The Wirecard Financial Scandal: Causes, Course and Consequences

The Wirecard financial scandal in Germany is one of the most shocking examples of financial fraud. There are million-dollar embezzlements, failures of public institutions, and arrests of prominent CEOs. What was this case about?

On the occasion of the collapse of Silicon Valley Bank, we recall the biggest scandals of the banking and financial industry in recent times.

How Wirecard Became a DAX 30 Company

Wirecard AG was founded in 1999 in Munich and was listed on the German Stock Exchange. Markus Braun became CEO of the company and took it to the top. Wirecard offered revolutionary, secure, and fast online payment services.

In 2004, the company made a reverse takeover of the failing call center Europe AG and became a public company. Now it could open access to a broader investor base and expand the range of services offered. In 2018, the company reached a value of 191 euros and was included in the DAX30 index (now DAX40).

Wirecard & EY: The Role of the External Auditor

However, as early as 2008, there were reports of irregular cash flows in some M&A transactions, which indicated unclear actions by the company. In response to these reports, Wirecard AG said that the people behind them were trying to change the price of the company’s shares to make money from short-selling transactions. As a consequence, the accused whistleblower was sentenced to imprisonment.

In the same year, Wirecard started cooperating with the German branch of Ernst & Young, commissioning an external audit. Within a few years, the German branch of the British consulting giant became a permanent auditor of the Bavarian company. From 2012, EY unqualifiedly approved subsequent financial statements of its client, despite further waves of reports of irregularities in the company.

The auditor’s role, in this case, was so important that after the outbreak of the scandal, several omissions committed by EY experts in cooperation with Wirecard came to light.

Manipulating Cash Flows

In the history of Bavarian fintech, 2015 was a breakthrough year when the company was featured in the Financial Times for the first time. The fact that the company paid large amounts of money in advance a month before the transaction was finished raised many questions. FT journalist Dan McCrum also pointed out that the transactions could be more transparent. Millions of euros have been spent on Asian companies struggling with financial problems. McCrum concluded that by manipulating cash flows, in particular by including temporary cash on the company’s balance sheet, Wirecard was performing much better than it was.

In 2015, a report from J Capital Research said that a German company overstated its financial results in Asia. In 2016, a report from Zatarca Research and Investigation said that Wirecard made it easier for money to be laundered.

2020 Wirecard Bankruptcy Leads to Arrest of CEO 

As a result, in 2020, Wirecard AG announced its bankruptcy and Markus Braun was arrested. The investigation found that the company had been reporting incorrect balance sheets for many years, leading to fraud, understatement of profits, and transferring huge sums of money to a South Asian business partner with links to organized crime. The scandal blew the German economy out of the water and undermined the country’s reputation as a technological powerhouse.

Now let’s go through point by point the causes, course, and consequences of the Wirecard financial scandal in Germany. Let’s also look at the lessons that the financial sector and state institutions have learned from this scandal, or at least should have learned:

The Wirecard Financial Scandal – Causes

1. Falsified financial records: Wirecard’s accounting practices were dubious, with the company allegedly fabricating financial transactions and inflating revenues and profits. The company claimed to have €1.9 billion in cash. Still, external auditors found that the accounts holding the money did not exist.
2. Inadequate oversight and regulatory failures: The German regulatory body, BaFin, failed to adequately supervise Wirecard and address concerns raised by whistleblowers and investigative journalists. Instead, it focused on protecting the company’s reputation and pursued legal action against those criticizing Wirecard.
3. Complex corporate structure: The Wirecard financial scandal had a complex network of subsidiaries and partners across the globe, making it challenging for regulators and auditors to trace its financial flows and transactions.

The course of The Wirecard Financial Scandal

1. Media and whistleblower allegations: From 2015 onwards, the Financial Times and other media outlets published articles suggesting financial irregularities at Wirecard. The company denied the allegations, and BaFin targeted the journalists and short-sellers instead of thoroughly investigating the claims.
2. Investigation and external audit: In 2020, Wirecard’s board hired an external auditor, KPMG, to investigate the allegations. KPMG’s report could not verify the existence of significant revenues and cash balances, causing the company’s share price to plummet.
3. Admission of missing funds and insolvency: In June 2020, Wirecard admitted that the €1.9 billion in cash did not exist, and its CEO, Markus Braun, resigned. Shortly after, the company filed for insolvency.
4. Legal consequences and arrests: Markus Braun and other senior executives were arrested on fraud, embezzlement, and market manipulation charges. Investigations into their involvement in the scandal are ongoing.

Consequences of the Wirecard Case

1. Loss of trust in the German financial system: The Wirecard financial scandal severely damaged the reputation of Germany’s financial regulatory system, prompting calls for reform and greater oversight of financial institutions.
2. Impact on investors and shareholders: Wirecard’s share price collapsed, causing significant losses for investors, banks, and shareholders. The company’s insolvency also led to the loss of thousands of jobs.
3. Regulatory and legal reforms: The scandal highlighted the need for better regulation and oversight in the financial sector. Increased state scrutiny and public criticism fell on BaFin. Since then, regulatory powers have been strengthened and BaFin’s ability to identify and prevent financial fraud has been improved.
4. Broader implications for fintech and payment processing: The Wirecard scandal raised questions about the integrity and stability of the broader fintech and payment processing industries. It led to increased regulatory scrutiny and calls for greater transparency and oversight.

Lessons from The Wirecard Financial Scandal

1. Strengthening regulatory oversight: The Wirecard case highlights the need for solid and effective financial regulation to prevent and detect fraud. Regulatory bodies must be proactive, independent, and willing to scrutinize companies, even when perceived as successful.
2. Enhancing transparency and corporate governance: Companies should maintain high transparency and corporate governance standards. They should release accurate financial reporting, robust internal controls, and effective risk management systems.
3. Whistleblower protection and encouragement: Encouraging and protecting whistleblowers who report fraudulent activities can help uncover malpractices earlier. Authorities should take these reports seriously and investigate them thoroughly.
4. Auditor independence and diligence: Auditors play a critical role in verifying the accuracy of financial statements. They should maintain their independence and exercise due diligence when examining the accounts of companies. Especially those with complex structures and international operations.
5. Improved collaboration between regulators and international authorities: Given the global nature of modern business, regulatory bodies should collaborate with their international counterparts. They should share information and coordinate efforts to address financial fraud.

Conclusion:

The Wirecard financial scandal in Germany happened because of several things, such as faked financial reports, a lack of oversight, regulatory failures, and a complicated corporate structure that made it hard to spot fraud. The Wirecard scandal is a lesson for the financial industry. It shows how strict oversight, openness, and accountability we need to stop fraud like this from happening again.