Context
Wirecard, a German payment services company, grew fast and in September 2018 joined the DAX, the main index of the German stock market. According to its filings, a significant part of its revenue came through partners in Asia.
Symptom
From 2019 the Financial Times published investigations into suspicious transactions in the company's Asian units. The company denied the allegations, and the German financial regulator BaFin temporarily banned short selling of its shares and filed a complaint against the journalists.
Cause
For years the money shown in the reports was not reconciled directly with the bank. According to published accounts, confirmations of the balances on trust accounts came through intermediaries rather than from the banks themselves. So the reported figures and the real money could diverge, and nobody saw it.
The fork
For investors, auditors and the regulator: trust the filings of a strong company, or check the one thing that matters, whether the money is in the accounts.
Decision
In spring 2020 a special audit by KPMG reported that it could not verify part of the revenue. In June 2020 the auditor EY refused to sign the 2019 accounts: it could not confirm €1.9 billion on trust accounts at Philippine banks.
Execution
The chief executive resigned, and the company admitted that the money most likely did not exist. On June 25, 2020 Wirecard filed for insolvency with debts to creditors of about €3.5 billion.
Outcome
Wirecard became the first DAX company to declare insolvency. The case is considered the largest financial fraud in the history of the Federal Republic of Germany and led to a reform of financial market supervision in Germany.
What it means for you
The size of a company does not make its numbers reliable. Every decision, from strategy to selling the business, rests on the books, which is why reliable records sit at the core of the EMET model.
- When did you last reconcile the balances in your reports directly with a bank statement?
- Which figures in your reports do you take on trust because a reliable person prepares them?
- Who can check your books independently of the person who keeps them?
We would start by reconciling cash, debts and inventory in the books with source documents and outside confirmations: bank statements, reconciliation statements, the actual stock in the warehouse.
Key dates
| Year | Event |
|---|---|
| 2018, September | Wirecard joins the DAX |
| 2019 | Financial Times investigations; BaFin bans short selling of the company's shares |
| 2020, April | KPMG special audit cannot verify part of the revenue |
| 2020, June | EY refuses to sign the accounts; €1.9 billion cannot be found |
| 2020, June 25 | Insolvency filing |
