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Berlin threatens to ditch audit watchdog as compliance row escalates

The German government is threatening to ditch the country’s accounting watchdog in a deepening row over the body’s governance and independence as the Wirecard scandal continues to send shockwaves through Germany’s business and financial establishment.

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

MPs disclosed earlier this month that FREP in 2016 banned its senior staff, including the president, from taking on new supervisory board roles. However, in 2017 FREP president Edgar Ernst nonetheless joined the board of German wholesaler Metro AG. He also holds board seats at the country’s largest listed landlord, Vonovia, and travel company Tui. The government earlier this month launched an investigation into the matter.

Ernst argues that taking up the Metro seat was in line with the rules as his employment contract was older than the 2016 ban on board seats and hence trumped the tightened governance regulations. He filed a legal opinion to parliament last week defending his move.

FREP is facing serious questions over its handling of fraud allegations against Wirecard. It told the payments company in 2016 that it did “not want” to formally investigate accusations raised by short-sellers and asked the now-disgraced payments company to prepare arguments “why the accusations are unfounded”.

In early 2019, the regulator BaFin asked FREP to open a probe into accounting manipulations raised by the Financial Times, but it did not produce any results until after the company’s insolvency in June 2020. The German government subsequently announced a fundamental overhaul of its accounting regulation.

So far the government’s plan is to stick to an overhauled form of Germany’s two-tier system where routine accounting checks are conducted by a private sector body with quasi-official powers while BaFin gets the remit to investigate fraud.

However, on Tuesday the ministry of justice, which oversees the private sector institution, issued a thinly disguised threat to walk away from FREP altogether should Ernst not relinquish his board seats or leave the institution.

“It is important that even the appearance of a conflict in interest is avoided,” the ministry said, adding that the government in future would only work with a body whose leadership does not have seats on supervisory boards.

The ministry stressed that a private sector partner that allows its management to have supervisory board seats “won’t be accepted” and that its future partner needed “clear rules that the work for the enforcement panel is incompatible with having supervisory board seats at companies”.

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

Berlin’s move follows pressure from MPs who harshly criticised Ernst’s behaviour. “Even if Mr Ernst’s board seat at Metro was in line with the letter of the law, it definitely is against its spirit,” said Matthias Hauer, an MP for Chancellor Angela Merkel’s conservative CDU/CSU bloc, adding that it should be self-evident that the FREP president respected the latter.

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

Ernst and FREP did not immediately reply to a Financial Times request for comment.


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