All in the family

Big four auditing firms do the DAX (re)shuffle

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So long, old friends – for now. Source: Ikon Images / Getty Images

EY, Germany’s third-largest accounting firm, has reason to celebrate. The company previously known as Ernst & Young just bagged an extension of the country’s most lucrative auditing contract, for industrial conglomerate Siemens. Last year, Siemens paid EY a cool €53 million ($61 million) for the work — more than any other constituent in the DAX 30 index of German blue-chip stocks. (Rivals Deloitte, KPMG and PwC all applied, but Siemens revealed that EY made the best offer.)

The battle of the bean-counters, however, is only heating up. Over the next two years a flotilla of German corporates, including Deutsche Bank, Fresenius, Henkel, Lufthansa and Volkswagen, must hand their accounts over to another financial examiner for annual scrutiny. Since 2016, the European Union requires large companies to switch auditors on a regular basis, in order to prevent managers becoming too cozy with their controllers.

A survey by Handelsblatt shows that so far, only five DAX companies have appointed a new auditor to comply with EU regulations. A dozen names in the index are due to change auditors by 2022. Two others, including Siemens, renewed with their previous partner, making use of an exception to the rule (see below).

Choosing a new auditor is an expensive, time-consuming task. The mandates must be put out to tender long before the actual change, followed by a stringent selection process that involves the auditors pitching their business at corporate headquarters. Depending on the size of the client, the costs for the application can run into the millions, says Hubert Barth, head of EY Germany.

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In many cases, managers are all too happy to stick with the same external checkers, arguing that their intimate knowledge of the company helps to navigate its problem zones in the long term. Allianz, the insurance giant, commissioned KPMG every single year since 1890 before switching to PwC in 2018. Now, banks and insurers have to replace their auditors every 10 years. For other companies, EU rules provide for a little temporary relief. If an examiner has been on board for less than 10 years, as was the case with EY and Siemens, the mandate can be extended for another decade.

Jörg Hossenfelder, a partner of market researcher Lünendonk & Hossenfelder, says that 10 years is on the short side. In principle, however, the change makes sense “in order to avoid routine and dependencies over a longer period,” he adds.

Misplaced expectations

EY and Deloitte, in particular, want to expand their market position. Deloitte aims to win three to five mandates in the DAX, up from one, from chemical and pharma giant Bayer. Deloitte spent three years angling for the Bayer account, putting together and training teams with industry expertise.

Of the “big four” auditors, KPMG by far has the most to lose from the “rotation,” a term that evokes visions of clients working their way around the quartet. For years, KPMG performed yearly audits of 16 DAX companies on its own, but will now inevitably relinquish many of these mandates. Apart from Allianz, PwC already lured away BMW, another long-standing customer of KPMG. Deutsche Bank will soon follow, sapping KPMG of €51 million in annual examiner fees.

By enforcing a rotation, the EU doesn’t just put a professional distance between clients and auditors. Regulators in Brussels also seek to loosen the market power of the big four, who for years had a vice grip on German blue chips and the MDAX index of the 50 largest companies below the top 30. However, any expectations that medium-sized auditors can muscle their way into the major leagues are likely to misplaced. Rather than lose pieces of the pie, the big four will have to make do with a grudging redistribution of fees.

Bert Fröndhoff leads coverage of German chemicals, health care and service companies for Handelsblatt. Jeremy Gray, an editor at Handelsblatt Global, adapted this story into English. To contact the author: froendhoff@handelsblatt.com

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