During the lockdown caused by the global Coronavirus pandemic, a scandal has broken out and rocked the finance world. The international payments firm knows as Wirecard has been wrapped in a heavy debt scandal revolving around a missing sum of €1.7bn, an arrest, and auditor EY. Keep on reading, and I’ll walk you through the Wirecard scandal, including what happened, who is involved, and what may happen next.
Before we even get into the scandal, let’s have a quick look at what Wirecard is. Wirecard is an extremely popular and widely used payment processor and financial services provider based in Germany. The service offers customers electronic payment services and risk management and is fully licensed by the German Bank. Wirecard also issues and processes physical bank cards. They have branches in multiple parts of the world, including a subsidiary in Newcastle upon Tyne and a North American branch after it acquired Citi Prepaid Card Services; New Zealand, Australia, South Africa, Turkey, and Brazil are all under their reach. SoftBank invested in the company in 2019, so it is also represented in Beijing.
Today’s scandal was unfolded to the public in 2020, but rumors exist about wrongdoings dating back to 2008. Rumors of suggestions of balance sheet irregularities and a dossier of money laundering allegations have been swirling around since then. People who criticized the company have found themselves, victims of hacking campaigns, though the perpetrator of these was never found. Wirecard’s legal staff in its Singapore HQ began an investigation into three finance team members in 2018. The investigation was sparked after a whistleblower alerted them to a plan to send money to India via third parties fraudulently. In the end, nothing came of the investigation, but it helped to alert the Financial Times to the investigation and subsequent inaction. Wirecard denied all claims, and its German regulator, BaFin, investigated the Financial Times over market manipulation. Things got heated in 2019 when the Singapore police raided the Wirecard offices BaGin once again, hit them with a two-month ban on short selling. Later in 2019, Wirecard received a cash injection of €900m from SoftBank and approval of the 2018 accounts from auditor EY.
The company had eyes looming over them as the Financial Times watched Wirecard closely throughout these events. Towards the end of the year, The Financial Times published documents indicating that profits at units in Dublin and Dubai were fraudulently inflated. The company firmly denied this upfront but still appointed KPMG to carry out a special audit. The KPMG audit was supposed to come to an end in March 2020, but the publication of the report from KPMG and full-year results by EY are postponed. The report was finally published in April; however, KPMG said they could not verify that arrangements responsible for the ‘lion’s share of profits reported from 2016 to 2018 were genuine. They even had queries about the €1bn of cash balances supposedly held in two banks in the Philippines. They couldn’t do anything substantial as the only proof of this was documents provided by a trustee that cut ties with Wirecard around the time the special audit began. Despite all the craziness, investors were told that EY is happy to sign off the 2019 audit. Official publications of the audit are delayed due to the Coronavirus pandemic.
Just as the pandemic was eased away and the world started to come out of lockdown, Munich prosecutors launched an investigation into the chief executive Markus Braun and three other executive board members. Then on June 16th, Philippine banks BPI and BDO inform EY that the documents detailing the €1.9bn in balances are “spurious”. Two days later, instead of publishing their audit results for 2019, they announce that they are missing €1.6bn. That was when the world put the spotlight on Wirecard.
The announcement of the missing €1.6bn spurred a lot of other parties to take action. The Philippines central bank confirmed the money never entered the country’s financial system, and the chief executive of Wirecard was soon arrested. EY didn’t agree to sign off on the firm’s 2019 accounts, and Wirecard has since withdrawn its financial results for 2019 and the first quarter of 2020. This pretty much closed the curtain on the claims as Wirecard announced it was to file for insolvency on June 25th. Multiple parties, including The German government, are planning on terminating their contract with the accounting watchdog over the scandal; The FCA in the UK has also frozen the UK subsidiary of Wirecard, meaning that many cannot access their money.
EY played their cards right because they knew that being embroiled in such a scandal is the last thing the accounting industry wanted or needed. Ever since the scandal came to light, it’s been reported that EY failed to request crucial account information from Singapore’s OCC Bank to confirm it held €1bn in cash on behalf of Wirecard. This is a basic audit procedure that could have uncovered the fraud much earlier. Wirecard’s new chief executive has also noted that basic checks should have been enough to uncover the scandal. The EY had already made their decision and spoken out about the scandal. The claimed responsibility for uncovering the fraud in a memo to senior partners. They did this even though they signed off on the accounts for more than a decade. Questions regarding Wirecard’s accounting practices were increasingly questioned by journalists and investors.
VEB, the European Investors, have adamantly called for a “thorough investigation” of EY’s work to be led by the German financial watchdog. As you would expect, the scandal has caused quite an uproar within the company, especially with the people working in the non-audit teams. The company’s name has been tarnished either way, and there is concern about future client relationships and the brands’ reputation. Wirecard has reportedly told its partners to brace for any backlash. People have made their thoughts known, saying that Wirecard set out to “deceive investors and EY” as part of the fraud. Partners have allegedly been provided “summary talking points” about the fraud.