The oversight of financial reporting in Germany: Essays on audit quality and on accounting enforcement

Abstract

Reliability, transparency, and quality of financial information are critical for the stability of the financial market. To support the oversight of financial reporting, the EU has promoted the institution of national enforcement systems, which supervise the compliance of financial statements with the applicable reporting framework, and has issued, in April 2014, Directive 2014/56/EU and Regulation (EU) No 537/2014, which aim at strengthening the role of the statutory auditor. This dissertation focuses on two aspects of the oversight of financial reporting in Germany, namely audit quality and accounting enforcement, and analyses whether the above-mentioned regulatory measures are potentially able to increase the quality of financial information among PIEs. The first part of the dissertation examines whether the limitations introduced by the EU-regulation on the provision of certain non-audit services (NAS), on NAS fees as well as on the proportion of fees an auditor can obtain from a client, and on the length of audit engagements, might improve audit quality. Audit quality is measured with the existence in audited financial statements of accounting errors, which are identified thanks to the enforcement announcements disclosed in the Federal Gazette. The second part of the dissertation evaluates whether companies with enforcement findings have a higher probability of engaging in earnings management (measured with Beneish’s m-score) than companies subject to the enforcement regime, which have not issued any enforcement announcements over the analysed period. The results show that the two-tier enforcement system is potentially able to find and sanction companies engaging in earnings management, which means that its work might contribute to increasing the quality of financial information. Conversely, there is only partial evidence that further restricting the provision of NAS, setting a cap on NAS fees as well as on the proportion of fees an auditor can obtain from a client, or limiting the length of audit engagements are effective in strengthening the role of the statutory auditor and in enhancing the quality of financial statements.