Independent oversight of German
audit firms has revealed shortcomings in the traditional peer
review system.

The Seventh Reform Act of the German Public
Accountant Act (Wirtschaftsprüferordnung – WPO), which was
implemented towards the end of 2007, mandated the independent
inspection of firms that audit listed companies or public interest
entities (PIEs). German oversight was previously limited to a peer
review system for audit firms and this system continues in parallel
with independent oversight.

The German Auditor Oversight Commission
(Abschlussprüferaufsichtskommission – AOC) conducted the first
independent inspections last year, visiting 32 audit firms.

AOC general secretary Tim Volkmann said
inspections are the most important part of the WPO and that they
have been received well by the profession. He said the reviews have
already revealed flaws in the peer review process.

“In a few cases a peer review performed just
recently before an inspection had failed to identify any
deficiencies, then the [AOC] inspection revealed considerable
shortcomings of the quality control system [at the firm],” he

“This goes to show we are on the right track
in moving away from additional peer reviews for auditors and audit
firms of PIEs in favour of thorough and objective inspections,
which also cover the scope of the former peer reviews.

“These considerations are supported by many
professionals who feel rather unenthusiastic about having two
separate teams of reviewers/inspectors visit their premises

BDO Germany chief executive Christian
Dyckerhoff said the added pressure of the inspection process began
to surface in the summer of 2008 when the firm’s first AOC
inspection took place and coincided with the profession’s ongoing
peer reviews.

Both Dyckerhoff and KPMG Germany head of audit
Joachim Schindler said the inspections were carried out

“Everything we have seen (during the
inspections) so far is these are highly professional people and
approach this with a professional view and background,” Schindler

Dyckerhoff added that the inspection system in
place is not perfect. He said it is “very detailed” and noted two

“One problem was that the inspection process
is still in a start-up phase so the inspectors, who were formally
employed by Big Four firms, looked a little bit at the processes
they were used to from their previous employers,” he said.

The second problem was that BDO had no chance
to prepare for the requirements because sufficient guidelines have
not yet been developed. The AOC inspectors can tell the firms the
newly agreed processes, but these are not based on professional
rules set by any of the nation’s professional bodies.

“The co-operation between the AOC and the
audit firms will improve if we develop rules of how it ought to be
so the audit firm is prepared for an efficient inspection to
optimise its efforts in auditing,” Dyckerhoff said.

The AOC recently reported its findings for the
first time. Shortcomings identified in the audits included a lack
in proper documentation, insufficient professional training or
training that didn’t match the auditor’s major fields of work, such
as IFRS. There was also a lack of evaluation of objectivity when
using the work of another auditor or expert.

Volkmann says that in a few cases the AOC had
to subject some auditors to investigations after professional
misconduct was suspected.