Introduction
Enforcement priorities
Detected breach of accounting standards
Whistleblower hotline
Comment


Introduction

On July 1 2013 the Control of Accounting Act entered into force. Its purpose is to ensure that financial reporting published by entities whose equity or debt securities are admitted to trading on a regulated market in Austria(1) (eg, annual reports and interim financial information) is compliant with national and international accounting standards. To this end, the act vests the Financial Market Authority (FMA) with the power to audit such financial information:

  • when indications exist that accounting standards have been breached; or
  • at any time on a random basis.

An audit of financial information can be conducted by the FMA directly or by the Financial Reporting Enforcement Panel acting on the FMA's behalf. When the FMA acts on indications of a breach, the respective company, its managers, employees and certain other persons have a duty to cooperate. While there is no duty to cooperate in the course of random audits, any information provided voluntarily must be accurate and complete. Any breach of the aforementioned duties may lead to an administrative fine of up to €100,000. A breach of accounting standards as such does not lead to any fines under the act, but may be subject to the general civil and criminal law penalties regime.

The act applies to financial information published in relation to financial years ending after December 30 2013. Consequently, financial statements for the financial year ending December 31 2013 (as well as interim financial statements for the 2013 and 2014 financial year) are already subject to supervision.

Enforcement priorities

When the FMA acts based on indications of a breach of accounting standards, its review may be comprehensive (ie, all accounting aspects that are potentially flawed may be reviewed). However, if the FMA acts in the course of a random audit, its review will follow the Protocol of Enforcement Priorities issued by the FMA (in accordance with the European Securities and Markets Authority (ESMA) European Common Enforcement Priorities) for every calendar year. The protocol for 2013 financial statements lists the following as priority review areas:

  • Impairment of non-financial assets (under International Accounting Standard (IAS) 36), in particular:
    • cash-flow projections;(2)
    • key assumptions for value in use;(3) and
    • sensitivity analysis;(4)
  • Measurement of post-employment benefits obligations (under IAS 19), in particular:
    • the adequacy of discount rates;(5)
    • actuarial assumptions;(6)
    • consequences of the revised IAS 19;(7) and
    • information about plans;(8)
  • Fair value measurement and disclosure (under International Financial Reporting Standard (IFRS) 13), in particular:
    • non-performance risk;(9)
    • units of account;(10)
    • data set out in the annex;(11) and
    • the allocation of any consideration in relation to business combinations;(12)
  • Disclosures related to significant accounting policies, judgments and estimates (under IAS 1), in particular the quality and completeness of disclosures that are relevant to an entity's financial statements, including:
    • in relation to the summary of significant accounting policies;(13)
    • significant management judgments;(14)
    • risky sources of estimation uncertainties;(15)
    • events and conditions that might cast doubt on the entity's ability to continue as a going concern;(16) and
    • disclosure of the impact of new standards, especially in relation to the consolidation package;(17)
  • Measurement and disclosure related to financial instruments, in particular:
    • any impairment of financial assets;(18)
    • the consideration of the ESMA Statement on Forbearance Practices; and
    • credit risk(19) and liquidity risk;(20) and
  • Consolidated management report (under Sections 243(1), (2) and (5) of the Commercial Code), in particular:
    • the description of significant risks and uncertainties; and
    • the analysis of the business in light of performance indicators.

Detected breach of accounting standards

If the FMA identifies no inaccuracies in the financial information in the course of its audit, it will issue an informal notice to the company stating thus. If the FMA detects inaccuracies, it will determine these inaccuracies in a ruling that can be subject to further appeal. In addition, if this would be in the public interest, the FMA may order publication of any inaccuracies it has identified. However, if the entity has a legitimate interest in keeping the findings confidential and makes a respective request, the entity's interests must be weighed against those of the public. Further, if there are any indications of a criminal offence, the FMA must notify the competent law enforcement agencies.

Legal commentators have criticised the fact that there is no statutory definition of what constitutes an 'inaccuracy' for purposes of the act. However, there seems to be consensus that not each and every insignificant deviation from accounting standards should be deemed an inaccuracy leading to a ruling, only significant deviations.(21) However, whether the FMA will adopt such restrictive interpretation and whether the number of rulings in Austria will be as high as in Germany (ie, 16% in 2012 and 19% in 2011) remain to be seen.(22)

Whistleblower hotline

On January 1 2014 the FMA launched a whistleblower hotline through which persons who know of or reasonably suspect a breach of the act can anonymously inform the FMA of such knowledge or suspicion by telephone. The hotline primarily addresses employees of supervised companies (eg, credit institutions, insurance undertakings, pension funds and investment services providers). However, it may be used by anyone who knows of or reasonably suspects a violation of the law as described above. In addition, as of February 1 2014 a secure electronic whistleblower system will be launched through which whistleblowers can have an encrypted anonymous dialogue with the FMA. In relation to the act, the whistleblower hotline and electronic whistleblower system offer a means by which any person reasonably suspecting a breach of national or international accounting standards can report such an alleged breach. Where there are indications of a breach, the FMA will review the financial information in question comprehensively (ie, in relation to all accounting aspects that are potentially flawed) without limiting its review to the protocol.

Comment

The whistleblower hotline and system, combined with the FMA's comprehensive review and the absence of a definition of what constitutes an inaccuracy may lead to an increased likelihood of enforcement activities.

For further information on this topic please contact Ursula Rath or Nora Frizberg at Schoenherr by telephone (+43 1 53 43 70), fax (+43 1 53 43 76100) or email ([email protected] or [email protected]). The Schoenherr website can be accessed at www.schoenherr.eu.

Endnotes

(1) This can also be an entity with its seat outside Austria whose debt or equity securities are admitted to trading on a regulated market in Austria.

(2) IAS 36.33a and 36.34.

(3) IAS 36.134(d).

(4) IAS 36.134 et seq.

(5) IAS 19.83.

(6) IAS 19.144 et seq.

(7) IAS 19.10 et seq.

(8) IAS 19.139.

(9) IFRS 13.42 et seq.

(10) IFRS 13.69.

(11) IFRS 13.93 and 13.97.

(12) IFRS 3.

(13) IAS 1.117.

(14) IAS 1.122.

(15) IAS 1.125 and 1.129.

(16) IAS 1.25.

(17) IFRS 10, 11 and 12.

(18) IAS 39.58.

(19) IFRS 7.31, 7.36 and 7.37.

(20) IFRS 7.39 and 7.B11E.

(21) Schrank, WBl 2013, 311, 312 and 314; Houf/Milla, persaldo 2013/1, 29, 29; Moser, AufsichtsratAktuell 2013/1, 12, 14.

(22) See pages 2 and 3 of the Financial Reporting Enforcement Panel's Annual Activity Report 2012.