Increasingly far-reaching restrictions with respect to the COVID-19 virus also bring to light the issue of timely drafting, auditing, adoption, and publication of annual and consolidated financial statements, in particular for listed companies. This against the background that capital market-oriented companies, i.e., companies whose shares are listed on the regulated market, have to publish their annual financial statements and, where applicable, consolidated financial statements in accordance with the German Commercial Code and the Securities Trading Act within four months from the end of the fiscal year. This also requires that the accounts need to be audited within this period.
Recommendation F.2 (in the December 16, 2019 version, in force since March 20, 2020) of the German Corporate Governance Code (“Code”) even stipulates publication of the annual financial statements within 90 days from the end of the fiscal year. Although this deadline is not binding on companies, due to the Code’s “comply-or-explain” system, deviations from said deadline are to be disclosed in the corporate governance declaration.
Deadline for companies using the calendar year as fiscal year
If, as is frequently the case, a capital market-oriented company’s fiscal year corresponds to the calendar year, the deadline for publication in accordance with the Commercial Code or the Securities Trading Act expires at the end of April 2020. To comply with the Code’s requirements, publication is required by March 30, 2020 already.
It should also be noted that a period of three months after the end of the fiscal year is stipulated for drafting the annual and consolidated financial statements, so that the Executive Board has to draft them by March 31, 2020.
In view of the far-reaching restrictions imposed by the COVID-19 virus, the question now arises as to whether and how capital market-oriented companies will be able to meet these deadlines.
The deadlines set by the Commercial Code and the Securities Trading Act for drafting and publishing the annual financial statements are rigid and do not provide for any extensions or exceptions for cases of force majeure.
Difficulties due to the current situation
Compliance with the deadlines may be particularly difficult in cases where auditors have to perform on-site audits that are practically impossible to do because of current restrictions. At present, there do not seem to be any generally applicable guidelines as to how auditors should proceed in such cases. While BaFin has already permitted exceptions for on-site audits in special cases relating to audits in accordance with the Banking Act and for audits of securities services companies in accordance with the Securities Trading Act. We are currently unaware of any such exceptions or efforts to introduce such exceptions for general audits under the Commercial Code. To ensure best possible compliance with the statutory provisions, in some cases, as inquiries with auditors showed, it is being considered to issue publications and perform audits to the extent possible and to indicate in the auditor’s opinions which audit procedures were not able to be carried out. For the time being, however, these are only the considerations of individual auditors.
It will likely also have to be taken into account for drafting the annual financial statements that the going concern forecast of some companies may have become questionable due to current developments. In such cases, it will therefore initially remain to be seen whether the auditor’s opinion may be issued without qualification. The decision on the going concern forecast could lead to delays in finalizing the annual statements.
It will also become important how the effects of the COVID-19 pandemic on the company are to be presented in annual or consolidated financial statements, in particular the management report / the forecast and risk report. The Institute of Public Auditors (Institut der Wirtschaftsprüfer, “IDW”), for instance, commented in two technical notes dated March 4 and March 25, 2020 on issues of whether and how the content of corona-related developments should be taken into account in the annual and consolidated financial statements.
Possibility of holding the Supervisory Board’s financial statements meeting by video conference
In this context, reference should also be made to the modalities of holding the Supervisory Board’s “financial statements meeting.” According to Section 171(1) sentence 2 Stock Corporation Act, auditors have to participate in the meetings of the Supervisory Board or the Audit Committee to report to the Supervisory Board members on the results of the audit and to answer questions. This duty of auditors to attend generally required their physical presence and thus the holding of financial statements meetings as a whole in the form of a presence meetings. Presence meetings were necessary to ensure close and direct exchanges with auditors as required by law. In the meantime, however, it has become the prevailing opinion that including auditors or holding the meetings as a whole by video conference also takes this requirement sufficiently into account. It is considered that it is not the format but the intensity of the exchange that is material for how effective the discussions are. This is also supported by a 2002 statutory amendment, according to which the legally required mandatory Supervisory Board meetings do not necessarily have to be face-to-face meetings.
Video conferences are therefore basically suitable for ensuring the necessary exchange with auditors. Literature only mentions video conferencing, however, as a possible alternative to face-to-face meetings. The option of telephone conferences is not discussed. Since video conferences are explicitly mentioned and telephone conferences are not, it can probably be concluded that holding a telephone conferences will not be sufficient. One voice in literature even explicitly holds that it is absolutely necessary to have video and audio transmission, so that telephone conferences are not possible. We therefore recommend that the Supervisory Board’s financial statements meeting should not be held by telephone conference, but by video conference.
Fines in the event of failure to meet deadlines
If the annual and consolidated financial statements are not published within the four-month period, companies may be liable to pay substantial fines in accordance with the Commercial Code and the Securities Trading Act. These fines have recently been increased considerably, in particular for capital market-oriented companies, leading to high payments last year. Fines may be imposed by the Federal Office of Justice (for infringements of the Commercial Code) and by BaFin (for infringements of the Securities Trading Act), but also and in particular by the relevant stock exchanges. The imposition of fines is, however, also dependent on fault. Although this is not uncontroversial in the area of the Commercial Code, it corresponds to prevailing opinion in jurisdiction and literature.
It should be noted that the three-month period for drafting the annual or consolidated financial statements is also subject to penalties. Since the relevant criminal provision also requires fault, however, and fault should not be given in the current situation, the Federal Ministry of Justice currently sees no reason to consider adjusting the deadlines.
As far as the imposition of penalties is concerned, the European Securities and Markets Authority (“ESMA”) recommended in a “Public Statement“ on March 27, 2020 that national supervisory authorities should in any case refrain from prosecuting the failure to comply with deadlines for a short period due to the corona pandemic. At the same time, however, ESMA stresses the importance of timely and transparent financial reports. Additionally, issuers should keep their investors informed about how long the publication will be delayed.
On the basis of this recommendation, the Federal Office of Justice decided on April 8, 2020 not to initiate administrative fine proceedings prior to July 1, 2020 against companies listed on the regulated market whose deadline for publication of the 2019 annual financial statements would normally expire on April 30, 2020. Additionally, the Federal Office of Justice resolved several measures to relieve the burden on those companies that to date have been able to submit their annual financial statements in due time.
Frankfurt Stock Exchange also commented on the issue of how to deal with corona-related exceeded deadlines. Neither the Exchange Rules and Regulations nor the General Terms and Conditions for the Open Market provide for options of granting extensions of deadlines or other facilitations in advance with respect to meeting transparency requirements for companies listed on the regulated market or the open market. Nonetheless, Frankfurt Stock Exchange is prepared to consider difficulties that may arise as a result of the current situation when dealing with breaches of duty. To this end, Frankfurt Stock Exchange asks issuers to contact it as early as possible and to notify it of the status of financial reporting and/or the auditing of the financial statements. Additionally, issuers should subsequently and continually document the following information for it to be transmitted to Frankfurt Stock Exchange in due course:
In this context, Frankfurt Stock Exchange points out that ESMA currently considers only those annual or half-year financial reports to be affected which relate to a reporting period ending on or after December 31, 2019, but prior to April 1, 2020.
In any event, companies are therefore well advised to contact the Stock Exchange at an early stage and to document precisely to which extent the current situation prevents them from drafting and publishing the financial statements on time. In addition, issuers need to inform capital market participants of any exceeded deadlines by way of publications.
It remains to be seen whether the legislator will also address the topic of the exceeding of deadlines caused by the corona crisis. There still seem to be no specific considerations in this regard. We will monitor the situation continually, however, and inform you about any new developments.
It may currently be difficult for capital market-oriented companies, i.e., companies whose shares are admitted to the regulated market, to meet the deadline of three months after the end of the fiscal year for drafting and four months after the end of the fiscal year for publishing the audited annual or consolidated financial statements. The periods provided for in the Commercial Code and the Securities Trading Act may not be extended and do not provide for any exceptions for force majeure. If the deadline is exceeded, high fines may be imposed. Delays for which companies are not responsible should, however, be taken into account. In a “Public Statement“ on March 27, 2020, the European Securities and Markets Authority ESMA recommended that national supervisory authorities should temporarily refrain from pursuing deadline delays due to the corona pandemic. The Federal Office of Justice followed this recommendation on April 8, 2020 and decided not to initiate administrative fine proceedings prior to July 1, 2020 against capital market-oriented companies whose deadline for publication of the 2019 annual financial statements would normally expire on April 30, 2020. Frankfurt Stock Exchange also announced that it would take current circumstances into account in case of potential breaches of duty. It requests, however, that contact be established early and ongoing documentation of issuers’ status and measures be provided.
With respect to Supervisory Board’s financial statements meetings, in which the audited financial statements are discussed jointly with auditors, it is certainly possible to refrain from holding attendance meetings and to hold meetings by video conference instead. On the other hand, the holding of telephone conferences will likely not meet the requirements of financial statements meetings.
It remains to be seen whether, against the backdrop of the current situation, even the legislator will address the issue of the timely adoption of financial statements, for example via exemptions. We will continually monitor the situation and keep you informed.