ESMA find loopholes in German supervision of Wirecard’s financial reporting

The European Securities and Markets Authority (ESMA), the European Union securities markets regulator has published the results of its Fast Track Peer review, in which it has evaluated collapsed payments firm Wirecard AG and its supervision by Germany’s BaFin and the Financial Reporting Enforcement Panel (FREP).

Bundesanstalt für Finanzdienstleistungaufsicht (BaFin) is a Federal Financial Supervisory Authority which falls under the purview of the Federal Ministry of Finance in Germany while the Financial Reporting Enforcement Panel (FREP) is a body which examines the public listed companies.

Back in June, the Wirecard financial fraud scandal broke, during which €1.9 billion of cash went missing from the company’s balance sheet and subsequently the company filed for bankruptcy. The ESMA’s investigation began in June after the German payments group collapsed into insolvency.

The review has focused on the application by BaFin and FREP of the Guidelines on Enforcement of Financial Information (GLEFI) and on impediments to the effectiveness of the German two-tier supervisory system for financial reporting in the specific context of the Wirecard case, the press release noted.

“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 European Union”, said Steven Maijoor, ESMA Chairman.

The deficiencies observed by the peer review were:

  • There was a conflict of interest of BaFin’s employees via-a-vis issuers.
  • Highlighting the “risk of influence by the Ministry of Finance given the frequency and detail of reporting by BaFin, sometimes before actions were taken”.

The examination of Wirecard’s financial reports by FREP were inadequate in that the scope of the examination “did not appropriately address areas material to the business of Wirecard, nor the media and whistle-blowing allegations against Wirecard”. Also, the analyses performed by FREP were found to be insufficient by ESMA.

The report also highlighted the supervisory system in the area of financial reporting, in which it found irregularities related to BaFin and FREP in areas such as coordination between them and a “strong confidentiality regime” which led to a hindrance of information sharing.