The Financial Market Integrity Strengthening Act includes a large number of innovations aimed at strengthening confidence in the German financial market by placing more comprehensive obligations on auditors when auditing companies of public interest. In addition to optimizing balance sheet control and further regulating the auditing of financial statements, the innovations also affect corporate governance at companies.
The German Federal Ministry of Justice and Consumer Protection (BMJV) on December 16, 2020, presented the government draft of the new German Financial Market Integrity Strengthening Act (Finanzmarktintegritätsstärkungsgesetz (FISG)), which is to come into force as early as July 1, 2021.
The FISG provides for various amendments in, among others, the German Stock Corporation Act (AktG), the German Public Auditor Code (WPO), and the German Commercial Code (HGB).
Although those amendments are primarily aimed at listed companies and companies of public interest, they also redefine the standard of due diligence for capital market–oriented and other companies and legal forms.
The following amendments are, in particular, noteworthy for investors in German stock companies.
The supervisory board of German stock companies (AG) that are of public interest shall be strengthened in its powers and required to establish an audit committee. The chairman of the audit committee is to be given a direct right of information vis-à-vis those heads of central departments who relate to the tasks of the audit committee. Listed stock companies will be required to establish appropriate and effective internal control systems (ICS) and corresponding risk management systems (RMS).
The current two-stage balance sheet control procedure, which is based on the consensual participation of the audited companies, shall be reformed and tightened. The German Federal Financial Supervisory Authority (BaFin) is to be given more powers and rights of access to companies, such as search and seizure rights. In the future, BaFin will be directly responsible for investigations and suspicious activity audits.
In addition, BaFin will be granted information rights against third parties in the context of balance sheet audits, the possibility of forensic audits, and the right to inform the public earlier than before about its balance sheet audit procedures.
In addition, confidentiality obligations will be lifted to the extent necessary to ensure the exchange of information between the authorities and ministries involved. As in the past, random audits will be financed by levies, while BaFin's suspicious activity and cause-based audits will be financed by the companies concerned.
Capital market companies shall be subject to mandatory external auditor rotation after 10 years. The obligation to separate auditing and consulting for companies of public interest shall be significantly expanded. In the future, tax consulting and valuation services may not be provided for the same company in addition to audit services.
Furthermore, the auditor's liability under civil law toward the audited company will be increased.
BaFin shall be given direct powers of intervention in respect of companies to which essential areas such as banking or information technology functions are outsourced. New notification requirements for outsourcing are to be created and an obligation to keep an outsourcing register is to be introduced. In addition, BaFin shall be able to use a domestic agent for service of process in the case of outsourcing to third countries.
In the future, a false "balance sheet oath" by a company officer shall be punishable by up to five years' imprisonment (instead of up to three years as previously). This also applies to a substantively incorrect opinion by the auditor on the financial statements of a company of public interest.
The new provisions of the FISG must be seen in the overall context of a large number of increasingly stringent corporate governance requirements. Various regulatory developments are aimed at higher corporate governance requirements in Germany.
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