User:Egawaryuki21/sandbox/Wirecard Scandal

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Wirecard AG
Company typeAktiengesellschaft
FWB: WDI
DAX constituent
IndustryFinancial services
Payment processor
Technology
GenreFinancial
PredecessorInfoGenie AG
(Until 6 April 2005)
Founded1 January 1999; 25 years ago (1999-01-01)
HeadquartersAschheim, Germany
Area served
Worldwide
Key people
James Freis (CEO)
Thomas Eichelmann[1]
(chairman of the supervisory board)
ProductsElectronic payment processing
Banking
Card issuance
Mobile payment
Risk management
Number of employees
5,300 (Jun 2019[2])
Websitewww.wirecard.com

The Wirecard scandal is a series of accounting scandals that resulted in the insolvency of Wirecard, a German payment processor and financial services provider that is part of the DAX index. Wirecard AG is a payment processor headquartered in Munich, Germany. The company offers its customers electronic payment transaction services and risk management, as well as the issuing and processing of physical cards. The subsidiary Wirecard Bank AG holds a banking licence and holds contracts with multiple international financial services companies. Wirecard Card Solutions Ltd. (WDCS) is a wholly owned subsidiary headquartered in Newcastle upon Tyne, UK, with an e-money licence which allows it to issue virtual cards.

Allegations of accounting malpractices has trailed the company since early days of its incorporation, reaching a peak in 2019 after the Financial Times published a series of investigations along with whistleblower complaints and internal documents. On 25 June 2020, Wirecard filed for insolvency after revelations that €1.9 billion was "missing",[3][4] the termination and arrest of its CEO Markus Braun. Questions are raised with regards to the regulatory failure on the part of BaFin, Germany's top financial watchdog, and possible malpractice of its long time auditor EY.

Rise of Wirecard[edit]

Main article: Wirecard § History

The company was founded in 1999. After Markus Braun joined as CEO in 2002, the company consolidated in business towards online payment services, with initial focus on porn and gambling websites as clients.[5] By taking over the listing of InfoGenie AG, a defunct call centre group, Wirecard entered Neuer Markt stock market segment, an action that has been criticised as avoidance of proper scrutiny during an initial public offering.[6] This was achieved through a decision in a InfoGenie general meeting to transfer the non-listed Wire Card to InfoGenie AG by way of a capital increase against investment in kind, making Wire Card a stock corporation listed in the Prime Standard stock market segment through a reverse IPO. Since a clean audit from EY in 2007 allayed investors concerns, in 2008 Wirecard shares reached a peak valuing the company at €24bn.[6] Wirecard was included in the TecDAX since 2006[7] and in the DAX since 2008[8].

Wirecard attributed its fast growth to fast international expansion achieved through acquisition of local businesses, resulting in its revenue growth often outpacing general industry trends. In March 2017, Wirecard acquired Citi Prepaid Card Services and created Wirecard North America, entering the US market.[9] Also in 2007, Wirecard moved into the banking by purchasing XCOM, allowing it to issue credit and debit cards through licensing agreements with both Visa and Mastercard. Since November 2019, Wirecard was represented in China by acquiring AllScore Payment Services from Beijing.

Causes of Downfall[edit]

Wirecard engages in a series of accounting malpractices with the goal of artificially inflating its profit. Despite allegations lodged against the company, BaFin ultimately took little action against the company before its eventual collapse, while constantly joined in the company's attack against critics by painting them as colluding with shortsellers.[10]

Accounting Irregularities[edit]

Wirecard's operation of both banking (through its subsidiary Wirecard Bank) and non-banking operations (mainly payment processing) makes for opaque reporting since its results are harder to compare with peers. This has allowed for greater reliance on its adjusted version of its financial statements when investors evaluate their confidence of the company.[6] The “adjusted” metrics, unlike reporting adhering to International Financial Reporting Standards, can result in inflated earnings and cash flow figures.[11]

Redflags were raised as early as 2008, when the head of a German shareholder association attacked Wirecard's balance sheet irregularities. After EY conducted a special audit in response to the criticisms, it took over as the main auditor for Wirecard and would remain so for the rest of the company's history. As a response, German authorities prosecuted two persons due to insufficient disclosure of holding Wirecard's stock.[6]

In 2015, the Financial Times reported what it saw as a significant gap between the short-term assets and liabilities in Wirecard's payment business. This is a result of Wirecard's taking only a small commission from its payment processing volume, and the transient payment flow through Wirecard's accounts were adjusted to reflect Wirecard’s small cut.[12] A a response, Wirecard retained services of Schillings, a UK law firm, and FTI Consulting, a public relations agency in London.[6] Later in 2015, J Capital Research published a report recommending shorting Wirecard's stock as it sees the company's Asian operations to be much smaller than claimed.[13] In 2016, a critical report published by a previously unknown entity named "Zatarra" leads to share price crashes, prompting BaFin to launch an investigation on market manipulation.[10][14]

Opaque Acquisitions and Corporate Structure[edit]

Critics point to Wirecard's global acquisitions to mask trouble with organic growth by adding revenues from external sources, a tactic referred to as a rollup. Early criticisms were directed towards Wirecard's purchase of smaller businesses at significantly above market value. In 2015, Wirecard purchased an Indian payments group at €340m, despite the founders of those businesses failing to raise funding while valuing their key asset at €46m.[15] Wirecard responded to the reports by claiming its payment technologies are superior and arguing the current rapid growth of the cashless fintech industry justifies such valuations.[16] A series of deals involving Wirecard's “buy and build” strategy, which intends to buy customers for the company's payment services, has been criticized as structured in an unusual manner, resulting in difficulty in verifying €670m of intangible assets.[17]

In 2018, Southern Investigative Reporting Foundation (now the Foundation for Financial Journalism) concluded after a seven-month investigation that according to documents filed, at least €175m from Wirecard’s €340m purchase of an India-based payment processor in October 2015 were not transferred to the seller.[11]

Artificial Inflation of Profit[edit]

In January 2019, Financial Times reported on irregularities uncovered by Wirecard's Singapore investigation, which began in March 2018 internally but whistleblower feared was been squashed. Edo Kurniawan, head of accounting for Wirecard's Asian-Pacific operations, was accused of creating forged and backdated contracts in order to artificially inflate profit, creating questions as to the reliability of Wirecard's balance sheets.[18] At one instance, €37m was moved between Wirecard subsidiaries and external businesses, in a practice known as "round-tripping." A preliminary report commissioned by Rajah & Tann and seen by the FT points to several years of book-padding across Wirecard’s Asian operations, with some degree of knowledge at Wirecard's Munich operation teams.[19]

Despite the report, no actions were taken against key personnels named in the report. Singaporean authorities raided Wirecard as part of an ongoing investigation in February 2019.[20] BaFin banned short-selling for two months citing falling investor confidence.

Third-Party Acquirers[edit]

Third-party acquirers are local companies who process transactions on behalf on Wirecard for clients, with which Wirecard then pays a commission from processing fees. According to Wirecard, they are used in transactions where Wirecard does not hold the necessary license, or when the nature of the transaction is unsuitable for direct processing on the part of Wirecard. According to internal whistleblowers, as of 2018 transactions originating from third-party acquirers account for half of global transaction volumes reported by Wirecard.[21] Due to Wirecard's singular approach to counting its cash reserves, the cash held in trustee accounts of its third-party acquirers are counted in the balance sheets[22]. In 2019, it was reported that half of Wirecard's worldwide revenue and almost the entire profit are processed through three opaque third-party processors.[23] Auditing on the reported financials of third-party processors were not carried out to a sufficient degree to ensure compliance.

Wirecard announced lawsuits against the Singaporean authorities and the Financial Times in response to the allegations.[24][25]

Aggressive Attack on Critics[edit]

Wirecard has a pattern of unusually aggressive tactics towards those who raise questions about the companies business operations or accounting. In 2019, the company hired former head of Libyan foreign intelligence Rami El Obeidi to conduct sting operations against journalists and public shortsellers.[26] Mr. El Obeidi presented evidence as proof that the Financial Times colluded with shortsellers,[27] which the newspaper rejected after an investigation by an external law firm.[28]

Auditing and Regulatory Failure[edit]

BaFin conducted multiple investigations against journalists, shortsellers and market manipulation in response to negative media reporting. BaFin lacks the authority to investigate Wirecard's core business or its accounting practices, and in fact only has authority over Wirecard's bank business subsidiary.[29][30]

As revealed by KPMG's special audit, Wirecard's long time auditor EY failed to verify existence of cash reserves in what appeared to be fraudulent bank statements.[26] The special audit also revealed inability to verify the majority of Wirecard profits from 2016 to 2018.[26] During the special audit, Wirecard made misleading statements to investors, resulting in a criminal investigation after a complaint was referred to prosecutors by BaFin.[6]

Aftermath[edit]

Investors[edit]

With respect to criticisms against Wirecard, a set of smaller investors has long been supportive of the company by joining in both the company's and regulator's accusations against short-sellers and market manipulation. Critics cite the German regulator, press and investor community's tendency to rally around Wirecard against what they perceive as unfair attack.[31][32] Softbank invested with a €900m cash injection in 2019.[33] After the company's failure was made public, Softbank's executives blames what they see as failures on the auditor's part[34], and announced plans to sue EY for damages,[35] joining other efforts to launch legal actions against the auditor.[36][37]

Regulators[edit]

After initially defending BaFin's actions, its president Felix Hufeld later admitted the Wirecard Scandal is a "complete disaster."[38] In response, the European Commission calls for an investigation on whether BaFin broke EU rules on financial reporting.[26] Berlin announced strengthening of regulations on accounting,[26] beginning by severing ties with, the Financial Reporting Enforcement Panel (FREP), the quasi-official account watchdog and transferring the duties to BaFin.[39][40] Investors joined calls for union-wide regulation on market rules[41] and for a EU body in charge of regulatory actions.[42]

See Also[edit]

References[edit]

  1. ^ "Board member overseeing Wirecard audit elected chairman". 11 January 2020 – via www.reuters.com.
  2. ^ "Interim Report" (PDF). Wirecard. 15 August 2018. Retrieved 7 October 2018.
  3. ^ "Wirecard: Scandal-hit firm files for insolvency". BBC News. 25 June 2020. Retrieved 25 June 2020.
  4. ^ "Germany's beleaguered Wirecard to proceed with business after insolvency". Reuters. 2020-06-28. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  5. ^ "Wirecard: Ominöse 250-Millionen-Euro-Forderung in der Bilanz". manager magazin. Retrieved 2020-06-28.
  6. ^ a b c d e f McCrum, Dan (2020-06-25). "Wirecard: the timeline". Financial Times. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  7. ^ Vogel, Hannes (18 February 2019). "Warum fährt die Wirecard-Aktie Achterbahn?". ntv. Retrieved 16 December 2019.
  8. ^ Dörner, Astrid; Kokologiannis, Georgios; Kröner, Andreas (5 September 2018). "Commerzbank fliegt aus dem Dax, Wirecard steigt auf". Handelsblatt. Retrieved 16 December 2019.
  9. ^ Schnell, Christian (14 May 2019). "Ein Schritt hin zur Normalität: Wirecard zeigt technische Neuerungen" [A step towards normality: Wirecard shows technical innovations]. Handelsblatt (in German). Verlagsgruppe Handelsblatt. Retrieved 16 December 2019.
  10. ^ a b Schuetze, Arno (2019-02-18). "Germany bans Wirecard 'shorting' as prosecutors probe FT journalist". Reuters. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  11. ^ a b Boyd, Roddy (2018-01-23). "Wirecard AG: The Great Indian Shareholder Robbery". The Foundation for Financial Journalism. Retrieved 2020-06-29.
  12. ^ McCrum, Dan (27 Apr 2015). "House of Wirecard". FT Alphaville. Retrieved 2020-06-29.{{cite web}}: CS1 maint: url-status (link)
  13. ^ McCrum, Dan (2015-11-20). "JCap on Wirecard: a search for the Asian business". FT Alphaville. Retrieved 2020-06-29.{{cite web}}: CS1 maint: url-status (link)
  14. ^ Auchard, Eric (2016-03-15). "Head of Germany's Wirecard rejects fraud allegations by short-seller". Reuters. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  15. ^ McCrum, Dan (25 Jan 2018). "Revisiting Wirecard's big Indian deal". FT Alphaville. Retrieved 2020-06-29.{{cite web}}: CS1 maint: url-status (link)
  16. ^ Storbeck, Olaf (3 Oct 2018). "Wirecard's meteoric rise prompts questions". Financial Times. Retrieved 29 Jun 2020.{{cite news}}: CS1 maint: url-status (link)
  17. ^ McCrum, Dan (2015-05-05). "The strange case of Ashazi: Wirecard in Bahrain, via Singapore". FT Alphaville. Retrieved 2020-06-29.{{cite web}}: CS1 maint: url-status (link)
  18. ^ McCrum, Dan (2019-01-30). "Executive at Wirecard suspected of using forged contracts". Financial Times.{{cite news}}: CS1 maint: url-status (link)
  19. ^ McCrum, Dan (2019-02-07). "Wirecard: inside an accounting scandal". Financial Times. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  20. ^ Ng, Jun Sen (2019-02-08). "Police raid Wirecard entities in Singapore after reports of fraud allegations at payments giant". Strait Times. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  21. ^ McCrum, Dan (2020-03-29). "Wirecard's problem partners". Financial Times. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  22. ^ McCrum, Dan (2019-12-09). "Wirecard's singular approach to counting cash". Financial Times. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  23. ^ McCrum, Dan (2019-04-25). "Wirecard relied on three opaque partners for almost all its profit". Financial Times. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  24. ^ Schulze, Elizabeth (2019-02-08). "Wirecard sues the FT for 'unethical reporting,' but shares sink after Singapore raid". CNBC. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  25. ^ Palma, Stefania (2019-03-13). "Wirecard 'loses contact' with executive at heart of accounting scandal". Financial Times. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  26. ^ a b c d e Storbeck, Olaf (2020-06-28). "Germany to overhaul accounting regulation after Wirecard collapse". Financial Times. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  27. ^ Iwersen, Sönke (2019-07-21). "Wirecard erhebt schwere Anschuldigungen gegen die „Financial Times"". Handelsblatt. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  28. ^ Steinberg, Julie (2019-07-23). "Financial Times Hires Law Firm to Conduct Review of Wirecard Reporting". The Wall Street Journal. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  29. ^ "How Wirecard fooled most of the people all of the time". The Economist. 2020-06-25. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  30. ^ Nicola, Stefan (2020-06-24). "How German Fintech Darling Wirecard Fell From Grace". The Washington Post. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  31. ^ Boland, Vincent (2020-06-28). "Lessons for corporate Germany in the rise and fall of Wirecard". Business Post. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  32. ^ Aygen (2020-06-27). "Wirecard collapse reveals cracks at the heart of Germany, Inc". Swords Today. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  33. ^ Davies, Paul (2020-11-14). "SoftBank's $1 Billion Investment in Wirecard Came With a Twist—No SoftBank Cash". The Wall Street Journal. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  34. ^ "Critics' ire turns on auditor EY after Wirecard collapse". AFP News. 2020-06-28. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  35. ^ "SoftBank plans to sue EY over Wirecard scandal - Der Spiegel". Reuters. 2020-06-26. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  36. ^ "Wirecard's creditors set for battle over missing billions". Strait Times. 2020-06-29. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  37. ^ Kinder, Tabby (2020-06-29). "EY prepares for backlash over Wirecard scandal". Financial Times. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  38. ^ Comfort, Nicholas (2020-06-22). "Wirecard Scandal a 'Complete Disaster,' Says Germany's Bafin". Bloomberg. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  39. ^ "Germany to sever ties with accounting watchdog after Wirecard scandal". Channel NewsAsia. 2020-06-28. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  40. ^ Storbeck, Olaf (2020-06-28). "Germany to overhaul accounting regulation after Wirecard collapse". Financial Times. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  41. ^ Angeloni, Ignazio (2020-06-29). "Wirecard scandal raises need for common EU market rules". OMFIF. Retrieved 2020-06-30.{{cite news}}: CS1 maint: url-status (link)
  42. ^ "Wirecard proves Europe needs a single financial markets supervisor". FT Alphaville. 2020-06-27. Retrieved 2020-06-30.{{cite web}}: CS1 maint: url-status (link)
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