German Audit Quality Survey

Story vom 08. März 2022
Dr. Jacob Justus Leidner, CFA
Kirsten Baumbach, CFA

In light of an increasing public debate on audit-related regulations following the Wirecard scandal, as well as the current consultation of the European Commission on strengthening corporate reporting quality and its enforcement, the German Advocacy Committee of CFA Society Germany e. V. recently conducted a short survey among its members. The survey asked questions concerning their understanding of the concept of audit quality. Specifically, it aimed at getting a better understanding of whether and how audit quality-related information is taken into account in regular decision-making processes by investment professionals from different backgrounds.

What are the main findings of the survey?

The respondents do not ignore audit quality in their daily professional decisions, even though their understanding of what audit quality means varies. To summarize, respondents’ understanding of high audit quality is as follows: High audit quality is the assurance by independent auditors that financial statements are faithfully represented, in compliance with GAAP, and consistent. To allow users of financial statements to interpret areas of judgment, some mention that explanations in the notes are important. The respondents’ answers further suggest that independence, competence, professional skepticism, and comprehensive audit procedures are also perceived to be important for audit quality. Respondents also state that audit procedures should reflect a deep knowledge of the client and its business and be more transparent to the public.

Almost half of all respondents strongly or partially disagree with the statement that audit quality is sufficiently high across entities, which could be at least partly due to the recent Wirecard accounting scandal in Germany.

When evaluating audit quality, information on an engagement partner showing a lack of experience and any sanctions by the German Auditor Oversight Body either to the audit firm or to the engagement partner seem to be clear indicators of low audit quality. Interestingly, such information is either not publicly available or requires additional data collection from sources such as the public register of German Public Accountants and German Public Audit Firms. Other common auditor quality indicators used in empirical archival research to identify low audit quality – e.g., substantially high/low audit fees, very short audit tenure, correction of errors in prior financial statement – do not however negatively affect opinions of audit quality for the respondents. In this context, it is interesting to note that less than 20% of respondents used information from transparency reports, and a significant majority of respondents answered that transparency reports do not provide relevant information. Similar results were found for the use of financial statements of audit firms.

Lastly, the survey asked the members of CFA Society Germany e.V. what additional information they would consider relevant as indicators of audit quality, particularly information that is currently not publicly available. Respondents would like to get more detailed information about conflicts of interest (between auditor and client as well as within the audit team) and measures related to audit strategies and approaches. Repeatedly, respondents asked for information on staffing such as audit team composition and experience. They would also appreciate more information on certain specific audit procedures being performed, including materiality thresholds used, focus areas examined, and total hours required for the audit.