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German financial reporting system faces ESMA assessment after Wirecard collapse



The European Securities and Markets Authority (ESMA) plans to conduct an assessment of the supervisory response in the financial reporting operation of BaFin and the Financial Reporting Enforcement Panel (FREP) to the events leading to the collapse of the German payments group Wirecard AG. The assessment is expected to complete on 30 October 2020.

The ESMA believes that the Wirecard’s collapse undermined investor trust and the assessment of the events will help restore the investors’ confidence.

The assessment will focus on the operation of BaFin and FREP in applying the Guidelines on the Enforcement of Financial Information (GLEFI). The two authorities were designed to supervise and enforce financial information in the Federal Republic of Germany under the Transparency Directive (TD).

The assessment will utilize GLEFI and ESMA’s Peer Review Methodology. ESMA issued the GLEFI in 2014 to promote consistent application and supervision of IFRS. In support of this, in 2017 ESMA launched a peer review in seven Member States focusing on three GLEFI guidelines – Guideline 2 Human and financial resources, Guideline 5 Selection Methods and Guideline 6 Examination procedures. The review concluded that there are significant differences in national approaches, allocated resources and actions taken in the enforcement of financial information. BaFin and FREP were included in the review which identified positive aspects of the German enforcement model but also a highlighted a few areas for improvement.

German financial reporting system faces ESMA assessment after Wirecard collapse

The review found that some procedures in place in both FREP and BaFin could use some improvement, as well as the selection and examination of issuers. The review also identified independence and conflict of interests in FREP and cooperation issues between the two authorities.

ESMA invited BaFin and the European Commission to investigate whether the TD is correctly applied by Germany, given BaFin’s inability to comply with the GLEFI due to a lack of enforcement powers.

ESMA’s actions followed Wirecard’s filling for insolvency in June after accounting firm Ernst & Young found that €1.9 billion were missing from the company’s accounts. Following the Wirecard scandal, Germany announced it will give company accounting responsibilities to the market regulator BaFin.

The German government decided to terminate its relationship with Financial Reporting Enforcement Panel or “Deutsche Prüfstelle für Rechnungslegung” (DPR), a quasi-government entity that investigates accounting issues on behalf of public authorities. The DPR has been examining financial reporting of publicly listed companies since 2005 and reportedly audited Wirecard in 2019 but failed to “notice” the company’s issues.

Following the events in Germany, the UK Financial Conduct Authority (FCA) suspended Wirecard’s UK subsidiary and left thousands of people in the UK unable to access their money. The FCA stated that it has taken actions to stop Wirecard’s UK business in order to protect its customers.

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German financial reporting system faces ESMA assessment after Wirecard collapse

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