Audit of the annual financial statement and consulting – the current limits of the independence of auditors

External recipients of the annual financial statement such as shareholders and banks and the company itself must have confidence that the auditor provides an independent and objective opinion of the audited financial statement. The condition for this is that the auditor is independent, i.e. free of connections to the company which is to be audited. On the other hand consulting assignments and other tasks in connection with the annual financial statement to be audited justify concerns that the auditor either consciously ignores mistakes in the statement or has not even recognised them. Therefore the legislator has come up with regulations according to which the auditor is excluded from auditing the financial statement when there is any doubt with regard to independence. There are tight controls for public interest entities (PIE), i.e. companies which utilise the capital market pursuant to § 264 d of the German Commercial Code (HGB) while the auditor of the annual financial statement is allowed to provide a wide range of services for other, in particular medium-sized, owner-managed companies (non-PIE).

 

A fundamental principle is that consulting and auditing can be combined provided the audited company at the end makes the decisions on its own and within its own responsibility. It is therefore unobjectionable if the auditor only provides hints on how to set up structures and procedures of the company. These may, for example, relate to the splitting of internal processes and the development of charts of accounts or accounting manuals. In particular, the auditor is permitted to advise the company in the course of the audit, to refer to errors and make correction proposals. Within this scope consulting for accounting policies, support for the set-up of IT accounting tools or services in the area of the internal control system or risk management system is permissible. Services in the area of the payroll accounting are possible provided only technical work is performed (e.g. the processing of payrolls, data processing, etc.). In all cases the preparation of the annual financial statement or any of its parts or the account assignment of ongoing business processes is not permitted to be carried by the auditor.

 

The execution of individual audit assignments for an internal audit is permitted. On the other hand, it is not allowed for the auditor in the carrying out of an internal audit to take on a responsible position, assume complete responsibility or manage the audit.

 

Tax consulting services as such do not usually represent a problem for the independence of the auditor. There are exceptions to this for public interest entities, however, due to the current adjustments to the German Audit Reform Act (AReG). Tax consulting services are permissible here with limitations provided the principle already integrated in German law concerning the ban on
self-audit is sufficiently respected. Specifically it is emphasised that the tax consulting service is allowed to have a not insignificant effect. A significant effect is particularly present when the provision of tax consulting services in the financial year to be audited the profit necessary to calculate the tax is considerably reduced or a substantial part of the profit is transferred abroad without the existence of an economic necessity in order to achieve a tax advantage for the company. In order to control this mechanism § 319a Abs. 3 HGB introduces an approval obligation through the audit committee of the company. In all companies representation is regularly permitted in the course of external tax audits and in out of court settlements and court proceedings.

 

Also for other consulting services the auditor of the annual financial statement is not permitted to make entrepreneurial decisions in relation to the annual financial statement. For non-PIE organisations the auditor can participate in the development, set-up and introduction of financial reporting systems (e.g. programming or customising of ERP software), whereby for PIEs such consulting services are not permitted. Valuation services are only possible on a regular basis when the calculation basis is already stipulated by the company or if the valuation has no significant impact on the annual financial statement.

 

The auditor performs further auditing and consulting activities for his clients in medium-sized companies which are not involved in the capital market. In this case clients can benefit from the fact that the auditor due to his activity already has a detailed knowledge of the company and therefore in comparison to other suppliers has an advantage in terms of knowledge. The following overview indicates the areas where the auditor can in principle provide these non-PIEs with support and possibly with the corresponding contractual regulations:

 

Service category	​Service details (examples)
Introduction of ERP systems in the area  of accounting, logistics, HR	Finance, controlling, fixed asset accounting , business intelligence, payroll accounting, human resource management system, travel expense solutions, carrier planning, recruitment platforms
Introduction of a  consolidation system	Legal consolidation, management consolidation
Application management	Ongoing support for applications
Introduction of standard software	Accounting tools, planning software
Internal audits	Execution of individual audit assignments without overall responsibility
Tax consulting	Tax returns and consulting for tax design
​Consulting for system design	Design recommendations for control, risk management or compliance management systems