While churn in the market created by regulatory changes is keeping client demand at a reasonably high level, Germany is suffering from economic stagnation and a fractured government that does not seem to know what to do about it. Che Golden reports.
The last time IAB reported on Germany, auditing firms were having to turn away work. It seems the pressures on this particular part of the local accounting market have not eased.
“Due to the worsening economic situation in Germany, the state of the labour market has eased slightly,” said Jan Schmeisky, audit partner at Menold Bezler, an MGI Worldwide member firm. “However, the auditing and consulting sector is not (yet) benefiting from this to the desired extent. The situation in the labour market remains an absolute challenge, particularly for small and medium-sized auditing and consulting firms.”
As a result, Menold Bezler is finding itself continuing to actively manage clients and assignments in its portfolios, even rejecting assignments if necessary, especially if the set-up costs are high or only low hourly rates can be realised.
Michael Thelan, partner at KBHT, an Allinial Global member firm, sees a combination of complex regulations, a shortage of qualified professionals, and growing demand for high-quality audits, forcing firms to turn away clients. SMEs are struggling to offer specialised services but may not have the budget to secure specialised staff or IT.
This means the trend of consolidation amongst local firms continues. “Many small to mid-sized audit firms are merging with larger networks or consolidating to achieve economies of scale, expand their service offerings, and remain competitive in a market dominated by the Big Four and Next Ten,” said Thelan. “This is particularly crucial in an environment where regulatory requirements and client expectations are growing.”
There is also constant movement in larger audit firms, according to Schmeisky. “Succession is also a key factor,” he said. “Small audit firms find it difficult to transition to an orderly succession. Young professionals often do not want to get into debt and take over shares from retiring partners.”
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By GlobalDataAs a result, Thelan has seen a noticeable decline in smaller, independent firms. They face difficulties competing due to rising compliance costs, increased demand for digital solutions, and staffing shortages.“The disappearance of these firms leads to a more concentrated market, making it harder for SMEs to find cost-effective audit services tailored to their needs, often forcing them to rely on larger firms that may not offer the same personalised service,” he said.
For the larger firms, being able to have international reach could be key to their future survival. “The network changes at Ebner Stolz and dhpg underline the need for international reach and competitiveness,” said Schmeisky. “RSM International parted ways with the next-seven company RSM Germany and added Ebner Stolz to its global network. In return, the Stuttgart-based WP company left the Nexia network. At the same time, dhpg also completed a network change from Nexia to CLA Global.”
Private equity interest in German accounting and audit firms has grown, particularly in firms that provide specialised consulting, technology-enabled services, or are looking to expand regionally or internationally, according to Thelan. PE firms see these as attractive opportunities for investment due to predictable cash flows and growth potential in advisory services. There is also growing interest in cross-border mergers and partnerships to serve international clients and tackle more complex audit and advisory requirements, especially in light of global regulatory changes.
While M&A activity might be slow within German firms, foreign-owned companies are on a spending spree. So far in 2024, international companies have been on a USD 47.2 billion German shopping spree, according to research by 7Square. It seems that Germany’s economic woes have made German companies a bit of a bargain, with high energy costs and sluggish demand having affected its industrial base.
“Industry in Germany is suffering massively from very high energy prices,” said Schmeisky. “The price per ton of carbon dioxide has risen significantly. This has had a price-driving effect on natural gas, heating oil, diesel and petrol. The ‘energy price brake’ in place in the previous year has expired. The return to the full VAT rate of 19% is also driving up prices in the restaurant sector. The legalisation of cannabis, which is associated with bureaucracy, is not helping.”
German companies are simply not as powerful as they once were on the global corporate scene, with the banking sector especially hard hit. Deutsche Bank was the 10th-largest in the world by assets in 2013. It is now the 26th. In terms of market value, corporate Germany accounts for two per cent of the MSCI all countries index, down a third compared with a decade ago, while Denmark and the Netherlands have seen their weightings rise.
But despite the economic doldrums, the accounting industry is generally healthy with strong demand for services, particularly in advisory, compliance, and audit areas.
“However, fee pressure remains intense, especially from large corporate clients who expect high-quality services at competitive rates,” said Thelan. “Recruitment and retention are major challenges, with a shortage of qualified professionals leading to rising salaries and efforts to retain talent through improved work-life balance and technology-driven efficiency.”
“Customer demand remains pretty high,” stated Dr Christian Gorny, CEO of ETL Global. “Staff recruitment and retention remain difficult and the prevailing challenge for accounting firms.”
Recruitment, as ever, is a bug bear. “The situation tends to be constantly difficult,” said Schmeisky. “It is particularly difficult for auditing and consulting firms to attract young people. Although the earning prospects are good, many young people do not want to take the rather ‘hard path towards the professional exam’. The traditional final exam is considered dusty – although with digitalisation and sustainability, there is hardly any other profession that is so exciting.”
Local changes within the market are creating demand for firms for instance from recent regulatory changes focused on enhanced transparency, ESG reporting, and stricter audit quality standards. There has been more emphasis on the implementation of EU directives, particularly around sustainability disclosures, digitalisation of financial reporting, and heightened scrutiny from regulators on audit firms’ independence and quality controls.
“Demand for advisory services, especially around ESG reporting, digital transformation, cybersecurity, and compliance with new regulations such as the Supply Chain Due Diligence Law, has increased significantly,” continued Thelan. “Clients are also seeking more integrated and data-driven solutions, which has pushed demand for technology consulting within the audit space.”
The topic of sustainability reporting is now also finding its way into German SMEs, according to Schmeisky. “Companies are increasingly focusing on the EU Taxonomy Regulation or the ESRS standards,” he said. “Although the topic is still generally seen as a bureaucratic monster and cost driver, there is increasing demand for consultancy services as companies become more familiar with the subject.”
Over the next year, Thelan predicts that continued digitalisation of the audit process, will create more focus on ESG and sustainability reporting, and a further tightening of regulatory scrutiny.
“The industry may also see increased automation, AI-driven analytics in audits, and continued consolidation,” he said. “Additionally, firms will likely invest more in upskilling their workforce and leveraging technology to meet evolving client demands.”
These are trends likely to shape the near future of the German audit profession, as firms adapt to regulatory changes and market dynamics.
“It can be assumed that AI will play an increasingly important role in the auditing sector,” said Schmeisky. “Despite the weak economic outlook, it can be assumed that the auditing and consulting market will continue to grow in the next 12 months. Growth can be expected in the areas of restructuring and turnaround – but ESG will also play an important role. Good consultants must accompany their clients’ transition process.”
If businesses are to have a healthier environment they can thrive in, the country needs to pull itself together politically. The last state elections held in Germany were dramatic for the coalition of the Social Democratic Party (SPD), the Greens and the neoliberal Free Democratic Party (FDP) — the results appeared to echo the mood of the country. Never before in the history of postwar Germany has a federal government been as unpopular as this coalition.
As a result, the Greens have changed their leaders and are now trying to reshape their party policies, and the FDP, the smallest member of the coalition, is threatening to pull out of the coalition altogether. The party’s leader, Finance Minister Christian Lindner, has warned that the coalition will be judged by its performance. He has called for an “autumn of decision-making” and issued an ultimatum.
Ultimatums may not be the best way forward for a suffering country. Seen as the economic heart of Europe, Germany’s economy now stands out as the slowest growing among the G7 and Eurozone countries. Recent IMF forecasts show a projected 0.2% contraction in 2024 and only 0.8% growth in 2025. A budget gap exceeding EUR 40 billion, combined with plummeting tax revenues expected to fall short by EUR 60 billion over the next five years, has businesses of every size tightening their belts. Some analysts are even asking if Germany is on the verge of a ‘lost decade’.
Further bad news for the coalition came in October, when Volkswagen announced that it wants to close at least three factories in Germany, with further job cuts planned at other sites. The company did not give details of its plans, but chief personnel officer Gunnar Kilian said in a statement, ‘the fact is that the situation is serious and the responsibility of the negotiating partners is enormous’.
Chief executive Oliver Blume cited new competitors entering European markets, Germany’s deteriorating position as a manufacturing location and the need to “act decisively” as reasons for the decision.
Difficult times are ahead for local accountancy firms.
