Management Forecast Regulation and Practice in Germany – Firm and Auditor Perspectives

Abstract

The German regulation on future-oriented reporting is unique in the international context. Its scope is extensive and it specifically pertains to a two-year time horizon in the management forecast section of the annual report. The goal of our research is to provide insights into the perspectives of forecasters on the one hand and auditors on the other, as well as to contrast their viewpoints in order to promote the regulatory debate. Applying the multiple case study method, we exploratively interview forecasters and auditors in order to extract perspectives on the regulation itself, the forecasting process and their mutual relationship. Our main results show that the auditing of forecasts is a regular cause of friction and that most firms and auditors are dissatisfied with the current regulation. In particular, its concreteness and detail are criticised because the forecasting behaviour of firms is generally rather heterogeneous in practice. The management of small enterprises and auditors of smaller firms seem to view management forecasts even more critically. Our research provides evidence for the ongoing regulatory discussion in the German and international contexts and allows for greater insight for both auditors and forecasters into the viewpoints of their respective counterparts.

Notes

For important changes in US regulation and their effects on management forecasting, see Hirst et al. (2008, pp. 321–322). For Germany, see Knauer and Wömpener (2010).

The IASB issued an exposure draft on the management commentary in summer 2009. It is expected that the draft will serve as a framework for an adequate management commentary on a voluntary basis. Thus, the German regulation will retain its relevance for German firms.

For the specific importance of management forecasts see Coller and Yohn (1997).

Primarily due to concerns of anonymity, a dyadic approach was not feasible.

Existing research focuses almost exclusively on publicly listed firms (Hirst et al., 2008; see also Section 2.3). In the German context, however, private firms account for the majority of firms (KfW Bankengruppe, 2010).

Nölte (2009) shows in a cross-sectional analysis of DAX 30 and MDAX firms that forecast precision declines significantly when uncertainty is high.