FRANKFURT AM MAIN, Germany (3rd UPDATE) – In what could be one of the biggest financial frauds of recent years, German payments provider Wirecard on Monday, June 22, admitted 1.9 billion euros that auditors say are missing from its accounts likely “do not exist.”
The scandal has already claimed the scalp of founder and chief executive Markus Braun, and adds to a series of recent German upsets.
Over the past decade, business headlines have been dominated by repeated financial infractions at Deutsche Bank and the “dieselgate” emissions fraud that has cost Volkswagen more than 30 billion euros.
In Wirecard’s case, 1.9 billion euros ($2.1 billion) supposedly sitting in trust accounts in the Philippines made up a quarter of the company’s balance sheet.
But “on the basis of further examination…there is a prevailing likelihood that the bank trust account balances in the amount of 1.9 billion EUR do not exist,” Wirecard said on Monday.
The admission follows more than a year of reporting, especially by the Financial Times, on accounting irregularities in the company’s Asian division.
Now Wirecard is in crisis talks with creditors and is “examining a broad range of possible further measures to ensure continuation of its business operations,” including restructuring and selling off or simply halting some activities.
Interim CEO James Freis has tasked investment bank Houlihan Lokey with the tough negotiations.
But investors’ confidence appeared to be evaporating fast, as shares in Wirecard were trading below 16 euros early Monday afternoon – down from almost 100 last Wednesday, June 17.
The company also announced late Monday that it had dismissed chief operating officer Jan Marsalek, days after suspending the top executive.
The head of German financial markets watchdog BaFin, Felix Hufeld, said “we are in the most horrifying situation I’ve ever seen a DAX company have,” referring to the blue-chip stock index.
Meanwhile credit ratings agency Moody’s withdrew its B3 evaluation of Wirecard’s debt “predicated on insufficient independently verifiable financial information.”
The scandal marks a fall from grace for the Bavarian start-up, set up in 1999 and riding a global wave of electronic payments to become the darling of the fintech scene.
Now Wirecard’s name is more frequently heard in association with Enron.
The Texan energy company’s early-2000s collapse featuring accounting fraud, complicit auditors, and political connections shook the United States economy.
There could well be further revelations to come in the Wirecard scandal.
The missing cash was held to cover risks in trading supposedly carried out by third parties on Wirecard’s behalf.
But the board said in its statement that it is unclear “whether, in which manner and to what extent” so-called third-party acquiring business “has actually been conducted” in recent years.
On Sunday, June 21, the Philippine central bank had said that none of the missing funds had entered the Philippine financial system. The names of two of the country’s biggest banks – BDO and Bank of the Philippine Islands (BPI) – were used to try to mislead eventual investigators, it added.
Both BDO and BPI have said that Wirecard was neither a client nor a business partner, the central bank said, adding that it had warned Wirecard’s auditors Ernst & Young. (READ: Mark Tolentino, Wirecard trustee, denies irregularities)
Wirecard, which employs nearly 6,000 people, has for now withdrawn its preliminary results for 2019 and the 1st quarter of this year as well as financial targets for 2025.
Dogged by scandal
Wirecard execs initially pooh-poohed FT reporting about financial irregularities, and German financial markets watchdog BaFin said it was investigating the paper for potential ties to short-sellers betting against the shares.
But in the meantime, auditors KPMG were reviewing Wirecard’s accounts for 2016-2018.
BaFin ultimately filed charges with Munich prosecutors alleging “market manipulation” by the group’s 4-strong board, targeting their attempts to present intermediate steps of the audit in a favorable light.
The filings “could have given misleading signals for the company’s stock market price,” prosecutors said.
The hammer blow came when auditors Ernst & Young said on Thursday, June 18, that 1.9 billion euros were missing from Wirecard’s accounts, and Braun resigned the next day. – Rappler.com