Düsseldorf On July 3, 2015, the then Federal Minister of Justice Heiko Maas (SPD) put warm words into a speech. He spoke on the tenth anniversary of the German Audit Office (DPR), which is often referred to as the German “accounting police”. It is your job to take a close look at the company’s annual financial statements and uncover mistakes.
At the ceremony in the Konzerthaus on the Gendarmenmarkt in Berlin, Maas spoke of the fact that the founding of the DPR “increased confidence in the capital markets and strengthened our economic order”. Although he advised the committee to modernize its content, it did not doubt its usefulness.
The “proven two-stage system of balance sheet control should not be endangered by anyone,” said Maas, referring to the interaction between the DPR and Bafin, the Federal Financial Supervisory Authority.
This confession ended five years later. The Federal Ministry of Justice confirmed on Sunday that it will terminate the contract with the DPR. It is the first consequence of the balance sheet scandal at the payment service provider Wirecard, as regards the revision of the supervision installed in Germany over the accounting of listed companies.
The federal government accuses the privately organized DPR of failing Wirecard’s balance sheet audit, which has lasted for at least 15 months. The attempt to control the balance sheet created by the economy itself has failed. The DPR sees itself as a “pawn sacrifice” in this game.
In fact, the dismissal from the government side means a clear vote of no confidence in the effectiveness of the association, which has been criticized several times in the past – also with regard to President Edgar Ernst.
Response to balance sheet scandals
The public hardly took any notice of the DPR until the Wirecard scandal. It was founded in 2005 with the aim of preventing renewed accounting scandals and strengthening the confidence of the capital market in the annual financial statements of listed companies.
The years before the company was founded were the time when the balance sheet was falsified: the fraud of the energy company Enron shook the economic world, in Italy the balance sheet manipulation of the food manufacturer Parmalat was made public. And in Germany, the scandal surrounding the construction equipment manufacturer Flowtex caused an earthquake: he managed to convince his auditors of the existence of businesses that did not even exist.
Germany responded to the scandals with a two-stage control system. In a first step, the newly created DPR should take a close look at the balance sheets of the stock exchange groups: as part of random checks, at the request of Bafin or if there are specific indications of a violation of accounting regulations. The Bafin itself is a downstream body that intervenes based on the findings of the DPR.
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The founding of the DPR was the typical attempt by business to try to solve the problems itself before the state intervened to push for regulation. The private law association is supported by all relevant German business associations: among others by the BDI, DIHK, banking association, shareholder protection, auditor chamber.
So the claim is high, but in the Wirecard case, the federal government accuses the DPR of failure. Reason: In February 2019, the Bafin already provided the DPR with information about possible inconsistencies in the 2018 balance sheet of the payment service provider. However, the investigation initiated as a result has so far been unsuccessful.
Incomprehension among exam experts
On Sunday, it was announced that the Wirecard balance sheet review at DPR had been carried out by a single employee for months. DPR President Edgar Ernst defended this in the evening: It would be normal practice, moreover, he explained, the Bafin did not hang the case so high himself. After all, she opposed the short sellers and acted against newspaper reports that Wirecard assumed that there were accounting inconsistencies.
This view is met with misunderstanding among examination experts. Hansrudi Lenz, business professor at the University of Würzburg, accuses the DPR of not correctly assessing the risk of Wirecard. Due to the large number of critical media reports and the high level of public interest, the position of the investigation should have been given high priority.
Lenz does not accept the reference to the lack of personnel. Because the law stipulates that the inspection body “can use other people to carry out its tasks”. The DPR could therefore have engaged external auditors to seriously investigate the allegations.
When dealing with Wirecard, the weaknesses of the DPR construct become clear when it comes to effective balance sheet control: as a private-law institution, the position depends on the willingness of companies to participate in this check.
Even if the companies involved participate, they can refuse to publish the results. The procedure, which is so broadly dubbed an “enforcement” procedure, can thus be prevented without consequences. The DPR has no legal remedies.
Critical role of the Bafin
Examining expert Lenz is therefore critical of Bafin’s role in this process. It has to be questioned why the financial regulator accepted the DPR procedure with the lack of personnel. After all, according to the German Securities Trading Act, she had the right to have such an examination carried out if there were serious doubts about the proper examination of the DPR. It is not only clear for him: Two institutions have failed here.
The DPR, which was probably founded with good intentions by the economy, has long been criticized – also with regard to the person of President Edgar Ernst. Ernst has been in the management position since 2011 and is therefore responsible for clarifying possible balance sheet scandals. He is also a member of the supervisory board of the Metro retail group, Vonovia real estate service provider and the Tui tourism group.
Critics consider it incompatible that DPR employees may have to audit a company on whose supervisory board their president sits. This led to a full-blown conflict in the DPR leadership in 2014. The Berlin business professor Axel von Werder, the then DGB board member Dietmar Hexel and the corporate governance expert Theodor Baums withdrew from the organs of the “balance sheet police”.
The Wirecard case should now lead to the end of the DPR. “The self-regulation of the economy failed completely,” says a manager who is close to the organization. It is foreseeable that Bafin will take on the tasks of balance sheet monitoring itself.
“Of course, this does not mean that it works more effectively and efficiently,” says examining expert Lenz. It will depend on the design regarding competence and independence of the staff.
More: Fate days for Wirecard – this is how the former giant continues.