It has become commonly understood in many countries that widely-accepted standards for the operation and control of stock corporations listed on a stock exchange are needed in order to build and maintain investor confidence. To this end, an expert commission in Germany has recently introduced the Corporate Governance Code (available at www.corporate-governance-code.de/eng/kodex/index.html), which aims to make the German corporate governance system transparent and thereby promote the trust of international and national investors, customers, employees and the general public in the management and supervision of German stock corporations listed on a stock exchange. The Code describes existing legally-binding provisions as well as making recommendations for the conduct of such stock corporations. It focuses in particular on shareholders' rights, competence and duties of the management and the supervisory board, transparency in the corporation's field of activity and on the reporting and audit of annual financial statements. The latter aspect has received much attention recently due to a number of accounting scandals, in the US as well as in Germany, which have shown that "good and responsible governance", as the foreword to the Corporate Governance Code puts it, is of greater significance than ever.
The US has reacted to these scandals, connected with names like Enron and WorldCom, by enacting the Sarbanes-Oxley-Act. Under the Sarbanes-Oxley-Act, the issuance of a written statement filed with the SEC falsely certifying that financial statements comply with legal requirements is threatened with a maximum fine of $5 million or imprisonment for up to 20 years, or both.
German law likewise provides for criminal - and also civil - law provisions in order to ensure correct reporting in the annual financial statements.
According to the newly enacted Section 161 of the German Stock Corporation Act, the management board and supervisory board of German stock corporations must declare on an annual basis that they have complied with the provisions set out in the Corporate Governance Code, or how far they have failed to follow the recommendations set out in the Code. Although non-compliance with this duty does not automatically trigger criminal sanctions, the violation of mandatory accounting principals (German Gaap) might constitute a criminal offence according to several provisions of German business law. The German Commercial Code provides for a fine or imprisonment of up to three years if accounting principles are violated in drawing up the annual financial statements or the consolidated financial statements (under German Gaap, or, if the company or a subsidiary of it is listed at an organized market, under German Gaap, US Gaap or IAS, as the case may be). The criminal liability concerns individual members of the management and the supervisory board and requires that the incorrect financial statements have been submitted to the appropriate interested party, for instance a shareholder, and that the potentially liable person holds possible and accepts the possibility of incorrectness in the financial statements.
Even if a German corporation draws up its financial statements in accordance with German Gaap, but draws up incorrect additional financial statements under US Gaap (for example, if listed at a US stock exchange in order to file the financial statements with the SEC, or for the purpose of admission to the German New Market) this also might trigger criminal sanctions under the German Stock Corporation Act or the Limited Liability Company Act.
Thus, there are far-reaching criminal sanctions under German law forcing the responsible individuals to use the diligence needed to ensure compliance with the applied accounting principles, be it German Gaap, US Gaap or IAS. In particular, a violation of US Gaap provisions by German companies may be criminally sanctioned even in Germany. Against the background of the numerous accounting scandals in the recent past, it remains to be seen whether the German public prosecutors and criminal courts will increasingly apply the sentences set out in the described sanctions.