On That $ 2.1b: As Wirecard Goes Bankrupt, Scandal Focuses On German Supervision

FRANKFURT, Germany (AP) – An accounting scandal at one of Germany’s fastest-growing front-line companies has raised questions about the national financial regulator and, in addition to other high-profile fraud cases, raised questions about the country’s capacity . to supervise their corporate titans.

Some 1.9 billion euros ($ 2.1 billion) disappeared from payment system provider Wirecard, until recently announced as the emerging giant of Germany’s financial technology sector. Its CEO was arrested on suspicion of market manipulation and inflating financial numbers. And on Thursday, the company said it was filing for insolvency, a form of bankruptcy protection.

In addition to the damage to Germany’s corporate reputation was the reaction of financial regulator BaFin when media reports last year questioned the company’s accounts. Instead of investigating Wirecard, he targeted investors, banning them from betting on a drop in the stock price, which fell more than 40%.

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“That is a documented failure of supervision to intervene when there was clear evidence in this case,” Florian Toncar, a member of parliament for the opposition Free Democratic Party, said in an interview on public radio Norddeutscher Rundfunk.

He said the case was “a severe blow” to Germany’s reputation as a financial center.

“Wirecard was until now one of the few operating technology companies to have brought new ideas to the market and now it turns out that it was largely about smoke and mirrors.”

The company’s logo is seen at the headquarters of German payment provider Wirecard in Aschheim, near Munich, southern Germany, on June 24, 2020. (Christof STACHE / AFP)

BaFin head Felix Hufeld admitted that the Wirecard implosion was “a disaster.” But the agency upholds its decisions throughout the scandal, the details of which are still emerging.

Wirecard provides the technology to businesses and consumers to make cashless payments, a growing and competitive market worldwide. Its founder and CEO, Markus Braun, resigned last week and said “it cannot be ruled out” that the company may have been a victim of fraud.

He was arrested Monday on suspicion of inflating the company’s financial numbers and later released on bail. By Thursday, the company’s share price had lost almost all of its value at just € 3, from more than € 150 last year.

Under new CEO James Freis, the company has said previous descriptions of its business in countries where it worked with partners, a key pillar of profit, were inaccurate and that it was investigating whether those businesses were always conducted in the best interest. . of the company. The missing 1.9 billion euros was supposed to be found in trustee accounts at two Philippine banks, but they said they have no dealings with Wirecard. The EY auditor declined to sign the company’s annual report.

Corporate allegations are not unknown in Germany, to say the least.

Volkswagen was caught tampering with diesel engines to cheat on US emissions tests, and paid more than 33 billion euros ($ 37 billion) in fines and settlements, while the chief executive and president of industrial conglomerate Siemens He resigned over a 2006-2007 scandal for bribing foreign officials to win contracts. Banking giant Deutsche Bank has paid fines for breaking money laundering rules.

Wirecard’s problems have a specific focus: they question the honesty of the financial statements that their investors and creditors trusted. In that regard, it echoes the accounting scandals of the early 2000s that rocked the U.S. stock markets, such as that of the energy company Enron.

BaFin has come under scrutiny in part for its decision in February 2018 to prevent operators from betting against the company’s shares. BaFin imposed the ban after the shares fell in Financial Times reports that raised questions about the company’s accounting, including reports of previously dated sales contracts that inflate revenue to meet financial goals. BaFin said the short sale ban was to protect the integrity of the market and investors, not the company.

In trying to explain what went wrong with the regulator, Toncar and others have pointed to BaFin’s limited range of authority. As a financial regulator, he was responsible for Wirecard Bank AG, Wirecard’s German banking arm, not the company as a whole.

Thorsten Sellhorn, a professor at the Ludwig Maximilian University in Munich, said Germany’s accounting regulator, the Financial Reporting Control Panel, was the first line of defense, not BaFin. Sellhorn, president of the European Accounting Association, said it was “too early to point to the culprits” before criminal investigations are resolved.

However, he said he doesn’t see a “smoking gun” on BaFin.

Instead, the company’s board of directors “would be much closer to home” and the first stop if external auditors had questions. Germany has done what it called “slow progress” in improving board oversight, such as a corporate governance code that asks CEOs to wait two years before taking board positions, more women on the board, and experience independent financial officer among those appointed to the board.

Carola Rinker, an economist and consultant who studied accounting fraud, said various factors could have hampered BaFin and its auditors, EY. One is the complexity of the Wirecard business model, which involves handling cashless payments between a complex network of credit card companies, merchants and banks.

Another is that, unlike an industrial company, much of the value on Wirecard’s balance sheet comes in the form of intangible financial factors, such as goodwill and customer relationships.

Such “intangibles” were high at Wirecard, Rinker said, amounting to € 1.4 billion out of a balance of € 5.8 billion. He compared Wirecard to the 2000 scandal over machinery manufacturer FlowTex, which borrowed € 2 billion on the basis of drilling machines, a tangible asset that did not exist. “The problem with intangibles is that you cannot see their existence because they are not physical, so it is more difficult to show their value,” he said.

Those are complexities and problems that BaFin chief Hufeld will have an opportunity to discuss soon. He is scheduled to appear next week before the finance committee in the Bundestag, the lower house of parliament.