Monitoring of financial reporting

The number of companies subject to the two-tier enforcement procedure by BaFin and the German Financial Reporting Enforcement Panel (Deutsche Prüfstelle für Rechnungslegung – FREP) again declined significantly in 2016 as against the previous year.¹ As at 1 July 2016, only 615 companies (previous year: 686) from 9 countries (previous year: 19) were affected. The decline is primarily attributable to the fact that open-ended funds are no longer supervised. In addition, the organised market recorded more delistings than new listings by companies whose securities are admitted to trading there. By contrast, the introduction of the home country principle did not have any significant impact (see info box).

The FREP completed a total of 96 examinations in 2016 (previous year: 81), of which 87 were sampling examinations. BaFin itself performed financial reporting enforcement procedures at 16 companies (previous year: 15) and ordered the publication of errors in 13 cases. In 9 of the 16 cases, the FREP had previously identified errors in agreement with the relevant companies (see Table 25 "Enforcement procedures"). The remaining 7 cases were based on error identification procedures performed by BaFin. In 4 of these cases, the companies had not accepted the FREP's findings, and in 3 cases the companies had refused to cooperate with the FREP.

A total of 4 of the 7 cases ended in error findings. For these 4 procedures, BaFin ordered the publication of the findings. These procedures related to various accounting issues, such as the understatement or overstatement of goodwill in 3 cases. The procedures relating to management and group management reports highlighted that the risks of future development had not been presented and that the forecast of future results of operations had been inadequate. 8 cases were still pending at BaFin at the end of 2016.

Table 25 Enforcement procedures

Enforcement procedures

Source: BaFin

Legal certainty

A ruling of the Securities and Takeover Division of the Higher Regional Court (Oberlandesgericht) of Frankfurt am Main, the competent court of first and last instance, brought further legal certainty in 2016.

In proceedings to obtain interim relief, the Higher Regional Court explained that the criterion of considerable doubt within the meaning of section 37u (2) of the German Securities Trading Act (Wertpapierhandelsgesetz) and section 50 (3) no. 2 of the German Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz) had to meet considerable requirements.² The existence of these considerable doubts could only be assumed, if the court considered it more probable than not that BaFin's administrative act would be reversed in the main proceedings following a summary examination. It was not sufficient, however, to claim that the legal basis was still uncertain. Moreover, just like in other areas of the law, interpretive issues in accounting legislation could not be left to the "discretion" of the party applying the law, but would have to be decided by the competent courts in binding rulings on disputes. The interpretation that the accounting was merely "justifiable" did therefore not provide sufficient grounds in interim relief proceedings.

Publication of financial reports

In 2016, BaFin examined in approximately 940 cases whether the issuers had published their online annual and half-yearly financial reports on time (previous year: 950). In 27 cases, it continued the examinations in administrative offence proceedings (previous year: 28).

In 2016, BaFin performed approximately 940 examinations in order to establish whether the issuers had met their financial reporting requirements (previous year: 950).

27 cases were referred to the BaFin division responsible for administrative offences because there were no financial reports. The compliance ratio is on a level with the previous year.

BaFin made it a main focus of its examinations to monitor the publication of notifications on annual financial reports. The publication of notifications is intended to provide timely information on when and where financial reports are published on the Internet. In 34 cases, issuers whose registered office is in Germany failed to publish these notifications; BaFin pursued these cases in administrative offence proceedings. What is more, in all the above cases, the corresponding annual reports had not been published either. The publication of annual reports by issuers whose registered office is in Germany is monitored by the Federal Office of Justice (Bundesamt für Justiz).

Another main focus of its examinations was the completeness of financial reports. BaFin initiated administrative offence proceedings in 16 cases because the responsibility statements in accordance with section 37w (2) no. 3 and section 37w (2) no. 3 in conjunction with section 37y no. 2 of the Securities Trading Act had not been included in the half-yearly financial reports.

BaFin launched 13 administrative procedures to enforce the financial reporting requirements. A total of 14 proceedings were still pending from the previous year, and 13 proceedings were concluded by BaFin in 2016. During administrative proceedings, BaFin threatened coercive fines in 12 cases. It imposed coercive fines and initiated enforcement measures in 7 cases. Coercive fines were paid in 3 proceedings. In one of these proceedings, the coercive fine paid amounted to €260,000.

Following the entry into force of the German Act Implementing the Transparency Directive Amending Directive (Umsetzungsgesetz zur europäischen Transparenzrichtlinie-Änderungsrichtlinie), BaFin published measures it had imposed in order to ensure compliance with the financial reporting requirements on its website³ for the first time in 2016. Seven measures were published there.

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