The government, supervisor BaFin and Ernst & Young auditors. They all failed in the Wirecard scandal. This is why the German parliament is now tightening the regulation of financial affairs. The new regulation, which bears the cumbersome name of the Financial Market Integrity Strengthening Law (FISG), It plans to strengthen the controls of the balance sheet of the companies, in order to ensure correct accounting, and that will enter into force on July 1, 2021. The Ministry of Finance will have to carry out annual checks, instead of every 24 years as was the case previously. In addition, there must be an internal rotation of auditors at least every five years. Audit and advice will also need to be separated more clearly, with firewalls making tax advice difficult for auditors.
Experts had been asking for this for a long time because tax advice is completely incompatible with an independent audit, but until now the industry had managed to resist. Another objective of the law is for the financial supervisory authority BaFin to increase the scathing in its task. In the future, you will be the highest balance sheet audit judge and will have the opportunity to convene and question the senior management of an audited company and its auditor. But, above all, Germany toughens the civil liability of the auditors.
The auditors criticize the changes. They look “in the pillory.” There is “no systematic failure of the audit that has been demonstrated,” says the IdW Institute of Auditors in a statement, which does not consider that an additional separation of audit and consulting assignments can be deduced from the Wirecard case, as in the new law is required. They are also unclear on how frequent auditor changes can help prevent similar cases of fraud. They warn that if more responsibility is placed on auditors, there will inevitably be an even greater concentration on the sector, because smaller audit firms will not be able to bear the risk. CDU Financial Spokesperson Matthias Hauer has defended a motion that small and medium auditors will not be subject to unlimited liability in the event of negligence and that their activities would therefore remain insurable.
Law or no law, the auditors involved are already being punished. At this week’s Annual General Meeting, Commerzbank shareholders decided to separate from auditor Ernst & Young, implicated in the Wirecard case, and switch to competitor KPMG. Ernst & Young, in fact, has already lost four important customer accounts. Commerzbank had been auditing since 2018 and could have kept that account for years. But Germany’s second bank, which was one of Wirecard’s lenders, had to write off € 187 million due to bankruptcy and does not want to continue working with them. At the beginning of the year, Deutsche Telekom announced that Ernst & Young would not control its balance sheets, as planned. State development bank KfW, Germany’s third-largest bank in terms of total assets, has also distanced itself from the auditor. And at Siemens’ general meeting, shareholders and employees signed an application saying that ‘Ernst & Young GmbH’, proposed by management, has impressively demonstrated in the Wirecard case that it cannot stand up to the examination of a complex company. Therefore, it is not suitable for the examination of the Siemens group and no longer has the confidence of shareholders. In February, the head of Ernst & Young in Germany, Hubert Barth, had to leave his post. But the scandal does not appear to have led to a blanket punishment of auditors. A quick look at the audit mandates of the 30 DAX Frankfurt corporations shows that, with the exception of SAP and its contract with BDO, all other corporations continue to have their balance sheets controlled by one of the Big Four auditors. Lufthansa, Volkswagen, Munich Re and Deutsche Bank continue to be audited by Ernst & Young. The other DAX mandates are divided between KMPG, Deloitte, and PwC.
Large companies, therefore, ignore the expert report ordered by members of the parliamentary commission of inquiry into the collapse of Wirecard at the law firm Rödl & Partner, an in-depth investigation of EY’s work. In exchange, the examiners had access to Ernst & Young’s confidential examination documents. The author responsible for the report, Martin Wambach, appears this week behind closed doors as a witness before the investigation committee, which will ask the Federal Court of Justice that the report for now classified be made public. Ernst & Young has indicated that it only considers the publication of a summary of the report legal. “Ernst & Young Germany cannot comment on the content of the investigators’ reports”, a spokesperson for the auditing company only replied. The more than 50-page report shows that in the audit of fiscal year 2018, at the end of which Ernst & Young awarded the Wirecard Group a certificate, the most profitable part of the business, that Wirecard had allegedly outsourced to so-called external partners in Asia , did not exist. 1,900 million euros were missing, which the auditor did not realize.