hile the world has been gripped, quite rightly, by the global Coronavirus pandemic, a scandal has unfolded that has rocked the finance world.
The payments firm Wirecard has been embroiled in a scandal that involves a missing €1.7bn, an arrest and auditor EY.
In this article, we explain the Wirecard scandal including what happened, who is involved and what may happen next.
What is Wirecard?
Firstly, what is Wirecard?
Wirecard are a payment processor and financial services provider based in Germany. It is a fully licenced German Bank and offers customers electronic payment services and risk management. It also issues and processes physical bank cards.
Wirecard has a subsidiary in Newcastle upon Tyne as well as a North American branch after it acquired Citi Prepaid Card Services. It is also active in New Zealand, Australia, South Africa, Turkey and Brazil.
In 2019, SoftBank invested in Wirecard, and it is also represented in Beijing.
How did the Wirecard scandal unfold?
The scandal as we know it was uncovered this year, however, there have been whisperings of wrongdoing dating back to 2008.
These whisperings include suggestions of balance sheet irregularities and a dossier of money laundering allegations. Those that criticised Wirecard were victims of hacking campaigns, though the perpetrator of these was never found.
In 2018 the legal staff at Wirecard’s Singapore headquarters began an investigation into three members of the finance team. This came after a whistleblower alerted them to a plan to fraudulently send money to India via third parties. While nothing came of this investigation, the Financial Times were alerted to the investigation and subsequent inaction. Wirecard dismissed the claim and BaFin, the German regulator, actually investigated the Financial Times over market manipulation.
However, in 2019 the Singapore police raided the Wirecard offices. BaFin, the financial regulator in Germany, hit them with a two-month ban on short selling. The same year, they receive a cash injection of €900m from SoftBank, as well as an approval of the 2018 accounts from auditor EY.
The Financial Times
Throughout this, the Financial Times have been watching Wirecard closely. And in late 2019 they published documents indicating that profits at units in Dublin and Dubai were fraudulently inflated. Despite denying this, Wirecard appoint KPMG to carry out a special audit.
The audit was supposed to end in March 2020, but publication of the report from KPMG and full-year results by EY are postponed. When the report was finally published in April, KPMG said they cannot verify that arrangements responsible for the ‘lion’s share’ of profits reported from 2016 to 2018 were genuine. They also queried the €1bn of cash balances that are supposedly held in two banks in the Philippines. However, the only proof of this was documents provided by a trustee that cut ties with Wirecard around the time the special audit began. Despite this, investors are told that EY are happy to sign off the 2019 audit. Publication of this is delayed due to the Coronavirus pandemic.
While the world was starting to come out of lockdown, Munich prosecutors launched an investigation into the chief executive Markus Braun and three other executive board members. A few weeks later, on June 16th, Philippine banks BPI and BDO inform EY that the documents detailing the €1.9bn in balances are “spurious”. And on June 18th, instead of publishing their audit results for 2019 they announce that they are missing €1.6bn.
And that’s when people really started to take notice.
What has happened since June 18th?
Since the announcement of the missing €1.6bn, the Philippines central bank confirmed the money never entered the country’s financial system and the chief executive has since been arrested. EY refused to sign off on the firm’s 2019 accounts and Wirecard have since withdrawn its financial results for 2019 and the first quarter of 2020.
When did Wirecard file for insolvency?
Wirecard announced it was to file for insolvency on June 25th. The German government is planning on terminating its 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.
What part did EY play in the Wirecard scandal?
Being embroiled in such a scandal is the last thing the accounting industry wanted or needed.
Since the scandal unfolded, it’s been reported that EY failed to request crucial account information from Singapore’s OCC Bank to confirm it held the €1bn in cash on behalf of Wirecard. This is a routine audit procedure, and could have uncovered the fraud much earlier. The new chief executive of Wirecard has also noted that basic checks should have been enough to uncover the scandal.
However, EY have since spoken out about the scandal. In a memo to senior partners they claimed responsibility for uncovering the fraud. This is despite the fact that they signed off on the accounts for more than a decade and questions regarding Wirecard’s accounting practices were increasingly questioned by journalists and investors.
European Investors VEB have called for a “thorough investigation” of EY’s work to be led by the German financial watchdog.
The scandal has caused quite a stir within the company. In particular with those working in the non-audit teams. There is concern about future client relationships and the brands reputation. The firm have reportedly told partners how to prepare for any backlash. They have also emphasised the fact 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.
What happens next?
The fraud has only been uncovered in the past ten days or so, which means this story is developing every day. There is no saying what is going to happen next. Despite filing for insolvency Wirecard are intending to continue operating. Naturally there will be questions asked about how they managed to fraud investors, and EY, for so long, and this may further damage trust in auditors.