The European Securities and Markets Authority (ESMA) on Tuesday 3 November unveiled the results of its peer review of what went wrong in the accounting scandal involving the German payment service provider ‘Wirecard’ (see EUROPE 12512/15). It concludes that there are a series of “deficiencies, inefficiencies and legal and procedural obstacles” in German supervision.
It was the European Commission that asked ESMA at the end of June to conduct a preliminary investigation into the adequacy of German supervision in this case (see EUROPE 12515/13).
ESMA, which has no power of direct supervision over financial reporting by issuers, has concentrated on the application by the German regulator, BaFin, and the German Financial Reporting Enforcement Panel (FREP) of its guidelines under the control of financial information (GLEFI) of 2014, explained ESMA President Steven Maijoor at a press conference.
In terms of monitoring, the report criticises the FREP in particular for failing to take international media alerts seriously and for failing to take a closer look at Wirecard between 2016 and 2018. And when it finally did, ESMA believes that the reviews failed to adequately address areas of importance to Wirecard’s activities and allegations from the media and whistleblowers.
However, the review above all highlights the obstacles created by the German two-tier supervisory system for financial reporting, involving firstly the FREP and secondly BaFIN, which is responsible for taking action in the event of infringements.
The report concludes that BaFin and FREP do not have the same perception of their respective roles and of their limits and possibilities within this system.
The strict confidentiality regime to which both institutions are bound may also, according to ESMA, have hampered the exchange of relevant information between them and with other competent bodies. Both authorities may not have the necessary powers to request information from auditors or other interested parties, the report also suggests.
BaFin’s independence questioned
The report also analyses the independence of the two authorities vis-à-vis issuers and the government. While for the FREP, ESMA does not identify any particular problem of independence from the German government, for the BaFin, on the contrary, it concludes that there is “an increased risk of influence from the Ministry of Finance, given the frequency and detail of reporting to the Ministry of Finance, in the case of Wirecard, in some cases before action is taken”.
Furthermore, the lack of information on the shares held by its employees raises, according to ESMA, “doubts about the robustness of the BaFin’s internal control system with regard to its employees’ conflicts of interest vis-à-vis issuers”.
At the beginning of October, the German government presented a package of measures aimed precisely at strengthening its supervisory rules, including additional powers for BaFin. According to Steven Maijoor, it is still too early to judge whether this reform will be sufficient and respond to the recommendations made in the report.
ESMA will also learn from this case about the effectiveness of its guidelines, he said.
For its part, the European Commission welcomed the work of ESMA and said that it now had to analyse the report in depth in order to draw the necessary conclusions. “The report is a useful step in understanding the circumstances that led to Wirecard’s bankruptcy”, said Daniel Ferrie, a Commission spokesperson.
In statements annexed to the report, the two authorities, for their part, contest the conclusions of the ESMA. “ The conclusions do not adequately reflect or correspond to the duties and responsibilities under the legal financial reporting control framework applicable to the FREP, are not supported by evidence and explanations provided during the review process, and are biased by retrospective materiality”, the FREP states.
See the report: https://bit.ly/3kUlyMB (Original version in French by Marion Fontana)