In French it’s déjà vu -- adopted in English, for lack of an equivalent.
The same in German, and aptly describing the behavior of the German government, dazed and confused in the fall-out of last June’s crash of erstwhile market darling Wirecard.
Confronting the familiar question -- “Where were the auditors?” –- German officials are pursuing the imperative in the DNA of regulators under stress, hoping to be seen as “doing something.” That is, heedless of the ineffectiveness or unintended consequences, they are re-cycling proposals already attempted and no more effective in other countries.
I carry no water here for Wirecard auditor EY, as it defends the enforcement scrutiny and investor lawsuits that center on the hole in the company’s cash accounts of an apparently fictitious € 1.9 billion.
Rather, as aired out in the Financial Times of November 16, a menu of German proposals have the air of familiarity and futility displayed elsewhere over the last two decades: mandatory auditor rotation, further rules on services to audit clients, tinkering with the structure and authority of the regulator, and adjustments in the standards for auditor liability.
We’ve seen these movies before. They were weak in earlier screenings, and are unimproved in this latest re-run.
In the US, Enron and WorldCom brought forth the Sarbanes/Oxley law of 2002 – which influenced neither financial reporting throughout the crisis of 2007-2008 nor such later-exposed scandals as the Ponzi scheme of Bernard Madoff or the corporate fictions of Elizabeth Holmes at Theranos.
In the EU, neither the constraints on auditor’s ancillary services to clients, the infliction of mandatory rotation, nor the introduction of extended auditors’ reports avoided the money-laundering at Danske Bank or the goodwill puffery at Steinhoff.
Mandatory ten-year rotation in Germany might be a wrinkle on the existing EU timetable – although suffering no less the absence of any credible demonstration that extended auditor tenure is in any way associated with audit quality. And the challenges to engage replacement auditors in a supply-challenged market are already on display in the region – see the compliance difficulties of Sports Direct in the UK and the pending default of Plaza Centers NV in the Netherlands.
As for further constraints on services to audit clients, those are already effectively foreclosed by existing EU rules, and in any event do not address the nature or quality of performance of the basic assurance function itself.
In the UK, the list of recent scandals is headed by the collapse of Carillion in January 2018, with additions including Patisserie Valerie, Thomas Cook, and NMC Health among others. But Brexit and the pandemic have tossed into the ditch the perfervidly critical reports on the Big Audit model, even as the cries for disruption of the Big Four’s structures and market dominance remain untested against the inexorable impracticalities of any alternative. [1]
Broader powers are mooted for the German financial regulator – itself well deserving the opprobrious characterizations of the UK’s shambolic Financial Reporting Council as “toothless” and “useless.” Well and good, but irrelevant to concerns for actual audit performance – because it is in the very nature of a government agency to be resource constrained, limited in vision and initiative, and consistently in reactive mode after-the-fact to the speed, agility and superior imagination of new generations of white-collar malefactors.
Finally, the proposal to raise or eliminate the current auditor liability cap under certain German legal theories raises for two reasons the problem of “be careful what you wish for.”
First, given the relatively immature body of auditor liability jurisprudence in Germany compared with the major Anglo jurisdictions, there is no reason to think that a German court, if convinced that auditor malfeasance in a multi-billion euro scandal was sufficiently grave, would not readily over-ride the damages cap currently set at a negligible four million euros.
Second, the possible consequences of a “worst case” judgment in a case on the scale of Wirecard include the disintegration of the audit firm itself – it being plain, even if not widely recognized, that the Big Four lack the financial resources and organizational stability to survive claims of the magnitude of the Enron collapse that brought down Arthur Andersen in 2002.[2]
Not that any of these observations mean that the German government will find a path out of the mire. To paraphrase baseball guru Yogi Berra on those fans reluctant to visit the ballpark of a loser, “if the audit regulators don’t want to apply good judgment, you can’t stop them."
[1] Please see my book of last spring, “DOA: Can Big Audit Survive the UK Regulators?” (Amazon 2019).
[2] For the particulars, please see my book, available on Amazon, “Count Down: The Past, Present and Uncertain Future of the Big Four Accounting Firms” (Emerald Books, 2d ed. 2017), pp. 56-60.
Thanks for joining this dialog. Please share with friends and colleagues. Comments are invited and welcome, and subscription sign-up is easy and free – both at the Main page.