Quality assurance procedure

Description of the approach to ensure the quality of the published information

The MSG must ensure the quality of reporting on payments made by companies to government agencies as well as the corresponding government revenues. This is a key requirement of the EITI standard. In the first two D-EITI reports, the MSG relied on mutual disclosure of payment flows for quality assurance. This so-called EITI standard procedure provides for an individual comparison of the reported payments of companies with the corresponding revenues of the government agencies by an Independent Administrator. There were no or no notable differences between payments made by companies and payments received from government agencies.

From a systematic point of view, the standard payment reconciliation procedure is a case-by-case examination of the payment flows reported by the participating companies. There is no recording and assessment of the processes and controls associated with the payment flows.

Since the 2018 reporting period, Germany has been developing and implementing an alternative method for quality assurance of reported payment flows to government agencies. For this eighth German EITI report, the alternative method will continue to be used by the MSG and the Independent Administrator.

The alternative method replaces payment reconciliation with a two-step system-based approach. In its first step, information about the relevant processes and controls as well as the control environment is collected and analysed. The focus is essentially on the government payment recipients, for example the collection processes of the government agencies, the existing monitoring bodies or the general legal framework conditions in the government agencies. The aim of the analysis is to enable the MSG to make an informed assessment of whether there are risks of incorrect processing of extraction-related payments to government agencies during the reporting period.

Depending on the result of the risk assessment, different steps are derived: from a plausibility check based on key figures or further analytical considerations in the case of missing risk indications to detailed analyses/checks in the case of risk indications.

The concept of the system-based approach developed under the alternative quality assurance process is considered appropriate to meet the requirements of the EITI standard on the reliable disclosure of payments from the extractive industries. In the meantime, the alternative has been included as an EITI standard procedure.

The investigative actions of the company reports carried out by the Independent Administrator lead to the assessment that the MSG can successfully complete the quality assurance required according to Requirement 4.9 of the EITI standard on the basis of this system-based approach.

Type and scope of the work of the Independent Administrator

The work of the Independent Administrator consisted of investigative actions in accordance with the International Standard on Related Services (ISRS) 4400, Engagements to Perform Agreed-upon Procedures.

The investigative actions carried out by the Independent Administrator do not constitute a (final) audit or an audit review of the reported payment flows in accordance with professional standards for auditors recognised in Germany or internationally. Therefore, the Independent Administrator has not issued an overall judgement (neither with sufficient nor limited certainty) on the reported payment flows. The Independent Administrator has not carried out their own investigative actions to verify the accuracy, completeness and reliability of the payment data with regard to the data reports of the participating companies or the government agencies. Moreover, the investigative actions were not aimed at the detection of errors or infringements on the part of the participating companies or government agencies.

The activities of the Independent Administrator under the alternative reconciliation procedure were set out in a comprehensive work report for the 2023 reporting year.

Templates and information on data collection

Based on the MSG’s decisions on the D-EITI reporting process, the Independent Administrator has created a Word-based template for collecting the relevant data from the companies.

In order to provide companies with practical advice and assistance, a FAQ document (Frequently Asked Questions) was compiled in addition. In addition, the Federal Ministry for Economic Affairs and Energy (BMWE) provided an accompanying letter for the enquiry.

The template for data collection from companies also serves the MSG as a tool for communication with the participating companies to record the payment flows. Thus, at the request of the MSG and in line with previous years, additional enquiries were made regarding beneficial owners within the meaning of the Money Laundering Act and regarding the presence of so-called politically exposed persons (PEPs).

Managing tax secrecy

EITI reporting includes tax data, namely payment flows relating to corporate tax and trade tax, which are subject to tax secrecy in accordance with Sections 30 et seq. AO (German Taxation Regulation). In the course of preparing the EITI report, the payment flows reported by the companies and received by government agencies were prepared and disclosed. This usage of tax-relevant data is only permissible if the taxpayer, i.e. the respective company, expressly agrees (Section 30 para. 4 No. 3 AO).

The data reporting by means of the enquiry form ensured that the consent of each individual company was obtained. This consent has been confirmed by all participating companies by the signatures of authorised persons.

Identification of companies

The Independent Administrator has carried out a comprehensive analysis to identify the relevant companies for the eighth D-EITI reporting. The analysis was based on the D&B Hoovers database. All the companies which are mainly active in the extractive industries in the areas of lignite, crude oil, natural gas, potash and salts as well as quarried natural resources were selected. This was based on the allocation of the companies to sub-sections 05 to 08 in accordance with Regulation 1893/2006/EC of December 2006 (see Selection of companies).

In the second step, the companies were selected according to the size criteria specified by the HGB for “large” companies.

The circle of these provisionally identified companies was manually expanded by the Independent Administrator to include corporate groups in which so-called group infection via “active” subsidiaries could be considered (for details see Selection of companies). The following aspects must be taken into account, unchanged from the previous D-EITI reporting:

• Companies which are primarily active in the storage of natural resources (e.g. construction and operation of cavern storage facilities for the storage of natural gas) are not considered, despite being assigned to sub-sections 05 to 08, since the extraction of natural resources is not the main focus here; the same applies to other services.
• All the companies in sub-section 07 (ore mining) initially included do not actively extract natural resources in Germany and were therefore not considered.

Due to the legal requirements (see Sections 341q et seq. HGB) and their interpretation, complete identification of all companies subject to reporting requirements for the current D-EITI reporting cannot be ensured. Nevertheless, the published payment reports for 2023 show that the companies determined according to the methodology used are broadly in line with the reporting companies.

It is evident that the selection criteria set by the MSG have achieved a high level of coverage for the lignite, crude oil, natural gas, potash and salt sectors (see 2023 payment flows). These natural resources are exclusively free-to-mine mineral resources. These sectors contain few large companies. On the other hand, the natural resources in the quarried natural resources sector are mainly produced by a large number of small to medium-sized companies.

According to evaluations by the Bundesverband Baustoffe – Steine und Erden e.V., there is a total of approx. 3,400 companies in the building materials, stone and earth industry in Germany in 2023. About 81% of these companies employ fewer than 50 people. These smaller units account for about 40% of the sales revenue of the building materials, stone and earth industry. The fragmentation of the sector is also due to the widely differing capital intensity of production; in particularly capital-intensive subsectors (e.g. cement production), larger medium-sized and large companies are significantly more represented than in the area of pure natural resource extraction. The size structure of the industry has changed little over the past decade.¹

As a result, it can be assumed that a number of companies or corporate groups that do not meet the size criteria of the D-EITI reporting are already among the 25 largest providers in this sector. Coverage of the quarried natural resources sector therefore lags behind that of the other sectors, owing to the large number of small and medium-sized companies not covered.

Quality of data provided by companies

Companies in Germany are subject to comprehensive, legally-regulated

• accounting,
• disclosure, and
• auditing obligations.

The structure of the regulations depends on the size, legal form and activity of the company and must therefore be determined individually for each company. In principle, corporations and limited partnerships within the meaning of Section 264 a para. 1 HGB² must draw up annual accounts with notes and, if necessary, a management report at the end of each financial year.³ The obligation to carry out an audit is regulated in particular in Section 316 et seq. HGB. There is a legal obligation to carry out audits for, among others, “medium-sized” or “large” corporations and certain limited liability partnerships. The size categories are determined according to Section 267 para. 2 and 3 HGB and are based on the criteria balance sheet total, turnover and average number of employees.

The statutory audit must include at least the annual accounts (balance sheet, profit and loss account and notes) as well as the management report and the accounting records. The auditor must determine whether the accounts are consistent with the underlying accounting principles and with any other legal basis such as the Articles of Association or the partnership agreement (compliance/regularity audit). Furthermore, it must be determined whether the respective financial statements together with the associated management report give a true and fair view of the company’s position, whereby it must also be examined whether the management report accurately presents the opportunities and risks of future development. The auditor summarises the results of the audit in a written audit report (see Section 322 HGB).

The annual accounts, management report and audit report (in the case of statutory audits) as well as other documents must be disclosed in the Company Register (Section 325 HGB). So they are generally available to the public at the internet address https://www.unternehmensregister.de/en. However, there are disclosure exemptions for certain size criteria.⁴

The shareholders of a subsidiary may waive the statutory audit and disclosure requirements for the annual accounts and management report of the subsidiary. This requires certain conditions (see Section 264 III HGB) to be met, including that the consolidated financial statements of the parent company are disclosed and that the parent company has agreed to assume responsibility for the obligations entered into by the subsidiary up to the reporting date. If the shareholders make use of all or part of the relief, these cases must, however, also be disclosed transparently via the Company Register.

In contrast to the annual accounts, the (group) payment reports are not subject to any statutory auditing obligation pursuant to Sections 341 q et seq. HGB. However, the statutory auditor

must report in the audit report if no (group) payment report has been prepared or disclosed despite the statutory obligation.

The management board or executives must ensure that the relevant financial statements are correct. To fulfil their due diligence obligations, they are usually supported by an internal audit department. The internal audit department provides independent and objective audit and advisory services. It supports the organisation in achieving its objectives by using a systematic and targeted approach to assess and improve the effectiveness of risk management, controls and management and monitoring processes. In Germany, there is no legal obligation to establish this process-independent control function, but it complies with the principles of good corporate governance (see German Corporate Governance Code). It is particularly common in large, complex or internationally active corporations.

In addition, many companies rely on compliance management systems to ensure compliance with legal requirements and internal policies. They include preventive measures, training or whistleblower channels to prevent or detect violations of laws or internal regulations. The establishment of a whistleblower system has been mandatory in Germany since 2023 for companies with 50 employees or more. The corresponding Whistleblower Protection Act (HinSchG) is the German implementation of the EU Whistleblower Directive.

Since the Financial Market Integrity Strengthening Act (FISG), listed companies also need to put in place an adequate and effective internal control system. An internal control system (ICS) consists of systematically designed technical and organisational measures and controls in the company to comply with guidelines and to prevent damage that can be caused by its own staff or malicious third parties. In particular, the accounting-related internal control system is geared to the accuracy and completeness of the financial statements.

Published accounts of the participating companies

The audited financial statements or consolidated financial statements are published on the websites of the participating companies or in the Company Register. Below is an overview with reference to the relevant documents.

Since it is technically not possible to link to individual enquiries in the Company Register, the following click instructions are included:

1. Click on the linked website
2. Enter the company name into the “Company name” search field
3. If you select the “Extended search” option, you can narrow your search by stating specific criteria such as the registered office, subsidiary or desired publication period
4. Select the corresponding documents according to the name in the table that subsequently appear

Identification of government agencies

Due to the federal structure of the administration in Germany, it is not possible to centrally record all the relevant government agencies that generate revenue from the extractive industry. They are therefore derived directly from the defined payment flows:

• Corporate tax: Competent tax offices at the registered office of the companies
• Trade tax: Municipalities in whose territory the relevant establishments are located
• Mine site and extraction royalties: Competent mining authorities of the federal state in which the licensed/approved field is located
• Lease payments and payments for infrastructure improvement: Government bodies at state or municipality level, depending on the type of payment

The basis for the presentation of government revenue is the corresponding data on payments by companies for the current reporting year.

Basis for risk identification and assessment

On the basis of publicly available sources of information, interviews with employees of the government agencies and the information provided by members of the MSG, it was assessed whether there were any indications that the following payment flows could be irregular in the 2023 reporting period:

• Mine site and extraction royalties
• Corporate tax and
• Trade tax

Details of this assessment process are described in more detail below.

The assessment is based on the processes and control mechanisms put in place by government agencies to ensure proper collection (debit) and settlement (payment) of the respective payment flows. The concept of “regularity” means, with regard to the EITI objectives,

• that adequate processes or procedures are in place at the level of the relevant government agency to ensure that payments are made in a timely manner and in accordance with the law,
• that processes and controls are in place to ensure full and timely clarification of any discrepancies between the debit position of government agencies and payments by companies,
• that adequate controls are in place at the level of higher government agencies; and
• that verification of the controls by independent audit offices is ensured.

The analysis of the processes and controls set up on the part of the government agencies therefore necessarily also takes into account the wider administrative environment of these government agencies and the relevant legal framework.⁵

In Germany, this system is based on a combination of legal bases (e.g. civil service law, budgetary law, criminal law, administrative regulations), the structure and organisation of the authorities (e.g. by means of rules of procedure, business allocation plans, establishment of segregation of duties, dual-control principle) and additional monitoring of processes and controls (e.g. by means of internal audit offices and other independent audit offices).

All these processes, procedures and controls are to be understood as an internal control system. An ICS supports the objective of a correct collection of the respective payments.

The definition of an internal control system is the result of various framework concepts. The concept of the Committee of Sponsoring Organisations of the Treadway Commission (COSO) has been widely disseminated internationally. Its basic principles are reflected, for example, in the Standards for Internal Control in the Federal Government of the United States Government

Accountability Office, which means that it can also be applied to government agencies. At the same time, this framework concept is, among other things, the methodological basis for the auditing standards applied in Germany by the Institut der Wirtschaftsprüfer in Deutschland e. V. (IDW) in statutory audits and voluntary audits.⁶

According to COSO, the components of an internal control system include the control environment, risk assessments, control activities, information & communication and monitoring of the internal control system. These components are applied to the relevant payment flows of corporate tax, trade tax and mine site and extraction royalties.

 

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