Wirecard collapsed on Thursday due to nearly $ 4 billion in creditors after revealing a hole in its books that its EY auditor said was the result of sophisticated global fraud.
The payment company filed for insolvency in a Munich court saying that, with 1.3 billion euros ($ 1.5 billion) of loans past due in a week, its survival as a going concern “was not assured.”
Wirecard’s implosion came just seven days after EY, its auditor for more than a decade, refused to log out of 2019 accounts, forcing CEO Markus Braun and forcing him to admit that $ 2 probably didn’t exist, 1 billion of your cash.
“There is clear evidence that this is an elaborate and sophisticated fraud involving multiple parties around the world,” EY said in a statement.
EY said that while completing the 2019 audit, it received false confirmations regarding escrow accounts and reported them to the relevant authorities.
Wirecard declined to comment after EY’s statement.
The financial technology company is the first member of Germany’s prestigious DAX stock index to fall, just two years after earning a place in the country’s top 30 listed companies with a market valuation of $ 28 billion.
“The Wirecard case hurts corporate Germany. It should be a wake-up call for reforms, “said Volker Potthoff, chairman of the ArMID corporate governance think tank.
Creditors have little hope of recovering the 3.5 billion euros owed them, sources familiar with the matter said. Of that total, Wirecard has loaned 1.75 billion from 15 banks and issued 500 million in bonds.
“The money is gone,” said a banker. “We can get some euros back in a couple of years, but we will cancel the loan now.”
The collapse of Wirecard, once one of Europe’s most popular financial technology companies, dwarfs other German corporate failings. It has rocked the country’s financial establishment with Felix Hufeld, head of regulator BaFin, calling it a “total disaster.”
German Finance Minister Olaf Scholz described the collapse as a “scandal”, acknowledging that it was time to review the regulation. “We must rethink our oversight structures,” Scholz said, adding that he had asked his ministry to come up with ideas in the coming days.
“If legal, legislative and regulatory measures are needed, we will adopt and implement them,” he said. “A scandal like Wirecard is a wake up call that we need more monitoring and supervision than we have today,” he said.
Wirecard’s shares, which were suspended before a previous announcement that it would seek creditors’ protection, collapsed 80% when operations resumed. They have lost 98% since the EY auditor questioned their accounts last Thursday.
EY, one of the world’s “Big Four” accounting and consulting firms, faces a wave of litigation in a debacle that has led to comparisons to Arthur Andersen’s disastrous oversight of US energy company Enron.
German law firm Schirp & Partner said that with Wirecard now effectively sidelined, it would file class actions against EY on behalf of shareholders and bondholders.
“It is terrifying how long Wirecard AG was able to operate without being challenged by auditors,” said partner Wolfgang Schirp.
Wirecard’s new administration had been in crisis talks with creditors, but withdrew Thursday morning “due to impending insolvency and over-indebtedness.”
The insolvency request did not include its Wirecard Bank subsidiary, which has deposits estimated at € 1.4 billion and is already under emergency management by BaFin.
A second source close to conversations with creditors said that although the company had a healthy core, it had faked two-thirds of its sales. This meant that there was no way to pay off all of his debt, despite all the legal challenges he will face.
The Wirecard rise, which was founded in 1999 and is based in a Munich suburb, was haunted by allegations by whistleblowers, reporters and speculators that its income and earnings had been increased through bogus transactions.
Braun rejected critics for years before finally calling KPMG external auditor late last year to conduct an independent investigation.
KPMG, which released its findings in April, was unable to verify the € 1 billion cash balances, questioned Wirecard’s acquisition accounting, saying it was unable to track hundreds of millions in cash advances to merchants.
“Today is a complete vindication for those who exposed fraud,” said Fraser Perring, who bet on a fall in Wirecard’s shares and co-authored a 2016 report alleging fraud.
The Munich prosecutor’s office, which is investigating Braun on suspicion of misrepresenting Wirecard accounts and market manipulation, said: “We will now look at all possible crimes.”
Braun was arrested on Monday and released on bail of € 5 million a day later. Former COO Jan Marsalek is also under suspicion and believed to be in the Philippines, according to justice officials there.