In the end, the collapse took only seven days. Wirecard admitted last week that approximately a quarter of its assets (€ 1.9 billion) in cash probably never existed. CEO Markus Braun resigned and was quickly arrested on suspicion of artificially inflating the company’s balance sheet and sales through false transactions. Wirecard filed for insolvency on Thursday.
Braun, who has been released on bail, has consistently denied the offenses, suggesting that Wirecard was the victim of a highly sophisticated fraud. But an image is being produced of a esteemed technology company that was encouraged by the authorities instead of examining them, and of a supervisory board that did not act as a review by a chief executive that many considered as a visionary. The accounting firm EY precipitated the fall of Wirecard by refusing to sign up for the final results of 2019, after more than a decade of auditing the company.
“You have a lot of evidence of sinners, of observers, of all kinds of culprits,” said Christian Strenger, academic director of the Center for Corporate Governance at HHL Leipzig Graduate School of Management.
Wirecard is the first member of the Frankfurt elite DAX stock index to file for insolvency. But its implosion follows a series of scandals over the past five years that have upset Germany’s government, regulators and business community, raising questions about the strength of corporate governance and financial regulation in the world’s fourth-largest economy.
The explosion at the Tönnies plant highlighted the poor working and living conditions faced by foreign workers in the industry and the German government responded by promising to ban the use of subcontractors and double fines for non-compliance the rules of the working day.
Companies operate in different industries, but with the exception of the Tönnies group, they are listed for sale and are headed by a board of directors with responsibility for day-to-day operations and overseen by a supervisory board that includes employee representatives. Critics say oversight breaks down when boards are too welcoming, which can happen when senior executives move into oversight positions. Investors complain that their interests are too often subjected to other considerations, such as politics or internal corporate dynamics.
Strenger said German corporate governance has improved significantly in recent decades, but that the shortcomings of executives and directors are still too common. He assured that relatively simple additional safeguards could be installed, such as changing stock market rules to prevent companies from delaying their financial results, as Wirecard had done.
The German government is paying close attention. Finance Minister Olaf Scholz called the Wirecard scandal “extremely worrying”, saying the country must act quickly to improve oversight. “There seem to be critical issues about the company’s oversight, especially when it comes to accounting and balance sheet control. It appears that auditors and supervisory bodies have not been effective here,” Scholz said in a statement.
The German Federal Financial Supervisory Authority, or BaFin, is actively investigating whether Wirecard breached the rules against market manipulation. But the regulator is now under heavy scrutiny, and critics argued that it should have done a better job overseeing Wirecard’s banking unit, even if it had no direct supervision from the larger company.
Observers also want to know why BaFin issued a temporary ban in 2019 that prevented investors from lending Wirecard shares to sell them in anticipation of falling prices and why it filed a criminal complaint against reporters in the Financial Times, which publish a series of articles that expose accounting and management irregularities to the company. BaFin chief Felix Hufeld described the scandal earlier this week as a “total disaster”.
The European Commission has asked its top market supervisor to conduct a preliminary investigation into BaFin. Valdis Dombrovskis, an EU official in charge of financial services policy, told the Financial Times that the bloc should be prepared to launch a formal probe if necessary.
“We need to clarify what went wrong,” he said.
EY, which is already facing a criminal complaint from the German shareholder association SdK, said on Friday that the collapse of Wirecard was the result of an “elaborate and sophisticated fraud, which involved various parts of everything the world in different institutions, with the deliberate aim of deception ”.
“Collusive frauds designed to deceive investors and the public often involve extreme efforts to create a false documentary trail,” the auditor added in a statement. “Professional standards recognize that even the most robust and extensive audit procedures may not uncover collusive fraud.”
– Chris Liakos, Eoin McSweeney and Stephanie Halasz contributed to the presentation of reports.