Finance Scandal: Did Berlin Bank Use Enron-Like Methods?
August 23, 2002
New evidence suggests that Belgium-based auditor BDO International may have knowingly signed off on improper accounts at Bankgesellschaft Berlin – accounts that ultimately led to a monumental debt crisis and the near bankruptcy of Germany's capital.
The re-emergence of a 1997 report by special auditor Achim Walther shows that BDO and the bank's property unit IBG were aware of risks arising from property-fund guarantees whose extent could not at that time be properly calculated. Mr. Walther said that as Bankgesellschaft auditor five years ago, he sounded the alarm in vain. "I was asked to change the critical passages in my report. I replied, 'The report stays the way it is,'" he said. Mr. Walther's contract as special external auditor was cancelled by the bank, and his report was shelved. The bank said that upon the recent rediscovery of the Walther report, it sent it to the Berlin state attorney's office.
BDO refused to comment on the matter, as did BAFin, the German federal regulator for financial services. BAFin, which has been criticized for lack of diligence in the matter, said confidentiality rules prohibited it from saying anything.
According to Hans-Peter Schwintowski, a professor of economic law at Berlin's Humboldt University, Mr. Walther's report should have been enough to keep BDO from unconditionally signing off on Bankgesellschaft's full-year statement. "Because of the Walther report, the auditor knew that they were approving something that was incorrect. That should not have happened. In my view, this fact provides sufficient grounds on which to build a case for balance-sheet fraud," he said, adding that Bankgesellschaft could seek billions in damages from BDO.
Bankgesellschaft, majority-owned by the city-state of Berlin, became plagued by problems in its property-loan portfolio as the building boom that followed the collapse of the Berlin Wall and German reunification gave way to a downturn. The mounting number of bad loans pitched the bank into a debt crisis, from which it had to be bailed out at a cost of 2 billion euros. Berlin underwrote 1.75 billion euros of that sum as part of a capital increase and consequently raised its stake to over 80% from 57%. The severely cash-strapped city-state in April provided a further 21 billion euros in risk provisions for the bank's property fund. Wolfgang Rupf, the bank's former chairman, had blamed his inability to head off the crisis on misinformation from the bank's units.
Berlin’s mayor at the time, Eberhard Diepgen, who became a political casualty of the crisis, said he can't recall a letter from Mr. Walther warning of financial impropriety at the bank. Mr. Diepgen's successor Klaus Wowereit said that after taking office, he handed the entire matter over to Berlin's financial administrators.