In its ruling RV/7102618/2018 of 28 February 2019, the Austrian Federal Finance Court (BFG) stated that an internal control system (ICS) can protect the management of a company from prosecution under (financial) criminal law.
False advance payments of VAT due to a replacement
The issue here was incorrect calculations for payment demands as a result of incorrect advance payment entries in the accounting system. This happened in connection with the departure of the long-standing head of accounting and a long process to find a replacement for this position. The result was that incorrect advance payments of VAT were made.
Can the mangement be blamed fair filing their duties?
In the oral hearing before the Federal Finance Court, the question therefore arose as to whether the company’s management could be blamed for failing in their duties (selection and monitoring culpability) to detect the errors made in the advance VAT declarations (UVAs). ‘Selection and monitoring culpability’ refers to whether the appropriate individuals for an activity are selected by the management and whether these individuals are also appropriately supervised (monitored). Such an accusation can have repercussions for the management under (financial) criminal law.
In brief, long-standing and experienced clerks, who now had to do the work of their former superior, overlooked the fact that a change in the reconciliation of VAT was triggered by advance payment items being netted. The employees did not know that this would have meant preparing a new VAT reconciliation by means of a manual entry in the accounting system.
Problems with automatic accounting software
The error in the VAT assessment and processing thus arose from a combination of human error and the shortcomings of the automatic accounting software (change in the correct way of reconciling VAT, thereby making it necessary to manually enter a new VAT reconciliation calculation). The wrong UVAs were ultimately corrected in a subsequent period.
No selection and monitoring culpability
After the oral hearing and the accompanying explanations of the facts, the Federal Finance Court came to the conclusion that the management of the company had relied on the work of employees who carried out this work correctly for years without objections, that preliminary financial audits did not lead to any findings and that there was therefore no reason for the management to undertake further investigations in addition to the existing ICS. This means that the management was not to be held accountable for selection and monitoring culpability.
The findings of the Federal Finance Court show once again how important an ICS is for the management as it is generally not necessary for one or more managing directors to take care of the day-to-day operations, such as in the “well-rehearsed” accounting department.
Does your ICS really works? Our experts will check your internal processes: Do not hesitate to get in touch with TPA expert Sebastian Haupt, author of this article.