Wirecard, a high flying publicly traded fintech company from Munich, Germany, has attracted major investors around the globe including SoftBank. In about a year, the stock price of the company rocketed from €41 in 2017 to €192 in 2018.
Recently, Wirecard has admitted to book-keeping or accounting fraud. The company declared that the $2.1 billion cash on its balance sheet is “missing” (a quarter of its Balance Sheet value). It is not that the company received cash (cash-in) and then the cash was stolen (cash-out). The company never acquired that cash! By recording fictitious revenues/profits, the company accumulated a mammoth “paper” cash balance of $2.1 billion. Welcome to Alchemy Accounting.
Regrettably, the investors are left with the hefty bill—the stock is trading today around one euro!
Wirecard specializes in digital payments. The company offers its customers electronic payment transaction services, risk management, and physical cards. Initially known for processing payments in controversial markets, the company evolved into a full-service global financial payments player from 2006 following the acquisition of a bank. The company became publicly traded from 2005 following a “reverse merger” with InfoGenie, a Berlin-based company.
Over the past decade Wirecard fueled its expansion through aggressive acquisition of smaller payment processing businesses including a major acquisition of 20,000 merchant clients of CitiBank in Asia-Pacific region.
What is Fintech
Fintech encompasses any kind of technology in financial services industry linking businesses with consumers through software or other technology/apps (from payment apps to cryptocurrency). Fintech has been used for many of the newest technological developments – from payment apps like PayPal, Venmo, and cryptocurrency.
Cooking the Books
As part of investigations of potential financial fraud, Financial Times (FT) concluded that there were reasons to suspect that Wirecard’s units in Singapore and other Asian countries may have engaged in accounting fraud. According to FT, one of Wirecard’s “third-party acquirer” (licensed by Visa and Mastercard to help retailers accept credit card transactions), a Dubai-based intermediary called Al Alam Solutions, contributed half of the German company’s worldwide profits in 2016. This third party acquirer had only six-seven staff members despite processing vast sums of transactions for 34 of Wirecard’s most important clients in the US, Europe, Middle East, Russia and Japan (around E350 million between 2016 and 2017). Neither Visa nor Mastercard have any record of a relationship with Al Alam.
Investigations raise doubts whether the sales and profits recorded by Al Alam were invented. For instance, Wirecard says the US payments processor CCBill was a multimillion-dollar-client of its partner company Al Alam Solutions but CCBill says it had no business with Al Alam. Similar cases of fraud may have been perpetrated by Wirecard Dublin office.
Wisecard and Big 4: E&Y is the external auditor
As the audit firm of Wisecard for nearly a decade, E&Y GmbH, the German affiliate of E&Y Global Limited (global umbrella organization for E&Y firms) issued unqualified opinions every year until 2018 despite increasing questions from journalists and short sellers over the company’s accounting practices.
In 2019, Wirecard hired KPMG to investigate allegations raised by some in the media and sophisticated investors that a large share of Wirecard’s reported revenue-profits between 2016 and 2018 originated from a trio of third-party partners. In April, KPMG released a 74-page report saying it couldn’t verify the arrangements with the third parties because of lack of cooperation.
During its 2019 audit, E&Y concluded that it could not verify the cash balance of $2.1 billion held by trustee-controlled bank accounts in Philippines. Why would a German company hold cash in Asia that too in a trustee-controlled account? Wisecard’s explanation for such an unusual arrangement was that they were following risk management strategies and were reserving cash to process refunds and chargeback. Ironically, Germany’s central bank could not confirm that the money had entered its financial system.
On Friday, a German shareholder association filed a criminal complaint to the prosecutors’ office in Munich accusing E&Y auditors of missing the alleged fraud.
In Germany, Financial Reporting Enforcement Panel (FREP), a quasi-private entity, supervises the financial statements of companies traded on the German stock exchange. Germany’s lead financial regulator BaFin often relies on the investigations initiated by FREP to supervise companies. Following the Wisecard accounting scandal, Justice and Finance Ministries decided to sever ties with FREP.
BaFin President Felix Hufeld is scheduled to testify behind closed doors to German parliament members.
Expect even more fallout!by