Germany unveils plans to prevent another Wirecard debacle

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Germany has presented plans to strengthen financial regulator BaFin’s powers and tighten accounting rules, one day before the start of a parliamentary probe into one of the country’s biggest corporate failures.

The collapse of Wirecard AG this year exposed significant cracks in Germany’s financial oversight, as authorities failed to catch accounting issues at the digital-payments company despite ample warning. Slow decision-making and fragmented responsibilities appeared to allow the problems to go undetected.

Finance Minister Olaf Scholz and Justice Minister Christine Lambrecht presented the government’s “Wirecard Action Plan” Wednesday at a news conference in Berlin. The legislation currently being prepared would give BaFin the right to assess all listed companies and conduct forensic audits.

It will also include a requirement for external auditors of listed companies to rotate after 10 years, and force companies to hire separate firms for auditing and consulting. Accountants can also be made liable in cases of gross negligence.

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“The Wirecard case has clearly shown us that accounting controls reach their limits when they come up against energetic criminals and urgently need reform,” Lambrecht said. “Trust in Germany as a financial center must be won back.”

Germany is one of relatively few countries to split accounting enforcement between a private-sector watchdog and its markets regulator, while the investigation of money laundering at non-financial companies is handled by regional authorities. With the Wirecard fallout risking the country’s reputation as a place to do business, the government is keen to push ahead with reform.

The Bundestag, or lower house of parliament, will begin a full probe into what went wrong at Wirecard on Thursday, with opposition parties blaming the government. Once lauded as one of Germany’s fintech stars, the company filed for insolvency after saying that around $2.1 billion previously reported as cash on its balance sheet probably didn’t exist.

Felix Hufeld, BaFin’s president, has acknowledged that his institution is among the bodies that bears responsibility for the failure to identify the problems earlier.

A key weakness in Germany’s regulatory regime was that BaFin didn’t directly supervise Wirecard. Despite the fact that its business was largely financial, the company was classified as a technology company rather than a bank or insurer.

With traditional lenders Deutsche Bank AG and Commerzbank AG struggling with their own issues, Germany is grappling with how to rescue its role in modern finance.

The country’s reputation took a further hit last month when leasing firm Grenke AG was accused of accounting fraud, money laundering and a lack of internal controls by a shortseller.

BaFin responded by swiftly ordering a special audit. Grenke’s shares surged this week after it said its auditor has proof for almost all of its cash balances.

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