Topic Financial reporting enforcement Financial reporting enforcement
The supervision of companies financial statements, the so called financial reporting enforcement, is laid down in part 16, subpart 1 of the Securities Trading Act (Wertpapierhandelsgesetz, hereinafter WpHG). In a two-stage procedure, BaFin checks the legality of companies’ financial statements. The requirements came into force in December 2004 with the German Financial Reporting Enforcement Act (Bilanzkontrollgesetz – BilKoG) and are intended to strengthen investors’ confidence in the accuracy of financial statements of certain companies, which have access to an organised market.
In a two-stage procedure, BaFin checks the legality of the most recently adopted annual financial statements or the approved consolidated financial statements and the related (group) management report. Since 2007, with the entry into force of the Transparency Directive Implementation Act (Transparenzrichtlinie-Umsetzungsgesetz – TUG), BaFin has also been responsible for examining half-yearly financial reports, but only when there are specific grounds to do so. When doing so, it pays particular attention to the condensed set of financial statements and the related interim management reports.
With the German Act implementing the Transparency Directive Amending Directive the area of application was again extended:
Examination with cause may be conducted with regard to (group) reports on payments to governments as well as with regard to financial statements which refer to the previous financial year.
Furthermore, the reference point is now the home Member State principle: companies whose securities are admitted to trading on an organised market and whose home Member State is Germany are subject of the supervision of financial reporting enforcement according to part 16 subpart 1 of the WpHG. Exempted are companies whose securities admitted to trading on an organised market are only units and shares of open-ended investment funds.
Financial reporting enforcement procedure
First stage of financial reporting enforcement
The organisation, which operates at the first level, is the German Financial Reporting Enforcement Panel (FREP) (Deutsche Prüfstelle für Rechnungslegung DPR e.V. (DPR)), an institution organised under private law. It examines financial statements on a random sampling basis and also if there are specific indications of an infringement of financial reporting requirements or at the request of BaFin. The FREP only examines financial statements if the company under examination is willing to cooperate with it.
Second stage of financial reporting enforcement
BaFin has the powers of a public authority in financial reporting enforcement. BaFin steps in in the second stage if the company refuses to cooperate in an examination or does not agree with the result of the examination. It can also intervene in the enforcement process if there are serious doubts about the accuracy of the examination results or about whether the FREP has carried out the examination properly.
BaFin is also authorised to carry out a compulsory examination of the accounts. Moreover, it can carry out the examination if there would otherwise have to be duplicate examinations of credit or financial services institutions, insurance undertakings, investment management companies or externally managed investment companies. BaFin may order a company to publish errors that have been identified in the examination of its financial reporting and the main reasons for these.
The costs incurred by the FREP and BaFin – if they are not covered by charges, separate reimbursements or other revenues – are covered by a separate cost allocation levied by BaFin pursuant to the German Act Establishing the Federal Financial Supervisory Authority (Finanzdienstleistungsaufsichtsgesetz – FinDAG). BaFin's income and expenditure for its activities related to the BilKoG are listed separately in its budget, based on the FREP's approved budget. BaFin advances the costs which, according to its budget, are liked to be incurred to the FREP from the allocation money taken in.
Those liable to bear part of the costs incurred by BaFin are companies whose securities were admitted to trading on an organised market and whose home Member State is Germany. Exempted are issuers which exclusively have listed units and shares of open-ended investment funds. The cost allocation is calculated using a suitable allocation formula based on these companies domestic exchange turnover. The details of the allocation of the costs and prepayments are laid down in the Regulation on the Allocation of Accounting Enforcement Costs (Bilanzkontrollkosten-Umlageverordnung – BilKoUmV).
Companies subject to enforcement
The following list comprises companies whose securities within in the meaning of section 2 (1) of the WpHG were admitted to trading on an organised market und whose home Member State according to section 2 (6) of the WpHG was Germany on the reporting date 1 July 2017. The list is based amongst others on the notifications of the German stock exchanges pursuant to section 17d (2) of the FinDAG as well as on information of foreign stock exchanges about the listings there. The list will be updated on the reporting date 1 July 2018 and will be available on BaFin’s website during the fourth quarter 2018.