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Parliamentary inquiry into Wirecard opens window for reform – German FinMin

A new parliamentary inquiry in Germany into the collapse of Wirecard AG provides the country with an opportunity to push forward with much-needed reforms to corporate auditing practices and financial supervision, Finance Minister Olaf Scholz told a banking conference Sept. 3.

The minister also underscored the urgency of reform, urging the government not to wait until the inquiry is finished to enact changes. Waiting could mean reforms could be delayed until the next legislative period, potentially at least a year from now, Scholz said during a panel at the Handelsblatt Banking Summit 2020, whose lineup also included Felix Hufeld, president of the German financial regulator coming under fire for its role in the unraveling of the payments company.

The finance minister, who in August was tapped to be the Social Democratic Party's candidate for chancellor in 2021's federal election, does not see the inquiry impacting his election campaign and he, like the parliament's investigation committee, wants to ensure reforms are implemented where and when needed.

Wirecard filed for insolvency in June after its 2019 audit could not confirm the existence of €1.9 billion in cash balances on its books. Markus Braun, who had been the company's CEO, and several other former executives are being held in custody on fraud and embezzlement charges. The scandal has not only put pressure on accounting firm EY, which had been Wirecard's external auditor for a decade, but also calls into question the role of German financial watchdogs.

Germany's parliament launched the new inquiry on Sept. 1 after MPs said they were not satisfied with the information they had received from the authorities supervising Wirecard, including the finance ministry and BaFin, the German financial sector watchdog.

Speedy auditor, watchdog reform

During the panel, Scholz refuted MPs' allegations that the finance ministry was withholding information they had requested during a series of hearings that preceded the Sept. 1 launch of the inquiry.

The minister added that the inquiry has his endorsement while lauding it as a window of opportunity for change. Meanwhile, Scholz and Justice Minister Christine Lambrecht are aiming to present reform proposals for debate very soon, he said.

One potential amendment would be to require German companies to rotate the third-party companies they hire to audit financial reports more often than once every 10 years, as is currently the case. Scholz also wants to mitigate the risk of conflicts of interest by requiring a more-defined separation of the auditing and consulting functions of those third-party companies. Furthermore, he called on the government to give supervisory authorities additional and "sharper" tools with which to operate.

He noted that while Wirecard's supervisory board was able to mandate an independent audit by KPMG in 2019, the finance ministry, under the current legal framework, would not have been able to do the same.

"I want that to change," Scholz said. As he sees it, the ministry should be able to launch extraordinary investigations of companies' books without cause or the risk of damaging a company's reputation. He wants "supervision with more bite," a phrase he used after the news of the Wirecard scandal broke.

BaFin's defense

BaFin President Hufeld said during the second day of the banking conference that the authorities must "sharpen their instincts" to identify risks "in the maze of complex companies." BaFin considered the Wirecard group to be a technology company and only supervised a German subsidiary, Wirecard Bank AG.

Red flags must be identified and addressed faster while avoiding falling victim of bureaucracy, which regulators correctly follow but which leaves them at risk of missing red flags, Hufeld told the conference.

The BaFin president said the supervisory authority had become overly reliant on following technically correct procedures in the Wirecard case, which led them to probe single cases without being able to "see the forest for the trees," Hufeld said.

Hufeld added BaFin used all legal tools at its disposal to pursue reported improprieties at Wirecard and rejected the notion that BaFin had turned a blind eye in a bid to support a high-flying, high-profile German company, a criticism some MPs have voiced. "No supervisory authority works that way, least of all BaFin," Hufeld said.

Previously, Hufeld told a parliamentary hearing that had he been aware of the full extent of Wirecard's alleged mismanagement, he would have contacted the prosecutor's office immediately. Hufeld has also said he has no plans to step down despite some MPs calling for his resignation.