The new accounting regulation in Germany condemns auditors who are "too close" to their customers

In the wake of Wirecard's demise, the director of Germany's new financial reporting authority has taken aim at the nation's auditors, accusing them of being "too close" to clients and urging for more "professional skepticism."

Thorsten Pötzsch, head of accounting regulation at BaFin, criticized "audit teams who are left unchanged for years" and audit firms "who do not rotate" in his first interview as the regulator works to repair Germany's damaged reputation following many financial scandals.

"Auditors are required to exert professional scepticism. This . . . needs to be emphasised more than it was in the past," according to Pötzsch, chief executive director of securities supervision.

In January, BaFin and Pötzsch took over for Germany's contentious Financial Reporting Enforcement Panel (FREP), a private organization with de facto authority that was disbanded after failing to look into long-standing accounting complaints against Wirecard.

After confessing that half of its profits and €1.9 billion in corporate cash were fraudulent in 2020, the discredited German payments business collapsed, shocking the nation's political establishment.

Following the incident, German legislators revamped the nation's accounting oversight, scrapping the FREP and granting the BaFin broad authority to examine the financial records of Germany's most significant listed companies. In addition, the government tightened some auditing regulations despite strong opposition from the profession.

However, Pötzsch claimed that despite the regulator's increased authority, a systemic issue still existed. "We do not have enough firms that are able to audit large companies . . . we have an oligopoly."

According to data from the firm Lünendonk & Hossenfelder, KPMG, PwC, EY, and Deloitte have a combined market share of 80% in Germany. Such a concentration of power "does not lead to competition that is working. This is then surely reflected in real life ," Pötzsch added.

In contrast to FREP's staff of just 18, the watchdog's newly established accounting branch, which is still hiring, will eventually have 60 personnel.

When it revealed that troubled German real estate business Adler exaggerated its 2019 accounts by up to €233mn, BaFin exercised its powers in front of the public earlier this month. The group declared that it would file a lawsuit in opposition to the interim report of the ongoing BaFin investigation.

Pötzsch stated, "Our message to companies is that firms who are using illegal accounting shenanigans have no place in the German capital market. [...] The risk of getting caught has never been as high as it is today."

Elisabeth Roegele, who was in charge of BaFin's contentious restriction on shorting Wirecard shares in 2020 and resigned during a parliamentary investigation into the incident, was succeeded by Pötzsch in 2021.

Pötzsch, who oversaw BaFin's resolution and anti-money-laundering division starting in 2018, developed a reputation for being tough after publicly ordering Deutsche Bank to take action to stop money laundering and terrorism financing and appointing an independent monitor in an unprecedented move to assess the lender's progress.

Pötzsch stated to the Financial Times that BaFin's accounting division was closely collaborating with Germany's criminal prosecutors and that "we will act where it is necessary."

"If there are any indications of criminally relevant misconduct, we immediately reach out to the public prosecutors and share our insights," he said. He further stated that the watchdog had strong connections with criminal enforcement and that BaFin had already alerted prosecutors to possible accounting manipulation. He would not say which cases they were.

BaFin is creating a monitoring system that alerts users to potentially suspect organizations whose accounts require extra investigation using both publicly available and proprietary data.

The delayed release of quarterly results, which Pötzsch referred to as a "bad habit," will be one warning sign and will be viewed as a "clear indication that the affected firms deserve our scrutiny."

By fLEXI tEAM