IAB Germany Country Report (RGT)
Business OpportunitiesDecember 7, 2022 - RGT
This article is a contribution to the International Accounting Bulletin (IAB) Germany survey by PrimeGlobal member firm RGT which was published in IAB's November 2022 newsletter.
Please read the full article below and reach out to Frank Jockers, International Contact Partner, Assurance and Advisory at RGT, regarding any questions in relation to the article and doing business in Germany.
Has the FISG act bolstered confidence in German auditing?
Since the Financial Market Integrity Strengthening Act (FISG) has come into effect on 1 July 2021, the overall effect cannot be concluded for the time being.
However, a number of new regulations, which apply to capital market-oriented companies in the first place, but have an indirect effect on non-market-oriented companies as well, should bolster confidence in German auditing:
- Auditors may not audit and render consulting services to a client at the same time.
- Public interest entity (PIE) auditors must now rotate every 10 years (previously every 20 years or 24 years (joint audit)) and internal rotation of responsible partners must take place every 5 years (previously every 7 years).
- Companies are now required by law to implement an adequate risk management system.
- BAFIN (Bundesanstalt für Finanzdienstleistungsaufsicht) may immediately perform its own audit if violation of accounting regulations seem probable.
Has it gone far enough? Has there been a move toward joint or shared audits?
From today’s perspective, the FISG has gone far enough. However, only the day-to-day application of the FISG in real life can give the final answer. In Germany, so far no increase of joint audits have been observed. However, in France joint audits are obligatory for PIE companies since 1966, and the market share of the Big Four with 72% is significantly lower than in Germany (84%).
Has the unlimited liability for gross negligence resulted in further market concentration amongst auditing firms?
According to the half-annual member statistics of the German Chamber of Auditors (Wirtschaftsprueferkammer), the number of auditing firms has slightly increased from 3,013 on 31 December 2021 to 3,031 on 30 June 2022.
Is increasing regulation driving SME accounting firms away from auditing?
Increasing regulation will drive away SME accounting firms from auditing, as the insurance premiums have in some cases doubled from what we hear from the market.
Have there been any other significant regulatory developments in Germany over the last 12 months?
In 2021, the German Supply Chain Due Diligence Law (Lieferkettensorgfaltspflichtengesetz, LkSG), was enacted. It sets out that companies based in Germany will in the future be legally obligated to meet their responsibility to respect human rights and basic environmental standards in their direct supply chains and thus, for the first time, also outside their own business operations, once a certain number of employees are reached (2023: from 3,000 employees; 2024: from 1,000 employees).
How would you describe the health of the accounting industry in Germany in terms of customer demand, fee pressure, and staff recruitment and retention?
According to the Lünendonk-list and –study 2021 of leading accounting and tax firms in Germany, the leading accountancy firms (ACs) will increase by an average of 4.8 percent in the 2021 financial year (compared to an average of 5.3 percent in the Covid 19 year 2020). However, the cumulative domestic turnover drops from 10.2 to 10.1 billion euros. The reason for this is primarily the development of the Big Four, whose performance declines by an average of 2.9 percent despite growth at KPMG. Their turnover development had already weakened in the previous year 2020 (+2.6 %). In contrast, the ranks five to 25 increased by an average of 6.4 percent. The disproportionate developments of Bansbach (+21.9 %) and Grant Thornton (+15.6 %) are striking. RSM overcomes the 100 million euro turnover mark and thus moves into the circle of the so-called Next Seven.
Current challenges such as the Ukraine war, rising energy and manufacturing costs as well as the associated inflation hardly influence the revenue forecasts of the leading WP firms, comments Lünendonk managing director Jörg Hossenfelder. The top 25 are planning average growth of 7.5 percent for 2022.
The fee pressure remains high and staff recruitment and retention is key, especially for medium and small-sized accounting and tax firms in Germany. According to a recent study of the ifo-Institut, accounting firms are on top of the list: 71% of the accounting firms say that their business is affected by the shortage of skilled workers. The majority of the Lünendonk study participants see the biggest obstacles to organic growth as the lack of skilled workers and the increased fluctuation. "Although a fluctuation rate of around 10 percent is healthy for the industry, the increase in 2021 exceeds the expectations of the study participants," says study author Jörg Hossenfelder. The auditors and consultants are reacting to this with salary increases of between 3 and 4.5 percent. In addition, clients will also be confronted with fee increases due to the increased demand.
Are there any services areas where demand has grown over the last 12 months?
No specific service areas known where demand has grown over the last 12 months.
Has there been any significant consolidation or merger activity in the accounting profession?
There are no changes in positions five to eleven (Next Seven) according to the Lünendonk study: BDO continues to be Germany's fifth-largest audit firm and the only company outside the Big Four with a Dax 40 mandate (SAP). The Hamburg-based firm will pass the 300 million euro mark in 2021. Ebner Stolz (€297.9 million) and Rödl & Partner (€294.8 million) are about to clear this hurdle as well.
Mazars, for its part, surpasses the €200 million mark and ranks eighth with €204.2 million, followed by Baker Tilly (€176.9 million). Grant Thornton comes close due to its significant growth of 15.6 percent and is in tenth place with €169.6 million. RSM also makes significant gains with a 13.1 percent increase in turnover, closing out the Next Seven with €101.2 million.
ETL follows with 62.2 million euros. Dornbach makes up one place with a jump to 60.0 million euros and takes 13th place. DHPG also improves by one place with a turnover of 58.7 million euros.
What are your expectations for the next 12 months - are there any potentially significant developments in the pipeline?
According to study participants of the Lünendonk survey, ESG (environmental social governance) issues are expected to contribute to growth in 2022 and 2023 in addition to advancing digitalisation. The regulations are forcing a large number of companies to publish their own sustainability strategy in the non-financial part of the annual financial statements or in a separate report. Against this background, the study participants expect a continuation of the market consolidation, also due to the renewed discussion on the separation of audit and advisory.
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