Internal controls, accounts and audit
26. Are there any formal requirements or guidelines
relating to the internal control of business risks?
France
Law stated as at 01-Apr-2011
In listed companies, the chairman of the board of
directors (or supervisory board) must provide at the shareholders' meeting a
report on the company's internal control and risk management procedures. The
statutory auditors draft a report summarising their observations on the
chairman's report on internal controls.
Germany
Law stated as at 01-Apr-2011
The management board must take suitable measures (in
particular, it must establish a monitoring system) for the early recognition of
developments endangering the continued existence of the company (risk
management). The law specifies directors' general duties and leaves wide
discretion to them as to the method of the establishment of the monitoring
system.
For
companies in the financial sector the Federal Financial Supervisory Authority
has issued minimum requirements for the risk management. In relation to listed
companies, the statutory auditor must evaluate whether the management board has
taken such measures in a suitable form and whether the internal control system
is fit for purpose. The DCGK states that the management board ensures the
appropriate risk management and risk control throughout the company.
India
Law stated as at 01-Apr-2011
At present, there are no formal requirements or
guidelines relating to the internal control of business risks.
The Netherlands
Law stated as at 01-Dec-2012
One or more shareholders together holding at least 10%
of the issued capital, or shareholders that hold shares with a nominal value of
at least EUR225,000 (or a lower percentage or amount if the articles state
otherwise), can request the Company Division of the Amsterdam Court of Appeal
to appoint a person(s) to inquire into the policy and conduct of the company's
business (enquete procedure). As of 1 January 2013, the thresholds to
submit a request will change for companies with an issued share capital of more
than EUR22.5 million to 1%, or for listed companies to EUR20 million at market
value (or a lower percentage or amount if the articles state otherwise). If
this investigation concludes that the mismanagement is apparent, the court can
be requested to take measures such as to suspend or dismiss directors or
temporarily transfer shares to a nominee.
Minority
shareholders can also, for example:
· Request information from the supervisory or management
board during a general meeting (see Question 23).
UK (England and Wales)
Law stated as at 01-Apr-2011
The Companies Act requirement that directors promote
the success of their company and exercise reasonable care, skill and diligence
should indirectly focus their attention on internal risk controls.
A
Main Principle of the Code provides that "the board is responsible for
determining the nature and extent of the significant risks it is willing to
take in achieving its strategic objectives. The board should maintain sound
risk management and internal control systems". The Turnbull Guidance
available on the FRC website (www.frc.org.uk) gives further assistance on this
topic. There are also various requirements for disclosures in a company's report
and accounts to show how the directors are meeting their responsibilities on
risk and internal controls.
FTSE
100 banks and life assurance companies are recommended to have a separate risk
committee with responsibility for oversight and advice to the board on risk
exposure and risk strategy.
United States
Law stated as at 01-Dec-2012
· Bring a claim, either on behalf of the corporation
(referred to as a derivative action) or as a shareholder class action, against
the corporation’s directors for breach of fiduciary duty.
· Call a special meeting of shareholders if the corporation’s
certificate of incorporation and bye-laws allow.
· Submit shareholder proposals to the board.
· Engage the corporation in a proxy contest in an
attempt to replace the board and the corporation’s management.
· Contact the board or senior management of the company
to express the shareholder's view. The company is generally not required to
respond to the shareholder's inquiries but may do so as an investor relations
matter.
· Use any other grievance methods provided for by a
particular company.
27. What are the responsibilities and potential
liabilities of directors in relation to the company's accounts?
France
Law stated as at 01-Apr-2011
The company's accounts must be accurate and fairly
represent the assets, financial situation and results of the company,
otherwise, management can incur criminal penalties (a five-year prison sentence
and a EUR375,000 fine).
In
listed companies, any irregularity in the annual accounts also exposes the
company and its management to financial penalties imposed by the AMF.
Germany
Law stated as at 01-Apr-2011
The management board is responsible for the
preparation of the annual financial statements and the annual report within the
first three months of the subsequent fiscal year. On completion, the management
board must promptly submit them to the supervisory board. Following approval of
the annual financial statements by the supervisory board, the management board
must file them with the electronic Federal Gazette without
undue delay. Failure to perform these duties on time can result in fines for
the directors.
Management
board members who falsely report or conceal the company's condition in the
annual financial statements, annual report or interim financial statements are
subject to imprisonment of up to three years or a monetary fine. An affidavit
is required from the management board members in relation to the company's
financial condition being accurately reflected in the annual financial
statements. Investors who suffered losses as a result of any untrue or
misleading statement in the annual financial statements can bring action
against the management board.
India
Law stated as at 01-Apr-2011
· Provide at every AGM the balance sheet and profit and
loss account for the specified period. If the directors breach this
requirement, they can be subjected to a fine and imprisonment.
· Authenticate the balance sheet and profit and loss
account and approve it in a board meeting. If the board does not authenticate
and approve the balance sheet and profit and loss account, then every director
is subject to a fine.
· Attach a company's balance sheet and profit and loss
account to the directors' report which is laid before the shareholders at the
AGM. Non-compliance on the part of the directors is punishable with a fine and
imprisonment.
The Netherlands
Law stated as at 01-Dec-2012
For both listed and unlisted companies with a
supervisory board, the management board must issue a statement at least once a
year, reflecting the general principles of strategic policy, general and
financial risks and the risk monitoring and reporting systems of the relevant
entity.
For
listed companies, the CGC has a general principle that the management board is
responsible for managing the risks associated with the company's activities,
and an effective and adequate internal risk management system should be created
that includes:
· Risk analyses of the company's operational and
financial objectives.
· A corporate governance code of conduct (published on
its website).
· Guidelines for the layout of the accounts and the
procedure for drawing up the accounts.
· A system for monitoring and reporting.
The
supervisory board should be closely involved in strategic decisions and
monitoring of risk management. The process of risk management is concluded by
risk reporting and accounting in the annual governance statement.
UK (England and Wales)
Law stated as at 01-Apr-2011
Directors must prepare their company's accounts and
not approve them unless they are satisfied they give a true and fair view of
the company's assets, liabilities, financial position and profit or loss. If
the accounts do not comply with the Companies Act and related regulations,
every director who knew of the failure, or was reckless about it, and who
failed to take reasonable steps to ensure compliance, commits an offence.
Directors
must also prepare a directors' report for each financial year to accompany the
accounts, and a failure to do so is also a criminal offence.
The
accounts of a listed company, to which the Disclosure and Transparency Rules
apply, must contain a responsibility statement by the directors that they give
a true and fair view, and there must be a similar statement that the business
review is fair. A failure in either case would be a regulatory breach
punishable by the FSA.
United States
Law stated as at 01-Dec-2012
The rules adopted by the SEC under Section 404 of the
Sarbanes-Oxley Act impose formal requirements on the corporation’s internal
control over financial reporting (ICOFR). ICOFR is a subset of the
corporation’s internal controls. A corporation’s annual report filed with the
SEC must generally contain an internal control report:
· Stating the responsibility of management for
establishing and maintaining an adequate internal control structure and
procedures for financial reporting.
· Identifying the framework used by management to
evaluate the effectiveness of the corporation’s ICOFR.
· Containing an assessment, as of the end of the most
recent fiscal year of the corporation, of the effectiveness of the internal
control structure and procedures of the issuer for financial reporting.
· The corporation’s independent auditor is required to
issue an attestation report on the corporation’s ICOFR.
The
SEC regulations also require quarterly reports to discuss changes in ICOFR. In
addition, the CEO and CFO must annually and quarterly provide certifications
that relate, in part, to ICOFR.
France
Law stated as at 01-Apr-2011
· Auditing the company's accounting documents.
· Ensuring compliance with applicable accounting
standards.
· Ensuring the accuracy of the information provided in
the management report and documents provided to shareholders on the company's financial
situation.
Companies
publishing consolidated accounts and listed companies must appoint at least two
statutory auditors.
Germany
Law stated as at 01-Apr-2011
The accounts of all companies must be audited, with
the exception of small companies. Small companies are those that do not exceed
at least two of the following criteria:
· A balance sheet total of EUR4,840,000 after deducting
any deficit shown on the assets side.
· Turnover proceeds total of EUR9,680,000 in the 12
months preceding the close of the fiscal year.
· An average of 50 employees during the year.
India
Law stated as at 01-Apr-2011
The Netherlands
Law stated as at 01-Dec-2012
The DCC provides for liability of managing directors
if the annual accounts, the annual report or any interim figures that the
company publishes are misleading or inaccurate. In that case, each managing
director can be held jointly and severally liable for damage incurred by third
parties. Individual managing directors are not liable if they can prove that
any misrepresentation or errors are not attributable to them. Supervisory directors
are similarly jointly and severally liable for damage incurred by third parties
as a result of misleading annual accounts, unless he proves the defect is not a
result of his negligent supervision.
Liability
for misleading accounts and other financial information can qualify as a tort.
Not filing the accounts in a timely manner may also cause the directors to be
liable in the event of insolvency (see Question 16, Insolvency law).
Managing
and supervisory directors who deliberately publish or allow to be published
misleading annual accounts risk criminal punishment consisting of fines or
imprisonment. In the context of insolvency, the receiver/bankruptcy trustee
often reports culpable or fraudulent bankruptcy of managing or supervisory
directors if circumstances allow for it.
UK (England and Wales)
Law stated as at 01-Apr-2011
· The company is "small" for the year
concerned, which, in this context, means that it has turnover of not more than
GB£6.5 million and a balance sheet total of not more than GB£3.26 million.
Public companies and a number of other entities are excluded from this
exemption.
· The company is dormant for the year, that is, it had
no accounting transaction required to be entered in its accounting records.
In
either case, shareholders with at least 10% in nominal value of the company's
shares can nonetheless require an audit.
United States
Law stated as at 01-Dec-2012
Any director who makes or causes the making of any
false or misleading statement in a document filed with the SEC can be held personally
liable for the misstatement, including those made in connection with the
corporation’s accounts under various sections of the 1933 Act and the 1934 Act.
In
the context of securities offerings, every director of an issuer corporation
can be held personally liable for any untrue statement of a material fact in a
registration statement or for any omission of a material fact required to be
stated or necessary to make the statements not misleading (1933 Act). A
director can avoid liability by proving that he had acted in good faith and
with lack of knowledge. Under the Sarbanes-Oxley Act, directors can also face
criminal liability for fraudulently influencing, coercing or misleading an
accounting firm during an audit, with the intention of rendering the audit
report misleading.
France
Law stated as at 01-Apr-2011
Statutory auditors are appointed for six financial
years. In unlisted companies, they can be reappointed indefinitely.
Statutory
auditors are appointed (or their appointments are renewed) by the shareholders'
meeting, further to a proposal from the board or, under certain circumstances,
the shareholders. In listed companies, when the board of directors selects the
proposed statutory auditors, the CEO and deputy CEO(s) abstain from voting if
they are also directors.
The
AMF is notified of proposals for the nomination or renewal of the appointment
of the statutory auditors made by listed companies.
Germany
Law stated as at 01-Apr-2011
Under the HGB, auditors of the financial statements
are generally appointed by the shareholders. The auditor is appointed on a
yearly basis and the appointment is always for one specific year. Auditors can
be re-elected, subject to a seven-year limit in relation to companies listed
for official trading.
In
relation to AGs, auditors are appointed by shareholders' resolution unless
special regulations apply (for example, to insurance companies). The
supervisory board can suggest candidates. After the appointment of the
auditor(s) by the shareholders, the supervisory board issues the specific audit
assignment. The DCGK recommends the establishment of an audit committee with an
independent chairman. In relation to GmbHs, the articles of association can
provide different rules regarding the appointment of auditors.
The
auditor can be removed only by court order on request of members of the
management or supervisory board or shareholders holding a certain amount of
shares if restrictions apply to the auditor (see Question 30). The court must hear both parties before it decides
on the replacement of the auditor. The auditor can terminate the assignment for
good cause (for example, conflict of interest in relation to the content of the
audit certificate) in writing.
India
Law stated as at 01-Apr-2011
The company's auditors are appointed by the board of
directors, subject to the approval of the shareholders. The auditors are
appointed from one AGM until the next AGM.
The Netherlands
Law stated as at 01-Dec-2012
A company must have its accounts audited and published
by filing the accounts with the Trade Registry, unless it is either a:
· Small company, that is, a company that on two
consecutive balance sheet dates and, without interruption, on two consecutive
balance sheet dates after this, satisfies two of the following requirements:
o the value of the assets according to the balance sheet
and notes, on the basis of acquisition and production cost, is no more than
EUR4.4 million;
o the net turnover for the financial year is no more
than EUR8.8 million;
o the average number of employees during the financial
year is fewer than 50.
· Subsidiary company that has its accounts consolidated
in the published audited accounts of a direct or indirect parent company and,
among other things, the parent company has declared itself jointly and
severally liable for debt resulting from the subsidiary's legal acts.
UK (England and Wales)
Law stated as at 01-Apr-2011
The directors of a company usually appoint its first
auditors and they can fill any vacancy which occurs between annual general
meetings. The appointment must be made within a certain period, depending on
whether the company is private or public. In the case of a company which holds
an AGM, it is the shareholders who appoint the auditors at the AGM. If the
auditors being appointed are not the same as for the previous year, certain
formalities must be observed to ensure that any reasons for the change are
disclosed. The auditors of a private company continue in office until they
resign or the shareholders remove them or appoint new auditors in their place.
There
is no statutory or best practice rule for auditors to be changed after a
certain number of years, but professional guidance suggests the partner in
charge of the audit should change every five years for listed companies (ten
years for other companies).
United States
Law stated as at 01-Dec-2012
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