How the Wirecard Case Has Impacted the German Audit Market

With a turnover of 17 billion euros ($18.7 billion), Germany has a strong audit and tax consulting market enjoying steady growth. TheBig Four—PwC, Deloitte, KPMG and EY—have a market share of almost 50%.

However, Big Four dominance isn’t as pronounced in Germany as elsewhere, in part due to the strong German “mittelstand”—small and medium-sized companies—and due to the ambitions of a number of smaller internationally connected audit firms. Now, in the wake of the Wirecard scandal, the auditor oversight authority has hit EY with the severest penalties ever imposed in Germany.

The Wirecard Scandal

The payment service provider Wirecard was considered a success story for several years, and in 2018 even ousted Commerzbank from the DAX 30 (now the DAX 40) index, becoming one of Germany’s most respected companies.

Wirecard denied the first media reports of accounting irregularities back in 2015. Wirecard’s denials initially were given credence but, in 2020, EY refused to issue an audit opinion on the 2019 financial statements, causing Wirecard’s share price to plummet and forcing it to file for insolvency in June 2020. December 2022 saw the start of criminal proceedings against the former CEO Marcus Braun.

The Consequences

The Financial Market Integrity Strengthening Act of 2021 was a direct reaction to the Wirecard case, as the German government sought to strengthen confidence in the German financial market. Legislation was revised in the areas of corporate governance, auditing, and enforcement.

Under this law, listed companies are now required to establish appropriate and effective systems of internal control and risk management. In addition, public interest entities, or PIEs, have to establish an audit committee, which hitherto had been optional.

The new law also imposes stricter prohibitions of non-audit services for PIE-auditors—resulting in a ban on tax advice to a PIE audit client. The German government reversed its previous decision on the EU Statutory Audit Regulation option, and now disallows the extension of an audit engagement beyond an initial 10-year period; internal rotation of the audit engagement partner is also reduced from seven to five years.

The ceiling for auditor liability under civil law has been raised significantly, especially for the audits of listed (and soon-to-be listed) companies; gross negligence by an auditor no longer falls under this ceiling for these companies. The statutory liability cap is hugely significant because German law prohibits contractual agreements that limit auditor liability allowed elsewhere.

The oversight of financial statements also has been restructured. With the abolishment of the Financial Reporting Enforcement Panel, responsibility for enforcement rests directly with the Federal Financial Supervisory Authority, or BaFin. One new feature is that the BaFin can announce an upcoming examination of financial statements on its website and in the Federal Gazette.

Sanctions Imposed

On March 31, the supervisory body APAS issued its decision relating to the audit, stating that this was its most extensive proceedings to date. Initially 12 auditors and the audit firm EY were to be investigated for breaches of professional duty in the audits of the Wirecard AG and Wirecard Bank AG financial statements for 2016 to 2019. Five individual auditors were fined between 23,000 and 300,000 euros. Seven individuals rescinded their professional titles and thus weren’t subject to sanction. EY itself was fined 500,000 euros and sanctioned with a two-year ban on taking on new PIE audits. This ban doesn’t apply to the renewal of audit engagements under the EU 2014 Statutory Audit Regulation.

The APAS decisions only become legally binding if the parties concerned don’t appeal. Irrespective of this, EY hasn’t picked up any noteworthy new audits since the Wirecard case became known.

The ban doesn’t apply to non-PIE audits and other assurance and advisory services, and EY’s ongoing PIE audit engagements can continue for a maximum of 10 years.

Impact on German Audit Market

Shifts in the audit market are still unclear. Whether EY Germany’s existing audit clients will sit out the rotation period or re-tender earlier is impossible to predict. If it comes into force, the ban will further concentrate the PIE audit market for at least two years. EY still audits 12 DAX40 companies; three will tender soon.

Meanwhile, mid-tier audit firms have picked up two significant DAX40 audits—perhaps the starting signal for companies to engage medium-sized audit firms. Fueled by EY’s pending ban, this could herald a reshuffling within the DAX40 audit market, as seen in other market segments.

Outlook

The ban for EY underscores the importance of multi-disciplinary firms. With its “Everest” project, EY wanted to split itself into an audit and a consulting firm. The abandoning of this project by EY Global at the same time as the APAS ruling was coincidental, but it does mean that EY Germany can reallocate resources freed up by the ban to other areas and reactivate them for future audits when the ban expires.

Avoiding accounting scandals in future solely through changes in auditing isn’t feasible. Both the prevention of financial reporting violations and sanctioning of those identified has to be tackled at the root. The German legislator’s focus on corporate governance and enforcement clearly shows their acknowledgment of this. Since taking on its new responsibilities in 2022, the BaFin has been increasingly proactive and is making an important contribution to investor confidence in corporate financial statements.

In this context, the Wirecard case and EY’s sanctions also underline the increased importance of a high-quality audit and the diligent application of auditing standards. The foundations are there: high-quality auditor qualifications, professional skepticism, internationally accepted auditing standards aligned by the Institute of Public Auditors and, finally, the code of conduct recently adopted by German auditors.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Klaus-Peter Naumann is chief executive officer, Institute of Public Auditors in Germany.