Statutory Audit in Germany: When Is a Company Required to Have Its Annual Financial Statements Audited?
Under German commercial law, companies that are not classified as small companies are generally subject to a statutory audit of their annual financial statements and management report. This applies in particular to medium-sized and large corporations, such as German GmbHs (limited liability companies) and AGs (stock corporations), as well as certain partnerships that are treated like corporations for accounting purposes.
The statutory audit requirement depends on the size classification of the company under the German Commercial Code (HGB). A company generally changes its size classification only if the relevant thresholds are exceeded or fallen below at two consecutive balance sheet dates.
German statutory audit thresholds
- Small companies: up to €7.5m balance sheet total, €15m net turnover and 50 employees
- Medium-sized companies: up to €25m balance sheet total, €50m net turnover and 250 employees
- Large companies: above €25m balance sheet total, €50m net turnover or 250 employees
Statutory audits in Germany are generally performed by German public accountants (Wirtschaftsprüfer) or audit firms (Wirtschaftsprüfungsgesellschaften). A medium-sized limited liability company (GmbH) and a medium-sized partnership subject to statutory audit may also be audited by certified book auditors (vereidigte Buchprüfer) and book-auditing firms (Buchprüfungsgesellschaften).
The statutory auditor should generally be elected before the end of the financial year to which the audit relates. The audit engagement must then be issued without undue delay. Companies becoming subject to a statutory audit for the first time should therefore address the appointment of an auditor well before year-end.
It is particularly important for companies that fall just below the thresholds, and for rapidly growing companies, that the management keeps a close eye on these thresholds. If a company is subject to a statutory audit but the audit has not been performed, the annual financial statements cannot be formally adopted (festgestellt) under Section 316 HGB. Depending on the legal form and the circumstances, further legal consequences may arise. This can affect, among other things, the formal adoption of the annual financial statements, profit distributions and the company's disclosure obligations. Companies should therefore clarify a potential audit requirement at an early stage.
Does a German subsidiary require a statutory audit?
Foreign companies with a German subsidiary should check the German statutory audit requirements separately. The audit requirement generally depends on the legal form and size of the German entity under German commercial law. A German subsidiary may be required to have its annual financial statements audited under the German Commercial Code (Handelsgesetzbuch, HGB), even where the parent company's financial statements are prepared and audited under IFRS or another foreign accounting framework.
In addition to the statutory audit, group reporting requirements may apply where the German company is part of an international group. The interaction between German statutory accounts, group reporting and the parent's consolidation requirements should therefore be considered at an early stage.
The annual financial statements and other required documents must generally be filed with the German Company Register (Unternehmensregister). Where a statutory audit is required, the auditor's opinion (Bestätigungsvermerk) or the statement that the opinion has been withheld must also be disclosed.
What should management do?
- Monitor the statutory thresholds: Keep track of the company's balance sheet total, net turnover and average number of employees.
- Assess the audit requirement early: Do not wait until the annual accounts are being prepared to determine whether an audit is required.
- Appoint the auditor in good time: This is particularly important for a company's first statutory audit.
- Coordinate the year-end inventory count: The auditor may need to attend or observe the physical inventory count as part of the audit procedures.
- Prepare for the first audit carefully: A well-prepared first audit can significantly improve the efficiency of the audit process.
- Use the audit as a management tool: The audit can provide valuable insights into financial reporting, internal controls and business risks.
A statutory audit is more than a compliance exercise. Especially during a first-time audit, the audit process can provide management and shareholders with valuable insights into financial reporting, internal processes, risk areas and the quality of financial information used for decision-making.