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Regulating Risk Disclosure in Germany: a leap into the unknown

Professor Martin Glaum
Justus-Liebig-Universitat Giessen
Email: martin.glaum@wirtschaft.uni-giessen.de|

Date: June 2001
Venue: CARR Seminar Room, H615


In the late 1980s and early 1990s, several large German firms broke down as a result of severe mismanagement, speculation in the derivatives markets, manipulations of financial accounts and other forms of criminal misbehaviour. These cases led to serious concerns about the adequacy of the governance system of German firms. As a result, in early 1998 the German legislator passed a bill which amended both the Corporate Act (Aktiengesetz) and the Commercial Act (Handelsgesetzbuch, HGB). One of the new rules introduced by the bill expands the disclosure requirements for firms; the annual reports of firms from now on have to provide information about the risks the firms face. The legislation did not, however, provide any details as to how these disclosures would have to be reported. Because of this, the German Accounting Standards Committee (which itself was founded only in 1998 on the basis of the above mentioned amendment of German accounting law) set up a working party in order to prepare a draft standard which would establish a set of rules on the content and structure of German firms' risk disclosure.

In late 2000, the German Accounting Standards Committee published an exposure standard; the publication of the final standard on risk disclosure is expected by mid 2001. The paper will describe the developments that led to the amendments in German commercial law. It will outline the proposed rules on risk disclosure for German firms, discuss several critical issues (e.g., definition of risk, risk categories, quantification of risks), compare the proposed German rules to accounting and disclosure standards in other countries, and report on the discussion of the draft standard in Germany.