Are firms still having to turn down auditing work?

According to Section 51 of the German Auditors' Code (WPO), auditing firms must reject audit engagements if there are reasons such as conflicts of interest, lack of expertise or time constraints. In these cases, it is mandatory to declare the rejection of an audit engagement immediately.

Are firms still consolidating into bigger firms and networks?

According to the Lünendonk Study 2023 (source: Lünendonk® Study 2023), the top 25 auditing firms in Germany grew by an average of 10.9% in 2022. The large networks and alliances in particular, such as the Big Four (PwC, EY, KPMG and Deloitte), as well as the so-called Next Seven, are recording solid growth figures

Consolidation enables these larger law firms to expand their reach and scope of services while benefiting from economies of scale. According to statistical analyses by the German Chamber of Public Accountants, almost all auditors operating in Germany are networkers: around 1.056 WP/vBP practices were registered with the WPK in around 470 networks in 2022.

Are German SME accounting firms disappearing? If yes, what effect is this having on the market?

There are around 11.100 auditing/accountants practices in Germany, of which 3.000 are auditing firms. The auditing and tax consultancy sectors employ around 440.000 people. Around 1.056 auditing firms are registered in around 470 networks and associations.

The reduction in the number of small and medium-sized entities in Germany could have a significant impact on the market. These firms serve a considerable part of the market, in particular the medium-sized German real economy. Their disappearance could lead to a reduction in market diversity and a loss of audit quality. This could also have a negative impact on financial stability, as fewer providers would be available.

It is important that the market remains competitive and that measures are taken to ensure the diversity and quality of audit services.

Are private equity firms moving into German accounting more than ever?

Due to legal regulations, participation in the field of auditing is highly regulated, but private equity firms are becoming increasingly involved in German auditing. According to a report by PwC, the activities of private equity firms in Germany have increased significantly in recent years. These companies are not only active in the areas of mergers & acquisitions, deals & consulting, valuation, tax services and audit & accounting, but also in supporting companies with digitalisation and the transition to international standards such as IFRS.

The cooperation between private equity companies and auditing firms is becoming ever closer, as both sides benefit from this partnership. The auditing firms enable better investment protection through controls and open up new customers and business areas themselves.

Has the Supply Chain Due Diligence Law had an impact?

Due to the EU legislation, which has not yet been fully transposed into German law, this law on corporate due diligence obligations in supply chains (Supply Chain Act) already has some impact on companies in Germany. Since 1 January 2024, this law has applied to companies with at least 1.000 employees in Germany. It obliges these companies to ensure that human rights and environmental standards are observed along their entire supply chain. Nevertheless, smaller companies are also increasingly affected by these due diligence obligations due to their cooperation with large companies.

The most important effects are:

· Risk analysis: companies must regularly analyse and assess risks in their supply chains

· Preventive and remedial measures: Companies are required to take measures to prevent or mitigate violations of human rights and environmental standards

· Transparency: Companies must report annually on their due diligence measures

· Grievance mechanisms: Companies must set up grievance mechanisms through which people in their supply chains can report violations

These measures aim to improve working conditions and environmental protection in global supply chains.

Have there been any significant regulatory developments in Germany over the last 12 months?

There have been significant regulatory developments in the area of auditing in Germany with regard to ISA 315. The Institute of Public Auditors in Germany (IDW) revised the ISA 315 (Revised 2019) auditing standard and introduced it in December 2022. This revised standard replaces IDW PS 261 n.F. and IDW PS 330 and integrates the IT audit into the risk-oriented audit approach. Previously, the parallel audit approach was still possible.

The most important changes include

· New definitions and terms: New terms such as ‘significant types of business transactions’ and ‘risks arising from the use of IT’ have been introduced.

· Spectrum of inherent risks: The introduction of the concept of ‘spectrum of inherent risks’ for better risk assessment

· Automated tools and techniques: The use of automated tools and techniques is now explicitly considered in the auditing standard

These changes intensify the audits and aim to make the audit process more systematic and effective, particularly with regard to the identification and assessment of risks of material misstatement. In Germany, the „management report“ (Lagebericht) also remains a component of the audit of the annual financial statements.

How would you describe the health of the accounting industry in Germany in terms of customer demand, fee pressure, and staff recruitment and retention?

The auditing industry in Germany is currently undergoing a dynamic development in terms of client demand and top issues.

Here are some important aspects:

· Client demand Demand for audit services remains stable and is further fuelled by the increasing complexity of regulations and the need to ensure transparency and sustainability

· Fee pressure The pressure on fees is high, fundamentally due to competition from large networks and alliances such as the Big Four. Smaller and medium-sized law firms often have to match the prices of the larger providers, leading to intense competition.

· Recruitment and retention of employees The sector faces challenges in recruiting and retaining qualified employees. The ageing of the profession and the stagnating number or barely increasing number of new auditors pose a major challenge. In addition, digitalisation and the need to acquire new skills are becoming increasingly important.

Overall, despite these challenges, the sector remains competitive and adaptable to changing market conditions.

Are there any services areas where demand has grown over the last 12 months?

Over the past 12 months, demand has increased in certain areas of German auditing.

Particularly noteworthy are:

· Accounting and assurance

· IT audits and cyber security: With increasing digitalisation and the associated risks, there is a growing need for IT and cyber security audits.

· Sustainability and ESG reporting: Companies are required to transparently report their environmental, social and governance (ESG) performance, leading to increased demand for related audit and advisory services.

· Compliance and internal audit: With stricter legal requirements and regulations, the demand for compliance and internal audit audits is also increasing.

· The availability of: Procedural documentation, compliance with the ‘Act on the Stabilisation and Restructuring Framework for Companies’ (StaRUG) and the use of integrated financial planning are also becoming increasingly important

These trends show that companies are increasingly emphasising security, transparency and sustainability.

Has there been any significant consolidation or merger activity in the accounting profession?

Yes, there has been some notable consolidation and merger activity in the German audit industry over the last 12 months. It is worth mentioning here that the number eight ‘Ebner Stolz’ joined the international network RSM in October 2023 as the exclusive German partner. The larger networks and alliances, such as the Big Four (PwC, EY, KPMG and Deloitte), have continued to expand their reach and service scope. These consolidations are aimed at capitalising on economies of scale and meeting the growing demands of market conditions.

What are your expectations for the next 12 months - are there any potentially significant developments in the pipeline?

Over the next 12 months, the German auditing industry is expecting some significant developments.

Here are some of the most important trends:

· Advancing digitalisation and artificial intelligence (AI)

· The integration of AI and data analysis into audit processes will continue to progress. Companies expect their auditors to use AI to improve the efficiency and accuracy of audits. This includes automated document review, review of accounting journals and identification of risks and anomalies.

· Sustainability and CSR Sustainability reporting is becoming increasingly important and auditors will play a greater role in the verification and validation of sustainability reports. Companies will be expected to report transparently on their environmental, social and governance (ESG) performance and auditors will review these reports.

· Regulatory requirements With the increasing complexity of regulations, the demand for specialised audit services will continue to rise. Auditors must constantly adapt to new regulatory requirements and ensure that their clients are compliant.

· Talent development and retention The industry will continue to face challenges in recruiting and retaining qualified employees. The need to acquire new skills and adapt to changing market conditions is becoming increasingly important.

These developments show that the German auditing industry must continue to adapt to changing market conditions.