Germany’s supervisory system for financial reporting has been heavily criticised for its failures in handling problems at Wirecard, the German fintech which became embroiled in an accounting scandal and went into administration owing €3.5bn (£3.16bn)
The European Securities and Markets Authority (ESMA) conducted a fast track peer review assessing the events leading to the collapse of Wirecard and the supervisory response by BaFin, Germany’s markets regulator, and the Financial Reporting Enforcement Panel (FREP), the country’s accounting watchdog.
The review looked at how BaFin and FREP had applied the guidelines on enforcement of financial information (GLEFI), which apply to competent authorities in all EU member states.
It considered how effectively the German two-tier supervisory system for financial reporting had dealt with the Wirecard case, which saw the company forced to admit that €1.9bn of cash balances on trust accounts, representing approximately a quarter of the consolidated balance sheet total, might not exist.
ESMA’s report identified a number of deficiencies, inefficiencies and legal and procedural impediments.
These included the independence of BaFin from issuers and government, with ESMA highlighting a lack of information about its employees’ shareholdings, raising doubts about how well conflicts of interest were managed.
The report cited a heightened risk of influence by the Ministry of Finance given the frequency and detail of reporting by BaFin, sometimes before actions were taken.
Both BaFin and FREP were criticised over their market monitoring, with the report claiming they failed to select Wirecard’s financial reports for examination based on risks in the period between 2016 and 2018.
The scope of FREP’s examinations of Wirecard financial reports did not appropriately address areas material to the business of Wirecard, and nor did it adequately consider the media and whistle-blowing allegations against the company.
The analyses performed, in terms of the level of professional scepticism, timeliness of examination procedures, assessment of disclosures and their documentation were insufficient.
In addition, ESMA found that the two-tier system of supervision meant in case of possible fraud in financial reporting, BaFin and FREP were not clear about their perception of each other’s role and the scope that each had.
BaFin was not put in a position where it could thoroughly assess FREP’s examinations of Wirecard, which would have enabled BaFin to determine whether it should take over the examinations from FREP.
ESMS said the strong confidentiality regime, by which both institutions are bound, may have hindered the exchange of relevant information between them and with other relevant bodies, and found instances of a lack of coordination and inefficiency in exchange of information between relevant teams in BaFin.
Steven Maijoor, ESMA chair, said: ‘The Wirecard case has once again highlighted that high-quality financial reporting is essential for maintaining investor trust in capital markets, and the need to have consistent and effective enforcement of that reporting across the EU.
‘Today’s report identifies deficiencies in the supervision and enforcement of Wirecard’s financial reporting.
‘The report’s recommendations can contribute to the review of the German regime for supervision and enforcement.’