In 2005, a little-known startup called Wirecard joined the Frankfurt stock exchange. The payments processing company soon became a unicorn, eventually surpassing Deutsche Bank, Germany’s biggest bank, in value and attracting notable investors such as Softbank.
Despite allegations of accounting irregularities over the years, Wirecard grew to become Europe’s largest financial technology company worth $28 billion at its peak. “The former CEO of has been arrested on suspicion of falsifying accounts. This after the German payments firm disclosed a $2.1 billion hole in its balance sheet”. Then in June 2020, it filed for insolvency, finding itself at the center of one of the biggest financial scandals in history.
In the autumn of 2018, Munich-based company was added to a stock index of the 30 leading German companies, also known as the Dax index, displacing the country’s second-largest bank in the process. It was a huge moment for the fintech industry to see a European company with the means to compete against the tech-titans of Silicon Valley.
It was in 2008 that the first allegation of accounting irregularities was lobbed at Wirecard. In the wake of the attack, company appointed EY, one of the world’s biggest accounting firms, to conduct a special audit. It soon became chief auditor and would sign off the company’s accounts for more than a decade. Following the first allegations, German authorities prosecuted two men who stood to benefit from Wirecard’s stock performance. As more allegations of financial misconduct surfaced over the next few years, a pattern began to emerge.
First, Wirecard would aggressively deny any accusations of malpractice. When the German regulators investigated, those officials sometimes focused their sights on the accusers instead of looking into the claims against company. As a result, some financial analysts and investors continued to heap glowing praise onto the tech darling. An independent research company said its Asia operations were far smaller than claimed. In an attempt to quell suspicions of financial impropriety, Wirecard orchestrated a tour of its Asia offices to impress the investment bank analysts.
Undeterred by the negative coverage, Wirecard’s share price doubled in 2017 after reporting significantly improved revenue streams. By the summer of 2018, share price hit a peak of €191, valuing the company at more than $28 billion. It claimed to have 5,000 employees and process payments for 250,000 merchants, and its clients included major European supermarket chains and airlines. Despite company’s meteoric rise, troubling reports that its books couldn’t be trusted continued to stalk it.
Protection by Regulators?
As allegations of accounting fraud mounted, why did BaFin, the German financial regulator, not investigate the claims against Wirecard? Many analysts believe that Wirecard was seen as a rare homegrown tech champion that needed to be protected and that any attack was an affront to Germany and its finance sector.
In February of 2019, BaFin even announced an unprecedented two-month ban on investors betting against Wirecard as its share price fell below €100, citing Wirecard’s “importance for the economy” and the “serious threat to market confidence”. Some also point to Germany’s corporate culture which tends to be wary of foreign speculators and the fact that many of these allegations were made outside Germany, like British newspaper the Financial Times, accusations which BaFin has denied.
Critics have argued that the country’s regulatory system is not equipped to deal with a payments company like Wirecard. Unlike regulators in other countries, BaFin doesn’t have the power to bring criminal charges or the oversight to investigate potential accounting malpractice. BaFin, along with the European and German central banks, also considered Wirecard a technology company even though it owned a bank.
Wirecard is a payment processor that facilitates debit and credit card transactions. Its payment systems collect money from the consumer’s bank that issues the card and then delivers that money to the merchant so that it arrives in their account. It makes money by taking a percentage of every transaction they process.
There are hundreds of payment processors doing the same thing, so how did Wirecard become so successful? Well, it marketed itself as the leader in payment processing systems and claimed it used a superior technology. As more of the world started to shift towards a cashless society, company seemed well-positioned to capitalize on this trend.
According to hedge funds and independent analysts such as J Capital Research and Zatarra Research, Wirecard bought shell companies that acted as third party payment processors, which could handle transactions in territories its licenses didn’t cover. In return for bringing them business, these companies paid commission into escrow accounts, which was claimed to total more than $2 billion. But in reality, these third-party businesses, which accounted for all of Wirecard’s operating profits, were allegedly much smaller, and in some cases, weren’t real.
Following more accusations of fraudulent practices, Wirecard hired KPMG to conduct a special audit. However, it couldn’t verify whether these escrow accounts were genuine. Then when EY went to complete its 2019 audit it found that the escrow accounts that held all of the company’s operating profits were fake, and the $2 billion didn’t exist.
One of Germany’s biggest accounting scandals has only created more questions than answers. Regulators are under the spotlight as investigators worldwide try to work out how the company was able to portray itself as a highly profitable business for so long. Wirecard’s auditor EY is also facing scrutiny for failing to check bank statements for three years. The fallout has also impacted Softbank, whose reputation as an astute tech investor has taken another hit following the failed IPO of WeWork.