Reiner Quick

Regulation of the statutory auditor in the European Union: a comparative survey of the United Kingdom, France and Germany

In this paper we discuss regulation of the statutory auditor in the United Kingdom, France and Germany. Previous research has addressed regulation of statutory auditors with respect to regulatory harmonization and the reduction of barriers to intra-European trade in professional services. While these are important goals, it has also been the policy of the European Commission to encourage high standards of auditing, which the Commission anticipates will evolve within the legal and regulatory frameworks of the Member States of the EU. In this regard, our paper seeks to investigate how auditor regulation is organized in three important EU economies. In particular we examine several key functions of auditor regulation and how these are deployed in the three countries investigated. In addition we provide some forward-looking comments concerning regulation of statutory auditors in the EU.

EC Green Paper Proposals and Audit Quality

In order to restore confidence in financial statements the European Commission proposes different measures to enhance audit quality. This paper examines potential effects of selected proposals on audit quality in the light of prior research findings. It concludes that an increased emphasis on substantive audit procedures may not be beneficial and that joint audits potentially improve competition and audit quality, but might increase audit fees. An appointment by a third party would strengthen auditor independence. The overall impact of a mandatory rotation of audit firms is unclear due to opposite effects on auditor competence and auditor independence. The provision of non-audit services might affect independence in appearance negatively. However, a total ban would not be necessary. Finally, a limit to the proportion of fees an audit firm can receive from a single client as well as a capping of non-audit fees seem to be desirable.

The formation and early development of German audit firms

Abstract This paper examines the emergence of audit firms in Germany through an analysis of contemporary sources. Special attention is paid to the range of services offered, their legal forms and ownership structure. In Germany, the demand for external audits developed because the corporate supervisory boards had been unable to fulfil their monitoring task satisfactorily. As a consequence of the major economic crisis of 1929–1931 and the collapse of large corporations caused by the fraudulent actions of managing directors, statutory audits for stock corporations were introduced in 1931. The first German audit and trust company, the Deutsche Treuhand-Gesellschaft, was established much earlier in 1890. Like other trust companies which emerged from 1905 onwards, it was owned by large banks. After the First World War, large commercial groups on the one hand, and the state on the other hand, started to form their own audit firms. Most of the audit and trust companies used the legal form of a corporation. Originally, the main activities of the trust companies were trustee activities and audits. Subsequently, they also offered tax and business advisory services. These features (a broad range of services offered, the corporation as the dominant legal form, and clients who are also owners) help us to understand key characteristics of modern German audit firms such as their limited liability to third parties.

Auditing, Trust and Governance. Developing regulation in Europe

Auditing, Trust andGovernancewas published under the auspices of the European Auditing Research Network (EARNet). EARNet was formed in 2000 to ‘foster research and exchange ideas among auditing scholars and researchers at a European level’. This book represents a milestone towards accomplishing this objective. Motivation for the book evolved from the major corporate failures in the USA (e.g. Enron and Worldcom) and Europe (e.g. Ahold and Parmalat), and the resulting loss of trust and confidence in financial reporting and the auditing profession. The response by regulators to these events was the passage of the Sarbanes– Oxley Act in the USA and the revised Eighth Directive on Statutory Audit in the European Union. Auditing, Trust and Governance provides a detailed account of how a number of European countries responded to this crisis in confidence. The book contains 13 chapters written by leading auditing scholars. The first chapter sets up the book by presenting a general discussion of the main issues of trust, audit quality, regulation and corporate governance. This chapter was particularly helpful to me in understanding the extent of research on audit quality in Europe. The authors conclude ‘the evidence on audit quality differentiation in Europe is mixed and highly country specific’ (p. 8). The chapter provides a number of areas for future research studies in Europe on audit quality. The next 11 chapters are written from the perspective of each of the following countries:

Disciplinary practices and auditors in Europe: a comparison between Germany and the Netherlands

This paper presents the results of a comparative study on auditor responsibility within two members of the European Union: Germany and the Netherlands. Auditor responsibility is an important factor in establishing audit quality. The quality of service within the auditing profession is maintained through the promulgation of professional standards and disciplinary law. In Germany, the Wirtschaftspruferkammer is the supervisory body which oversees compliance with standards and professional duties. In the Netherlands, a special court (Raad van Tucht) is concerned with disciplinary actions against auditors. The results of this study show that the disciplinary laws, regulations and professional codes remain basically national, despite efforts to harmonize auditing to meet an increased demand for international audits. This study identifies characteristics of disciplinary systems common to both countries and provides information on the functioning of both systems that may be useful in a number of ways. The results presented might initiate a more systematic comparison of disciplinary systems within members of the European Union, which would enhance institutional knowledge of the European market for auditing services. This in turn could promote the process of further integration of the internal European market and reduce market inefficiencies.

Agency conflicts and the demand for non-audit services

Purpose - The aim of the present paper is to examine the impact of agency costs on the demand for non-audit services (NAS) in Germany. Design/methodology/approach - This study uses data from German listed companies to test whether audit clients vary their purchases of NAS according to agency costs over time. The paper used multiple regressions and included ownership composition, performance-based management compensation, and leverage as proxies for agency conflicts. Findings - Overall, the hypothesis that agency costs influence the demand for NAS was not confirmed. None of our proxies for agency conflicts were significantly associated with the purchase of NAS. These findings remain stable when alternative NAS fee measures were applied. Research limitations/implications - Findings cannot be generalised for smaller, private companies. Particularities of the German setting might have caused the insignificance of agency costs, but this cannot be tested statistically. The contrast between these insignificant results and the significant impact of agency costs on the demand for non-audit services revealed by many previous studies, in particular from the US and the UK, raises important questions for future research. Practical implications - This paper concerns managements perceptions on how stakeholders perceive the effect of NAS provision on auditor independence. Thus, its findings should be of interest to German, European and international regulators when evaluating the impact of the provision of NAS on independence in appearance. Originality/value - This study is the first to provide evidence on the relationship between agency conflicts and the demand for non-audit services from Germany and thus from a continental European country. Moreover, it provides evidence for periods after the introduction of stricter standards on the provision of non-audit services. In addition, it applies a new proxy for agency costs (i.e. performance-based management compensation).

A comparison of auditors’ legal liability in the USA and selected European countries

Compares auditors’ legal liability to third parties in several major countries, with principal emphasis on comparisons between the USA and the UK. Public accountants claim that they are being adversely affected by lawsuits brought by shareholders, creditors and other third parties. It has been asserted, without any specific evidence, that increased exposure to legal liability has caused public accounting firms to cease the practice of auditing or go out of business entirely. Details auditors’ legal liability to third parties in the USA and Europe and, in particular, the UK. Concludes by reviewing certain positions taken by the Federation des Experts Comptables Europeens with respect to auditors’ legal liability in the face of European economic and political union.

More applicable environmental scanning systems leveraging modern information systems

With Ansoff’s article about weak signals as a flagship example, a substantial body of knowledge about environmental scanning systems exists. However, these concepts often go unused in practice. The 2008/2009 economic crisis provided a strong, ongoing impulse for redesigning such information systems (IS). This article develops six guidelines for the conceptual design of environmental scanning systems that are more applicable than those specified by previous research. We start with literature research, which reveals three gaps in existing approaches. Then we develop design guidelines to fill these gaps with the help of “modern” IS. To address the lack of sound requirements analysis, our first design principle proposes 360-degree environmental scanning systems for executives and suggests how to select the most important scanning areas. Three further findings cover weaknesses in the IS model perspective, focusing on more effective implications of weak signals. In terms of method, we propose incorporating scanning results more closely into executives’ decision-making processes. Applying the design guidelines at a raw materials and engineering company, we arrive at a prototype we call the “corporate radar.” It includes an IS-based tree with economic value added at risk on top. The resulting lessons learned help to evaluate our findings and the research method presented here, as well provide concrete starting points for future research.

Beeinträchtigen Beratungsleistungen die Urteilsfreiheit des Abschlussprüfers? Zum Einfluss von Beratungshonoraren auf diskretionäre Periodenabgrenzungen

ZusammenfassungDie Verknüpfung von Prüfungs- und Beratungstätigkeiten könnte die Unabhängigkeit des Abschlussprüfers beeinträchtigen. Aktuelle deutsche wie auch internationale Studien belegen einen negativen Einfluss der parallelen Beratung durch den Abschlussprüfer auf Unabhängigkeitswahrnehmungen. Dagegen lässt die anglo-amerikanisch dominierte Forschung zur tatsächlichen Unabhängigkeit keine eindeutigen Zusammenhänge erkennen. Für DAX-, MDAX-, SDAX- und TecDAX-Unternehmen wird mit Hilfe von Regressionen ein möglicher Zusammenhang zwischen der Höhe des Beratungshonorars und der Unabhängigkeit des Prüfers für die Geschäftsjahre 2005, 2006 und 2007 untersucht. Da die Unabhängigkeit nicht unmittelbar beobachtbar ist, wird das Ausmaß der Bilanzpolitik im Abschluss des Mandanten als Surrogat für die Urteilsfreiheit des Prüfers verwendet. Die Ergebnisse lassen vermuten, dass von der Beratung im Allgemeinen, den „Bestätigungsleistungen“ und der „Steuerberatung“ keine Beeinträchtigung der tatsächlichen Unabhängigkeit ausgehen. Dienstleistungen, die unter den „Sonstigen Leistungen“ ausgewiesenen werden, entfalten hingegen eine negative Wirkung auf die Rechnungslegungs- und damit auch auf die Prüfungsqualität.AbstractThe provision of non-audit services could impair auditor independence. Prior research revealed a negative impact of advisory services on independence in appearance. With regard to the effect on independence in fact, results are mixed. We examine the relationship between non-audit fees and auditor independence for DAX-, MDAX-, SDAX-, TecDAX-companies for the periods 2005, 2006 and 2007. Discretionary accruals are used as a proxy for audit quality and thus, for auditors’ independence in fact. The magnitude of discretionary accruals is measured by cross-sectional-accrual-models. Results show that earnings management is not related to total non-audit fees, fees for “assurance services” and fees for “tax services”. In contrast, we find a significant positive association between high fees for “other services” and discretionary accruals.

Abschlussprüfung und Beratung - Eine experimentelle Analyse der Auswirkungen auf Unabhängigkeitswahrnehmungen deutscher Aufsichtsräte

ZusammenfassungDie Verknüpfung von Prüfungs- und Beratungstätigkeiten gefährdet die Unabhängigkeit des Abschlussprüfers. Dadurch erhöhen sich mandantenspezifische Quasirenten und die Gefahr für Unabhängigkeitsbeeinträchtigungen steigt. Aus der bisherigen, anglo-amerikanisch dominierten Forschung lässt sich erkennen, dass gleichzeitige Beratung weniger die tatsächliche sondern eher die wahrgenommene Unabhängigkeit gefährdet. Die wenigen deutschen Studien erkennen dagegen mehrheitlich keinen negativen Einfluss auf Unabhängigkeitswahrnehmungen. Über eine experimentelle Studie wurde der Einfluss auf die Unabhängigkeitswahrnehmungen der Aufsichtsräte der DAX 30-, MDAX-, SDAX- und TechDAX-Unternehmen untersucht. Betrachtet wurden die Steuerberatung, die Personalberatung und die Beratung in Bezug auf Finanzinformationssysteme. Alle drei Leistungen entfalten eine negative Wirkung. Einzig die Personalberatung ist einem Abschlussprüfer einer kapitalmarktorientierten Gesellschaft in Deutschland nicht explizit untersagt. Ihr negativer Einfluss war aber am stärksten. Über univariate und multivariate Analysen ließ sich des Weiteren zeigen, dass das Ausmaß der Beeinträchtigung der wahrgenommenen Unabhängigkeit von der Art der Beratungsleistung abhängt. Ein generelles Beratungsverbot erscheint daher nicht als erforderlich. Zudem wurde deutlich, dass Unabhängigkeitswahrnehmungen umso stärker beeinflusst werden, je geringer die Erfahrungen der Aufsichtsräte und deren Vertrauen in Abschlussprüfer sind. Dagegen konnten keine Unterschiede zwischen den Wahrnehmungen von Aktionärs- und Arbeitnehmervertretern identifiziert werden.AbstractThe revised 8th EU directive restricts the provision of non-audit services to audit clients. The reason behind this is the idea that the simultaneous provision of audit and non-audit services to clients may endanger auditor independence. This is also indicated by previous research on the provision of non-audit services to audit clients. There is however little evidence on the perceptions of supervisory board members regarding this issue. This study therefore investigates the perceptions of supervisory board members on the effect of the simultaneous provision of non-audit services and audit services on auditor independence in Germany. The results show that the provision of non-audit services is perceived to have a negative effect on the independence of auditors. Furthermore, when we distinguish between various forms of non-audit services, human resource consulting is perceived to have the most influence on auditor independence. Finally, confidence in auditors and experience affect the perceptions of Supervisory Board Members regarding the effect of non-audit services on auditor independence.