Options for audit reform: a report by Dusseldorf Competition Economics

This study examines options for an audit reform, with particular reference to Germany in the wake of the Wirecard fraud scandal. It provides a useful overview and analysis of the different options that have been discussed to improve audit quality in the UK and the EU during the past years.

The publication was commissioned by Mazars in Germany and led by Dr. Justus Haucap, Director of the Dusseldorf Institute of Competitive Economics (DICE) and former Chair of Germany’s Monopolies Commission. 

Among the options explored in the study are joint audit, shared audit, managed shared audit, the state appointment of auditors and market share caps. In analysing them, their respective impacts on competitiveness, audit quality and audit fees remain important areas of consideration, which are studied both with regard to the predictions of economic theory and, where available, empirical analyses.

The report identifies three key issues within the audit market for public interest entities (PIES) that must be addressed:

  • The Big four represent an oligopoly, controlling more than 95% of PIE audits in Germany in 2020.
  • There are increasing complaints about companies having a significant lack of choice when selecting auditors, as well as reports of companies finding it difficult to find an auditor.
  • The operational deficiencies in the audit market can lead to quality problems and massive economic turbulence, which were clearly illustrated in the Wirecard case, for example.

In response to the above, the study proposes a new market design for audit: the ‘Choice and Quality Framework’, which is based on the joint audit model and includes added features designed to properly address market concentration, lack of competition and low audit quality.

The authors suggest that joint audit should be supplemented by a number of other measures, such as:

  • Introducing a system of proportionate liability in regards the joint auditors based on audit engagement size or respective audit fees
  • Taking advantage of the member state option under the EU’s Corporate Social Responsibility Directive (CSRD), allowing a different auditor to perform sustainability and financial audits
  • Facilitating greater market transparency by ensuring regulators provide reliable information on audit quality from different auditors

Further, it recognises that the integrated package of measures proposed above are essential for a decisive step forward and to be successful, it must actively be supported by key stakeholders working together: companies, auditors, regulators, standard-setters and legislators. 

The full study, in English and German, is available below. 

Discover the study here