The management report is a document to be prepared by the management for annual financial statements. It is not part of the annual financial statements, but an independent section that represents an additional reporting instrument for the reader of financial statements. In the management report, the manager should reflect the situation of the company to the outside world. Accordingly, its main purpose is to provide information. The management report discusses the business and general conditions, the results of operations, the net assets position, the financial position and the future opportunities and risks relating to the company in question. In Germany, a management report is prepared by medium-sized and large corporations as well as by GmbH & Co. KG are required to prepare it.
Income Tax
Income tax (abbreviation: ESt) in Germany is levied on the income of natural persons. It is levied per calendar year. Income tax is thus a personal tax that taxes the economic performance measured by the income of each individual. For the tax burden according to the economic capacity, several tariff zones with increasing tax rates up to 45% are used in the income tax. Based on these, it is possible that low earners are taxed at a lower rate than higher earners. In principle, the seven different types of income are taxed at the same rate. An exception, however, is the taxation of capital income with a tax rate of 25%. Income tax is a joint tax, since the distribution of tax revenues in Germany is made between the federal government, the states and the municipalities. It is the most important source of government revenue.
German language in the audit report
In which language are commercial books and financial statements to be drawn up?
While according to § 239 para. 1 sentence 1 HGB the use of a “living language” is sufficient for the keeping of commercial books and other required records, annual financial statements, consolidated financial statements and IFRS financial statements, including (group) management report, if applicable, must be prepared and disclosed in German (§ 244, 298 para. 1, 325 para. 1 sentence 1 HGB).
- Section 244 is consistent with provisions of tax law: Section 87 (1) AO designates German as the official language. In addition, the taxpayer must submit a German translation of the commercial books upon request of the tax authority pursuant to section 146 (3) AO if these were kept in a foreign language.
What are the requirements for the audit report?
Pursuant to § 321, section 1, sentence 1, HGB, the audit report must be in writing and with the required clarity, i.e. an oral report is not sufficient. In addition, it must – apart from exceptions with due regard to the information content – generally be prepared in German, unless otherwise agreed and there is no obligation to submit the audit report to official German authorities (Beck’scher Bilanz-Kommentar, p. 2350, § 321 para. 14).
According to Hoffmann/Lüdenbach, the use of the German language is a de facto constraint which may be overcome in reasonable constellations (NWB Kommentar Bilanzierung, 12th edition, p. 2197, § 321 para.3).
In contrast to the auditor’s report, the audit report does not serve to inform the general public, but rather a limited group of addressees, usually the audit committee, supervisory board, shareholders’ meeting (§ 321 Ab. 5 S. 1 and 2 HGB). The tasks of the audit report essentially consist of informing the legal representatives (executive board, managing directors), the supervisory body (supervisory board) and the shareholders of limited liability companies/corporations & Co. about the type and scope as well as the result of the audit and its derivation and in providing information about the accounting as well as in monitoring compliance with the accounting regulations by the legal representatives.
What language is recommended for the audit report?
In view of the fact that legal representatives must submit a copy of the audit report to the tax authorities when submitting the tax return (§ 150, paragraph 4 AO, § 60, paragraph 3, sentence 1 EStDV), it seems sensible to write the audit report in German. Not least because according to § 87 AO German is the official language.
Likewise, a German-speaking group of addressees speaks in favour of drafting the audit report in German.
Notes
The notes to financial statements is a document to be prepared by management. It is one of the components of annual financial statements, along with a balance sheet and an income statement. Its purpose is to present supplementary information for the reader of financial statements that cannot be read from a balance sheet or income statement. Thus, the notes to financial statements not only present general information provided by management on financial statements, but also the accounting policies applied during the financial year, which provide information on the exercise of options. In addition, certain items of a balance sheet and income statement are required by law and are listed and explained in the notes. In Germany, the notes to financial statements must be prepared by corporations and GmbH & Co. KG.
Obligation to maintain a seal
When is the use of a seal obligatory?
Auditors and certified public accountants are obliged to use a seal when they make declarations that are reserved for them by law (section 48 (1) sentence 1 WPO). This includes both formal and substantive laws (e.g. ordinances). The most important statutory reserved task is the performance of annual audits according to § 316 ff. HGB. The auditor’s report to be issued pursuant to § 322 HGB – executed in the auditor’s copy – must be sealed in this context. The auditor’s report is always signed at the end of the report and before the annexes to the auditor’s report, thus regularly following the reproduction of the auditor’s opinion, as this is also required by law pursuant to § 321 HGB (IDW PS 450 n.F. Tz. 114). The auditor’s confirmation of the appropriateness of a settlement in a structural measure under company law (e.g. § 327c para. 2 sentence 2 AktG) must also be sealed. Other bases for issuing the declaration below this level, e.g. official instructions, regulations in articles of association, partnership agreements or other contracts do not constitute statutory provisions.
When is the use of a seal voluntary?
For certain declarations, section 48 (1) sentence 2 WPO does not provide for an obligation, but for the authority to keep a seal. The prerequisite for this is that declarations on audit results are made or expert opinions are issued within the scope of the professional activity as a certified public accountant, i.e. not in the private sphere or within the scope of a second profession, if any. The seal may be used for voluntary audits of companies that are not subject to a statutory audit requirement, e.g. small corporations. In this area, there are no legal regulations that require an audit by an auditor or at least reserve the activity (audit and issuing of an audit opinion) to the auditor. Nothing else applies even if the audit is carried out in accordance with the provisions of the HGB and the audit result is summarised in an “auditor’s report” which is modelled on the statutory auditor’s report in § 322 HGB. Neither the use of the term “auditor’s report” nor the issuing of a corresponding statement – even in this formulation – is legally reserved for the auditor/vBP.
Where is the seal placed and how is it to be designed?
The auditor must sign the written auditor’s report (section 322 (1) sentence 1 HGB), stating the place and date (section 322 (7) sentence 1 HGB) and seal it (section 48 (1) sentence 1 WPO). Auditors must use the professional title “Wirtschaftsprüfer/Wirtschaftsprüferin” without adding other professional titles (§ 18 WPO). The place and date are usually indicated below the text of the auditor’s report, but above the signatures and the seal. The signature of the auditor’s report always takes place at the end of the reporting and before the annexes to the auditor’s report, thus regularly following the reproduction of the auditor’s report.
The Chamber of Public Accountants shall, within the framework of the professional statutes for public accountants/sworn auditors, make more detailed provisions on the design (size and form) of the seal as well as the information to be included in the seal (§ 20 BS WP/vBP).
Can electronic seals also be used?
An electronic seal is permissible pursuant to § 20 (2) sentence 2 BS WP/vBP. This makes it possible to prepare the audit report and the auditor’s report in compliance with the law exclusively as electronic originals. The auditor must provide the audit reports and the auditor’s report file with the electronic seal, his name and a qualified electronic signature (§ 321, para. 242 Beck’scher Bilanz-Kommentar, 12th edition).
What are the consequences of a missing auditor’s seal?
It is true that auditors and auditing firms are obliged to use a seal when making declarations that are reserved by law for members of the profession. However, the seal is neither a prerequisite for the effectiveness of an auditor’s report under commercial law nor does it have any effects under liability law (WPO Commentary, 3rd edition, p. 678). With the focus of numerous professional duties on legally prescribed audits of financial statements by the APAReG and the new version of the professional statutes WP/vBP in 2016, the seal has lost importance with regard to further consequences under professional law. What remains is the duty for the auditor to be aware of the special professional duties that arise from the authority to issue statutory audit opinions and to use a seal.