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There are many fundamental questions regarding the management report: Is it part of the annual financial statements? Is it prepared by the auditor as part of his work? Step by step, we will dispel widespread myths about the management report.
The annual financial statements generally include the balance sheet and the profit and loss account in accordance with Section 242 Paragraph 3 of the German Commercial Code (HGB) and, in the case of certain companies, the appendix in accordance with Section 264 of the German Commercial Code (HGB). The management report, on the other hand, is not part of the annual financial statements, but rather supplements them. The management report is therefore a legally and functionally independent accounting instrument that primarily has an information function. The fact that the management report is not part of the annual financial statements is not only clear from Section 264 Paragraph 1 of the German Commercial Code (HGB), but also, for example, from Section 325 Paragraph 1 No. 1 of the German Commercial Code (HGB), in which the management report “stands alongside the annual financial statements”: “the adopted or approved annual financial statements, the management report and (…)”.
The mandatory information in the management report is regulated in Section 289 Paragraph 1 and Paragraph 2 of the German Commercial Code (HGB). This is intended to help assess the company's economic situation and estimate future economic development. It contains (mostly verbal) statements about the course of business, the business results and the company's situation. The management report must also contain statements about the company's risk management goals and methods, various risks, research and development and existing branches of the company. In this context, a forecast report and an economic report must be prepared. In addition, the most important financial performance indicators for business activities must be included. These mandatory components must be supplemented depending on the size and capital market orientation of the company.
Overall, everything must be presented in such a way that a picture is conveyed that corresponds to the actual circumstances (Section 289, Paragraph 1, Sentence 1 of the German Commercial Code). This special task falls to the management report due to the information limitations of the annual financial statements. The general norm of Section 264, Paragraph 2 of the German Commercial Code requires the annual financial statements to present a picture of the assets, financial position and earnings that corresponds to the actual circumstances "in compliance with the principles of proper accounting". This reference in the law to the GoB, as the principles of proper accounting are called, leads to a distortion of the picture of the "actual" economic situation, because the GoB means that the principle of caution and creditor protection dominate the contents of the figures.
In contrast, the management report does not have to take the GoB into account. The reporting should therefore be interpreted more realistically in the management report than in the annual financial statements. The aim is to balance the company's self-protection interests and the recipients' information requirements. Since companies have a legitimate interest in confidentiality, competitive considerations may have to be taken into account when making publicly available information available.
Capital companies and partnerships (OHG, KG) in which at least one personally liable partner is not a natural person (so-called limited liability partnerships) must prepare an annual report. Small capital companies and equally large limited liability partnerships, as well as micro-capital companies, partnerships and sole traders, are exempt from this obligation. They can of course prepare an annual report voluntarily.
The legal representatives - usually the company management - are responsible for preparing the annual report and not - as many assume - the auditor. If mandatory components are missing from the annual report or are incorrect, the legal representatives must expect sanctions, which are regulated by Section 334 of the German Commercial Code (HGB).
If another department of the company is responsible for preparing the annual report, the information from the company management must be passed on to them. In this case, the draft annual report should be agreed with the company management at an early stage, because they have comprehensive company information and are familiar with the overall context. Early coordination with the auditor can also be useful in order to incorporate possible complaints or suggestions for improvement.
Once the final financial statements are available, final work can be carried out on the management report. For example, the management report can be reconciled with the appendix or a final check for completeness can be carried out. The final approval can then be given by the company management. The subsequent audit of the management report focuses on whether it is consistent with the annual financial statements, whether it provides an accurate representation of the company's situation and its future development and whether the other mandatory components are present. Analytical audit procedures aimed at ensuring that the information is understandable are therefore of particular importance. In principle, a "full audit" is assumed, although the audit intensity of the individual areas can be adjusted to reflect the risk.
In summary, the management report represents a separate and more detailed piece of information alongside the annual financial statements, which provides the recipients with a clear overview of the current and future situation of the company without having to take into account the principles of proper accounting. The preparation of the report is the responsibility of the legal representatives, who must include basic mandatory components and possible additional information.
