Rankings report – GERMANY

German government introduces regulations to strengthen auditor independence

The Wirecard scandal rocked Germany’s accounting profession last year, and has damaged its credibility. The government has moved quickly to restore trust by bringing in new regulations to strengthen auditor independence and bring unlimited liability for gross negligence. Che Golden reports


hile industry figures feel regulation could still go further, it is a step in the right direction. German economic growth is strong and accountancy firms are seeing an uptick in new business.

Germany has other problems to contend with, other than trust – recruitment is a huge issue, while merger and acquisition activity is creating a churn in the smaller firms, leading to market consolidation. 

This year, the German government passed the Financial Market Integrity Strengthening Act (FISG). According to Martin Sengpiel, partner at Mazars, the FISG is considered a milestone for the accounting profession as it strengthens the auditor’s independence. 

“The most significant changes are that, as of 1 July 2021, the EU wide ‘black list’ is fully transformed into German law without any member state exemption options,” says Sengpiel.

"For fiscal years starting after 31 December 2021 there will be a consistent external rotation period for all public interest entities of 10 years – joint audit is no longer privileged or incentivised. For statutory financial audits for fiscal years starting after 31 December 2021 the professional liability for auditors is significantly extended.”

Martin Sengpiel, partner, Mazars

FISG also introduced new corporate governance related rules to all PIE audits. Some of the rules now formally implemented into the Stock Corporation Act are the requirement for the executive board of a listed PIE to install an effective internal control and risk management system; expanded fines for false balance oath for the executive board and the requirement to install an audit committee within the supervisory board. 

It was desperately needed. The Wirecard scandal has damaged trust in German accountancy. On 25 June 2020, Wirecard filed for insolvency after revelations that €1.9bn ($2.16m) was ‘missing’, and CEO Markus Braun was arrested. Questions were raised with regards to the regulatory failure on the part of the Federal Financial Supervisory Authority (BaFin), Germany's top financial watchdog, and possible malpractice by its auditor, Ernst & Young.

Andrea Bruckner, board member of BDO Germany, would like to see reform go further. “FISG just stopped at the level of sanctions and professional liability,” she says.

“We believe that action has to be taken to positively impact audit quality and to rebuild trust in the profession’s performance. That is why we are in favour of the four-eyes principle and consider France and other countries to be leading examples. Instruments like joint audits or shared audits with the mutual peer review of both firms during an assignment are possible solutions to improve audit quality.

"Professional know-how, resources and capacities can be shared more easily in a multiple-auditors-engagement which opens additional market opportunities to mid-size and smaller audit firms.”

Andrea Bruckner, board member, BDO Germany

“The Wirecard scandal has weakened confidence in the German profession,” says Guilia Klimt, officer at Acconsis, an Allinial Global member firm. “Even if the general demand for audit services is due to legal obligations not directly influenced, it must be the profession's goal to regain trust.”

Recently, SAP has decided to no longer appoint a Big 4 as their auditor – Klimt hopes this could be a first indication of a change in customers’ demand and that some trust is being regained among smaller firms.

On the other hand, some auditors fear that unlimited liability for gross negligence for the audit of public-interest entities will result in further market concentration among auditing firms

Anne-Kathrin Steinröder, head of ETL Global Network, fears the increased regulation could drive SME accountancy firms away from auditing. “Small and medium-sized accounting firms might not be able to deal with the growing obligations,” she says.

“The audit of a PIE might no longer be economically viable for an SME, taking into account the competitive price pressure on the one hand and the additional organisational and insurance cost on the other hand. This is likely to further increase the market concentration.”

Alexander Weigert, tax consultant, Ecovis Germany

“The pressure on fees is also still very high in the industry, which further disadvantages SMEs,” says Klimt. “It was my personal hope that the political reactions to the scandal would result into some changes with regards to the fee structure, but so far, there is no political discussion about the fees.”

However, Tobias Polka, tax advisor at ADK, an MSI Global Alliance firm, says fee pressure is not the same across the board.

“It really depends on the industry,” he says. “Companies with complex business and accounting processes are more willing to pay more than companies with less complexity. It also depends on the size of the accountant - small accounting companies are highly dependent on clients and therefore have higher pressure to lower fees, which is unhealthy.”

Like many other territories, there is a squeeze on recruitment in Germany. Besides the demanding access requirements to the profession, the continuing regulation with significant potential punishments of mistakes is proving a challenge for recruitment and retention.

Accounting firms will need to heavily invest into the employer branding in order to attract new staff, according to Dr Markus Emmrich of Ebner Stolz.

“Potentially, firms will have to change their approach with regard to the qualification of staff and open their firms to people without an education that historically was regarded as entrance requirement to the industry,” he says. “This will be rather difficult to deal with for smaller firms.”

Michael Thelen, partner, KBHT, an Allinial Global firm

Germany has tried to reform the entry level education needed for new recruits. Two years ago the procedure of the professional exam changed.

Until then, the individual sections of the exam – business administration, law, taxes and auditing – all had to be taken in one year, now it is possible to spread them over several years. The profession hoped for more people to participate and passing it, but it has not had the impact predicted.

Short term, the recruitment problem needs to be solved urgently as there is plenty of new business for firms to pursue.

“Customer demand is constantly growing, as well in quantitative as in qualitative aspects,” said Steinroder.

“New compliance obligations, state aid applications and the need for restructuring advice during the pandemic even increased this effect. In the traditional sectors, demand has grown in the VAT area, very often connected with online trading.”

Frank Jockers, managing partner, RGT, a PrimeGlobal member firm

Germany was still implementing Covid measures at the start of this year and this has given accountancy firms another business opportunity, according to Alexander Weigert, tax consultant for Ecovis Germany.

“The extension of the period of short time working to the end of 2021,” he says. “Companies can receive short time work benefits for their employees for up to two years and a financial contribution to the short time work compensation. Financial aid packages for SMEs have been extended to the end of 2021.

"Also,the Act on the Stabilisation and Restructuring Framework for Businesses (StaRUG) a pre-insolvency rescue procedure which allows a debtor to implement a restructuring plan outside formal insolvency proceedings, came into force on 1 January 2021.”

Weigert has seen demand for management and IT consulting increase more than usual. “The demand for accounting, tax, audit and legal advice also is high,” he says. “Clients are still concerned with access to state aid. The application for short time work benefits is complex.”

Not surprisingly, Brexit has led to a whole new market for German accountancy firms. “Due to the existing and new formal requirements, British companies bringing goods into the EU need an indirect customs representative,” says Michael Thelen, partner at KBHT, an Allinial Global firm.

“Many British companies are thus facing enormous challenges. It is practically impossible to find indirect customs representatives on the market. Many companies have reached out to us in search of a viable, long-term solution.”

Alexander Leoff, partner, Votum, an MGI member firm

Like France, Germany has seen plenty of merger and acquisition activity, despite the deadening effects of Covid on business. 

“Warth & Klein Grant Thornton grew by 30.5 % in the past fiscal year 2019. Organic growth contributed around 12 % to this development,” says Frank Jockers, managing partner of RGT a PrimeGlobal member firm.

“The merger with the Berlin-based accounting firm Trinavis made an important contribution to growth. In addition, the development of sales was positively influenced by full-year effects from the investments in advisory and legal. RSM continues to work its way up and takes eleventh place in the current ranking. In 2019, the firm generated €77.9m in revenue (+29.0 %). The growth is partly due to the acquisition of the Frankfurt office of PKF Fasselt Schlage at the beginning of 2019.”

There is a lot of M&A activity amongst the smaller accounting firms. “Small firms are no longer investing in digital processes and solutions for their clients,” says Alexander Leoff, partner at Votum, an MGI member firm.

“In most cases, the owners avoid the effort due to approaching retirement. Of course, the high investments are also a reason for this. These firms are increasingly being taken over by firms that have already invested in corresponding digital solutions and trained their employees in this area.”

While it might sound like the German accounting industry has enough balls to keep in the air in 2022, there is the extra burden of sustainable reporting coming down the line. 
“As part of the European measures for climate protection (Green Deal), the EU is planning extensive sustainability reporting by companies, the audit of which is to be carried out by the auditor,” says Hanns-Georg Schell, managing partner at Kreston Bansbach.

“Both the resulting requirements and the ambitious timetable will be a challenge for accounting industry and clients. The work of the auditor will increasingly have to include environmental aspects in order to provide clients with comprehensive advice and to be able to audit the sustainability reporting.

Hanns-Georg Schell, managing partner, Kreston Bansbach