In recent years, Germany has seen major financial scandals causing political and legal turmoil. The two most prominent scandals are the so called “cum/ex” tax scandal and the “Wirecard” financial fraud scandal. For many people, these names are associated with money lost. Litigators associate “cum/ex”, “Wirecard” and further scandals with proceedings against auditors and tax advisors; a hot topic for litigation in Germany.
Disputes are centered around the liability of auditors and tax advisors: Former clients – or sometimes insolvency administrators – sue auditors and tax advisors because of wrongful advice and erroneous auditing. In order to lodge a claim, claimants need to assess the chances of success of such liability claims. Claimants need to be able to substantiate that the auditors and tax advisors did indeed provide wrongful advice. A core piece of evidence for this are the so called Handakten – the auditors’ and tax advisors’ reference files. But how to get ahold of such files?
1. Legal Background
Auditors and tax advisors must “keep files that accurately document the work performed” under German law (Section 51b (1) of the German Public Accountant Act; Section 66 of the Tax Advisors Act). Clients of auditors and tax advisors can request to be provided with these files. Details of what level of files “accurately document the work performed” are lively discussed. Often, courts need to decide whether and what kind of files must be provided.
Claimants typically file a so called “action by stages” under Section 254 German Civil Code, i.e. a staggered requests asking auditors and tax advisors (i) first to disclose what documents exist in their reference files, (ii) second to grant access to inspect the files, and (iii) finally to (physically) hand over the files. It is generally accepted under German (case) law that such requests are well-founded. (Former) clients have a right to disclosure and to inspect auditors’/tax advisors’ reference files. Conversely, auditors and tax advisors are under an obligation to disclose and grant access to these files. The precise extent of these rights/obligations is controversially debated.
2. The Recent Decision of the Regional Court Stuttgart
The decision of the Regional Court Stuttgart dated 15 November 2022 (case no 31 O 125/21 KfH) is the most recent verdict in this debate over the scope of records requests for auditors’/tax advisors’ Handakten. The insolvency administrator of Wirecard had requested the Handakten from Wirecard’s former auditors. The court extended the scope of the auditors’/tax advisors’ disclosure obligation regarding reference files. This is particularly relevant since many contracts with auditors/tax advisors in Germany specify Stuttgart as the venue for disputes.[1]
(1) Legal basis and applicable standard: The court found that the auditors’/tax advisors’ disclosure obligation for reference files/Handakten is based on Sections 675 and 666 of the German Civil Code. Although the court examined both sections separately, it applied the same standard regarding their scope.[2] Sections 675 and 666 of the German Civil Code deal with service contracts, such as contracts with auditors and tax advisors. Section 666 states that “the mandatary is obliged to provide the mandator with the required reports“.
The court found that the obligation under Sections 675 and 666 of the German Civil Code are broader in scope than the obligation to (physically) hand over files under Section 51b of the German Public Accountant Act. The obligation to hand over files is limited by Section 51b (4) German Public Accountant Act which excludes certain documents such as working papers prepared for internal purposes. The court held that this limitation in scope does not apply to the obligation to disclose and grant access for inspection under Sections 675 and 666 of the German Civil Code. In doing so, the court applied a broader standard to the obligation to disclose and grant access for inspection than it had previously done in a judgment from 2019.[3] According to the court, these obligations generally encompass the reference files in their entirety.
Notably, the court clarified that self-created documents, working papers such as notes by audit assistants and other documents prepared by the auditors themselves are a mandatory part of the reference files under Section 51b (1) of the German Public Accountant Act. In contrast, previous case law had found that working papers which the auditors had created for internal purposes only during the mandate were outside the scope of disclosure. The recent decision of November 2022 now stipulates that these documents are essential to the audit activity. Without these documents, the auditors’ reference files cannot provide a third party with an accurate picture of the audit work performed.
Following the courts’ reasoning, auditors’/tax advisors’ disclosure obligation encompass inter alia: (i) written correspondence with third parties, (ii) notes on meetings with third parties, (iii) self-created files/documents/other items, (iv) correspondence between auditors/tax advisors and clients, (v) notes on meetings with clients, (vi) documents the client has already received, and (vii) working papers of the auditors/tax advisors prepared for internal purposes.
(2) Limitations of scope: The court also assessed limitations to this scope. In the case before the court, the auditor had argued that records of personal impression and of confidential background information should be excluded from the disclosure obligation. These limitations were recognized in previous decisions. The court left this question unanswered in its recent judgment. It recognized, however, that there could be unwritten limitations, but noted that these would require a sound justification. Importantly – and highly relevant for practitioners –, the court elaborated on the burden of substantiation for such limitations. The court found that it was the responsibility of the auditor to inform the client and, if necessary, the court about the relevant reasons if they wanted to refuse to disclose certain documents.
(3) Costs: Finally, the court dealt with the objection that an inspection of the reference files would be too costly. The Court found that the objection is without merit. (i) First, the reference files are – at least partly – typically available in electronic form. (ii) Second, the costs are generally not disproportionate to the reasonable interest of the client/insolvency administrator to investigate possible violations of auditing duties.
3. Conclusion
The recent judgment of the Regional Court Stuttgart further adds to the debate over auditors’/tax advisors’ duties to disclose reference files under German law. The Regional Court Stuttgart’s position is clearly in favor of a broad disclosure obligation. Especially the extension of the disclosure obligation to include auditors’ working papers is far reaching. Similarly, the heightened standards to justify a refusal to disclose individual documents fuel the debate further. It remains to be seen whether this new development will be upheld on appeal and in future decisions.
[1] The reasons are that many (German) auditing/tax advisory firms are based in Stuttgart and the Stuttgart courts have judges specialised on professional liability cases.
[2] The Court only differentiated with regard to specific legal objections.
[3] Regional Court Stuttgart, Decision dated 16 January 2019 (case no 27 O 272/18), DStRE 2019, 852.
