How do you solve a problem like Wirecard?
It’s been a wild ride for Wirecard. When the German payments firm premiered on the prestigious blue-chip Dax index just two years ago, shares were priced at €200 apiece. Today, prices hit as low as €20 per share, forcing out chief executive Markus Braun and leaving the future of the digital payments firm in question.
In its relatively short history, Wirecard has received a lot of investor hype. Its €24bn (£21.7bn) valuation in 2018 booted 150-year-old Commerzbank off its long-held position on the main German index, and swiftly earned Wirecard its reputation as Germany’s fintech darling.
But in the shadows of its stock market success, the digital payments firm has long been riddled with accusations of financial inaccuracy. For more than a decade, Wirecard remained a favourite of short sellers who affirmed its bloated valuation.
Yesterday’s discovery of a €1.9bn accounting black hole proved short sellers’ inklings, sending shares into a tailspin that marked the worst ever single-day crash on Germany’s main stock market index.
The Hamburg-based newspaper Der Spiegel today called Wirecard a “disgrace for Germany”, and lamented the opportunity the fintech once seemed to present for the auto-heavy nation.
So how did Wirecard, once hailed as Germany’s technological prodigy, fall victim to an accounting blunder?
What went wrong?
Founded in 1999 in the Bavarian town of Aschheim, Wirecard was one of Germany’s first digital payments firms. In 2002, a then-33 year Braun joined as chief technology officer, and oversaw its aggressive expansion across the globe.
The former KPMG consultant set out with a noble premise — to “make payments invisible” — and rapidly established Wirecard’s presence in the Asia Pacific market.
The cogs seemed well-oiled. In 2008, Wirecard introduced virtual credit cards for online payments, and swiftly set up a fraud prevention suite to safeguard transactions. Over the next six years, the company rapidly expanded further afield, starting operations in the US, New Zealand, Australia, South Africa and Turkey.
But alarm bells quietly rang behind the scenes, as reports of accounting inaccuracies threw suspicion on its steep valuation. Concerns reached boiling point in January last year, when the Financial Times started to investigate allegations of forged financial accounts in the company’s Singapore office.
In October, the FT ran an article claiming that staff at Wirecard’s finance team had appeared to conspire to fraudulently inflate profits at the firm’s Dubai and Dublin subsidiaries, in a bid to dupe auditors at EY.
KPMG was hired to conduct an independent audit of Wirecard’s finances in response to the allegations. But six months later, the auditor said it had not been able to obtain enough information to fully address the accusations against Wirecard, sending shares down more than a quarter and reassuring short sellers’ suspicions that the firm was overhyped.
But the big blow for Wirecard came yesterday, when EY delayed the publication of its financial accounts for the fourth time this year, after it discovered that €1.9bn of cash that was meant to be on its balance sheet was “missing”.
Shares plunged 62 per cent, triggering a rout that slid a further 35.3 per cent to €25.82 today. In his final words before his departure, Braun was quick to blame the accounting hole outside the realms of the fintech, saying Wirecard had become “the aggrieved party in a case of fraud of considerable proportions.”
The firm is now in emergency talks with banks to secure a financial lifeline, with Wirecard set to lose €2bn worth in loans if it fails to locate the missing cash by the end of today.
Economists have warned that the debacle has caused serious damage to the Dax’s international reputation. “This will have significant consequences for the image of the German capital market,” said Caroline Rinker, a German economist specialising in accounting fraud.
But others seem optimistic that Wirecard will recover with fresh leadership. So what next for the fintech?
The business world has seen no shortage of accounting scandals in recent years. Auditing failures have plagued high-profile British businesses such as BHS, Carillion, Patisserie Valerie and Tesco to name a few.
For some, like Carillion, BHS and Patisserie Valerie, accounting blunders are considered irredeemable falls from grace, and mark the end of the horizon. But for others like Tesco, auditing failures form mere hiccups in a long stock market career.
The future of Wirecard has split experts. Barry Norris, founder of fund manager Argonaut Capital, said he believes the company could be “declared insolvent by the weekend.” Chris Hohn, meanwhile, the short seller at TCI Fund Management, has called for the German banking regulator to remove Wirecard’s license to operate as a payments processor. But others remain optimistic.
“What isn’t going to be totally clear in the case of Wirecard, is how much of its share price drop is going to be an element of correction against an overhyped valuation versus the fact that they don’t look like they’re in control of some of their trustee accounts,” says Simon Bittlestone, chief executive of financial analytics firm Metapraxis.
For Bittlestone, the problem is one of ill health in the accounting industry rather than problems within the firm itself — and it might not spell the end of the road for Wirecard.
“A company that still has several billion in the bank is still a big business — the moment people know that this missing cash isn’t going to cause them an existential crisis as an organisation, then that share price will bounce right back up.”
“The mistake was not having enough checks and balances,” Bittlestone adds. “But that can be remedied.”
How can other companies avoid the same mistake?
Regulators have long called for a shakeup to the auditing industry to end the dominance of the Big Four accounting firms — Deloitte, EY, KPMG and PwC — who come with hefty price tags despite their frequent mishaps.
The Financial Reporting Council last year found that more than a quarter of audits fell short of quality thresholds, and critics have warned that increasing accounting blunders seem to pose an industry problem.
“Wirecard’s share price plunge poses a really broad question around how in 2020 we can still have accounting failures that orientate around cash at the bank not being present. It is just madness,” says Bittlestone.
“I can only imagine what’s happened with Wirecard, and its happened in many many other instances, is that the auditor has accepted a printed report or just the confirmation from the trustee’s bank accounts that the cash is there.”
“The solution requires the model to change, and become more technology-based. Part of the problem is that the audit firms are still relying on people to do the audits. Until we see that we’ll still see fraud and accounting failures causing all sorts of challenges.”
Wirecard’s accounting failures have seen its share price plummet more than 80 per cent since Wednesday’s close, and waved goodbye to both its chief executive and chief technology officer. But its failures might not run to the core of its business.
With a new leadership book on the cards, and with several billion still in the bank, this might not spell end for Wirecard. But others should take note.
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