Editorial

On 25 June this year, Wirecard, a payments company based in Germany failed; it had debts of €3.2 billion. The German regulator, BaFin, is investigating the circumstances, but it appears that the company used accounting fraud to inflate revenue and create balances to hide losses over a number of years. The company’s chief executive and two other former executives have been arrested, and two other men are still being sought; all are suspected of embezzlement. The president of the German Bundesbank, Jens Weidmann, said ¹ recently that Germany should toughen its rules for audit and accounting and Olaf Scholz, the German finance minister, has proposed ² that financial oversight of companies should be tightened. In the UK, a series of high profile corporate failures has been followed by extensive calls for improved corporate reporting, better audit and enhanced enforcement. In this context, the latest annual report by the Financial Reporting Council (FRC) into audit quality at the seven largest audit firms in the UK makes disappointing reading. Despite the fact that the firms are under the spotlight for having failed to deliver high quality audits in the past, it appears that the FRC remains concerned that they are still not doing so satisfactorily. Overall in 2019/20, one third of all audits reviewed, down from one quarter the previous year, failed to meet the FRC’s standard for good quality audit. Moreover, the areas in which the auditors are falling down continue primarily to be those that require them to challenge the judgements of management. One example of an area in which management estimates are critical concerns the cash flow projections that underlie asset values for the purpose of impairment testing, which is one of the most sensitive issues for the current round of interim reports for companies adversely affected by Covid-19.