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Wirecard AG Scandal

 

  • What is the Wirecard fraud?
  • How Wirecard accounting fraud stunned the world once again, forcing it to rethink on governance and accounting lapses?

 

In the last two decades, the financial world has seen numerous corporate frauds. Starting with the iconic case of Enron, an energy company which fudged its accounts for years, ultimately exposed in the year 2001 and which took Arthur Andersen, a prestigious auditing and accounting firm of that time, down in the dumps with it. The list is long with many big names like WorldCom, Volkswagen, Mitsubishi, Satyam, Wells Fargo which has shaken the market with scams resulting from unethical practices over the years. The latest name is Wirecard AG, a German fintech company which came in limelight on June 18th 2020 when its auditor EY (a Big 4 accounting and auditing firm) made a bizarre announcement that they couldn’t locate a whopping USD ~2 billion of cash (€ 1.9 billion) that Wirecard purportedly saved in escrow accounts in a Philippines bank. On June 22nd, 2020, Wirecard admitted that, the money, as auditors said, is missing from its balance sheet and likely the USD 2.1 billion “do not exist”. Further investigations revealed shocking findings including the non-existence of the said bank account in Philippines, nor was there any money in it.

The latest Wirecard fraud has raised many questions on corporate governance and accounting processes, integrity of market regulation and lapses in audit procedures by Big 4s since Wirecard is not any small or micro company, not at least in Germany. Established in 1999 as a provider of financial services to the gambling and adult entertainment industries, Wirecard later became a pioneer fintech player in the payment processing industry. It provides electronic and smartphone payment transaction services, issues and processes credit cards and also provides, risk management services. Riding on the growth wave of electronic payments globally and through aggressive acquisitions of more than 18 companies, this start-up grew rapidly and generated USD ~2.4 billion revenue in 2018 and USD ~2.8 billion revenue in September 2019 LTM basis from just under near USD 0.5 billion in 2012.

 

                                 Source: EquiBase – Televisory

 

The company become a rare example of fintech success story in a country known for manufacturing, auto and heavy industries. And this story was well received by investors who showed great interest in the company. In the last one decade to Sept 2018, Wirecard’s stock price skyrocketed more than 60-fold. In 2018 only, the company entered the prestigious Germany’s DAX 30 blue-chip index and became a favourite amongst investors which pushed the company’s market cap close to USD 30 billion in 2018.

 

                                 Source: EquiBase – Televisory

 

However, the success story started turning into dark tales when Financial Times (FT) reported in early 2019 regarding suspicion of large scale fraud and raised questions about accounting practices and financial irregularities at Wirecard’s Asia-Pacific division, especially in Singapore. The German financial markets regulator BaFin reported that it has received red flag documents on Wirecard which it evaluated alongside FT allegations and stepped in to temporarily ban short selling of Wirecard shares on suspicion of market manipulations and citing Wirecard’s “importance for the economy”. Allegations of accounting violations and possible money laundering at Wirecard continued until its Founder and CEO Markus Braun ordered a special audit by KPMG, another Big 4. KPMG in its special audit, which came in April 2020, reported that it could not independently confirm USD 1.12 billion in cash balances.

It is interesting to know here that EY has audited Wirecard for almost a decade and for the last three years it failed to properly verify Wirecard’s bank statements from a Singapore bank where Wirecard claimed it had up to USD 1.2 billion in cash. Instead, it relied on documents provided by a third-party trustee and Wirecard itself. Although EY called it an “elaborate and sophisticated fraud” by its client Wirecard, it finally refused to sign off the company’s 2019 financial report on 18th June 2020 and made an announcement that it couldn’t find USD 2 billion which the company purported as sent to escrow account of banks in the Philippines as regulators temporarily froze payments to Wirecard users in Europe and Asia. Three days later, Wirecard confirmed that the cash probably does “not exist”!

In nearly a weeks’ time, this scandal whacked a huge cost to Wirecard. From thriving as one of the most hyped fintech enterprises, the company has now withdrawn its financial results for 2019 along with the first quarter of 2020 and finally filed for insolvency on 25th June 2020. Wirecard, which employs around 6,000 people, has become the first DAX company in history to go out of business. Things also became grim for investors as company’s shares lost more than 97% value after the revelation of the scandal.

Now, CEO Markus Braun has resigned and has been arrested for accounting fraud while auditor EY is facing lawsuits and criminal complaints from shareholders and bondholders for failing in performing fundamental professional duties to flag malpractices and detect fraud by solely relying on account confirmations that were provided by third parties. BaFin is facing scrutiny for mishandling allegations against Wirecard. But in the end, the whole series of affairs has raised concern about how much reliance investors can place in corporate governance, audit process and inattentive watchdogs of financial markets.

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