The European Securities and Markets Authority has criticised Germany’s financial regulator BaFin and the country’s accounting watchdog FREP for their “deficient” handling of the Wirecard accounting scandal.
In a report published on Tuesday, in which the regulator detailed the result of its investigation into the Wirecard accounting fraud, Esma wrote that BaFin and FREP ignored red flags over Wirecard’s financial reporting for years.
“FREP did not pick up signals in the international media and failed to select Wirecard for examination in the period between 2016 and 2018,” said Esma, adding that BaFin also had not requested FREP to take a closer look during that period either.
“Today’s report identifies deficiencies in the supervision and enforcement of Wirecard’s financial reporting,” said Esma chairman Steven Maijoor, adding that high-quality financial reporting was essential for maintaining investor trust in financial markets.
Esma’s investigation was started in June after the German payments group collapsed into insolvency in one of Europe’s biggest postwar accounting frauds.
Starting in 2015, the Financial Times had raised serious questions over Wirecard’s accounting in a series of articles, and in 2016 short-sellers published a critical report about the company’s conduct.
In its report, Esma said that the scope of an earlier FREP probe into Wirecard in 2014 had been too narrow.
The regulator voiced similar criticism about the investigation that FREP launched in 2019 on BaFin’s request, which failed to focus on Wirecard’s outsourced business in Asia, the operations at the core of allegations raised by whistleblowers.
“More attention should have been paid to the FT reporting during the first half of 2019,” the report said.
Esma also raised questions about BaFin’s independence from political interference, pointing to the fact the regulator was closely updating the ministry of finance about its work on an ongoing basis, “in some cases before actions were taken”.
Such a close co-operation created “a heightened risk of influence by the Ministry of Finance”, Esma wrote in the report.
The watchdog also underlined the lack of public “information about BaFin employees’ shareholding”, warning that this could lead to conflicts of interest.
“Trading in Wirecard shares by some of BaFin’s [market abuse regulation] team members is also concerning, given the MAR team’s role in supplying information needed for financial reporting supervision.”