Wire Card’s missing 1.9 Billion Euros- the Accounting Scandal That Broke the Internet
For the last year, the Financial Times had been reporting that Wirecard, the German payment processing Fintech Company which was launched during the “dotcom” boom in 1999 helping websites and merchants collect credit card payments from their customers was faking some of its revenue. Wirecard fought back accusing the reporters for conspiring with short sellers to push down its stock price. About a month ago, Wirecard disclosed that some of its cash was missing and eventually admitted that there is a likelihood that the bank account with which the sum of 1.9 Billion Euros was in, does not exist.
How Did Wire Card get away with it for so long?
Wirecard went public in 2002 by taking over the listing of a defunct call center group and that avoided the evaluation and scrutiny that typically applies to an initial public offering (IPO). By 2006, they moved into banking making it possible for them to issue both credit cards and handle money on behalf of merchants and business owners which was unusual at the time- this made it rather difficult to compare the fintech with their peers and so auditors and stake holders were left with little or no choice but to adjust to the company’s unusual financial statements.
In the last decade, Wirecard began purchasing small payment companies across Asia in some oddly structured deals.
The Accounting Scandal that Broke the Internet
Finance experts are referring to this 15 yearlong accounting fraud as the biggest accounting scandal in post war German history and probably because it does have the ingredients that make up the most perfect scandals:
- A complex corporate structure and dubious accounting practices.
- A charismatic front man as their CEO.
- Consistent complaints about predatory short sellers.
The basis of the Wire Card fraud was tied to a small Dubai based third party acquirer, Al Allam Solutions. On paper, they were one of Wirecard’s most valuable assets processing billions worth of payments across Europe, the Middle East and the United States.
However, the Financial Times investigated and found an operation with no more than 6 or 7 full time employees, they then reached out to the biggest clients of Al Allam- 15 of which said they had never heard of Al Allam and 8 had shut down their operations since 2017. Also, neither Visa nor MasterCard had a relationship with Al Allam.
In essence, Wirecard had been inflating revenue by reporting false transactions which led to commissions that were reported and recognized but never actually existed, this was deposited into fake offshore bank accounts.
The attention brought on by the FT exposed Wirecard’s accounting inaccuracies but still the fintech consistently accused the FT of colluding with short sellers and surprisingly it worked, not long after this, Germany’s financial Regulatory Authority filed a complaint against FT and banned the short selling of Wirecard stock.
In March, 2020 Wirecard’s auditor, Ernst and Young (EY) was unable to conclude their audit and in April, the accounting firm could not verify the genuineness of Wirecard’s profits from 2016 to 2018. On June 18th, Wirecard announced that 1.9 Billion Euros was missing and the next day Marcus Brown the CEO resigned. June 22nd, Wirecard announced that said cash probably does not exist. Following this announcement, Marcus Brown was arrested and then Wirecard announced they will file of insolvency.
EY is also facing some backlash from the scandal because apparently, a simple routine audit procedure that required the auditor to request for the account information from a Singapore bank where Wirecard had up to 1BN Euros in cash would have uncovered this fraud sometime in the last three years and saved investors so much money.
Tech Companies have an Obligation to Do Better
Doing things in a new way has resulted in creativity being the order of the day which in turn is what makes technology the leading industry right now but with this ability comes great responsibility. Just because you can get away with fraud for a while does not make it okay to do it.
Situations of this magnitude and the unwanted scrutiny it brings to the companies offering tech solutions is the reason regulators among others are concerned that tech firms have way too much power.
Undoubtedly, technology is the future; hence, regulations, accounting processes and company structuring will adjust with the evolution but regardless, I strongly believe everyone in the technology space from the business decision makers to the developers have an obligation to work in an ethical manner- this unspoken moral conduct should be adhered to strictly even when it seems easy not to.