In October 2020, the German Government announced an action plan to improve the work of auditors in Germany (see https://globallitigationnews.bakermckenzie.com/2020/10/21/unlimited-liability-for-auditors-in-germany/). This action plan resulted from the Wirecard scandal, one of the biggest financial scandals Germany has ever seen. Among others, the auditors of Wirecard had failed to uncover the massive financial fraud scheme that the top managers of Wirecard had created. An investigation committee of the German Parliament is still trying to get to the bottom of the scandal and is also questioning Wirecard’s former auditors (FAZ, 27 November 2020).
Following the action plan, the German government has now presented the draft law regarding the strengthening of financial market integrity (Entwurf eines Gesetzes zur Stärkung der Finanzmarktintegrität vom 16. Dezember 2020 (FISG)). The draft inter alia provides for a drastic increase of the auditors’ liability under German civil law.
Auditors’ liability under German law
The liability of auditors is governed by Section 323 of the German Commercial Code (HGB) which provides as follows: “The auditor (…) shall be obliged to conduct the audit conscientiously and impartially and to maintain confidentiality (….). Any person who intentionally or negligently breaches his duties shall be liable to compensate the corporation (…) for the resulting damage. (…)The liability of persons who have acted negligently shall be limited to one million euros per audit. In the case of an audit of a stock corporation whose shares are admitted to trading on the regulated market, the liability of persons who have acted negligently shall (…) be limited to four million euros per audit.”
The liability caps of EUR 1 million per audit or EUR 4 million per audit for publicly noted companies cover all cases below the threshold of intent (i.e. including gross negligence). German law thus deviates significantly from the laws of many countries, which contain much stricter rules for auditors’ liability.
Drastic changes in draft law
The draft law now proposes two drastic changes to the existing liability regime under German law:
- First, the draft proposes an increase of the maximum liability in three categories: the limitation of liability for the audit of publicly noted companies shall be increased to EUR 16 million (instead of EUR 4 million so far). The maximum liability for the audit of private banks and insurance companies shall be increased to EUR 4 million, and to EUR 1.5 million for the audit of other companies (instead of EUR 1 million so far). This represents an increase in the auditors’ liability risk of up to 400 percent.
- Second, the draft proposes that there should no longer be any limitation of liability for grossly negligent conduct. If enacted, auditors will be able to limit their liability only in cases of simple negligence. The burden of proof that an auditor acted with intent or gross negligence – and therefore cannot invoke the limitation of liability– shall be borne by the injured party.
The following table provides a synopsis of the current wording of Section 323 of the German Commercial Code (HGB) and the proposed changes in the draft law:
| Current wording of Section 323 HGB (English) | Proposed wording of draft law (English) |
| (1) The auditor (…) shall be obliged to conduct the audit conscientiously and impartially and to maintain confidentiality; (…). | (1) The auditor (…) shall be obliged to conduct the audit conscientiously and impartially and to maintain confidentiality; (…). |
| (2) The liability of persons who have acted negligently shall be limited to one million euros per audit. In the case of an audit of a stock corporation whose shares are admitted to trading on the regulated market, the liability of persons who have acted negligently shall, notwithstanding sentence 1, be limited to four million euros per audit. This shall also apply if several persons have participated in the audit or several acts requiring compensation have been committed, and without regard to whether other participants have acted intentionally. (…) | (2) The liability of the persons referred to in paragraph 1 sentence 1 to pay compensation for an audit shall be limited as follows: 1. in the case of corporations that are a public interest entity pursuant to Section 316a sentence 2 number 1: to sixteen million euros; 2. in the case of corporations which are a public interest entity pursuant to Section 316a sentence 2 number 2 or 3 but not pursuant to Section 316a sentence 2 number 1: to four million euros; 3. in the case of corporations not specified in numbers 1 and 2: to one million five hundred thousand euros. This shall not apply to persons who have acted with intent or gross negligence. The maximum limitation of liability in accordance with sentence 1 shall also apply if several persons have participated in the audit or several acts requiring compensation have been committed, and without regard to whether other participants have acted intentionally or with gross negligence. (…) |
| (5) The notification pursuant to the second subparagraph of Article 7 of Regulation (EU) No. 537/2014 shall be addressed to the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht), and in case of suspicion of a criminal or administrative offense also to the respective competent authority responsible for prosecution. |
Draft law not yet set in stone
According to the government’s explanatory note, the purpose of the draft law is to strengthen the quality of audits of financial statements. The German legislator aims to provide the necessary incentives and deterrence for a careful and conscientious audit.
Various groups and associations have publicly criticized the draft. A particular fear is that the unlimited liability in cases of gross negligence (instead of only in cases of intent) will make insurability for auditors more difficult and expensive. Due to the increase in the maximum liability, some players in the auditors’ community even fear that certain (medium-size) audit firms might even withdraw from the market.
It would be premature to consider the draft legislation as the final law already. The formalized legislative procedure before the German Parliament and Federal Council (Bundesrat) has not yet begun. Most certainly, the rule which former German Defense Minister Peter Struck once called “Struck’s first law” applies: “No law comes out of parliament the way it was introduced.” There will certainly be changes to the draft. This is also likely with regard to the described changes to the auditor’s liability. The auditors’ community will do its best to mitigate the increase in risk. But already according to the current draft, there will not be a totally unlimited liability of auditors in Germany, as it was (politically) pronounced by some as a consequence of the Wirecard scandal. Rather, unlimited liability may only exist in cases of gross negligence and intent.
