Islands-based funds would feel the effects of the EU directive more than Bermuda entities.

Some have suggested that the clampdown on standards could tempt some companies to de-list from EU exchanges, as regulators balance the enforcement of auditing standards with the desire not to lose listed companies.

For example, Paul Boyle, the chief executive of the FRC in the UK, said: “The rules may make London less competitive. They are not as burdensome as ‘Sarbox’ rules but they’re the same kind, in that they apply to one territory for companies coming in from another.”