Germany must review the way it regulates accounting firms as it seeks “radical solutions” to contain the consequences of the large fraud in the Wirecard payments group.
The government will terminate its contract with the country’s accounting regulator, the Financial Reporting Control Panel, as soon as Monday, according to informed officials on the matter.
Power to initiate investigations into the companies’ financial reports would be handed over to BaFin, Germany’s financial regulator, officials said.
Wirecard, once a high-flying German payment group, filed for bankruptcy last week after admitting that € 1.9 billion in cash probably “didn’t exist.”
German regulators have faced allegations that they did not adequately supervise the financial technology group, which has been audited by the accounting firm Big Four EY for a decade.
FREP, a quasi-official private sector body, oversees the financial reporting of publicly listed companies on behalf of the government.
“What the Wirecard affair has shown is that. . . self-regulation by auditors is not working properly, “Jörg Kukies, Germany’s deputy finance minister told the Financial Times.” So we will inevitably have to wonder whether the bodies that currently regulate the industry should continue to do so in their current form. “
For more than three years, EY did not request crucial information from a Singapore bank account where Wirecard claimed it had deposited cash, a routine audit procedure that could have uncovered the vast fraud in the German payment group at a much later stage. earlier.
The Wirecard affair has been very embarrassing for the German government, which it fears could damage the reputation of the country’s financial services industry. Chancellor Angela Merkel described the case as “alarming” on Friday through her spokeswoman, while finance minister Olaf Scholz called it “a scandal that is almost unprecedented in the world of finance.”
“We should view Wirecard’s history as a signal to address these problems, which have been around for quite some time, and to find radical solutions,” said Kukies. “Only then can we contain the consequences of this matter.”
Kukies, a former Goldman Sachs banker who joined the finance ministry in 2018, said BaFin “currently has very limited powers” to oversee accounting firms in Germany. “We have to think about how the regulatory regime should be changed,” he added.
FREP was founded in 2004 in response to the Enron accounting scandal, but has only 15 employees and a small annual budget of € 6 million. KPMG’s special audit of Wirecard’s accounting, which resulted in an inconclusive report, involved 40 employees and cost € 10 million, according to a person with first-hand knowledge of the details.
Under German law, BaFin can ask FREP to open an investigation into a company’s financial reports, but it has no influence on the actual process. The Bonn-based regulator needs to wait for the result of a FREP probe before it can start its own investigation.
BaFin in early 2019 asked FREP to start an investigation into Wirecard after the FT reported on allegations by whistleblowers of accounting manipulations, according to people briefed on the matter.
However, only one FREP investigator has been working on the case and little progress was made, informed officials on the matter told the FT. It only picked up pace after a special audit commissioned by the company by KPMG in April failed to verify that large parts of Wirecard’s business, as well as € 1 billion in company cash, reportedly held in accounts in Asia, they really existed.
“We have seen that FREP can really take its time when investigating a company, and then authorities can only intervene at a relatively late stage,” Kukies said. “We need to check if that is correct. The Wirecard affair has shown that these controls should occur much more quickly. ”
Berlin-based lawyers Marc Liebscher and Wolfgang Schirp said Sunday that they are preparing an investor class action lawsuit against the Federal Republic of Germany. Investors are demanding damages for an alleged “failure of the German regulatory authorities” in the Wirecard case.
After the termination of the contract with FREP, which was first reported by Bild am Sonntag, an 18-month notification period begins that will give the government time to come up with a new regulatory setup.
FREP currently completes around 85 audits at listed German companies a year and discovers deficiencies in approximately 20 percent of cases. The body reveals individual cases only if they reach a negative verdict.
In a high-profile ruling in 2018, FREP forced Adidas to reserve a charge of € 475 million after concluding that the sportswear maker had been overly optimistic about the potential of Reebok, which the group bought in 2005.
Kukies also criticized the fact that Wirecard was treated as a tech group and not directly supervised by financial regulators. “In our opinion, we need a European supervisory regime for payment service providers,” he told the FT, adding that Germany had been pushing for that for a long time. “The events around Wirecard will definitely accelerate that,” he said.
Valdis Dombrovskis, the EU’s executive vice president in charge of financial services policy, told the FT on Friday that he was writing to the supervisor of the bloc’s main markets asking him to assess BaFin’s handling of Germany’s fallen fintech champion.
FREP and BaFin declined to comment.