Wirecard: How signs of serious trouble were ignored
With firm's promising prospects, even experts, media missed the red flags, failing to probe deeper.
The crash of German fintech company Wirecard brings back memories of the darkest days of the dot-com bubble of the early 2000s.
Then newcomers entered the market of the New Economy promising fantastic returns and attracting loads of investors.
As with Wirecard today, exaggerated prospects often outshone serious signs of trouble on the horizon.
Last Thursday, Wirecard had to file for insolvency after almost €2 billion (S$3.13 billion) went missing from its accounts.
The company has become the first member of DAX, Germany's blue-chip share index, to go out of business.
The effects have rippled worldwide. In Singapore, the Monetary Authority of Singapore (MAS) and the Accounting and Corporate Regulatory Authority are now collaborating with the Singapore Police Force's Commercial Affairs Department "to scrutinise other possible aspects of the case".
The MAS said yesterday: "Due to the cross-border nature of some of the transactions, Singapore authorities have reached out to relevant foreign authorities for further information and also stand ready to assist investigations by foreign authorities."
The CAD had commenced criminal investigations into WireCard's Singapore operations in February last year, which are "extensive and ongoing", said the MAS.
The fall of Wirecard is dealing a huge blow to the already poor shareholder culture in Germany.
Germans have always been wary when it comes to investing in stocks - only 15 per cent of the population own shares, one of the lowest among countries in Europe.
Being risk-averse has a long tradition that dates back to stock market crashes in the past century and also the failure of the so-called "people's share" of Deutsche Telekom, which dropped from over €100 to less than €10 in 2002, erasing massive amounts of capital.
The collapse of the Wirecard stock is grist to the mill of those who warned that equity investment is an untrustworthy business.
Wirecard shares lost over 90 per cent of their value last week to close at €1.28 on Friday. Yesterday, they shot up 142 per cent to €3.10 at 11.45am in Frankfurt after a media report that private equity investors and payments firm Worldline may buy parts of Wirecard.
Hoping Wirecard could become a new star like Apple, fund managers were all too willing to not look deeper into the inner workings of the company.
But there are others to blame. German media, which missed the warning signs of the 2008 financial crisis, again did not sufficiently question the Wirecard business model.
Only the British Financial Times (FT) once again was raising red flags about sham transactions and obscure business partners.
After the accusations could not be dismissed, Wirecard boss Markus Braun ordered the auditors of KPMG to provide a special report.
The results, presented in late April, were devastating.
Only then did the controller company Ernst & Young (EY) decline to certify the Wirecard balance sheet of 2019 and declared that €1.9 billion was missing.
For a company already laden with debt of €3.5 billion, this was the fatal blow.
EY had reason to become suspicious in 2016 after reports first surfaced that Wirecard was involved in fraud.
But the story of the fintech company from Aschheim, a little town in Bavaria, that was conquering world markets was simply too good to be embraced. Criticisms were dismissed by pointing out that the company's rapid growth meant it could not keep up with all requirements and regulations.
According to the FT, EY failed for more than three years to request important account information from Singapore bank OCBC.
Wirecard had claimed to have around €1 billion in cash in the bank. But EY, which audited Wirecard for 10 years, allegedly never questioned this and instead relied on documents and screenshots provided by a third-party trustee and Wirecard itself, said the FT.
An opaque business structure also supported the Wirecard business model for years. In Asia, for instance, Wirecard did not have a licence for processing payments, so it worked with local partners.
This model accounted for almost half of Wirecard's sales revenues. Local merchants then processed the payments via these partners, who relied on Wirecard's IT solutions and paid fees to the company.
The stellar reputation of EY also helped Japanese technology firm SoftBank to dispel any doubts and buy convertible bonds at a whopping €900 million issued by Wirecard.
The financial injection was supposed to boost Wirecard's growth, and a strategic partnership was even later discussed between SoftBank and Wirecard.
Now, EY is entangled in the Wirecard debacle.
And the fallout from the scandal is far from over.
Mr Felix Hufeld, head of the German financial supervisory authority BaFin, has admitted that his agency had not done its job. What happened was a "total disaster", he said at a banking conference in Frankfurt last week. "We have not been effective enough to prevent such a case. I fully accept the public criticism."
On Wednesday, Mr Hufeld has to report to the Finance Committee of the German Bundestag.
If it is revealed that whistle-blowers had flagged early on the artificially inflated business numbers at Wirecard, Mr Hufeld may be in deep trouble.
Both BaFin and EY are already facing claims for damages from hundreds of investors.
The controllers are accused of repeatedly rubber stamping Wirecard's false annual financial statements.
Source: Straits Times © Singapore Press Holdings Ltd. Permission required for reproduction.