Dear friends, dear interested,
In the face of the massive accounting scandal unfolding at German payments service provider Wirecard, Luis Garicano and I as liberal and green coordinators in the ECON committee have published a joint appeal for a reform of the EU rules on statutory audits. Please, see below for our joint statement.
With European greetings,
Sven Giegold
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Joint appeal by MEPs Luis Garicano (Renew Europe) and Sven Giegold (Greens/EFA):
In the last days, a major accounting scandal at German payments service provider Wirecard has been revealed. Many details remain unclear but in a statement the company confirmed that 1.9 billion euros, about a fourth of its balance sheet, likely never existed. The firm has long been accused of irregularities in its accounting and corporate governance practices but always disputed all allegations. Critical coverage further intensified in 2019 after the Financial Times reported on dubious accounting practices in Wirecard’s Singapore branch and overstated revenues from the firm’s operations with a Dubai-based partner company. The allegations forced Wirecard to task KPMG with a special audit, but instead of providing relief, the audit report published this April revealed major shortcomings and called into question previous statements on Wirecard’s international third-party business. Finally, last Friday Wirecard’s statutory auditor EY (formerly Ernst & Young) refused to sign off the firm’s financial statements for 2019.
The developments leading to the present scandal raise major concerns regarding the effectiveness of existing control mechanisms. Just about a year ago EY signed off on the firm’s financial statements for 2018 without flagging serious issues. Despite the long-standing allegations, investigations by German financial regulator BaFin that supervises Wirecard’s German bank subsidiary have not been able to uncover the severe problems. Instead, in a remarkable offence to the freedom of the press, BaFin in April 2019 filed charges for alleged market manipulation against the two Financial Times journalists that had reported on the accounting practices in the Singapore branch.
Effective and reliable statutory accounting is essential for the functioning of financial markets. Accounting firms therefore play a key role in the creation of a successful Capital Markets Union. European lawmakers should provide accounting firms with the adequate legislative framework that allows them to fulfil that role consistently.
Wirecard is only the latest in a long history of accounting scandals. The weaknesses and problems revealed in the current case have been known for long. It is now time to finally address them.
Therefore, we call for the following:
- We will suggest that the European Parliament conducts a hearing on the Wirecard scandal. It should be investigated whether supervisory control was exercised effectively and appropriately by all involved authorities, in particular by German financial regulator BaFin and the European supervisors ESMA and EBA. We will also propose to invite the key journalists. Functioning supervisory systems are essential for a successful Capital Markets Union.
- We call on the European Commission to review the Statutory Audit Directive as soon as possible to address the inherent wrong incentives in statutory auditing. Such incentives arise because accounting firms are selected and paid by the companies they audit. As customers, the audited companies can freely hire and dismiss their own auditors. Moreover, all big accounting firms also engage in consulting and sell advisory services to audited companies. As a result, accounting firms have strong incentives to please their customers rather than to exercise scrutiny.
- We call on the European Commission to investigate whether oligopolistic structures in the statutory auditing markets hamper the effective exercise of control. Too much influence is concentrated on the “big four” accounting firms that dominate the market. Small and medium-sized accounting firms need a favorable regulatory environment in order to have more competition in key markets.
Luis Garicano, MEP
Sven Giegold, MEP
MEP, Luis Garicano (Ciudadanos, Spain), Renew Europe Group’s coordinator in the Economic and Monetary Affairs Committee:
Of the many worrying issues in this case, maybe the most worrying is the reaction by German regulators and prosecutors of trying to “shoot the messenger.” Unlike Singapore regulators, who launched a probe into Wirecard´s accounting, German authorities chose to investigate the journalist. Uncovering financial malfeasance in our countries should not require heroism, and yet, in this case, it took nothing less than heroism on the side of the FT investigative journalist to pursue this investigation.
MEP, Sven Giegold (Bündnis 90/Die Grünen), The Greens’ coordinator in the Economic and Monetary Affairs Committee:
We have to end the wrong incentives for statutory audits. The audit EU rules must change so that auditors are not any more chosen and directly paid by the auditee. Audit firms have to be fully separated from advisory business.