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Nexia Ebner Stolz

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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