The Anatomy of a Fraud :Inside "Wirecard's" Multi-Billion Dollar Accounting Scandal

|Photo: Wirecard Signage at one of its Office, Reuters|

Wirecard AG, once a national pride of Germany and its answer to the giant US tech Companies has lost nearly 85 per cent of its market value and filed for insolvency being unable to pay off its debts just days after it was revealed that it had a $2 billion hole in its balance sheet. The cash was supposed to be held at two Asian Banks, though Wirecard has admitted recently that the missing billions may not even exist. This scandal has shuddered its investors and its credit rating has been withdrawn by Moody's. The Wholistic View encapsulates this sensational fraud which has been termed as one of the worst financial disasters in Europe since the financial crisis of 2008. (7 Min Read).

For the last year or so, Financial Times(FT) Journalist Dan McCrum has been constantly reporting that German Fintech Company Wirecard was faking some of its revenue. Wirecard, on the other hand, had been fighting back aggressively by accusing Mccrum of conspiring with short-sellers(Investors who've bet on the downfall of the stock price of a company) to push down its stock price. Only, 2 Weeks Back, Wirecard finally admitted that the Bank Trust Account balances in which the amount of $2 billion is kept, do not exist. This $2 Billion is equivalent to all the profits that Wirecard has made in more than a decade and everyone is wondering where did the money go? Let's rewind and start with what Wirecard does.

|Image: Wirecard Business Model, Source: Wirecard Website|

Wirecard AG is one of the world's largest digital platforms in the area of financial commerce and is headquartered in Germany that came into existence in the late stages of the dot-com boom in 1999 as a payment processor helping websites to collect credit card payments from their customers. It is a payment service provider, with clients including FedEx and KLM. Merchants use it to accept payment through credit cards, Apple Pay, Paypal, and others. The company began 20 years ago processing payments for gambling and porn websites. Over the years, the company began to bloom as the commerce shifted online and away from cash payments. It attracted attention from giants like Softbank and Credit Suisse.

The giant now operates in English with a global footprint, supposedly massive Asia operations, and ties to numerous top banks.  It is one of Germany's Top 30 most valuable companies on the German stock market (DAX) and has been ranked in the “Top 100 Most Innovative Growth Companies in the World” by Forbes Magazine. The company boasted about 6,000 employees in 26 countries and reported revenues of over $2.2 billion in 2018. Wirecard's stock almost grew sixfold between 2016 and 2018 with its stock price hitting a peak of $213 in September 2018 and company was valued—worth about $26.9 billion. It is now valued at about $2.2 billion and falling fast.

|Photo: Former chief executive of Wirecard Markus Braun was arrested on suspicion of falsifying accounts at the  

the company, Getty Images|

Wirecard's CEO Markus Braun resigned after the fraud surfaced. Braun joined Wirecard in 2002 and became its CEO and CTO. Braun is seen as the driving force behind the ascent of Wirecard as he transformed an obscure company into a Tech Icon. He himself holds around 7% of the shares of the company and thus, is the biggest shareholder of Wirecard. When critics like those of Dan Mccrum raised red flags about the company's seemingly miraculous success, questioning murky accounts and income that could not be traced, Braun hit back repeatedly and the stock price skyrocketed. But the entire kingdom came crashing down when Wirecard's Auditor EY (Ernst & Young), said that company had carried out "an elaborated and sophisticated fraud".

Wirecard, which owes creditors €3.5 billion, said its survival was not assured, sending its battered shares below €2  from over €100 in a week's time. The European Commission has opened an investigation into Germany’s financial regulator for failing to catch the problems, despite numerous reports of wrongdoing. German prosecutors arrested Mr Braun on Monday on accusations of inflating sales volume with fake income to lure investors, and authorities are searching for Jan Marsalek, his former chief operating officer. The Philippine government is investigating the missing €1.9 billion, which Wirecard claimed to have held in two Philippine banks; the banks said last week that they had never dealt with Wirecard.

|Image: One of Germany’s most feted companies, Wirecard is the first member of the benchmark DAX stock index to file for insolvency proceedings. Credit...Arne Dedert/DPA, via Associated Press|

This whole fiasco has raised brows at German Financial Regulator, BaFin, for its failure to closely monitor the whole sequence of events as well as turning itself away from the allegations posed by various critics and analysts. This was partly due to the iconic status Wirecard enjoyed in Germany. In the tech world, Wirecard was seen as the flagbearer of German tech magnitude. Thus, BaFin instead of closely examining Wirecard's financial affairs, investigated the people raising red flags.

Critics said they were subject to a harassment campaign, including phishing attacks by hackers to gain access to email accounts and intimidating surveillance outside their homes and offices. Wirecard has denied any wrongdoing. Scrutiny of BaFin has intensified since its president, Felix Hufeld, acknowledged this week that officials had failed to prevent a calamity. “The situation is a complete disaster,” he said.

|Image: Felix Hufeld, president of BaFin, which had previously suspected short-sellers of manipulating Wirecard’s stock price, turned its attention to Wirecard itself. Credit Armando Babani/EPA, via Shutterstock|

The background of this scandal lies in Wirecard's Growth Story and its ascent to become a behemoth. Wirecard's Finances were questioned way back in 2008 when a german shareholder association alleged that financial records of the company were incomplete and misleading. Wirecard hired EY to conduct an audit, which didn't substantiate those claims and Wirecard continued to prosper. Between 2011 to 2014, the company raised €500 million from shareholders and began an aggressive global expansion. It bought various small third party payment companies across Asia, to operate in countries such as Singapore, Indonesia, Malaysia, Dubai and beyond. These merchant providers plugged their retail payment terminals also known as POS machine into Wirecard's payment system thereby generating large chunks of revenues and profits of the company over the years. They were supposed to deposit the money generated into Wirecard's Escrow accounts but the company said the funds might not have existed.

It is due to this botched business model that analyst highlighted their concerns over Wirecard's project prudent financial situation. Analysts after examining these acquired companies found out that they generated very low revenues with very thin profitability. While Wirecard was shelling out astronomical sums for buying these smaller companies while claiming that these companies generated around half of its revenue tell you about the bleak finances of the company but this arrangement of relying on offshore companies prevented its auditors to verify the accounts.

|Image: Wirecard's Stock price fell from  €104 to almost €1.28 per share in just 10 days after the fraud came into picture|

When Wirecard bought an Indian Payments business for nearly €340 million, Many Analysts started to suspected that Wirecard was falsifying its profit and balance sheets, partly through buying companies at high prices — including the Indian firm — where the purchase money went to related parties and was then returned back to Wirecard. Despite the critical reports, Wirecard was becoming part of Germany’s corporate elite. It leapt into the DAX index in September 2018, knocking out the stalwart Commerzbank and causing a sensation in the country.

Mr Braun was moving more into the spotlight, becoming an A-list speaker at technology and payment conferences, where he was hailed as a “hero” and “rock star,” and eventually began wearing Steve Jobs-style black turtlenecks. He promoted the concept of a fully cashless society from which players like Wirecard stood to benefit, and predicted that all retail payments would be digital within a decade.“The aim of the board is to conquer the world in a powerful, organic way,” the German newspaper Welt reported him saying in 2018.

But as more reports suspected wrongdoings, The Company hired KPMG to provide an independent assessment of its books. In the most serious finding, covering 2016 to 2018, KPMG said it was unable to verify the existence of €1 billion in revenue that Wirecard booked through three third-party acquiring partners. German financial regulators redirected their scrutiny from critics to the company itself. On June 5, prosecutors raided Wirecard headquarters and opened proceedings against management on suspicion of releasing misleading information that may have affected Wirecard’s share price. On June 17, EY said it would not publish its long-delayed annual report and audit because it could not account for the missing €1.9 billion. By 24th June 2020, Wirecard made news for nothing but because it had filed for Insolvency.

Source: The NewYork Times, CNN, CNBC, FastCompany, MarketWatch, Bloomberg, WallStreet Journal, Wikipedia, The Guardian, Forbes.

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