Options for Reforming the Audit Market

A healthy competition in the audit market is in the best interest of both companies and investors. This became especially apparent when the Wirecard AG accounting scandal was uncovered, an event with ongoing repercussions. Despite the scandal, the questions of how to introduce greater choice in the audit market and improve audit quality remain unanswered.

The new study "Options for audit reform" that we commissioned answers these questions. Under the auspices of Prof Dr Justus Haucap, the renowned consulting firm Düsseldorf Competition Economics (DCE) took a closer look at the audit market in the sector Public Interest Entities. With the Choice & Quality Framework, the study authors provide a concrete proposal for redesigning the market to enable more competition, a greater diversity of providers, improved audit quality, and greater financial stability.

The key findings of the study are:

  1. Many requirements of the Financial Market Integrity Strengthening Act ("FISG") make good sense, but inadvertently further restrict the choice of audit firms available and thus limit competition between these firms. The same applies to the Corporate Sustainability Reporting Directive ("CSRD"). If the same auditor handles both the annual and consolidated financial statements and the sustainability reporting, this threatens to squeeze small and medium-sized audit firms out of the market.
  2. A key attribute of a new market structure must be the ”four eyes principles”, because joint audits have a stronger impact on competition than single audits, shared audits, or managed shared audits. To increase competition, companies must be mandated to equitably distribute the work involved among all the firms participating in the joint audit. This also helps guarantee an additional quality control for the entire audit process.
  3. A new market structure, such as the proposed Choice & Quality Framework, must be carefully established based on mandatory joint audits and contain elements that promote diversity in the audit market. It is important to consider that there are three key players here: companies, auditors, and government. A competitive regulatory framework and other measures are also needed, and these must comply with, among other things, international auditing standards and regulations regarding market transparency.

Detailed results of the study "Options for audit reform” are available further down on the page.


Study Options for an audit reform 2023