Enforcing Financial Reporting Standards: The Case of White ...

necessary although financial statements are reviewed by independent auditors. Also, we aim
to demonstrate how the enforcement is organized and how the FREP selects companies that
will be inspected. Thus, students will receive an overview of the enforcement process.
Solutions:
(1) In 2005, the German Financial Reporting Enforcement Panel (FREP) conducted their first
examinations with the aim to restore investor confidence in companies’ financial statements
and equity markets as a whole. The additional institution that checks and controls a
company’s financial reporting aims to increase compliance with accounting standards.
Triggering events for the creation of FREP were accounting scandals like Enron and
WorldCOM. These scandals showed that, in spite of reviews by auditors, companies could
still manipulate their financial statements. As a result, many countries introduced new ways
to further inspect accounting as well as auditing (e.g. Sarbanes-Oxley-Act). In addition,
enforcement institutions also aim to prevent mistakes by publishing error findings as well as
recommendations. Thus, they want to increase management’s and auditors’ awareness of
common errors and mistakes in certain accounting areas.
The instructor may also guide students through discussions about the “value” of
reliable accounting figures for functioning and efficient capital markets. This can enable
students to see the big picture of reliable accounting figures.
(2) In Germany, the enforcement was designed to reflect characteristics of both a sovereign
authority as well as a privately held institution. A two-step-process was implemented that
includes the private FREP who conducts the primary investigation and the sovereign
Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin)
who takes over in case FREP’s investigation fails. Companies that will be examined are
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