The Future of Audit After the Wirecard Accounting Scandal – Proposal for a Change in the Payment Model

Abstract

Auditors take over a crucial role in corporate governance and capital markets. A main contribution of auditors is to enhance firms ‘cost of capital by fostering trust among public and private investors. Moreover, auditors have to discipline corporate insiders to avoid misbehavior and prevent financial fraud. In order to fulfill these obligations, however, in addition to adequate knowledge, skills and expertise, auditors must act in an independent manner. Unfortunately, auditors are still explicitly subject to a major conflict of interest, resulting from the fact that they act as an agent and are hired and paid by the principal audited company. Despite many accounting scandals Enron, Parmalat, Satyam in the past and most recently Wirecard this very often observed conflict within academia, was not subject to any reform or rehearsal. Policymakers and scholars around the world have tried to remediate the auditor independence puzzle through a variety of mechanisms such as prohibitions and rotation of auditors. This article looks at recent accounting scandal of Germany’s based Wirecard with an attempt to rigorously define an enhancement in the payment model between principal and agent contractual relation. Addressing this conflict and providing remediation provides a large value enhancement potential for the capital market. Even if auditors assumed to act independently in the best of their knowledge and their professional attitude, investors as knowing this conflict of interest will think otherwise and incorporate into the company’s risk assessment for corporate valuation. Drawing from corporate governance, law and economics, and accounting literature, this article proposes a new payment model to solve the auditor’s principal-agent conflict. Regulators should set-up a funds, which pays the auditors. All companies would need to pay a contribution to a funds. This payment model is known and working since decades in the banking industry. Under this model the type of services potentially provided to the audit client are not restricted.