German Government enlists consultants for BaFin reform

The Federal Government of Germany has tasked consultants from Roland Berger, KPMG and Sopra Steria with assisting an overhaul of the nation’s financial watchdog BaFin. The regulator was recently accused of turning a blind eye to an accounting scandal that led to the collapse of German payment processor Wirecard.

The Finance Ministry has commissioned consultancies Roland Berger, KPMG and Sopra Steria to submit a report with reform recommendations by the end of November. Key to this is the Government’s aim of tightening the financial supervision of listed companies, which completely malfunctioned in the case of Germany’s former tech jewel but now bankrupt Wirecard.

Wirecard is a payment processor headquartered in Munich, Germany. The company offers its customers electronic payment transaction services and risk management, as well as the issuing and processing of physical cards. Allegations of accounting malpractices have trailed the company since the early days of its incorporation, reaching a peak in 2019 after the Financial Times revealed a series of investigations along with whistle-blower complaints and internal documents.

The situation peaked in June 2020, when auditor EY performed a u-turn on its work, and refused to sign off on Wirecard’s 2019 accounts, following months of investigation into missing €1.9 billion from its books. The move led to the sacking and arrest of then-Chief Executive Markus Braun, and the collapse of Wirecard.

Despite seemingly acting to defuse the mounting scrutiny it was facing, EY has continued to come under fire for signing off on Wirecard’s books for four years without flagging issues and failing to request crucial account information from a bank in Singapore which held up to €1 billion of Wirecard's cash – a state of affairs which has also piled pressure on Germany’s financial watchdog, BaFin.

In the summer, BaFin was sued by Wirecard investors who said the regulator turned a blind eye despite widespread evidence of an accounting scandal that led to the company’s collapse – a lawsuit which EY was later added to.

In an attempt to prevent a repeat of the Wirecard debacle, the team of consultants has been brought on board to help the Ministry overhaul the beleaguered ombudsman. German origin consultancy Roland Berger will lead the coalition of firms, cooperating with the legal wing of KPMG and Sopra Steria to develop specific recommendations for optimising the processes, the organisational structure and the resources at BaFin.

In addition to the consulting firms, representatives of the interests of auditors and the financial services industry, the administration of justice and science and, above all, civil society have also been asked to be involved.

According to Federal Finance Minister Olaf Scholz, the project should help pave the way for stricter rules for auditors and balance sheet control, as “the financial supervisory authority needs to have more power to control… We must not put the reforms on the back burner now.”

Considering the similarities between the Wirecard scandal and the series of accounting blunders which have placed the Big Four in the spotlight in the UK, however, Scholz’ choice to involve a number of consultancies in the process is sure to raise a few eyebrows itself. The British financial watchdog has come under increasing pressure to stop ‘conflicts’ between the audit and advisory wings of large consultancies like PwC, Deloitte, EY and KPMG inhibiting their accounting function, so the Government’s inclusion of one of these firms in particular is more than a little controversial.