by George W. Russell
As the European Union’s economic powerhouse, Germany requires a solid and active auditing and accounting profession. Klaus-Peter Naumann, Chief Executive Officer of the country’s Institut der Wirtschaftsprüfer, tells George W. Russell about their unique challenges.
Twenty-five years ago this October, Germany’s accounting institute – the Institut der Wirtschaftsprüfer in Deutschland – witnessed the kind of mergers and acquisitions deal that none of its peers had experienced: a merger with another country, as East and West Germany reunited after 45 years of separation.
“At the time of reunification, practical difficulties were at the forefront,” recalls Klaus-Peter Naumann, who had joined the IDW in the previous year when the Berlin Wall separating east and west had been breached. “A state-run economy had to be transformed into a market-driven economy.”
East Germany’s mostly struggling state-owned entities were transferred to a privatization agency and subsequently evaluated by financial professionals. “Decisions had to be made as to which operations could be transformed into new business models and which would have to be dissolved,” says Naumann, who is an economist by profession.
Much of that responsibility fell to the IDW. “The profession did a great deal of work in assisting practical implementation, such as business valuations, preparation or audit of the so-called DM-opening balance sheets, the first use of the currency of the reunited country.”
The IDW’s job was complicated by the absence of an equivalent profession in East Germany at the time. “By taking on a significantly increased workload, the West German public auditors, who were certainly extremely busy at the time, played a significant role in helping Germany to achieve reunification,” says Naumann.
A quarter-century later, apart from a brief sojourn at Schitag Schwäbische (now EY) between 1993 and 1995, Naumann looks back on a career spent largely at the IDW. He has been Chief Executive Officer since 2007, and has served as Chairman of the Board since 2001.
“When I started, my main focus was on technical work,” he says. “Now it is more a question of looking at the perspective of future development and assisting the profession in positioning itself successfully. My main task is to keep the profession up
to date on new challenges and ensure we are appropriately prepared for them.”
Mapping the future of German accounting, says Naumann, can work only in an atmosphere of trust. “We perceive ourselves as an organization that supports the profession in all areas relevant to its work, whether technical, political or commercial,” he says, adding that the task is aided by the IDW’s members seeing themselves as a “community” that depends on cooperation to achieve their goals.
Naumann says that new challenges mainly arise from changes in professional requirements, but also in the expectations of members, clients and regulators. “My role also includes the development of the German profession in the international context,” he notes.
Germany’s role in the European Union – it is the largest member economy with more than 80 million people and gross domestic product in 2014 of €3.65 trillion – has given IDW a prominent cross-border role, especially during the EU’s sovereign debt crisis that began in 2009 and resulted in bailouts of major financial institutions.
In 2009, occasioned by the euro currency crisis, the IDW issued a landmark position paper on the valuation of Greek government securities. “This paper was based upon both political decisions that had been made and that were anticipated,” says Naumann. “Decisions aimed at supporting Greece.”
The paper assumed help for Greece would not be provided solely by EU member states or the EU itself and that Greece’s creditors would also have to participate. Naumann says the paper’s correct reading of the situation, and the positive reception to its issuance, prompted a new research initiative: IDW Trendwatch.
“We established a working party at the IDW tasked with both identifying and contributing to socially and publicly relevant themes in order to enhance the public’s perceptions of the profession,” says Naumann. “This working party now looks at topics of particular importance, coordinates the experience already held, works on the important messages and decides on appropriate communication strategies.”
The euro crisis, which continues and which formed a part of the 2008-2012 global financial crisis, gave rise to concerns over corporate governance, of which Germany has long been considered a model. “We have a well-established system,” says Naumann. “On the one hand there is management and on the other hand the supervisory board, which supervises management’s activities.”
Naumann adds that the crisis taught IDW members the importance of communication among the auditors, audit committees and supervisory boards, as well as within corporate entities. “Perhaps we need to improve our communication in the auditor’s report, too, by adhering less to formalities,” he suggests.
IDW has proposed that directors who intend to enter into particularly risky transactions that could threaten the company’s existence should be required to obtain supervisory board approval, irrespective of the probability of failure. “This does not, however, mean that the supervisory boards should assume a management role,” says Naumann.
The German discussion of fallout from the crisis became an international conversation, leading to increased integration of oversight of capital markets and financial services in Europe, Naumann points out. “The role of national regulators is declining, while that of institutions such as the European Central Bank and the European Securities and Markets Authority is increasing,” he says.
As a result, the IDW will be seeking to increase interaction with such organizations, while Naumann also sees a bigger role for the Brussels-based Fédération des Experts Comptables Européens, the accounting profession’s regional voice. “The IDW is represented on all of FEE’s policy groups and committees and plays a key role.”
While the first attempts at harmonization of financial reporting within the EU date from the 1970s, opt-out provisions available to individual countries severely limited standardization. “This did not change until the adoption of IFRS for public interest entities,” says Naumann.
He notes that the IDW was instrumental in the debate that led to German public interest entities being able to apply IFRS. However, he doesn’t expect “harmonization will – beyond the application of IFRS – lead to consistent financial reporting within Europe in the foreseeable future,” he says.
Naumann believes national accounting bodies will continue to play an important role, particularly through the Accounting Standards Advisory Forum, which was established in 2013 as a global board of advisers to the International Accounting Standards Board. “They will be tasked with ensuring national aspects are included in the global debate and informing their countries about international developments. This will include using the knowledge obtained to advise the national legislator,” he adds.
IDW members remain vital to Germany’s own unique business interests, such as the Mittelstand, its thousands of medium-sized companies hailed throughout the world for technical innovation, precision engineering and export-orientated mindsets.
The IDW has launched a dedicated Mittelstandsinitiative directed at medium-sized companies. “As part of this we have developed a support tool that depicts the audit process,” says Naumann. “We offer this free of charge to companies for their internal training purposes.
“It is precisely for the Mittelstand that the IDW is of special significance,” he adds. “In this sector, the auditor is in demand as an all-rounder, to provide advice on taxation issues, on setting up a business, and on succession planning. There are many Wirtschaftsprüfer [accountants] working for medium-sized firms.”
Despite such successful niches, Naumann acknowledges that some areas of the profession are struggling. “We are aware that our members face increasing competitive pressures,” he says. “This has led to heavy demand for support from the IDW, especially for technical inquiry services.”
Small practitioners have particular challenges, Naumann believes. “It is our role to point out the opportunities each firm has,” he says. “For some, this might mean developing their assurance services further, while for others it may be better to offer different or new services or to form into a cooperation arrangement among smaller practitioners.”
While Naumann says the profession of Wirtschaftsprüfer maintains a generally high reputation in Germany, the IDW must continue to communicate their role to the general public. “It is not easy to convey auditing and the responsibilities of the auditor to the public,” he says. “There is also a danger that inappropriate behaviour by a single member will be attributed to the profession as a whole.”
There are broader challenges for the future: Germany has one of the lowest fertility rates in Europe, with an ageing population and smaller cohort of youths to produce the accountants of the future. “The professional examinations taken in Germany demand a high degree of commitment and effort and the high failure rate can be a deterrent for many young people,” Naumann says.
To ensure a sufficient number of well-qualified and committed candidates, the IDW is working to demonstrate to young people how diverse and challenging the profession can be and what developmental potential it can offer. “While audit is an important anchor product, the profession is developing a number of new services for its clients at the moment.”
Naumann insists that these services are not standard business advisory tools that can be found outside the profession. “These services ultimately offer security to the client,” he says, “security as to the reliability of systems and processes and about the results these will deliver.”
The accounting profession, he says, must allow itself to be modernized so that it can enhance its contribution to the way in which companies are governed, not just in the interests of the entity itself, but also in the interests of its various stakeholders. “There is no patent remedy,” Naumann concedes. “However, I am convinced that the profession will continue to assert itself successfully in the future.”
The Global Accounting Alliance facilitates cooperation among 11 of the world’s leading professional accounting organizations, including the IDW and the HKICPA.
This article was originally published in the May 2015 issue of A Plus. You can also read the pageflip version.