On 20 May 2021, the German Parliament passed the Financial Market Integrity Strengthening Act (Finanzmarktintegritätsstärkungsgesetz, FISG) as it appears in the Finance Committee’s recommendation for a resolution. The law went into effect in July, with some provisions have transitional arrangements. The key objective is to improve financial statement control for business entities and thus strengthen trust in the German financial market for the long term. For this purpose, it contains updates in the areas of:
Here, you will learn about the key information and what you need to look out for.
What’s new for corporate governance
The updates in the area of corporate governance may be of special interest to executive board and supervisory board members.
Establishment of an audit committee with financial experts and right to information:
One of the key changes: Public-interest entities (capital-market-oriented business entities, banks and insurance companies) must now establish an audit committee staffed by at least two financial experts, one of whom has expertise in the field of accounting and the other of whom has expertise in the field of auditing. The members of the audit committee have a direct right to information from the leaders of those central departments of the business entity that are responsible for the tasks concerning the audit committee.
Business control systems:
In addition, business entities listed on the stock exchange are required to establish an adequate and effective internal control and risk management system to reinforce corporate governance. The explicit requirement to establish this suggests a higher level of formalisation, which must be determined and designed specifically for each business entity.
Monitoring the quality of the audit:
It was also clarified that the supervisory board or audit committee must monitor the quality of the audit.
This is new for the audit area.
External rotation of the auditor:
An important update is the reduction in the maximum mandate for auditing all business entities of public interest to ten years; the extension options for capital market-oriented business entities have been removed. In credit or financial services institutions and insurance companies that are not business entities of public interest, a new auditor must now be appointed if the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) has been notified of the same auditor for eleven consecutive financial years. In these cases, BaFin may request the appointment of another auditor.
Internal rotation of the responsible audit partners:
The internal rotation period for responsible audit partners when auditing business entities in the public interest is reduced from seven to five years.
Provision of non-audit services:
The auditor may no longer provide tax consulting and assessment services in business entities of public interest going forward. Likewise, the German Auditors’ Supervisory Authority (Abschlussprüferaufsichtsstelle, APAS) no longer has the authority to permit the auditor, upon request, to exceed the 70% professional fee caps for consulting services in relation to auditors’ services for a financial year.
This is new in the area of enforcement proceedings
The two-step enforcement proceedings have been transformed into one-step proceedings, for which BaFin is responsible.
