Germany is not particularly known for corporate scandals. Unlike the USA or UK. Or the rest of Europe. The last big one was Volkswagen. But, one involving Wirecard, the payment processing firm with a global footprint, has been unravelling over the last one week, since Ernst & Young (EY), the company’s auditors, announced that it could not find USD 2.1 billion (Euro 1.9 billion), roughly a quarter of the balance sheet size. This is a first for the DAX, a 30-member index trading on the Frankfurt Stock Exchange.
In what is obviously an accounting fraud, several years in the making, the company had lost 80 per cent of its share value within three days of the disclosure by EY. The accounting scandal has already been dubbed by Felix Hufeld, the Head of BaFin, the financial regulator, a “complete disaster.” Markus Braun, an Austrian citizen, and CEO of the firm for almost two decades, confirmed on 22 June that the amount did not exist. He was arrested for suspected fraudulent accounting and released the next day. Insolvency proceedings started on 25 June.
Wirecard differed from other payment service providers in the support it gave to pornographic and online gambling sites. During its period of growth, Wirecard also purchased a bank, which is how BaFin came into the picture. It was also the regulator of the stock markets.
EY was quoted in FT (26 June 2020) as saying that “this was an elaborate and sophisticated fraud, involving multiple parties around the world in different institutions, with a deliberate aim of deception”.
Including Braun, three-fourth of the Board came from Austria. None of the directors were on the boards of other top German firms in the DAX indicating that they had no experience of managing big corporates. Most of the Wirecard business was rather unusually regulated by the government of the Upper Bavarian district, which according to The Economist, was not equipped to regulate a global fintech firm.
Among charges against Braun were false claims of using artificial intelligence for analysing customer data and selling off his own stake prior to the scandal, reducing his stake from 7.1 per cent to 2.6 per cent. Financial Times reports that Wirecard employees were using spreadsheets to put together customer information.
EY had stated, partly in defence, that “even the most robust and extended audit procedures may not uncover a collusive fraud”. It will take a full scale investigation to reveal what actually went wrong with Wirecard. But, the case poorly reflects on the role of the Board, the firm’s auditors, and even the regulator.
Meanwhile, BaFin has posted an official at the Wirecard Bank to ringfence its operations from the scandal-hit parent. Continuing corporate scandals, despite a plethora of standards, principles, regulations and codes, should remain a concern for the public as well as those who regulate corporates and auditors, and those who design regulation itself.
Update: The actions in 2019 of BaFin, Germany’s financial supervisor, where it banned short selling Wirecard’s shares and filed criminal actions against two Financial Times reporters for writing about whistleblower allegations regarding accounting fraud at Wirecard is now under greater scrutiny. Felix Hufeld, head of BaFin, subsequently told MPs that BaFin, the European Central Bank and the Bundesbank had agreed that Wirecard should be categorised as a technology company and not as a financial services provider. This limited BaFin’s ability to act as Wirecard was not fully under BaFin’s purview. As a result, BaFin was responsible only for the regulation and supervision of Wirecard Bank. This gives rise to questions as to the regulation of fintech companies across the world and whether there are already such existing gaps where no regulator is responsible for overseeing these technology service providers which have close links with the financial sector and impose huge threats to financial stability.
© G Sreekumar 2021
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