The Financial Market Integrity Strengthening Act (FISG)

On July 1, 2021 the Financial Market Integrity Strengthening Act (FISG) was adopted by the German Federal Council, whose aim is to strengthen the functioning of the German financial market following the Wirecard affair. The act newly regulates the existing system of balance sheet control as well as auditing and corporate governance in order to ensure the accuracy of the accounting documents of public interest entities.

New regulation of balance sheet control

Among other things, the repeal of section 108 of the German Securities Trading Act (WpHG) means that the audits carried out by the German Financial Reporting Enforcement Panel (DPR) are no longer necessary and the BaFin's¹ powers (rights to information, submission of documents, searches and seizures, announcement of significant procedural steps on the Internet) have been significantly increased. The balance sheet control procedure has been fundamentally reformed and is now regulated by the German Securities Trading Act.

Strengthening the non-bias of auditors

With the draft law, the German government also imposes a duty on auditors for fiscal years beginning after December 31.12.2021. There is no transitional period:

»     Obligation to rotate the external auditor after 10 years

»     Greater separation of auditing and consulting services

»     Tightening of the auditor's liability under civil law

»     Reporting obligations to BaFin and, if applicable, the public prosecutor's office in the event of irregularities

With respect to the separation of auditing and consulting services, the provision of tax consulting services is generally no longer permitted. In more detail, the provision of the following services is prohibited:

(i) Preparation of tax returns

(ii) Wage tax

(iii) Customs duties

(iv) Identification of state aid and tax incentives, unless an auditor or auditing company is required by law to assist in the provision of such services;

(v) Assistance with tax audits by the tax authorities, unless the auditor or auditing company is required by law to assist in such audits;

(vi) Calculation of direct and indirect taxes and deferred taxes

(vii) Provision of tax consulting services 

Tightening of the law on accounting penalties and offenses

The intention of changes to the law on accounting penalties is to allow sufficiently dissuasive penalties to be imposed on those responsible for a company if an incorrect "responsibility statement" is issued as well as on auditors if an incorrect audit opinion is issued on the financial statements of public-interest entities. With respect to accounting offenses, the provisions on fines for auditors auditing public-interest entities have been extended in terms of content and the scope of such fines has been significantly increased.

Strengthening of Corporate Governance

Section 91 (3) of the German Stock Corporation Act (AktG) stipulates that in future the management board of a listed company must establish an appropriate and effective Internal control systems (ICS) and risk management system (RMS). As a result, a company must install a comprehensive ICS and RMS, with only a discretionary decision possible when it comes to "how".

For companies that are public interest entities, the new expertise requirements apply insofar as appointments to the Audit Committee or Supervisory Board are made after July 1, 2021 or an Audit Committee is established after this date. These stipulate that at least one member of the Supervisory Board must have expertise in the field of accounting and at least one other member of the Supervisory Board must have expertise in the field of auditing. If an Audit Committee exists, the expertise requirements also apply to this committee.

In section 107 (4) sentences 4-6 of the German Stock Corporation Act (AktG), the FISG provides that any member of the Audit Committee may obtain information directly from the heads of the central departments which are responsible for tasks relating to the Audit Committee via the Committee Chairperson. In detail, these include the head of Internal Auditing, Risk Management, Accounting and Controlling. If the Chairperson of the committee has obtained information, he/she shall pass this information on to all members of the Audit Committee. The Management Board must also be informed of this without undue delay.

WTS: No audit - no conflicts

Since the founding of WTS, we have deliberately refrained from providing auditing services. We have long anticipated the separation of auditing and consulting services required by the EU and additionally tightened as a result of the Financial Market Integrity Strengthening Act (FISG). In this way, we can offer our clients a conflict-free and, above all, lasting partnership.

¹  German Federal Financial Supervisory Authority