The Wirecard Case – From Darling of the Financial Markets to Unchecked Crash on the Stock Exchange

A criminal case that is spreading more and more, economic thriller, possible political involvement and apparently an intelligence story. The company Wirecard, not long ago the star in the German innovation sky, at times worth more than 20 billion euros on the stock exchange, is bankrupt. The responsible public prosecutors have recently extended their accusations considerably and are now (as of July 2020) on the brink of charging them with commercial gang fraud. Back in June, attempts of justification by the former CEO Markus Braun were made. Then the ball started rolling, fictitious transactions and inflated balance sheets, according to investigators, for the past five years. Air bookings, fictitious accounts, everything to deceive investors. Damage: 3.2 billion euros, most likely lost. If the accusations are confirmed, Wirecard could become the biggest fraud case in post-war German history. Professors Gunther Friedl and Christoph Kaserer of the TUM School of Management have provided various news outlets with their expertise on the case. In the following article, they address its financial and economic significance.

From the darling of the financial markets to the unchecked crash on the stock exchange: in the case of the payment service provider Wirecard, just a few days were enough. Since the beginning of 2019, the Financial Times has repeatedly reported on employees in Asia who are said to have conducted fictitious transactions, falsified balance sheets and embezzled funds. Slowly, auditors expressed doubts about the existence of the trust accounts worth billions. No one seemed to be listening.

Prof. Friedl, what was going on here?

“The fact that Wirecard itself did not carry out the reconnaissance, although they knew that something must be wrong, is quite astonishing. But it is even more astonishing that the supervisory board and even BaFin did not think of it either. With such a DAX company, many people must actually work together to cover up such a fraud. It can’t have been just one or two people, there must have been several people working together with truly fraudulent intent to make it go undetected.”

Shareholders, investors, everyone, driven by the hope of rapid growth and high profits. Even the auditors of Ernst & Young, itself a billion-dollar corporation, apparently allowed themselves to be dazzled. With regard to Wirecard’s Annual Report for 2018, they wrote: “In our opinion, the attached consolidated financial statements comply with the legal requirements in all material respects and give a true and fair view of the net assets and financial position of the company”.

Prof. Friedl, why have all control mechanisms failed in this case?

“We were all impressed with Wirecard. While our commercial banks produced one negative report after another, a technology company in the financial sector managed to make a fairytale ascent to the DAX, the largest German share index. Nevertheless, it is hardly comprehensible that neither supervisory boards, auditors, analysts, rating agencies nor the state supervisory authority saw the debacle coming.” For many years, there have been enough indications of irregularities, both in the media such as the Financial Times or the Manager Magazine, as well as through informants. In their last audit opinion, the auditors were aware of these accusations and examined them particularly. The fact that they nevertheless maintained their positive verdict is inexplicable to Gunther Friedl.

Prof. Kaserer, in a recent article in the SZ you wrote about whistleblowers and corporate governance. Why does the Wirecard case remind us of the important role of whistleblowers in corporate governance?

“Because the case once again shows how overburdened federal supervision is. This has something to do with flawed incentives for the employees there, a lack of job attractiveness and also legal restrictions. One must realize that effective corporate governance must be ensured first and foremost by market players. These include investors and short sellers, but also whistleblowers. And for the latter there are currently almost no incentives to become active at all.”

Not only auditors are under criticism. According to experts, the supervisory board and the state supervisory authority also failed in the Wirecard scandal. The Federal Minister of Finance has announced that the control systems will be reformed, and that Bafin will be given more staff and competencies.

Prof. Kaserer, you view this critically. Why is the Wirecard case not a clear argument in favor of increasing the competencies and budget of Bafin?

“Because we have been doing exactly this for more than 30 years – with questionable results. Before we talk about more competencies and more money for supervision, we should try to clearly identify where the problems actually are. I don’t think it was a lack of competence, but rather a lack of expertise and incentives. If we want to change this, we should first consider what form a reorganization federal supervision should take. Then we can talk about what it might cost.”

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