On June 25, Wirecard collapsed leaving a debt of $4 billion from creditors after revealing a widening gap in their financial statements which their auditor EY said to be the aftermath of complex global fraud.
The payments firm filed for insolvency at the Munich court explaining that their $1.5 billion or 1.3 billion euros of loans due within the week were not assured.
The collapse of the payment giant came just seven days after EY, Wirecard’s auditor for over 10 years, rejected to sign off on the company’s 2019 accounts. This forced Markus Braun, Wirecard CEO, to admit that $2.1 billion of cash probably did not exist.
EY said that this was a sophisticated and elaborate fraud involving several parties across the world. While it was completing the 2019 audit, EY said that it was given false confirmations with regards to the escrow accounts and immediately reported them to the authorities.
Wirecard refused to comment after EY’s statement.
The fintech company is the first1st member of the prestigious DAX stock index in Germany declare bankruptcy, barely 2 years after winning the spot among the top 30 listed companies with a $28 billion market valuation in the country.
Chairman of corporate governance think-tank ArMID, Volker Potthoff, said that the Wirecard scandal damages the German corporates and should be a wake-up call for reform.
Meanwhile, creditors have little hope of even getting back the 3.5 billion euros of debt. Of that total, Wirecard has outstanding loans of 1.75 billion from 15 banks and distributed 500 million in bonds.
One banker said that the money is gone and that they may recoup a few euros in a few years’ time, however, the only thing they can do now is to write off the loan.
Once one of Europe’s biggest and hottest fintech companies, the Wirecard scandal dwarfs other German corporate fiascos. It has completely shaken the financial establishment of the country.
Olaf Scholz, the German Finance Minister, described the Wirecard collapse as a scandal, saying that it was time to review regulations. Scholz said that the country’s supervisory structures need to be rethought and asking his ministry to come up with innovative ideas.
He also said that if legal measures are needed, then the country needs to embrace and implement them. He added that scandals like the Wirecard are a wake-up call that the country needs more serious monitoring and oversight than what they have today.
Meanwhile, Wirecard shares that were suspended ahead of the earlier announcement that it will seek creditor protection, and then dropped 80 percent when trading resumed. The company lost 98 percent of its value since EY questioned their accounts.
EY which is one of the “Big Four” accountancy and consulting companies in the world also faces a wave of lawsuits and was compared with the disastrous oversight of the US energy company Enron by Arthur Andersen in 2002-2002.
Schirp & Partner, a German law firm said that the Wirecard is now sidelined, filing class actions against EY on behalf of the bondholders and shareholders. The law firm said that it’s frightening how long Wirecard was able to operate without any objections from the auditors.
The new management of Wirecard has been in crisis talks with its creditors, however, pulled out due to the impending over-indebtedness and insolvency.
The filing of insolvency didn’t include the company subsidiary, holding approximately 1.4 billion euros in deposits and is already handled and managed by BaFin.
A Complete Vindication
A second source close to the talks with creditors claimed that although the company may have had a strong core, it had faked 2/3 of its sales. Meaning, there’s no way that it could repay all its debt, aside from all the legal challenges that it will face.
The rise of Wirecard, founded in 1999 and based in Munich suburb was determined by allegations from speculators, reporters, and whistleblowers that its profits and revenues had been pumped up via fake transactions.
CEO Braun dodged the critics for years before finally calling outside auditor KPMG late last 2019 to run an independent investigation.
The auditor published its findings in April and was unable to verify the 1 billion euros in cash balances, questioning the acquisition accounting of Wirecard and said that it couldn’t trace hundreds of millions in merchant’s cash advances.
Fraser Perring who bet on the fall in the shares of Wirecard and co-authored the 2016 report of the alleged fraud said that the company’s collapse is a complete vindication for those who tried to expose the fraud.
Meanwhile, the Prosecutor’s office of Munich is currently investigating Braun on suspicion of misrepresenting the accounts of Wirecard and of market manipulation. They also said that they are now looking at all possible criminal offenses.
Braun was arrested on June 29 and paid 5 million euros for bail a day later. In addition, Jan Marsalek, former chief operating officer of Wirecard, is also under suspicion. He was believed to be in the Philippines.