The Wirecard Scandal 2020. Wirecard and related Corporate Governance Issues

Table of Contents

Abstract

Table of Contents

List of Figures

List of Abbreviations

1 Introduction to the Wirecard Case

2 Background Information about Wirecard

3 The scandal of Wirecard

4 Related Corporate Governance Issues

5 Lessons learned and proposed solutions

6 Summary and Outlook

List of References

Abstract

This paper addresses the Wirecard scandal of 2020 and aims to derive related corporate governance issues. An analyzation of proposed solutions that should help to provide similar future crises is also part of the investigation. Firstly, it is argued that there is a confusion concerning the responsibility among german supervisors which needs to be clarified. Additionally, it is discussed that early warning signs must not be neglected. Finally, suggestions for necessary modifications within the external and internal audit process are given and analyzed.

Key Words

Wirecard, Wirecard Scandal, Corporate Governance, Auditing, Supervision, BaFin

List of Figures

Figure 1. Share Price and Trading Volume of Wirecard AG

List of Abbreviations

AOB Auditor Oversight Body

BaFin Bundesanstalt für Finanzdienstleistungsaufsicht

CEO Chief Executive Officer

CMS Compliance Management System

DCGK Deutsche Corporate Governance Kodex

DM Deutsche Mark

DPR Deutsche Prüfstelle für Rechnungslegung

ECON Committee on Economic and Monetary Affairs

ESCMS Single Capital Market Supervisor

ESMA European Securities and Markets Authority

EUR Euro

EY Ernst and Young

FT Financial Times

IDW Institut der Wirtschaftsprüfer

SAFE Leibniz Institut für Finanzmarktforschung

1 Introduction to the Wirecard Case

The popular motto of Wirecard “Alle Wege führen zum Erfolg – mit unserer intelligenten Financial Commerce Platform” (All roads/ways lead to success-with our intelligent Financial Commerce Platform)” (Sancak & Zeranski, 2020, p. 5) today probably has an ambivalent meaning.

Wirecard, a former FinTech company, offering services in the field of payment transactions, has become heavily involved in fraudulent behaviour during 2020. The management of the then Deutsche Aktienindex (DAX) member is accused, among other things, of having committed balance sheet manipulation resulting in faking non-existing payment accounts worth EUR 1.9 billion. The reappraisal of the operations is currently proceeding and reveals additional questions regularly. For instance, the role of Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and the auditing company Ernst and Young (EY) is the subject of controversial discussions (McCrum, 2020).

Scandals like the Wirecard case do harm investors trust in the financial markets, which has negative spillover effects on the asset allocation process. They not only harm economic growth; they also hinder non-fraudulent companies from raising capital because investors are no longer willing to take the risk. Therefore, it is crucial to pay sufficient attention to misconduct behaviour within the capital markets (Langenbucher et al., 2020). The causes and possible countermeasures to prevent future scandals of the same manner must be discussed in detail. This is also the purpose of the following paper.

To do, this work will initially provide background information about the operations at Wirecard and a brief summary of the progress of the scandal. Secondly, several corporate governance-related issues related to the disaster will be derived. This is followed by a description and analysis of possible countermeasures.

2 Background Information about Wirecard

Wirecard was founded back in 1999 as a venture capital Startup at the late stage of the dotcom bubble. Headquartered in the Munich suburb, the company worked on software-based solutions for electronic payment transactions, served as an interface for the risk associated with online payment, and issued credit cards (McCrum, 2020).

In 2000, the young company nearly went bankrupt after an internal project to overhaul its software failed. This was due to the fact that the Director of Technology, Jan Marsalek, who was also hired in 2000, had not informed the management of several occurring problems. A resulting loss of Deutsche Mark (DM) 2 million threatened the company's existence, whereupon the company sought help from the business consultants KPMG. Shortly thereafter, KPMG consultant, Markus Braun was hired as Chief Technology Officer and became the Chief Executive Officer (CEO) of Wirecard in 2005 (Holtermann & Schnell, 2020).

Due to the rising demand for the services offered, Wirecard's business model was able to recover from early troubles. After various operations into other companies and renaming, Wirecard finally became listed in the Prime Standard stock market segment due to a reverse IPO in 2005 (McCrum, 2020). The company, which was regarded as an innovative Fintech, quickly became a widely demanded stock, as can also be seen from its share price in Figure 1.

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Figure 1: Share Price and Trading Volume of Wirecard AG; Source: Sancak & Zeranski, 2020

From 2011, Wirecard greatly expanded its presence in the Asian region through various acquisitions (McCrum, 2020). Meanwhile, the FinTech achieved an average annual sales growth of almost 30% (Staista, 2020). Due to the rapid growth, Wirecard was listed in the TecDAX as early as 2006. In 2018, the FinTech finally displaced Commerzbank from the DAX and became listed among the 30 largest German stock corporations (Sancak & Zeranski, 2020).

However, with the share price peaking at Euro (EUR) 195 in September 2018, the success story increasingly terminated into an extremely volatile stock (cf. Figure 1). This was due to the emergence of various reports of manipulating the financial statements (Sancak & Zeranski, 2020). On June 18, Wirecard AG could not obtain a signature on the annual financial statements for 2019 from the auditing firm Ernst and Young (EY). On June 25, the company finally filed for insolvency due to imminent illiquidity (Holtermann & Schnell, 2020). The question of what was going on is addressed in the following chapter.

3 The scandal of Wirecard

With a market capitalization of EUR 12.6 billion and 123.5 million shares outstanding in 2019, Wirecard was considered a valuable investment opportunity (Sancak & Zeranski, 2020). For many shareholders and stakeholders, the insolvency of Wirecard came as a shock. However, others would claim that there had already been indications of dubious dealings within the company for years (McCrum, 2020).

In addition to other partly anonymous reporters, especially the Financial Times (FT) had published a number of allegations against Wirecard AG titled as "House of Wirecard" (McCrum, 2020). As early as in 2015, the reporters indicated discrepancies in the balance sheet. There were also increasing questions about various overpriced company acquisitions in the Asian region in the coming years. However, investigations by BaFin did not reveal any findings in any of the cases. Therefore, the allegations were rejected and deemed to be attempted market manipulation (McCrum, 2020). In 2019, the FT published further concerns about fraudulently inflated profits, resulting in further allegations of the BaFin. Upcoming doubts concerning possible misconduct of Wirecard had already triggered an increasing amount of short positions on the underlying shares. With the stock price coming under increasing pressure and volatility, BaFin issued a two-month ban on short-selling from February 2019. The ban, interpreted as an indication of short-sellers' unfounded position, had only a minor effect on the volatile share price (McCrum, 2020).

Contrary to public accusations, Wirecard was able to provide financial statements certified by EY until 2019. According to the BaFin, none of the audits gave cause for any concern regarding balance sheet accusations mentioned in media (BaFin, 2020). In the wake of new allegations by the FT, Wirecard commissioned a special audit by KPMG from October 2019. In April 2020, the KPMG audit did not provide the intended discharge, instead resulted in the questionable existence of various payments into escrow accounts in the amounting to EUR 1.9 billion (KPMG, 2020). In June 2020, BaFin filed charges against the entire Board of Management for suspected market manipulation, which is reasoned in the assumption that Wirecard made misleading statements during the KPMG audit and thereby manipulated the stock price (Ruhwedel, 2020). Finally, the actual auditor, EY, refuses to issue an audit attestation because they cannot find any evidence of the existence of the trust accounts. In June 2020 Wirecard acknowledged the potential scale of multiyear accounting fraud for the first time, warning that the EUR 1.9 billion of cash probably does not exist. Subsequently, BaFin issues a warrant of arrest against CEO Markus Braun and Jan Marsalek, who was heavily involved. On June 25, Wirecard finally filed for insolvency (McCrum, 2020). The former stock market star is currently being dismantled, with more than half of the approximately 1300 employees in Germany receiving notice of termination. Creditors have to prepare for high losses: Debts of EUR 3.2 billion are offset by assets of around EUR 400 million (McCrum, 2020). However, the biggest impact will be on the shareholders' side, who have to cope with total losses amounting up to EUR 20 billion (Ruhwedel, 2020).

4 Related Corporate Governance Issues

The Wirecard Scandal uncovers several shortcomings within the field of Corporate Governance. This chapter aims to analyze weaknesses on the side of institutional oversight as well as related corporate governance guidelines. Discussing the weaknesses of institutional oversight concerns a proper decision making of public authorities, ensuring trustworthy information channels and ensuring accuracy in external audits.

First of all, regarding proper decision-making of public authorities, the BaFin was blamed for having neglected existing signs of fraudulent behaviour at Wirecard (Krahnen & Langenbucher, 2020). Although the hindsight bias facilitates pointing fingers at someone, such claims have already been raised as early as 2015 by the FT. In this context, the European Securities and Markets Authority (ESMA) sees a lack of clarity in the German financial supervisory authority's responsibility.

"Apparently, there is a great confusion of responsibilities in the German financial supervision, which in the result leads to a lack of information exchange and a completely ineffective supervisory action." (Bender, 2020, n.p.).

The oversight of Wirecard did not fall under the direct regulatory supervision of the BaFin because the company was not defined as a financial holding company (Krahnen & Langenbucher, 2020). The first step in the legal process is to contact the "Deutsche Prüfstelle für Rechnungslegung" (DPR) before proceeding to BaFin (Krahnen & Langenbucher, 2020). Besides the regulatory confusion, the BaFin was furthermore blamed for giving wrong signals to investors. The two-month ban of short-selling was interpreted as a sign for the unfounded accusation of Wirecard and helped only slightly decrease the extreme volatility (Krahnen & Langenbucher, 2020).

The second important issue is to establish, maintain and ensure trustworthy channels of information. Especially on the stock market, the free flow of unbiased information is important in order to have accurate stock prices. As mentioned, in the hindsight, it is often argued that early warnings have been neglected or not taken seriously enough, which would be crucial to prevent expensive disasters such as Wirecard is. Two important warning signs that public authorities or the auditor have not been paid attention to have been: Information from whistleblowers and the increasing amount of short-selling positions. Both are critical channels and not easy to process; nevertheless, they need to be considered. Therefore, supervisors have to consider whistleblowing and short selling as an important channel and treat them accordingly (Langenbucher et al., 2020).

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