Wirecard's collapse reveals cracks at the heart of Germany, Inc
Wirecard's former CEO arrested in Germany 02:27
London (CNN Business)It's been a spectacularly bad week for German business.
One of the country's biggest public companies was brought down by an accounting scandal, another was forced to pay out billions in damages, and poor working conditions at a leading family-owned meat packing firm were dragged into public view by a huge Covid-19 outbreak.
The collapse of digital payments wunderkind Wirecard into insolvency
is the biggest scandal of them all. It was triggered by a $2 billion
accounting fraud that financial watchdogs, the company's supervisory
board and its longtime auditor failed to detect.
Now the regulators and corporate bosses tasked with safeguarding Europe's biggest and most successful economy are coming under intense scrutiny.
Journalists,
whistleblowers and skeptical investors had all questioned Wirecard's
accounting for years, but executives were able to brush aside their
allegations. Wirecard (WCAGY)
received cover from the country's banking regulator, which pushed back
forcefully against critical hedge funds and investigative reporters, but
failed to spot anything amiss at the company.
In
the end, the collapse took only seven days. Wirecard admitted last week
that roughly a quarter of its assets — €1.9 billion ($2.1 billion) in
cash — probably never existed. CEO Markus Braun resigned and was quickly
arrested on suspicion of artificially inflating the firm's balance
sheet and sales through fake transactions. Wirecard filed for insolvency
on Thursday.
Braun, who has been
released on bail, has consistently denied wrongdoing, suggesting instead
that Wirecard was the victim of a highly sophisticated fraud. But a
picture is emerging of a prized tech company that was cheered on by
authorities instead of scrutinized, and of a supervisory board that
failed to act as a check on a chief executive many regarded as a
visionary. Accounting firm EY precipitated Wirecard's downfall by
refusing to sign off on its final results for 2019, after more than a
decade of auditing the company.
"You
have a multitude of evidence of sinners, of overlookers, of all kinds
of various guilty parties," said Christian Strenger, academic director
of the Corporate Governance Center at HHL Leipzig Graduate School of
Management.
Wirecard is the first
member of Frankfurt's elite DAX stock index to file for insolvency. But
its implosion follows a series of scandals over the past five years that
have embarrassed 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.
Volkswagen (VLKAF), the world's biggest carmaker and champion of German manufacturing, admitted in 2015 that millions of diesel vehicles had been equipped with software to cheat on emissions tests. Deutsche Bank (DB), the country's biggest lender, has paid tens of billions of dollars in penalties related to its sale of toxic mortgage assets, interest rate manipulation and a Russian money laundering scheme.
Two
more German corporate snafus have generated global headlines this week:
more than 1,500 workers tested positive for coronavirus at a plant
owned by meat processing giant Tönnies Group, forcing local officials to
reimpose a lockdown on more than half a million people in the
surrounding region; and Bayer (BAYRY)
agreed to pay over $10 billion to settle claims that Roundup, a product
it owns thanks to its acquisition of Monsanto, causes cancer.
The
outbreak 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
to double fines for breaching rules on working hours.
The Bayer settlement comes after investors voiced deep concerns
about the acquisition of Monsanto, and questioned whether management
had properly understood the legal risks. Shares in Bayer have lost
roughly a third of their value since the purchase of Monsanto was
announced in September 2016.
The
firms operate across different industries, but with the exception of
the Tönnies Group, they are publicly listed and are run by a management
board with responsibility for daily operations and overseen by a
supervisory board that includes worker representatives. Critics say
oversight breaks down when the boards become too cozy, which can happen
when top executives move into supervisory positions. Investors complain
that their interests are too often subjugated to other considerations,
such as politics or internal corporate dynamics.
Strenger
said that German corporate governance has improved significantly in
recent decades, but that shortcomings by executives and directors are
still too common. Additional safeguards would be relatively simple to
install, he said, such as changing stock market rules to prevent
companies from delaying their financial results, as Wirecard had done.
"We've
made good progress ... but there is still room for human error, or for
trying to believe in people that are appearing in a convincing fashion.
[Wirecard] was traded in the analyst and investor society as the next SAP (SAP), and who wouldn't want to be on that bandwagon?" he said, referring to the software giant that is also listed on the DAX.
Former Wirecard CEO Markus Braun was regarded by many as a tech visionary.
The
collapse of Wirecard is making waves far beyond Germany. A frantic
search for the missing funds reached the Philippines, where the central
bank denied the money had entered the country's financial system. US card issuers Mastercard (MA) and Visa (V)
are reconsidering whether to allow Wirecard to continue processing
payments on their networks, according to Bloomberg, and a UK regulator
has moved to safeguard the funds of Wirecard clients.
Germany's
government is now paying close attention. Finance minister Olaf Scholz
described the Wirecard scandal as "extremely worrying," saying the
country must act quickly to improve oversight. "Critical questions arise
over the supervision of the company, especially with regards to
accounting and balance sheet control. Auditors and supervisory bodies do
not seem to have been effective here," Scholz said in a statement.
Germany's
Federal Financial Supervisory Authority, or BaFin, is actively
investigating whether Wirecard violated rules against market
manipulation. But the regulator is now coming under heavy scrutiny, with
critics arguing that it should have done a better job overseeing
Wirecard's banking unit, even if it didn't have direct oversight of the
larger firm.
Observers
also want to know why BaFin issued a temporary ban in 2019 that
prevented investors from borrowing Wirecard shares to sell them in
anticipation of prices falling, and why it filed a criminal complaint
against journalists at the Financial Times, which published a series of
articles that exposed accounting and management irregularities at 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 of BaFin. Valdis Dombrovskis, the 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 already faces a criminal complaint from German shareholders'
association SdK, said Friday that Wirecard's collapse was the result of
an "elaborate and sophisticated fraud, involving multiple parties around
the world in different institutions, with a deliberate aim of
deception."
"Collusive
frauds designed to deceive investors and the public often involve
extensive efforts to create a false documentary trail," the auditor
added in a statement. "Professional standards recognize that even the
most robust and extended audit procedures may not uncover a collusive
fraud."
— Chris Liakos, Eoin McSweeney and Stephanie Halasz contributed reporting.
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