The Wirecard scandal will galvanise efforts by Brussels to upgrade EU level financial supervision, according to one of the bloc’s top officials, who said the company’s downfall showed the need for stronger defences against fraud.
Valdis Dombrovskis told the Financial Times that the German payment group’s collapse had reinforced his belief that a previous thwarted attempt by Brussels to reinforce EU financial watchdogs had been a “missed opportunity”, and that another push was necessary.
“We are looking at how we can strengthen the system to avoid that kind of situation happening again,” he said. “It’s clear we are dealing with a case where investors were not given the truthful information about the state of play of the company.”
“It needs to be investigated and conclusions drawn from the concrete case,” he said.
The European Commission’s executive vice-president for economic policy also said that Brussels was exploring how to reinforce the role of audit committees at listed companies to make sure they do sufficient due diligence.
Wirecard was forced to file for insolvency in late June after admitting that €1.9bn of its cash probably did “not exist”, in one of the biggest corporate scandals in the EU’s history. It later emerged that its auditor, EY, had failed to check some of the company’s bank balances for more than three years, but German regulators have also been accused of failing to supervise the business adequately.
The European Securities and Markets Authority, an EU agency based in Paris, announced in July that it would probe the work of BaFin, the German financial regulator, and FREP, a private-sector body that monitors company accounts.
The investigation, requested by Mr Dombrovskis, will examine whether German authorities were lax in enforcing EU rules on sound financial reporting at listed companies.
Brussels sees the Wirecard case as particularly troubling because it breached three lines of defence that should normally protect EU investors: regulations and corporate governance requirements to ensure companies present sound accounts; the work of auditors, an EU regulated industry; and the existence of sound supervision by public authorities.
“Wirecard’s failure potentially raises issues at all three levels of defence and this is why we are now looking at those issues comprehensively to draw all lessons that need to be launched and take necessary actions,” Mr Dombrovskis said.
Brussels is “looking also at the role of audit committees” to see if stronger EU rules are needed there, he said, adding that it was part of a “comprehensive assessment”.
In 2017, Mr Dombrovskis spearheaded an effort by Brussels to reform Esma, an authority tasked with overseeing the implementation of EU financial-market regulations, and its sister agencies for banking and insurance in a bid to make them more effective in policing national watchdogs’ work
In order to dilute the influence of national authorities on the three agencies’ work, he proposed to make them more financially independent, with new decision-making structures given to full-time staff with executive power, and some reinforced responsibilities. At present, ESMA’s work is led by a board of supervisors largely made up of representatives of national agencies.
But many of his proposals were watered down by national governments in the EU Council, which had a binding say on the plans, out of concern that too much power was being drained away from member states.
The final result was “much more limited than the initial commission proposal,” Mr Dombrovskis said.
“Certainly it is something that we will have to look at again and see how to enforce, straighten supervision also at EU level,” he said, adding: “We have not arrived at the conclusions yet.”