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Germany to overhaul accounting regulation after Wirecard collapse

Germany is to overhaul the way it regulates accountancy firms as it seeks “radical solutions” to contain the fallout from the huge fraud at payments group Wirecard AG.

The government will terminate its contract with the country’s accounting watchdog, the Financial Reporting Enforcement Panel, according to officials briefed on the matter.

The power to launch investigations into companies’ financial reporting would then be handed to BaFin, Germany’s financial regulator, the officials said.

Wirecard, a once high-flying German payments group, filed for insolvency last week after it admitted that €1.9 billion in cash probably did “not exist”.

German regulators have faced accusations that they failed to adequately supervise the financial technology group, which has been audited by Big Four accountancy firm EY for a decade.

The Financial Reporting Enforcement Panel, a private sector body with quasi-official power, monitors the financial reporting of listed companies on behalf of the government.

“What the Wirecard affair has shown is that…self-regulation by the auditors doesn’t work properly,” Jörg Kukies, Germany’s deputy finance minister, told the Financial Times. “So we will inevitably have to question whether the bodies that currently regulate the industry should continue to do so in their current form.”

For more than three years, EY failed to request crucial account information from a Singapore bank where Wirecard claimed it had deposited cash — a routine audit procedure that could have uncovered the vast fraud at the German payments group at a much earlier stage.

The Wirecard affair has proved highly embarrassing for the German government, which fears it could damage the reputation of the country’s financial services industry. Through her spokesman, Chancellor Angela Merkel on Friday described the case as “alarming”, while Olaf Scholz, finance minister, called it “a scandal which is almost unprecedented in the world of finance”.

“We should see the Wirecard story as a signal to address these problems, which have existed for quite a long time now, and to find radical solutions,” Kukies said. “Only then can we contain the fallout from this affair.”

Kukies, a former Goldman Sachs banker who joined the finance ministry in 2018, said BaFin “currently has very limited powers” to oversee accountancy 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 into 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.

We have to think about how the regulatory regime should be changed

Jörg Kukies, Germany’s deputy finance minister

Under German law, BaFin can ask FREP to open a probe into a company’s financial reporting but has no sway over the actual process. The Bonn-based regulator needs to wait for the result of an FREP probe before it can start its own investigation.

BaFin in early 2019 asked FREP to start a probe into Wirecard after the Financial Times reported accusations by whistleblowers of accounting manipulations, according to people briefed on the matter.

However, only one investigator at FREP has been working on the case and little progress was made, officials briefed on the matter told the FT. It only gained pace after a company-commissioned special audit by KPMG in April failed to verify that large parts of Wirecard’s business, as well as €1 billion in company cash reportedly held on accounts in Asia, really existed.

“We’ve seen that FREP can really take its time when it investigates a company, and then the authorities can only intervene at a relatively late stage,” Kukies said. “We need to check whether that’s right. The Wirecard affair has shown that these checks should happen much more quickly.”

Berlin-based lawyers Marc Liebscher and Wolfgang Schirp said on Sunday they were preparing a class-action lawsuit of investors against the Federal Republic of Germany. The investors demand damages for an alleged “failure of 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 notice period starts that will give the government time to hammer out a new regulatory set-up.

FREP currently concludes about 85 audits into listed German companies a year and discovers shortcomings in about 20 per cent of cases. The body discloses individual cases only if they reach a negative verdict.

In a high-profile ruling in 2018, FREP forced Adidas to book a €475 million charge after concluding that the sportswear maker had been too optimistic about the potential of Reebok, which the group bought in 2005.

Kukies was also critical of the fact that Wirecard was treated as a technology group and not directly overseen by financial regulators. “In our view, we need a European supervisory regime for payment service providers,” he told the Financial Times, adding that Germany had been pushing for that for a long time. “The events around Wirecard will definitely speed that up,” 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 bloc’s top markets supervisor asking it to assess BaFin’s handling of Germany’s fallen fintech champion.

FREP and BaFin declined to comment.

© 2020 The Financial Times Ltd

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