Wirecard Case – The Impact of Unethical Behaviors and Poor Governance
By André H. Paris, Brazil
Partner – Oliveira Cardoso, Carvalho de Brito, Libardi Comarela, Zavarize & Antunes Coelho law firm, Compliance Consultant & Lawyer
Recently, the digital payments company Wirecard, which is being called as the “Enron of Germany”, had its former CEO arrested after an accounting fraud of over $2 billion was brought to light in the German company.
After the scandal was made known to the public the company’s shares sharply fell, having already lost around 90% of their value just days after the fraud was uncovered. All these factors made Wirecard file for insolvency.
The German organization former CEO (which investigators believe may have acted in cooperation with other members of Wirecard) is presumed to have artificially inflated the company’s balance sheet and sales by creating transactions that never existed. After been released on bail he suggested that the German company may be a victim of fraud.
As Enron (the former American energy giant infamous for its accounting frauds and for leaving thousands of shareholders without their investments after it filed for bankruptcy in 2001) once did, Wirecard may have included in its financial results profits forecasts that were never obtained.
It all came to public knowledge when an EY auditor refused to endorse the German company’s financial statements after he could not identify where over two billion dollars were in trust accounts.
The question that remains is how the relevant regulatory authorities and its external auditors did not formerly detect a lapse so substantial in Wirecard’ s balance sheet.
Despite the massive harmful impact, the company has beard in its market value, Wirecard, now a former Germany’s top 30 companies, still has almost six thousand employees in more than 25 countries around the globe. All these jobs are endangered due to reckless actions of top management and inadequate oversight (or even complicity) by the German company board’s members.
“The recent doubts about the company’s financial health started in 2015 and started to escalate in the past year (2019), when the Financial Times published two stories, one in the first quarter 2019 and one article in its last quarter.”
The First Story reported that:
The German company’s Asian subsidiaries were forging business transactions and creating insubstantial backdated contracts. The reporters were even able to find in the address one of wire card’s allegedly “payments processing” partners a retired seaman and his family (far from an international payment business).
The Second Story brought to light:
Some questions related to the financial statements being issued by the German company’s units in Dublin and in Dubai. Suspicions were raised that the profits documented were not consistent with reality and signs that they were overrated were found.
After the financial scandal burst, Wirecard tried to take some action to reduce its harmful consequences they appointed new CEO with professional experience in fighting financial misconducts who has worked for the US Department of the Treasury and hiring an investment bank to try to improve its financial strategy.
But unfortunately for the German company, its employees, stockholders, and other stakeholders, it was not enough, and the company filed for bankruptcy (reportedly owing creditors nearly four billion dollars).
Lessons can be learned from this event
There was an evident oversight failure from the supervisory board’s members. It is not only a best practice but rather their duty to monitor the management’s business decisions, including (and may specially) the financial ones.
It is unthinkable that such a massive inconsistency between the German company’s accounting records and its financial reality lasted so long, and after so many warning from the specialized press (as seen in the Financial Times’ articles), without being properly scrutinize by Wirecard’ s supervisory board.
Nonetheless, there was also a clear internal control’s issue. Such colossal discrepancy in the German company’s financial sheet should have been reported by its own accountants to the compliance function or should have been uncovered in the audits conducted by the company’s own employees.
Nevertheless, if the accounting fraud was indeed reported to the compliance function, top management, or the board (as it seems), then Wirecard and the members involved will face bigger problems, criminal ones.
If a misconduct is reported it must be duly investigated. If the wrongdoing is found to be true, the organization must promptly take the appropriate actions to cease and respond to the unethical conduct reported (that includes communicating the relevant authorities, even if it may result in financial losses for the company and in a drop of its market value).
Externally wire card’s scope of responsibility, the EY auditors also failed severely by not being able to expose the accounting fraud in progress over all the years it performed external auditing procedures in the company. Equally, BaFin, the German watchdog, did not gave the properly attention to reports that were received by it and, likewise, it failed to act (when it could have prevented larger losses for Wirecard’ s investors) after substantial suspicions on the German company’s financial records were raised.
After these event German governance professionals are defending further regulations related to the company board’s role, internal controls, and whistleblowers incentives.
Which do you think were the greatest flaws in the case examined?
What internal control might have been able to prevent the unethical behaviors seen in the Wirecard case?
Please, share your thoughts with us in the comments section.
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