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By its decision of 21 April 1997 (DB 1997, 1394), the Federal Court of Justice has relieved fears that the German civil courts might hold the tax consulting and auditing functions to be largely incompatible with one another. Instead, the court's decision confirms that the two functions are in principle compatible within broad limits.
German company law (sec. 319 HGB) provides who is qualified to audit the financial statements of a German corporation and also prohibits otherwise qualified persons from acting as auditor in the case of certain specified conflicts of interest. One such conflict exists with regard to an auditor who "has participated in the keeping of the corporation's accounting records or in preparing its financial statements other than in the exercise of his audit functions" (sec. 319 par. 2 no. 5 HGB). The prohibition is applicable mutatis mutandis to auditing companies (sec. 319 par. 3 no. 2 HGB).
In a much noted decision, the Karlsruhe Regional Court of Appeal held in 1995 (DB 1995, 2514 - 23 Nov. 1995) in a suit brought by a shareholder that the appointment by shareholder resolution of a particular auditing and tax consulting company as statutory auditor of the corporation's financial statements was void because the company in question was barred from the office of auditor under sec. 319 par. 2 no. 5 HGB. The shareholder's claim was that, in the exercise of its activities as tax consultant, the auditing company had helped prepare the financial statements it was to audit. Specifically, the auditing company had advised with respect to certain accruals set up in the financial statements for tax purposes. (Under German tax accounting, there is general linkage between the commercial and tax balance sheets.)
The Federal Court of Justice vacated the decision of the Karlsruhe Regional Court of Appeal. The Court admitted that consulting could cross the boundary drawn by sec. 319 par. 2 no. 5 HGB, but considered the lower court to have drawn the limits of permissible consulting too narrowly. In the view of the Federal Court of Justice, permissible consulting consisted of advising the client as to the possible alternatives (including presumably the legal preconditions for each) and expressing recommendations. Consulting became impermissible when the consultant himself actually made the business decision. Applying these principles to the peculiar situation of tax consulting, the Court appeared to see no conflict between the normal activities of a tax consultant and the audit function as long as the client remained in a position to assess and exercise the final power of decision with respect to the recommendations presented by the tax consultant/auditor. The Court noted, for instance, that the corporation in question had an entire department which was responsible for preparing its year-end financial statements.
This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.
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The New Turkish Commercial Code ("New Code") has been enacted and will enter into force in July 2012. One of the major changes brought by the New Code regards mandatory independent audits of corporations.
The law about payment of dividends has remained substantially unchanged for thirty years.
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