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Cheat Sheet: The Wirecard Scandal

By Máté Hekfusz

its heyday in August 2018, German fintech company Wirecard was worth 42 billion dollars and had just been accepted into the prestigious German stock index, the DAX 30. Hailed as the ‘darling’ of the European fintech world, it was riding on a meteoric rise, bringing incredible profits and plentiful investment.

In June 2020, however, less than two years after their DAX listing, the company filed for insolvency, brought down by one of the worst accounting scandals in recent European history. With 1.9 billion euros of cash ‘missing’ from its accounts, a colossal sum that the company later admitted did not exist, many questioned how Wirecard managed to get away with fraud of this scale for so long.

Fingers were quickly pointed in three directions. One of them was at Wirecard itself. The Financial Times had published several articles in 2019 highlighting discrepancies with the company’s accounts way before the scandal. In response, Wirecard sued the newspaper, relying on its influence in the German financial market to keep investor confidence high. Despite FT’s reporting, Wirecard continued to receive large-scale investment until the scandal broke.

When the 1.9 billion euros went missing, auditor KPMG was brought on to do a special audit of the company. It could not clear Wirecard of the accounting irregularities that the Financial Times had highlighted. In issuing such a damning report, it also pointed the suspicion onto EY, the company’s regular auditor and one of the world’s largest consultancy firms. For its part, EY laid the blame solely at Wirecard for its ‘elaborate’ fraud scheme that fooled auditors. Nonetheless, the scandal resulted in a loss of trust in EY, as it was uncovered that they had been made aware of potential fraud within Wirecard years ago.

The crimes of Wirecard and the failings of its auditor at uncovering them also highlighted issues at regulatory authorities. BaFin, Germany’s main financial regulator, had taken the company’s side in its previous clashes with FT, intervening in the market to protect Wirecard. As the full scale of the scandal was revealed, calls for reform followed shortly thereafter. The head of BaFin called the situation and the regulator’s handling of it a ‘complete disaster’ and vowed to change strategies to prevent such fraud from occurring again.

Wirecard’s fall from grace has been spectacular and bewildering to witness for most. Those who had seen the signs point to the innumerable mistakes that led to it, while some say that the scandal is a natural result of the entangled, questionably legal relationships between finance companies and the consultant firms that audit them.

Despite its stock price crash and insolvency filing, and the arrest and dismissal of some senior leadership, Wirecard is still standing. It still offers payment operations in several countries and is trying to cooperate with banks to bail it out of its billion-euro hole. At the same time, the scandal is far from over too, currently spreading from finance to the realm of politics with potentially far-reaching implications for the future of the industry.

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