Debate: The role of the European Supervisory Authorities in the Wirecard scandal
Date: WEDNESDAY, 7 OCTOBER 2020
Speaker: Valdis Dombrovskis
Language: EN

Every aspect needs to be looked at – from reporting requirements to auditors and supervision. This is why the Commission has been following this case very closely. As soon as Wirecard announced that it would file for insolvency, we asked the European Securities and Markets Authority to carry out a preliminary investigation on what happened.  The Commission welcomed the preliminary considerations that ESMA published on 15 July. We expect further results by the end of this month from the fast-track Peer Review of enforcement activities that ESMA has announced, and from the ongoing investigations by the various national authorities. It is too early to draw definitive conclusions about the causes of Wirecard’s collapse before those investigations have been completed. Having said that, it seems that the principal cause of the collapse is financial reporting fraud, potentially perpetrated over several years. We can and should already start reflecting on how to better protect investors in the EU from such failures in the future. EU rules and the way they are applied aim to eliminate risk of financial reporting fraud as much as possible. They set out three lines of defence to ensure that financial reports issued by listed companies present a true and fair view of a company’s financial position. This is very important to ensure that investors in those companies have all the information they need and are protected. The first line of defence is at the level of the company. EU law requires that EU companies with securities listed on an EU regulated market establish an audit committee. A majority of members of this committee must be independent of the audited entity. The audit committee has a broad range of responsibilities. For example, it must oversee the work of the statutory auditor. It must ensure the effectiveness of the company’s internal quality control and risk management systems and, where applicable, its internal audit. The EU law also requires disclosure of information about the company’s internal control and risk management systems in relation to the financial reporting process.  The second line of defence is at the level of the auditors themselves. EU rules require independent external audits. They aim to ensure high quality audits based on professional skills, independence and professional scepticism. Auditors must signal any issue that could materially affect the judgement of investors and other users of financial information provided by companies. The auditor of listed companies must also report suspected irregularities, including fraud, to the authorities. The third line of defence is at the level of supervision. National authorities must carry out the daily supervision of financial reporting by companies listed on regulated markets. Competent authorities must ensure that financial statements are drawn up in accordance with the relevant reporting framework and that they take appropriate measures when this is not the case. EU legislation on audits also requires national authorities to supervise the activities of statutory auditors. If appropriate, national authorities should also take enforcement actions, including by imposing sanctions. Supervision is a crucial element of EU policy, at a time when European financial markets are rapidly evolving. New types of business models and players bring innovation and benefits to citizens and companies, both in terms of cost and greater competition. But they need to be supervised in accordance with the regulatory framework. The Wirecard case raises serious questions about the effectiveness of all the three lines of defence. We need to take necessary actions on all fronts, including amending EU law where needed. The Commission has already identified certain areas that are worth exploring. On corporate governance, these may include reinforcing a listed company’s management responsibility for the design and proper functioning of internal controls of financial reporting. We could also propose to require compliance with corporate governance requirements like establishing an audit committee as a condition for listing on a regulated market. On external audit, changes could include reinforcing the role of auditors as regards the risks of fraud and the effectiveness of internal controls on financial reporting. On supervision, we could consider strengthening the alertness and response by supervisory authorities to early warning signals. ESMA could be given more powers towards national competent authorities on enforcement activities. National supervisory activities could be made more transparent, both towards the European Authorities, but also possibly towards the public. And we could reflect on reinforcing audit oversight and enforcement at national and European level. Again, as I said earlier, we will have more knowledge of what action is needed once the investigations have been completed. But in any case it is clear that we will need to react to this.  Thank you very much. I look forward to hearing your views on this important issue.