German fintech star Wirecard said $2 billion went 'missing' from its bank accounts. Analysts and accounting professors explain how it could have happened.
Wirecard is a German digital payments business. It was, until recently, one of the country's most successful tech companies. This week Wirecard announced that $2 billion had gone "missing" from its balance sheet. The company's former CEO, Markus Braun, resigned and was arrested on suspicion of false accounting and market manipulation. Business Insider spoke to fintech analysts and academics who study accounting fraud to figure out how that $2 billion might have disappeared. One possibility is that Wirecard committed financial fraud and its auditor, EY, didn't thoroughly evaluate the company's financial statements, according to the analysts and academics. The German regulator BaFin has also come under fire for failing to detect evidence of financial fraud at Wirecard. Wirecard likely buckled under the pressure of the coronavirus recession, the experts we spoke with said, and it could no longer keep up the charade about the growth of its business. Visit Business Insider's homepage for more stories.
Wirecard AG was a German tech darling. In September 2018, the Munich-based digital payments company replaced Germany's second-largest lender, Commerzbank AG, on the Dax 30. That's the stock-market index for the 30 major German companies trading on the Frankfurt Stock Exchange, all of which are automatic investments for pension funds. Wirecard, which counts Apple Pay and Google Pay as clients, reported a net revenue of €2.1 billion that year. This week, Wirecard announced that it was "missing" €1.9 billion, or about $2.1 billion, in cash, later saying it likely never existed. EY, Wirecard's auditor, called it "an elaborate and sophisticated fraud." Former CEO Markus Braun resigned and was arrested on suspicion of false accounting and market manipulation. Authorities are searching for Wirecard's former chief operating officer, Jan Marsalek, who is also suspected of market manipulation. The company said it would file for insolvency. The downward spiral comes more than a decade after suspicions were first raised about Wirecard's financials, and five years after The Financial Times started reporting on red flags in the company's accounts. But how, precisely, does $2 billion go missing? We talked with fintech analysts and professors of accounting to find out what might have happened. Fabricating cash is much rarer than fudging revenues Wirecard appears to have counted cash held in escrow accounts on its financial statements, The Financial Times reported. Money in escrow is held and disbursed by a third party, which would theoretically explain why Wirecard didn't have immediate access to the cash. The Financial Times also reported that an internal whistleblower at Wirecard alleged that the company had used a strategy called round tripping. That involves repeatedly buying and selling shares of the same security in order to make it look like a lot of transactions are taking place. Enron, the disgraced Houston-based energy company that filed one of the largest corporate bankruptcies in American history after several executives were charged with conspiracy, insider trading, and securities fraud, was famously accused of round tripping. In Wirecard's case, reports indicate that the company appears to have funneled money through three third-party companies in the Philippines, Singapore, and Dubai. It's hard to fabricate transactions "inside your own major operations," said Ruben Davila, a forensic accountant and a professor of clinical accounting at the University of Southern California's Marshall Business School. That's because "there would be a record of them." Instead, Wirecard said the transactions had gone through offsite entities. "It makes it more plausible that you don't have the detail," Davila said. Now it appears, per further reporting, that transactions that supposedly took place between Wirecard and those third parties were falsified. When KPMG asked Wirecard to produce records of those transactions, Wirecard failed to come up with the original bank records for €1 billion of payments. Wirecard did not respond to a request for comment. It has previously denied any financial impropriety. EY, Wirecard's auditor, reportedly didn't request bank statements for three years The professional-services firm EY had been auditing Wirecard since 2008, when suspicions about Wirecard's financials were first raised. During that time, Wirecard received clean audits from EY. Then, in June 2020, Wirecard announced that it was postponing reports for 2019 and the first quarter of 2020. These reports had already been delayed three times, Markets Insider's Shalini Nagarajan reported. Wirecard said on June 18 that EY could not find "sufficient audit evidence" of $2 billion on Wirecard's balance sheet. EY has since faced criticism for failing to spot what it has called "an elaborate and sophisticated fraud." Bloomberg reported that EY was sued in Germany, in June. The lawsuit alleges that the firm didn't flag that Wirecard improperly booked $1.1 billion in assets in their 2018 accounts. On Friday, The Financial Times reported that for three years EY did not request statements from a Singapore bank where Wirecard claimed it had up to $1 billion in cash. EY instead relied on screenshots and documents from Wirecard and from a third-party trustee, according to The Financial Times. (Wirecard told auditors that in late 2019, it moved that money to banks in the Philippines.) At another company that EY audited, Chinese coffee chain Luckin Coffee, an internal investigation found that employees had fabricated part of its reported 2019 revenue. EY said it flagged this fraud when auditing Luckin Coffee's 2019 financials, The Wall Street Journal reported. Public accounting firms do make mistakes A recent report from the Public Company Accounting Oversight Board found that in 2018, 27.3% of EY's audits had "deficiencies," meaning the auditor didn't have sufficient evidence at the time to support its opinion on the company's financials. A deficiency doesn't necessarily mean the auditor's assessment of the company's financials was wrong. EY isn't alone: The PCAOB found that Deloitte's rate of deficiencies was 20% and KPMG's was 50% in 2018. (The "Big Four" public accounting firms are EY, Deloitte, KPMG, and PwC.) It's possible that EY did conduct a thorough audit of Wirecard's internal controls and found them sufficient, said Daniel Taylor, an associate professor of accounting at the Wharton School of the University of Pennsylvania. (Taylor has also not studied Wirecard specifically.) Taylor said even robust internal controls are designed to catch one or two people in an organization who are engaged in fraud. If, as Taylor said is likely, there were multiple people at Wirecard engaged in fraud, the company's internal controls may not have been able to pick up on that. Cash fraud is uncommon, Taylor said, "mainly because of the thought that it's relatively straightforward to audit cash holdings." Presumably, the cash is either in the bank or not. That's what makes Wirecard's fraud "unparalleled," he added. In an email to Business Insider, a spokesperson for EY Germany said, "Collusive frauds designed to deceive investors and the public often involve extensive efforts to create a false documentary trail. Professional standards recognize that even the most robust and extended audit procedures may not uncover a collusive fraud." The spokesperson added, "With knowledge that 2019 bank statements, confirmations and other routine documentation were falsified, we cannot rule out that prior years' documents and confirmations are suspect." Wirecard called on the professional-services firm KPMG to conduct a special investigation in late 2019. In its April 2020 report (the text is in German), KPMG said that it couldn't verify that the "lion's share" of Wirecard's profits between 2016 and 2018 were authentic, and that there were "obstacles" to the investigation. On Wirecard's website, the link to the report is posted along with the statement that KPMG had found no incriminating evidence for allegations of balance-sheet manipulation. German financial regulator BaFin has also received criticism for its oversight of Wirecard The German financial regulator BaFin has also come under fire for potentially failing to detect evidence of financial fraud at Wirecard. In 2016, short sellers using the pseudonym Zatarra published a report alleging that Wirecard had engaged in money laundering. BaFin responded by investigating Zatarra for alleged market manipulation. In 2019, when The Financial Times reported on Wirecard's legal staff at its Singapore headquarters who were investigating three members of the finance team, BaFin opened an investigation into The Financial Times over an allegation of market manipulation. It's possible that BaFin was concerned that short sellers were influencing the Financial Times. "Regulators have always been very skeptical of the incentives of short sellers," said Taylor, the Wharton professor, though he's not familiar with BaFin's approach specifically. On Monday, BaFin President Felix Hufeld said at a conference in Frankfurt, "I completely accept the criticism that all of us including BaFin have to review a couple of strategies and measures, which we have taken or have not taken, once we sort out the immediate crisis." Now, the European Union is investigating BaFin to determine whether BaFin responded appropriately to allegations of financial fraud at Wirecard, Reuters reported. In an email to Business Insider, a spokesperson for BaFin said it does not and did not supervise Wirecard AG. Instead it supervises Wirecard Bank AG, within the Wirecard group. Wirecard likely buckled under the financial pressure of the coronavirus recession The house of cards likely came down this week because Wirecard was facing increased pressure due to the global recession underway. "The company wasn't doing as well as it was projected to everybody and they did everything they could to hide that," said Sarah Kocianski, the head of research at the consultancy 11:FS. (Kocianski previously worked at Insider Inc.) But it could no longer maintain the charade. Once KPMG indicated that it couldn't verify the authenticity of the bulk of Wirecard's profits, "Wirecard has no option but to come clean," Kocianski said. Wirecard has seen roughly 99% of its market value erased in just the last six trading days as its stock has plummeted from 104 euros, or about $116, to less than 2 euros as of this writing.SEE ALSO: Here's how Wirecard went from analyst darling to a $2.2 billion accounting scandal - and cost SoftBank hundreds of millions in the process Join the conversation about this story » NOW WATCH: What makes 'Parasite' so shocking is the twist that happens in a 10-minute sequence
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The Philippines is investigating Wirecard and its missing $2 billion, and a local lawyer says he's being framed, say reports
The Philippines is investigating local businesses that partnered the collapsed German payments company Wirecard, the Financial...The Philippines is investigating local businesses that partnered the collapsed German payments company Wirecard, the Financial Times reported. Wirecard went into administration and its former CEO Markus Braun was arrested after the firm claimed that more than $2 billion had disappeared from its balance sheet. Its auditor EY said the firm committed elaborate fraud. Wirecard had claimed the money was stored in two Philippine banks, which they both denied. Now the authorities will probe around five local businesses thought to be involved with Wirecard. Separately, a Filipino lawyer who opened bank accounts for Wirecard in the Philippines claims he's being framed for fraud. Visit Business Insider's homepage for more stories. Philippine authorities will probe local businesses thought to have connections to disgraced German payments firm Wirecard, which collapsed after admitting to a 1.9 billion euro ($2 billion) hole in its balance sheet, the Financial Times reported. The investigation is the latest probe as authorities in Singapore, Germany, and Brussels attempt to unpick the firm's accounting irregularities. According to the newspaper, the Philippine National Bureau of Investigation and Anti-Money Laundering Council will examine five businesses thought to be involved. The FT named Centurion Online Payment International, PayEasy Solutions, and ConePay International, all of which the newspaper had earlier identified in a March 2019 investigation as partners of Wirecard. According to that investigation, Wirecard claimed hefty commissions from several of these businesses, which didn't appear to have the paperwork (or the physical offices) to back the financial claims up. Separately, a Filipino lawyer who opened up six bank accounts for Wirecard has claimed he is being framed for the company's missing billions. Wirecard initially claimed its missing money was held in two Philippine banks, although both denied it. Lawyer Mark Tolentino told Reuters that he was the "victim of a frame-up." Tolentino has not been charged with a crime, but Philippine authorities said they plan to question the lawyer as part of their investigation. Tolentino told Reuters he had opened accounts for a Singapore-based firm, but didn't know it was Wirecard. "It seemed that all fingers were pointing to me to be the thief and manipulator of the missing money," he said. "I want to clear my name." Reuters noted that the lawyer declined to show documents that would clear his name. Wirecard filed for insolvency on Thursday, shortly after the arrest of its former CEO Markus Brown in Germany on suspicion of market manipulation and false accounting practices. The company was once the rising star of Germany's financial tech sector. It earlier admitted than more than $2 billion had disappeared from its balance sheet, and then later said the money may never have existed. The company's auditor EY on Friday accused it of orchestrating "an elaborate and complex fraud."Join the conversation about this story » NOW WATCH: Tax Day is now July 15 — this is what it's like to do your own taxes for the very first time
Markus Braun built Wirecard to “conquer the world,” but those aspirations attracted skeptics. Its accounting scandal...Markus Braun built Wirecard to “conquer the world,” but those aspirations attracted skeptics. Its accounting scandal has sent shock waves through Germany.