German Financial Regulator Expresses Shock At Wirecard ‘Disaster’

Munich-based Wirecard has acknowledged that some 1.9 billion euros (£1.7bn) in cash it booked into the accounts of one of its businesses probably never existed.

German financial regulators called the situation a “scandal” and a “disaster”.

The company is now in emergency talks with its lenders, whom it owes about 1.75bn euros, over its immediate options.

The massive discrepancy, affecting a company that was until recently one of Europe’s highest-profile fintech start-ups, has already led to the resignation on Friday of then-chief executive Markus Braun.

Discrepancy

Last week Wirecard said it was unable to release its annual results for 2019 because 1.9bn euros was missing from its accounts, following which Braun resigned and agency Moody’s withdrew the company’s credit rating.

On Monday Wirecard said the funds had probably never existed, after attempting to trace them and reaching a dead-end in the Philippines.

The scandal also reflects badly on German financial regulator BaFin, which initially focused its efforts against short sellers and journalists who had questioned Wirecard’s accounts.

BaFin head Felix Hufield said the crisis was a “total disaster”.

“It is a scandal that something like this could happen,” he said.

Missing funds

The company said last week that auditor EY had refused to sign off on its 2019 accounts as it was unable to confirm the existence of 1.9bn euros in cash balances and trust accounts, amounting to about one-quarter of the balance sheet.

“The Management Board of Wirecard assesses … that there is a prevailing likelihood that the bank trust account balances in the amount of 1.9bn EUR do not exist,” the company said on Monday.

Police searched Wirecard’s Munich headquarters earlier this month as part of a criminal investigation into potentially misleading statements to investors by Braun and three other board members regarding an audit earlier this year by KPMG.

State prosecutors are now considering arrest warrants for Braun and Jan Marsalek, a board member fired on Monday, according to reports.

The company said it is considering the sale or closure of parts of its business “to ensure continuation of its business operations”.

Wirecard’s shares have dropped from trading at 98 euros at the beginning of last week to around 13 euros at the end of trading on Monday.

Whistleblower

Wirecard processes electronic transactions for companies including Visa and Mastercard as well as offering other services, including virtual and physical payment cards.

In January of last year the Financial Times reported suspected financial improprieties within the company, based on information provided by a whistleblower.

At the time, Wirecard’s market capitalisation was greater than that of Deutsche Bank and it had replaced Commerzbank in Germany’s Dax 30 index.

The company denied the report, calling it “misleading and defamatory”, but later hired KPMG to conduct an independent audit.  The company said in March 2020 that the audit had concluded there was no discrepancy.

However, KPMG said in April it had not been provided with sufficient documentation to address the allegations, triggering a 26 percent drop in Wirecard’s share price.