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Auditing

European Parliament approves extensive disclosure plans of European Commission

• Large companies and groups face enhanced disclosure requirements starting in 2016 • New rules affect companies with more than 500 employees • Information on policies, risks and outcomes as regards environmental matters, social and employee-related matters, respect for human rights, anti-corruption and bribery matters must be disclosed.

Ger­man com­pa­nies take their social res­pon­si­bi­li­ties seriously and get invol­ved on a large scale. So far, they com­mu­ni­cate their com­mit­ment to society in ways that are appro­priate to their indi­vi­dual cir­cum­stan­ces, i.e., depen­ding on their indu­s­try, level of inter­na­tio­nal invol­ve­ment, type of sta­ke­hol­ders and con­su­mers, as well as the needs of the pub­lic.

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But this is not enough for the Euro­pean Com­mis­sion. The Euro­pean Com­mis­sion has cal­led for legis­la­tion that requi­res com­pa­nies to report on their cor­po­rate social res­pon­si­bi­lity (CSR)-rela­ted infor­ma­tion. Accor­ding to the Direc­tive adop­ted by the Euro­pean Par­lia­ment on April 15, 2014, due to be imp­le­men­ted into natio­nal law by the indi­vi­dual Mem­ber Sta­tes by January 1, 2016, com­pa­nies are now sup­po­sed to sup­p­le­ment their finan­cial infor­ma­tion with exten­sive non-finan­cial infor­ma­tion about sus­tainable gover­nance practi­ces. The goal is to pro­mote a sus­tainable glo­bal eco­nomy and for the com­pa­nies them­sel­ves to achieve grea­ter ope­ra­tio­nal effi­ci­ency.

The enhan­ced dis­c­lo­sure requi­re­ments are meant to apply only to large com­pa­nies and groups, espe­cially those with more than 500 emp­loyees. The­re­fore, small and medium-sized enter­pri­ses will be exempt. Nevert­he­less, SMEs, e.g., those that func­tion as sup­p­liers, may feel real pres­sure to intro­duce sus­taina­bi­lity repor­ting any­way in order to avoid being put at a disad­van­tage to the com­pe­ti­tion.

Alt­hough Ger­many has already impo­sed a requi­re­ment for com­pa­nies to dis­c­lose infor­ma­tion about cer­tain non-finan­cial key per­for­mance indi­ca­tors, such as environ­men­tal and emp­loyee mat­ters (Sec­ti­ons 289 (3) and 315 (1) of the Ger­man Com­mer­cial Code), as part of an expan­ded frame­work for mana­ge­ment repor­ting that was intro­du­ced in the Ger­man Com­mer­cial Code (HGB) and with Ger­man Acco­un­ting Stan­dard (GAS) 20 last year, the Euro­pean Com­mis­sion belie­ves this action does not go far enough. In the Com­mis­sion’s opi­nion, this finan­cial and non-finan­cial infor­ma­tion is no lon­ger suf­fi­ci­ent in and of its­elf for gai­ning an under­stan­ding of a com­pany’s future deve­lop­ment. Pur­su­ant to the Direc­tive on dis­c­lo­sure of non-finan­cial and diver­sity infor­ma­tion, in the future com­pa­nies will be requi­red to dis­c­lose infor­ma­tion about their poli­cies, risks and out­co­mes as regards environ­men­tal mat­ters, social and emp­loyee-rela­ted mat­ters, respect for human rights, anti-cor­rup­tion and bri­bery mat­ters as well as diver­sity on their boards. With respect to environ­men­tal mat­ters, for example, com­pa­nies will be expec­ted to pre­sent infor­ma­tion about the fore­seeable impacts of their ope­ra­ti­ons, inclu­ding on health and safety, their use of rene­wable and non-rene­wable energy, their gre­en­house gas emis­si­ons and air pol­lu­tion. As regards the other mat­ters, com­pa­ra­ble items have been spe­ci­fied.
If com­pa­nies do not have a spe­ci­fic policy in place for any of the areas lis­ted in the Direc­tive, they will have to exp­lain why (“com­ply or exp­lain”).

The Direc­tive, which is based on the Euro­pean Com­mis­sion’s pro­po­sal, will mas­si­vely expand the scope of mana­ge­ment repor­ting and thus lead to sig­ni­fi­cantly more bureau­cracy. The idea is for com­pa­nies to assess their per­for­mance and risks in addi­tion to pro­vi­ding a basic pre­sen­ta­tion of their cor­po­rate poli­cies. They are to pre­sent risk-rela­ted infor­ma­tion that may con­tain sen­si­tive cor­po­rate infor­ma­tion. In order not to encroach too hea­vily on com­pa­nies’ auto­nomy, the dis­c­lo­sure of inter­nal cor­po­rate infor­ma­tion will be at the disc­re­tion of a com­pany’s mana­ge­ment and super­vi­sory bodies.

In prin­ciple, com­pa­nies should pre­pare a non-finan­cial sta­te­ment for inclu­sion in the mana­ge­ment report that then falls wit­hin the audit enga­ge­ment of the exter­nal audi­tors. At a mini­mum, the non-finan­cial sta­te­ment must con­tain infor­ma­tion rela­ting to environ­men­tal mat­ters, social and emp­loyee-rela­ted mat­ters, respect for human rights, anti-cor­rup­tion and bri­bery mat­ters along with a descrip­tion of the poli­cies, out­co­mes and risks rela­ted to these mat­ters and how they are hand­led. In addi­tion, non-finan­cial key per­for­mance indi­ca­tors need to be ana­ly­zed. Thus, in addi­tion to the basic pre­sen­ta­tion of cor­po­rate policy, com­pa­nies will also be pro­vi­ding per­for­mance and risk assess­ments that their exter­nal audi­tors will review. This means an eva­lua­tion of the under­lying con­trol sys­tems of the com­pany by the exter­nal audi­tors. Such sys­tems audits are com­plex and not curr­ently part of the sta­tutory audit of the annual finan­cial sta­te­ments. Apart from that, cer­tain infor­ma­tion will be dif­fi­cult to verify for practi­cal rea­sons. For example, how could the exter­nal audi­tors manage to prove respect for human rights?

As an alter­na­tive to pro­vi­ding a non-finan­cial sta­te­ment in the mana­ge­ment report, com­pa­nies have the option of pre­pa­ring a sepa­rate sus­taina­bi­lity report, which would exempt them from the requi­re­ment to pro­vide a non-finan­cial sta­te­ment in the mana­ge­ment report. This is espe­cially appea­ling to those com­pa­nies who already report on their cor­po­rate social res­pon­si­bi­lity vol­un­ta­rily.

But even if the repor­ting requi­re­ments are being expan­ded, it is cer­tainly wel­come for pur­po­ses of com­pa­ra­bi­lity that the new rules are meant to be app­lied con­sis­tently across the EU. Howe­ver, we must be care­ful not to over­bur­den the mana­ge­ment report with insig­ni­fi­cant decla­ra­ti­ons of intent that may impair its cla­rity and reada­bi­lity as a whole.

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