escándalos financieros - cuatro ojos


Author: José Mª Bové.  President of Bové Montero y Asociados.


We auditors are faced with an unusual financial year conditioned by Covid-19, in the context of our work on the preparation and oversight of the annual accounts. At the same time, there have been noteworthy regulatory developments such as the recent adoption of the Spanish Audit Regulation, which sheds light on audit performance, the organisation of firms, the regulator’s policy framework, and other aspects that required regulatory attention.

The great reforms, culminating in the EU with the publication of Directive 2014/56/EU, on audit, and Regulation 537/2014, on specific requirements regarding statutory audit of public-interest entities, emerged in the wake of financial scandals that saw directors commit acts punishable under civil and criminal law and also affecting auditors, held accountable for failing to discover and disclose the true financial position of the companies in question.

The list of obituaries written in the financial world over the last few years is fairly extensive: Enron, Parmalat, Carillion, BHS, Thomas Cook, Wirecard, and Pescanova, among others. Although amplified in the media, from a statistical perspective the exceptions are very reasonable: In 2019, 61,428 audits were performed in Spain, with 63 disciplinary proceedings initiated by the Spanish Institute for Accounting and Auditing (ICAC).

At the international level, the debate which began in the UK regarding further audit reform continues apace. This includes proposals to split and separate audit services in multidisciplinary firms, and impose joint audits on public interest audits. Meanwhile in Spain, we could highlight the recent publication of “Audit in Spain – Value added”, by REA Auditores and the Consejo General de Economistas. This scholarly work on the audit profession includes valuable insights on the advantages of joint audits of public interest entities.

The fact is, however, that the previously mentioned great reform of 2014, which introduced painful measures such as the mandatory rotation of audit firms every ten years, has not had the desired effect of opening up the market to other firms. The many tweaks have produced little or no real change.

In the meantime, fresh scandals have emerged, casting further doubt over the role of oversight, audit committees, and other actors. Just look at what has happened in Germany, where the bombshell of the Wirecard case has shaken the foundations of the country’s oversight system. The payment services provider had a EUR 1.9 billion hole in its accounts and was driven into insolvency proceedings, events raising serious questions over control mechanisms, including the work of auditors.

Regarding this German issue, the European Securities and Markets Authority (ESMA), which coordinates and represents European securities markets in the same way that the CNMV does in Spain, has just published a consultation paper (36 pages of highly recommended reading) setting out a range of recommendations and referring to the need to “assess the relevance of requiring joint audits of large EU listed companies”.

In its recent March newsletter, Accountancy Europe (Federation of European Accountants) reflected the sense of anxiety that has pervaded the European Commission over the Wirecard case, with two MEPs (Luis Garicano and Sven Giegold) even going so far as to state that the auditors in question folded under pressure from the German-based multinational’s executives and failed to publicly disclose the problems detected. Giegold also commented, “the fact that companies pay their own auditors is a fundamental system error. This economically rewards lax auditing. Those who ask too critical questions risk losing mandates…”, adding that, “auditors should not be appointed by the companies themselves, but by a body committed to the common good”.

The two MEPs have also issued a joint call for EU reform and asked the European Parliament to conduct an investigation into the Wirecard scandal, including an evaluation of the control exercised by the German financial authorities (BaFin) and the EU supervisors (ESMA and EBA).

Last but not least, they have called on the European Commission to review the EU audit regulations, specifically those points relating to the appointment and payment of auditors, possible conflicts of interest arising from the offering of non-audit services by their firms, and excessive market concentration in four firms, among other issues.

In light of the German financial scandal and others such as the Greensill case in the UK, which threaten the control and warning mechanisms in certain countries in particular, but also in the EU as a whole, one may wonder: could these situations have been avoided if the companies had been audited by two firms instead of one?

Perhaps there is no clear answer to this question, but we believe that joint audit adds greater quality, security, and transparency to the financial statements. Detractors of joint audit point to the increase in auditors’ fees – of between 2.5% and 5% according to various sources – due to factors such as the extra hours of planning and review work involved in a collaboration, closing meetings with clients, or the discussion, analysis, and resolution of contentious issues.

In any case, any increase in audit costs involved in joint audit is but a drop in the ocean when compared to harm caused to institutions by financial scandal in terms of economic damage and loss of confidence and credibility in the eyes of savers and the public in general.


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