By Nina Trentmann 

Germany is overhauling its framework for accounting oversight following a financial scandal at Wirecard AG, and is canceling the existing regulator's contract after 2021.

The Federal Ministry of Justice and Consumer Protection is working on a new regulatory setup together with the Federal Ministry of Finance, a spokesman for the justice ministry said.

The justice ministry on Monday also canceled its contract with the country's accounting watchdog, the Financial Reporting Enforcement Panel, effective Dec. 31, 2021.

Aschheim, Germany-based Wirecard last week filed for insolvency proceedings after disclosing a $2 billion accounting hole. The once-high flying electronic-payments company and member of the German Dax index of blue-chip companies on June 22 said the money missing from its balance sheet probably doesn't exist, confirming earlier reports by banks which said they never held the funds.

The events led to a meltdown of the company's stock and the exit of Wirecard's chief executive, and triggered a debate among German regulators questioning whether the current oversight regime was working

"The Federal Ministry of Justice and Consumer Protection -- together with the Federal Ministry of Finance -- is currently analyzing the extent of the need for reform...resulting from the Wirecard balance sheet scandal. It is important to ensure effective control at all times, " the spokesman for the justice ministry said.

The current regulator FREP was set up in 2004 in response to various accounting scandals and fraud cases, including at Enron Corp. The Berlin-based body is responsible for overseeing the accounts of both listed and closely held companies in Germany. It had 15 employees and a budget of just over $6 million in 2019, according to its most recent annual report.

FREP conducted 86 investigations in 2019, up from 84 in the prior year, and found issues in about 20% of those examinations, the regulator said in its annual report. It has pursued some prominent cases in the past, including one against sportswear maker Adidas AG.

BaFin, Germany's banking regulator, asked FREP in February 2019 to look into Wirecard's 2018 financial results following tips from a whistleblower, according to a spokeswoman. BaFin couldn't conduct the investigation on its own because of the existing regulatory structure that gave FREP the right to conduct the first probe, the spokeswoman said.

FREP didn't respond to a request for comment, and hasn't commented on the results of its probe.

BaFin launched a separate investigation into potential market manipulation by Wirecard in 2019. That investigation is still ongoing, the spokeswoman said. BaFin President Felix Hufeld is expected to attend a parliamentary committee hearing on the Wirecard case on Wednesday.

The BaFin spokeswoman declined to say if BaFin would take over accounting oversight at nonfinancial institutions, replacing FREP.

The case also is placing a spotlight on Wirecard's longtime auditor Ernst & Young.

EY on June 25 said its client gave the auditor false information.

"There are clear indications that this was an elaborate and sophisticated fraud, involving multiple parties around the world in different institutions, with a deliberate aim of deception," the company said in its statement.

The company declined to comment on its interactions with regulators.

The current debate in Germany about accounting oversight at Wirecard mirrors a similar situation in the U.K., in which the government is working to overhaul the existing regulatory framework following a string of corporate failures.

The U.K. last year said it would launch a new regulator called the Audit, Reporting and Governance Authority, and integrate the existing watchdog, Financial Reporting Council, into it. Those changes are still to happen.

Write to Nina Trentmann at Nina.Trentmann@wsj.com

(END) Dow Jones Newswires

June 29, 2020 17:34 ET (21:34 GMT)