IMPLICATIoNS FoR CoMPANY oWNERS, INvESToRS AND ShAREhoLDERS 62

The term Principal-Agent-Conflict describes the prevailing state on the anonymous capital markets. Investors and shareholders (principals) put their capi- tal in to the trust of managers (agents). As investors and shareholders do not have the ability to effectively control these managers, it is possible for them in turn to use their power of authority to commit fraud worth billions of euros. Information asymmetries play a key role here. The financial statement of a company holds an important function in terms of information flow to shareholders. Managers can withhold or falsify information so that the company’s statements are false.

Statutory auditors cannot see into the finite detail of company’s status. Also share- holders often do not familiarize themselves with the complex financial reports but rely on press releases (cf. hofmann, 2008, p. 48).

Investors only use their right of information in a limited form and so enable a control vacuum to occur. Neither private nor institutionalized investors can close

this gap through their participation at the annual general meeting. Accordingly, increasingly few investors make use of their right to vote. Especially many small investors forgo their right to attend the annual meetings as they know that their single vote has no real influence. The limited influence of shareholders on the stra- tegic direction of a company leads to the already discussed question as to whether shareholders can still be described as sovereigns of companies (cf. hofmann, 2009, p. 48 ff).

Apart from the large accounting fraud scandals in the US, there were also some sensational cases in Germany where investors were damaged by managers following their own dubious interests. Managers made heavy gains through in- sider trading whilst the investors hopefully held on to their devalued shares (EM Tv/Informatec). In the case of Camroad, the statutory auditors were not able to expose the “empty bookings” and the faked false optimism intentionally created by management (cf. hofmann, 2008, p. 47 f).

2.4.3 Implications for the Perpetrator

The prosecution of white-collar offenders is affected by grave structural is- sues. Apart from the low perceptibility, there is also the high factual and legal complexity of the cases and lengthy proceedings that often stretch over a number of years. Problems proving accountability and personal guilt go hand in hand with an increased defense potential on behalf of the accused (cf. Bussmann, 2003, p. 91).

Personal guilt and being punishable presumes pursuant to § 331 of the German Commercial Code (hGB) intentional behavior which must be proven. The account- ing fraudster must, for example, specifically have thought it possible that the af- fected depiction was false or included a deception and have accepted it (cf. Wulf in Freidank, 2005, p. 222). Furthermore, the Public Prosecutors handling these types of cases are insufficiently staffed and professionally overtaxed (cf. hofmann, 2008, p. 68). If a white-collar offender is sentenced, despite the structural issues with the prosecution, then they can be sentenced to monetary punishment, imprisonment, court trial costs and compensation claim payments.

For pure accounting fraud, i.e. prosecutions which only take the creation of false financial statements or violate the report-back obligations of the statutory au- ditors into account, a prison sentence of one to three years or a monetary penalty is foreseen (§ 331, 332 hGB). The conviction process, however, is made difficult by the

wide scope of accounting law to define when a wrong accounting case according to § 331 hGB occurred. According to § 332 hGB, a careless audit as such cannot be sanctioned but rather the dishonesty of the auditor which must be proven as clear and deliberate false accounting. As accounting fraud often occurs along with other deceptions such as tax fraud, fraud and corruption, it frequently plays a secondary role in the overall penal procedure. on the other hand, due to the number of major scandals they have increasingly become the focus of law-enforcement agencies (cf.

hofmann, 2008, p. 68 ff).

Specific cases of accounting fraud will be highlighted using three examples.

Informatec AG founded in 1988 was one of the first new market companies that was for a long time one of the favored companies on the growth-oriented stock market. The price of Informatec shares rose steadily. After the euphoria came the sudden crash when in August 2000 it became known that the company had is- sued several ad-hoc publications that had been wrong. The two board members Gerhard harlos and Alexander häfele had driven the shares prices up through misreporting data and then sold Informatec shares worth 15 million euros. In 2001 Informatec had to file for insolvency. In November 2003 both board members were sentenced by the Augsburg regional court pursuant to § 400 of the German Stock Corporation Act for deliberate misreporting of data to investors and for insider trading to monetary punishments and imprisonment. harlos was sentenced to two years imprisonment on probation; häfele had to go to prison for two years and nine months. one investor who had invested DM 91,000 in Informatec shares based on the misreported data was liable for complete compensation by the two board members. This was ruled by the Federal Supreme Court in karlsruhe in a civil law proceeding against the defendant. The court recognized that this was a case of personal liability of the board members. It saw the fact of immoral willful intent as fulfilled pursuant to § 826 of the German Civil Code (BGB) (cf. Peemöller/

hofmann, 2005, p. 106 f; hofmann, 2008, p. 68).

Comroad AG based in Munich was founded in 1995 and was launched on the new market in 1999. According to the auditing firm kPMG, Comroad was already financially over-indebted in 1998 but presented ongoing outstanding business re- sults. After it came to light that customers were actually only phantom customers, kPMG withdrew its audit agreement in February 2002 with immediate effect. In March 2002 the chairman of the executive board Bodo Schnabel was dismissed

without notice and was arrested in April 2002. In November 2002 Schnabel was sentenced to seven years imprisonment by the regional court of Munich. he was found guilty of fraud (§ 263 German Criminal Code) as well as insider trading (§ 14 Securities Trading Act) and of manipulating share and market prices (§ 20a Securities Trading Act). Schnabel’s wife was sentenced to imprisonment for two years for aiding and abetting but this was suspended on probation. In addition, the confiscated property of the married couple Schnabel worth 20.1 million euros was declared forfeited (§ 73 German Criminal Code) and was transferred to the Land of Bavaria (cf. Peemöller/hofmann, 2005, p. 111 - 113).

Management striving for personal profit maximization cannot only be found in capitalistic companies whose structure is based on profit maximization. The union owned construction company Neue heimat made headlines in the seventies because the chairman of the board Albert vietor used his position for years for his own personal gain. vietor and five further managers were fired with immediate effect by the Supervisory Board of Neue heimat in 1982. False accounting, credit fraud and personal enrichment led to the insolvency of the Co op AG that was part of the German Trade Union Association (cf. Peemöller/hofmann, 2005, p. 83 ff).

once one has been sentenced then the loss of reputation and the social de- cline of the fraudulent manager is pre-programmed. Suitable employment cannot be found and the need to move the family can arise. The whole social environment of the family can break away, being socially ostracized can lead to a break-up of the family itself. The effects on the personal social arena can in its negative impact potentially be even graver than the judicial punishment.

Pursuant to § 332 of the German Commercial Code (hGB) independent au- ditors and their aids can be sentenced to monetary punishment or imprisonment of up to three years for the false reporting of the auditing results of, for example, the annual financial statement, the management report, the consolidated financial statement, the consolidated management report of a corporation or of an interim financial statement as well as the concealment of relevant events in the final audit report or because of a falsely issued audit certificate. If the breach of reporting duty is done against payment or with the intent of enrichment, then the delin- quent can be sentenced to a monetary punishment or imprisonment of up to five years. Apart from the direct financial loss for the independent auditor there can be further financial damage when they, for example, make “voluntary” payments

to avoid negative publicity or a lawsuit that can go on for years. The case of the auditing firm kPMG is a good example to illustrate this point which, without rec- ognition of a legal obligation in the case of Flowtex, paid out DM 100 million to aggrieved creditors (cf. hofmann, 2008, p. 45 f). In the Comroad case the speaker of the management board, harald Wiedmann, tried to counter the loss of public im- age of the corporation by announcing that the already attested financial statements from 2001 of all 45 kPMG mandates that were listed on the new market would be re-audited (cf. Peemöller/hofmann, 2005, p. 113).