Friday, 3 July 2020

By Julia Patterson

The collapse of leading European financial technology company, Wirecard, has led to allegations of elaborate and sophisticated fraud and questions of auditor negligence and the adequacy of Germany’s financial regulator, BaFin.

Following accusations of irregularities, Wirecard had engaged KPMG to undertake a special audit. Rather than providing reassurance to the market, KPMG’s report, published in April 2020, found the company had not provided sufficient documentation to address all allegations of accounting irregularities and corresponded with a 26% fall in its share price.

Wirecard filed an insolvency application on 25 June 2020 after EY, its long-serving auditor of over a decade, refused to sign off Wirecard’s 2019 accounts.

German law firm, Schirp & Partner, has said it will file class actions against EY on behalf of both shareholders and bondholders. Their questions being how EY was able to issue the last audit certificates for Wirecard without limitations and how the deficiencies identified by KPMG remained hidden from EY in the years prior.

Schirp & Partner’s position is that the audit certificates could probably not have been issued without a breach of EY’s auditing obligations and that EY has certified bank balances of up to $EUR1.9 billion without sufficient audit evidence, as the banks concerned deny the existence of the accounts.

Questions also exist in relation to the role of Germany’s financial regulator, BaFin, in relation to the collapse. The European Securities and Markets Authority has been instructed to undertake a fact-finding analysis of the situation, including the adequacy of the supervisory response to the events leading to Wirecard’s collapse.

The collapse of one of Germany’s largest corporations and subsequent lessons and findings resulting from the examinations of its auditor and regulators should be considered in relation to the Australian corporate environment, particularly given the pressures of the current economic climate.