What Is Wirecard?: How Did The Wirecard Scandal Unfold?

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hile the world has been gripped, quite rightly, by the global Coronavirus

pandemic, a scandal has unfolded that has rocked the finance world.

The payments firm Wirecard has been embroiled in a scandal that involves a
missing €1.7bn, an arrest and auditor EY.

In this article, we explain the Wirecard scandal including what happened, who
is involved and what may happen next.

What is Wirecard?
Firstly, what is Wirecard?

Wirecard are a payment processor and financial services provider based in


Germany. It is a fully licenced German Bank and offers customers electronic
payment services and risk management. It also issues and processes
physical bank cards.

Wirecard has a subsidiary in Newcastle upon Tyne as well as a North


American branch after it acquired Citi Prepaid Card Services. It is also active
in New Zealand, Australia, South Africa, Turkey and Brazil.

In 2019, SoftBank invested in Wirecard, and it is also represented in Beijing.

How did the Wirecard scandal unfold?


The scandal as we know it was uncovered this year, however, there have
been whisperings of wrongdoing dating back to 2008.

These whisperings include suggestions of balance sheet irregularities and a


dossier of money laundering allegations. Those that criticised Wirecard were
victims of hacking campaigns, though the perpetrator of these was never
found.

In 2018 the legal staff at Wirecard’s Singapore headquarters began an


investigation into three members of the finance team. This came after a
whistleblower alerted them to a plan to fraudulently send money to India via
third parties. While nothing came of this investigation, the Financial Times
were alerted to the investigation and subsequent inaction. Wirecard dismissed
the claim and BaFin, the German regulator, actually investigated the Financial
Times over market manipulation.

However, in 2019 the Singapore police raided the Wirecard offices. BaFin, the
financial regulator in Germany, hit them with a two-month ban on short selling.
The same year, they receive a cash injection of €900m from SoftBank, as well
as an approval of the 2018 accounts from auditor EY.
The Financial Times

Throughout this, the Financial Times have been watching Wirecard closely.
And in late 2019 they published documents indicating that profits at units in
Dublin and Dubai were fraudulently inflated. Despite denying this, Wirecard
appoint KPMG to carry out a special audit.

The audit was supposed to end in March 2020, but publication of the report
from KPMG and full-year results by EY are postponed. When the report was
finally published in April, KPMG said they cannot verify that arrangements
responsible for the ‘lion’s share’ of profits reported from 2016 to 2018 were
genuine. They also queried the €1bn of cash balances that are supposedly
held in two banks in the Philippines. However, the only proof of this was
documents provided by a trustee that cut ties with Wirecard around the time
the special audit began. Despite this, investors are told that EY are happy to
sign off the 2019 audit. Publication of this is delayed due to the Coronavirus
pandemic.

While the world was starting to come out of lockdown, Munich prosecutors
launched an investigation into the chief executive Markus Braun and three
other executive board members. A few weeks later, on June 16 th, Philippine
banks BPI and BDO inform EY that the documents detailing the €1.9bn in
balances are “spurious”. And on June 18th, instead of publishing their audit
results for 2019 they announce that they are missing €1.6bn.

And that’s when people really started to take notice.

What has happened since June 18th?


Since the announcement of the missing €1.6bn, the Philippines central bank
confirmed the money never entered the country’s financial system and the
chief executive has since been arrested. EY refused to sign off on the firm’s
2019 accounts and Wirecard have since withdrawn its financial results for
2019 and the first quarter of 2020.

When did Wirecard file for insolvency?


Wirecard announced it was to file for insolvency on June 25 th. The German
government is planning on terminating its contract with the accounting
watchdog over the scandal. The FCA in the UK has also frozen the UK
subsidiary of Wirecard, meaning that many cannot access their money.
What part did EY play in the Wirecard scandal?
Being embroiled in such a scandal is the last thing the accounting industry
wanted or needed.

Since the scandal unfolded, it’s been reported that EY failed to request crucial
account information from Singapore’s OCC Bank to confirm it held the €1bn in
cash on behalf of Wirecard. This is a routine audit procedure, and could have
uncovered the fraud much earlier. The new chief executive of Wirecard has
also noted that basic checks should have been enough to uncover the
scandal.

However, EY have since spoken out about the scandal. In a memo to senior
partners they claimed responsibility for uncovering the fraud. This is despite
the fact that they signed off on the accounts for more than a decade and
questions regarding Wirecard’s accounting practices were increasingly
questioned by journalists and investors.

European Investors VEB have called for a “thorough investigation” of EY’s


work to be led by the German financial watchdog.

The scandal has caused quite a stir within the company. In particular with
those working in the non-audit teams. There is concern about future client
relationships and the brands reputation. The firm have reportedly told
partners how to prepare for any backlash. They have also emphasised the
fact that Wirecard set out to “deceive investors and EY” as part of the fraud.
Partners have allegedly been provided “summary talking points” about the
fraud.

What happens next?


The fraud has only been uncovered in the past ten days or so, which means
this story is developing every day. There is no saying what is going to happen
next. Despite filing for insolvency Wirecard are intending to continue
operating. Naturally there will be questions asked about how they managed to
fraud investors, and EY, for so long, and this may further damage trust in
auditors.

Reference: https://www.accountancycareers.co.uk/2020/06/the-wirecard-scandal-explained/

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