Martin Kling's picture

Enforcement of financial reporting is performed in Germany in two stages; the first stage by the" Deutsche Prüfstelle für Rechnungslegung" (DPR) or FREP (Financial Reporting Enforcement Panel), while the second stage is performed by the Federal Financial Supervisory Authority (“Bundesanstalt für Finanzdienstleistungsaufsicht” – BaFin), with sovereign authority. The Financial Reporting Enforcement Panel (FREP) has the task to examine financial reporting of companies listed in the regulated market in Germany since 1.7.2005.

The FREP issues an annual report on their findings, the last issued one is on the activities in 2010.  A full blown detailed report is still to come but an overview on the finding was given. The rate of errors found was slightly over the average of the last 4 years. Main drivers for this are seen first in the scope and complexity of the IFRS accounting rules and second in effects of the financial and economic crisis of the last years. The latter led to errors in risk reporting and forecasting. As in the year before the error rate is nearly the same for big index companies as for small to medium ones.

This poses some interesting questions. Even taking into account that sometimes the boundaries given by the IFRS are stretched by purpose it seems that the rules are simply to complex to be used without mistakes regardless of the size of the accounting team and experts available. It has to be questioned if the assumed benefits for the investors justify the efforts taken on this.  After all the public report of a company is to give the investors a chance to evaluate the risk of that investment. The number of insolvencies and scandals in the last years did not significantly increase in spite of more and more detailed regulations on reporting. I do agree though that the sample based review of reports by the FREP or similar institutions worldwide is an important factor to raise quality levels.

The main difference between IFRS and US GAAP is that IFRS is principle-based in contradiction to the rule-based US GAAP. This should make it easier and less complicated to be applied - but obviously the sheer complexity and level of detail have already burned up this benefit.

Tags: GRC compliance LoungeTalk