May 13, 2021


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Berlin threatens to drop audit watchdog as compliance dispute escalates

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The German government threatens to abandon the country’s accounting watchdog in a deepening row over the institution’s governance and independence as the Wirecard scandal continues to send shockwaves through businesses and German financial institutions.

The Financial Reporting Enforcement Panel, a private sector institution with quasi-official powers, has come under fire after the parliamentary inquiry into the Wirecard fraud raised serious questions about its compliance.

MPs revealed earlier this month that FREP in 2016 banned its senior executives, including the president, from assuming new supervisory board positions. However, in 2017 FREP chairman Edgar Ernst nonetheless joined the board of German wholesaler Metro AG. He also sits on the board of directors of the country’s largest listed owner, Vonovia, and the Tui travel agency. The government at the beginning of the month launched an investigation in matter.

Ernst argues that taking the metro seat was within the rules, as his employment contract was older than the 2016 ban on board seats and therefore took precedence over tightened governance regulations. He tabled a legal opinion in Parliament last week defending his decision.

FREP faces serious questions about its handling of fraud allegations against Wirecard. He told the payment company in 2016 that he would not” to formally investigate the accusations raised by the short sellers and asked the now disgraced payment company to prepare “why the accusations are baseless” arguments.

At the start of 2019, the BaFin regulator asked FREP to open an investigation into the accounting manipulations raised by the Financial Times, but this did not yield any results until the firm’s insolvency in June 2020. The German government subsequently announced a fundamental overhaul of its accounting regulations.

So far, the government’s plan is to stick with a revamped form of the German two-tier system where routine accounting controls are carried out by a private sector body with quasi-official powers while BaFin is responsible for investigating fraud.

However, on Tuesday, the Justice Department, which oversees the private sector institution, issued a thinly disguised threat to withdraw from FREP altogether if Ernst does not cede his seats on the board or leave it. institution.

“It is important that even the appearance of a conflict of interest is avoided,” the ministry said, adding that in the future the government would only work with a body whose leadership has no leadership. sits on supervisory boards.

The ministry stressed that a private sector partner who allows its management to have seats on the supervisory board “will not be accepted” and that its future partner needs “clear rules indicating that the work of the committee of application is incompatible with having seats on the supervisory board in companies ”. .

In practice, such a move would mean the end of FREP, which will lose its quasi-official powers if the government does not sign a new contract.

The Berlin decision follows pressure from MPs who have severely criticized Ernst’s behavior. “Even if Mr Ernst’s board seat in Metro was in accordance with the letter of the law, it is definitely against its spirit,” said Matthias Hauer, Conservative Bloc CDU / CSU MP to Chancellor Angela Merkel, adding that he should be himself. evident that the president of FREP respected the latter.

Social Democrats MP Cansel Kiziltepe accused Ernst of “trying to get away with a legal subterfuge”, adding that this was unacceptable.

Ernst and FREP did not immediately respond to a request for comment from the Financial Times.

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