Global Finance - USA (2020-09)

PHOTO CREDIT TK

audits in Germany is in the hands of a self-regulating industry

agency, the Financial Reporting Enforcement Panel (FREP).

After the Wirecard scandal broke, FREP said its role was only to

ensure that accounting standards are adhered to, not to uncover

fraud. But the German government found that defense wanting

and announced June 29 that it was canceling FREP’s contract,

to terminate at the end of 2021.

German regulators weren’t the only ones who failed to detect

fraud at Wirecard. Singaporean authorities in August arrested

a director of a local accounting firm that had provided letters

falsely attesting it held millions of dollars of Wirecard’s funds in

escrow. Similar charges are being investigated against two banks

in the Philippines.

“There are clear indications that this is a large-scale fraud

in which several parties around the world and in various insti-

tutions were involved, with deliberate intent to deceive,” the

Stuttgart branch of EY auditors said in a statement.

FRACTURED ENFORCEMENT

But the supervision problem is especially acute in Europe,

says Nicolas Véron, senior fellow at the Peterson Institute for

International Economics; because, while the EU makes the

rules, they are then implemented and enforced by national

authorities that are often understaffed and underfinanced—

especially in smaller countries—and often want to protect their

local champions.

Continental

Grift

Wirecard’s scandalous collapse

exposes the weakness of a single

EU financial market that leaves

regulatory supervision to the

member states.

W

irecard was one of the great success stories

of Europe’s fintech sector and a German

national champion, holding a coveted place in

the DAX 30, the country’s main stock index.

But since it was suddenly declared insolvent

on June 25 following the disclosure of a €1.9 billion hole in its

accounts ($2.1 billion at that date), the e-payments company—

like Enron two decades earlier—has become a glaring symbol of

mismanagement, prompting demands that the EU take control

of financial supervision away from local authorities.

Wirecard represented a spectacular fraud. Its CEO, Markus

Braun, was arrested; and its chief operating officer, Jan

Marsalek, fled the country. But critics are wondering how

the company could have escaped detection by its auditors and

regulators for so long.

One explanation is that Germany classified Wirecard as a

technology company, not a financial institution. The Federal

Financial Supervisory Authority (BaFin) said it therefore had no

authority to supervise the company, even though it processed

billions of dollars in transactions for credit card companies in the

UK, the US and as far afield as Indonesia and Malaysia.

“I think part of the problem was the authorities were proud

they had a Silicon Valley-type startup here in Germany,” says

Wolfgang Schirp, a Berlin lawyer who has filed a class action

lawsuit on behalf of investors against Wirecard’s auditors, Ernst

& Young (EY). “Nobody really understood the business they

were in.”

BaFin’s president, Felix Hufeld, who came under wither-

ing criticism in Germany following Wirecard’s collapse, called

the scandal a “complete disaster.” He acknowledged at a public

conference in June that there is “a whole range of private and

public entities, including my own, who have not been effective

enough to prevent something like that happening.”

Another complicating factor is that oversight of company PHOTO CREDIT TK

“Nobody really understood the

business they were in.”

—Wolfgang Schirp, Schirp & Partners

German “wanted”
poster for Wirecard
executive Jan Marsalek

20 | Global Finance | September 2020

CORPORATE FINANCE

FINTECH ACCOUNTING | By Charles Wallace