Established in 1999, Wirecard is one of Europe’s leading financial technological companies. It is a global supplier of financial solutions functioning within the areas of mobile payments, e-commerce, digitalization and financial technology. From being a minor player to one of Germany’s biggest company in just over a decade, Wirecard has collaborated with over 280,000 companies, some of which being Qatar Airways, Allianz, Transport for London, etc.
The acceleration phase
At one point, the market value of the Wirecard exceeded that of Deutsche Bank. In September 2018, Germany’s second largest lender Commerzbank AG was dropped from the DAX index (the stock index of Germany’s 30 biggest companies) and lost its status as a German blue-chip company, replaced by Wirecard which reported a net income of 1.9 billion euros ($2.1 billion) in 2018. At that time, Wirecard boasted of 22.5 billion euros ($25.2 billion) in market capitalization, more than twice than that of Commerzbank.
Wirecard had rapidly expanded outside Germany, building an Asia Pacific business. Due to its unprecedented growth in the recent years, there had been multiple allegations from whistleblowers, journalists and speculators that its revenue and profits had been inflated through fake transactions with obscure partners.
At a press conference in 2019, Markus Brauns (Wirecard’s CEO and largest shareholder) told New York investors that Wirecard would increase revenue by six times by 2025 as a digital payments boom.
False accusations, or was it?
On 30th January 2019, shares of Wirecard took a hit after the Financial Times reported that a senior executive in the company was suspected of falsification of accounts and money laundering in the company’s Asian Pacific operations. To counter that, Wirecard issued a statement calling the report inaccurate and misleading. Additionally, it also filed a lawsuit against the Financial Times. Due to this report, BaFin banned short selling Wirecard shares from 18th February 2019 to 18th April 2019.
Surfacing of the scandal
To prove its innocence, in 2019, KPMG was hired to conduct an independent audit. In March 2020, Wirecard claimed that KPMG, after conducting the audit, had concluded that no discrepancy was determined, however on 18th June 2020, an auditor at Ernst and Young said that ‘sufficient audit evidence’ could not be found of 1.9 billion euros in the firm’s balance sheet which caused the shares to tumble about 26% in value. Wirecard’s headquarters were searched by police as part of a criminal investigation into potentially misleading statements to investors by CEO Markus Braun and three other board members regarding the audit.
It became known that this was the fourth time that Wirecard had failed to report its full year results from 2019. The following day, Markus Brauns resigned after serving for about two decades and James Freis was appointed as the interim CEO.
Initially, Wirecard was claiming that two Philippine banks, BDO Unibank and BPI Bank, were said to hold the 1.9 billion euros in escrow accounts which had been set aside for risk management. However, Philippine’s central bank governor said none of the missing money entered the country’s financial system. BDO Unibank also said that a document claiming the existence of a Wirecard account was falsified and carried forged signatures of bank officers.
A turn for the worse
Things took a turn on 22nd June when Wirecard claimed that 1.9 billion euros in the supposed accounts did not exist and withdrew assessment of its financial results. Shares crashed as much as 46% in one day itself. The firm’s Chief Operating Officer and Braun’s close ally, Jan Marsalek was removed. Markus Brauns turned himself in the next day even though he had first claimed to be a victim of fraud himself.
The missing money accounted for one fourth of the company’s balance sheet. From 2010 to 2019, Wirecard’s cash flow operations was about 2 billion euros ($2.2 billion) implying that the missing 1.9 billion euros could have wiped out nearly a decade of its reported cash generation.
As of September 30 2019, the fintech group’s total cash, interest bearing securities and fixed deposits totaled 3.8 billion euros ($4.3 billion). If 1.9 billion euros remain unaccounted for, that leaves a remainder of 1.9 billion euros of potential available liquidity. Wirecard’s shares have dropped by more than 80% in value and its only listed bond is trading at 27 cents to the euro.
Markus Brauns is being charged with balance sheet falsification and market manipulation. Prosecutors accuse Markus of inflating Wirecard’s finances to make it appear healthier and more attractive to investors and customers.
In April 2019, SoftBank Investment Advisors structured a roughly $1 billion investment in Wirecard through a convertible bond, a type of debt that can be repaid in stocks instead of cash according to the Financial Times. The fund is now going to lose out on hundreds of millions in profits that it might have reaped from the Wirecard trades.
Clutching at straws for survival
In an attempt to remedy the situation, the interim CEO has opened urgent talks with about 15 banks that have lent 1.75 billion euros ($1.96 billion) to Wirecard. Some of the banks do not favour cancelling their loans and sending Wirecard into insolvency but have demanded full transparency as they seek to recover their money. The company said that it is in ‘constructive discussions’ with banks on continuing credit lines and is assessing options for a sustainable financial strategy for the company.
The financial regulatory authority for Germany, popularly known as BaFin, is seeking to prevent money held at Wirecard Bank from being used to bail out Wirecard AG. According to the most recent figures, the bank held 1.4 billion euros ($1.57 billion) in deposits. Lawmakers should decide quickly how to tighten regulation which has exposed lapses by the auditors as well as the regulators. Germany has never witnessed any scandal of this magnitude.
An unsolved mystery
Wirecard’s name is now frequently heard in association with Enron, a Texan energy company’s early-2000s collapse featuring accounting fraud, complicit auditors and political connections shook the US economy. This is one of the biggest corporate accounting scandals in recent years. Till date, no one knows where the money went or even if it existed in the first place which, to think about it, is baffling.