HBP# HK1379

t
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SAMMY FUNG
TSUN-KAN WAN

WIRECARD’S MULTIBILLION-DOLLAR FRAUD:

WHO SHOULD BE BLAMED FOR THE
CORPORATE GOVERNANCE FAILURE?

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We are at the beginning of one of the biggest corporate scandals we have seen
in Germany . . . I think Wirecard is the Enron of Germany.
- Maximilian Weiss, an attorney at law firm TILP Litigation that filed an investor
lawsuit against Wirecard1
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In 2020, German lawmakers launched a parliamentary inquiry into a major fraud involving
Wirecard. A mere two years before, Wirecard AG (Wirecard, FRA2: WDI) was the largest
fintech in Europe, with market capitalization surpassing that of Deutsche Bank and
Commerzbank. Since then, it had been discovered that Wirecard had systematically overstated
its revenues, and billions of euros reported on its balance sheet had never existed. The fraud led
the president of Germany’s financial regulator and accounting watchdog, respectively, to step
down. Reforms for more effective corporate governance rules and enforcement were also called
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for in Germany.

As a high-profile company and a constituent stock in the DAX30,3 what had allowed Wirecard
to commit this fraud and fool government watchdogs, external auditors, and internal controls?
Why had the many layers of internal and external monitoring functions failed?
No

1 R. Browne, “‘The Enron of Germany’: Wirecard scandal casts a shadow on corporate governance,” CNBC, 29 June 2020,
https://www.cnbc.com/2020/06/29/enron-of-germany-wirecard-scandal-casts-a-shadow-on-governance.html, accessed May
2021.
2 FRA here refers to the Frankfurt Stock Exchange.
3 The DAX30 was a stock market index consisting of the 30 major blue-chip companies trading on the Frankfurt Stock

Exchange. In 2021the index was increased to 40 companies and became the DAX40.

Tsun-kan Wan prepared this case under the supervision of Dr. Sammy Fung for class discussion. This case is not intended to show
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effective or ineffective handling of decision or business processes. The authors might have disguised certain information to protect
confidentiality. Cases are written in the past tense, this is not meant to imply that all practices, organizations, people, places or
fact mentioned in the case no longer occur, exist or apply.

© 2022 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be digitized, photocopied
or otherwise reproduced, posted or transmitted in any form or by any means without the permission of The University of Hong
Kong.
Ref. 22/722C

Last edited: 24 May 2022

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 22/722C Wirecard’s Multibillion-Dollar Fraud: Who Should be Blamed for the Corporate Governance Failure?

Wirecard4

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Early Years
In 1999, Wirecard was founded in a suburb of Munich, Germany. It started as a payment
processor that helped websites collect credit card payments from customers.

In 2002, Wirecard almost became insolvent. Markus Braun, a former KPMG consultant, took
over as the CEO and made the decision to merge Wirecard with its rival, Electronic Business

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Systems.

In 2005, Wirecard listed its shares on the Frankfurt Stock Exchange through a reverse merger
with InfoGenie AG.5 This allowed Wirecard to be listed without facing the scrutiny that was
part of the initial public offering process. At the time, the core of Wirecard’s business was
managing payments for online gambling and pornography (nonbanking businesses of
Wirecard).

yo
In 2006, Wirecard purchased a bank called XCOM and renamed it Wirecard Bank. This bank
was licensed to conduct “banking businesses” such as issuing Visa and Mastercard credit cards
and handling money on behalf of merchants. According to the Financial Times, such “hybrid
of banking and non-banking operations” was “unusual.”

This unusual hybrid of banking and nonbanking operations made its accounts harder to compare
with peers and persuaded investors rely on the company’s adjusted versions of financial
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statements.

First Scandal on Accounting Irregularities

In 2008, the head of a German shareholder association publicly criticized Wirecard for balance
sheet irregularities. In response to the criticism, Wirecard appointed Ernst & Young (EY) to
conduct a special audit. The same year, EY was also the auditor of the group’s accounts.
tC

In 2010, Mr. Jan Marsalek, a protégé6 of Markus Braun who had been with the company since
2000, was appointed the COO of Wirecard. Wirecard also told its stakeholders of its aspiration
to expand globally.

From 2011 to 2014, Wirecard raised EUR500mn equity and acquired numerous payments
companies across Asia. These acquirees were described by the Financial Times as “obscure.”
The deals were also seen as “oddly structured.” The headquarters of these Asian companies
No

were in Singapore. Reports indicated that Wirecard’s investors were drawn to the group’s
growth and payments technology.

Peaking Price and Fame, Amid Internal Whistleblowing

In 2017, EY issued a clean audit opinion for Wirecard’s accounts that showed its strong cash-
generating ability [see Exhibit 1 for the years of annual reports audited by EY and the audit
opinion as of the respective years]. The group’s shares then rose by more than 100%.
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4 D. McCrum, “Wirecard: the timeline,” Financial Times, 25 June 2020, https://www.ft.com/content/284fb1ad-ddc0-45df-a075-

0709b36868db, accessed May 2021.
5 R. Browne, “It was once Germany’s fintech star. Now, a missing $2 billion puts Wirecard’s future in doubt,” CNBC, 19 June

2020, https://www.cnbc.com/2020/06/19/wirecards-future-is-in-doubt-as-accounting-scandal-deepens.html, accessed May

2021.
6 A person who is guided and supported by an older and more experienced or influential person.

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 22/722C Wirecard’s Multibillion-Dollar Fraud: Who Should be Blamed for the Corporate Governance Failure?

In late 2017, the group’s CEO, Markus Braun, personally took a margin loan of EUR150mn

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from Deutsche Bank. The loan was backed by some of his own shares in Wirecard. At the time,
he owned a 7% stake in the group.7

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In March 2018, an internal whistleblower at Wirecard alleged that the group had fraudulently
transferred funds to India via third parties. In response, Wirecard’s legal team started to
investigate only the three finance team members in Singapore related to the whistleblowing,
rather than the suspected fraud.8

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In August 2018, Wirecard’s shares had risen to EUR191, giving the company a market
capitalization of more than EUR24bn, making it the largest fintech in Europe. Braun’s personal
stake in the group was worth EUR1.6bn at that time. The next month, the stock price rose to its
historic high of EUR196.65.9

The Financial Times Exposes Wirecard

On 30 January 2019, the Financial Times published its first investigative article on Wirecard.

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This article alleged that an executive had used forged and backdated contracts in a series of
suspicious transactions.10 In response, Germany’s Federal Financial Supervisory Authority 11
(BaFin) started to investigate the Financial Times and not Wirecard.

Meanwhile in Singapore police raided Wirecard’s local offices in February 2019.12 This caused
Wirecard’s share price to drop below EUR100 [see Exhibit 2 for the illustrative chart of
Wirecard’s stock price from 2018 to June 2020]. BaFin responded by announcing a two-month
ban on short selling Wirecard shares13. The regulator explained that Wirecard was important to
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Germany’s economy and any short selling would be a “serious threat to market confidence.”14

In March 2019 and April 2019, the Financial Times reported that Wirecard’s outsourced
business partners were largely unmanned and unequipped. These partners played a key role in
the group’s outsourced third-party acquiring (TPA) business [see Exhibit 3 for the illustrative
diagram for the relationship between Wirecard, TPA partners, and merchants in the TPA
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business and merchant cash advance business]. To resolve the allegations, the group engaged
McKinsey & Co. for a compliance audit.15 In August 2019, McKinsey warned the supervisory
board and management board 16 about the group’s “non-existent” internal controls, and that
these compliance shortcomings posed “significant risk” and called for “immediate action.”
Rather than engaging McKinsey to roll out a new compliance program, the management board
7 O. Storbeck, A. Massoudi, and R. Smith, “Deutsche Bank revealed as behind €150m loan to Wirecard founder,” Financial
Times, 25 March 2019, https://www.ft.com/content/ea1d6db0-4bda-11e9-bbc9-6917dce3dc62, accessed May 2021.
No

8 The method by which the fund would be transferred was called “round tripping,”
9
Yahoo Finance, “Wirecard AG (WDI.HM) – Historical data,”
https://uk.finance.yahoo.com/quote/WDI.HM/history?period1=1485475200&period2=1643241600&interval=1d&filter=histor
y&frequency=1d&includeAdjustedClose=true, accessed May 2021.
10 D. McCrum, “Executive at Wirecard suspected of using forged contracts,” Financial Times, 30 January 2019,

https://www.ft.com/content/03a5e318-2479-11e9-8ce6-5db4543da632, accessed May 2021.

11 BaFin was a financial regulatory authority for Germany. It was under the supervision of the Federal Ministry of Finance of

Germany.
12 S. Palma and D. McCrum, “Wirecard ‘loses contact’ with executive at heart of accounting scandal,” Financial Times, 12

March 2019, https://www.ft.com/content/dcf600f2-44be-11e9-b168-96a37d002cd3, accessed May 2021.

13 Short selling refers to the market activity where a trader (short seller) borrows security from security lender and sells (short

sells) the security in the market, with the belief that the market price will drop later. Before the borrowing arrangement
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expires, the short seller should buy the security back from the market to return to the security lender. Short sellers are either
speculators or hedgers who bet on the drop in the security price. Therefore, they represented negative or pessimistic views
about the security, as opposed to positive or optimistic views.
14 Reuters, “Timeline: The rise and fall of Wirecard, a German tech champion,” 16 March 2021,

https://www.reuters.com/article/us-germany-wirecard-inquiry-timeline-idUSKBN2B811J, accessed May 2021.

15 O. Storbeck, “McKinsey warned Wirecard a year ago to take ‘immediate action’ on controls,” Financial Times, 14 July 2020,

https://www.ft.com/content/bfa1cafc-d8fa-4745-adef-ed99e88cb78f, accessed May 2021.

16 Wirecard’s board structure is explained on page 6 of this case.

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 22/722C Wirecard’s Multibillion-Dollar Fraud: Who Should be Blamed for the Corporate Governance Failure?

engaged PwC instead. PwC was also the auditor of the group’s Wirecard Bank. Furthermore,

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the media was told that PwC’s scope of work did not address Wirecard’s TPA business at all.
Although the position “group compliance officer” was created, this person was not given a seat

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on the management board.17

In October 2019, the Financial Times published documents indicating that profits at Wirecard’s
subsidiaries in Dubai and Dublin were fraudulently inflated. In order to clarify the media’s
accusations, the group appointed KPMG to conduct a special audit.18 In December 2019, the
Financial Times also reported that Wirecard had included the cash held in escrow accounts19

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managed by trustees within its own cash balances. From 2016 to 2018, the group recorded up
to EUR1bn in escrow account balances as cash on its balance sheet. The bank where the escrow
accounts were opened was the Singapore-based OCBC Bank. The media reported that EY had
not performed a routine audit procedure to verify the existence of the EUR1bn.20

In March 2020, the publication of both KPMG’s special audit report and EY’s annual audit
report were delayed. During the month, EY received documents from a party that purported to

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be Wirecard’s trustee in the Philippines. The documents stated that balances totaling EUR1.9bn
were held in two Filipino banks. Wirecard had also told EY that the escrow money had already
been transferred from OCBC Bank to the two Filipino banks in late 2019. This led to suspicions
that Wirecard acted to obstruct EY from verifying those balances.21

As of 28 April 2020, KPMG’s report was published, stating it could not verify that the TPA
arrangements contributing to “the lion’s share” of Wirecard’s profits reported from 2016 to
2018 were genuine. KPMG also questioned the group’s EUR1bn in cash balances. The balances
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were only evidenced by the documents provided by a Singapore trustee of the group.
Nevertheless, the trustee had “cut ties with” Wirecard when the special audit began. In addition,
“obstacles” to its audit work were cited [see Exhibit 4 for the obstacles that KPMG had cited
in its special audit report].22

Downfall
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In June 2020, BaFin filed a criminal complaint against Markus Braun and three other executive
board members for making misleading statements to investors. Some shareholders and short
sellers also filed civil lawsuits and criminal complaints. The audit watchdog of Germany, the
Financial Reporting Enforcement Panel (FREP), started to investigate the group’s accounting.23

On 16 June 2020, the two Filipino banks told EY that the documents of December 2019 related
to the EUR1.9bn balances in escrow accounts were “spurious.” As such, EY refused to sign off
Wirecard’s 2019 annual report, especially since these balances made up “a quarter of its balance
No

sheet.”24 In the same month, Markus Braun was arrested on suspicion of false accounting and
market manipulation. Wirecard acknowledged the potential scale of its multiyear accounting
fraud and warned about the nonexistence of the EUR1.9bn cash. On 25 June, Wirecard filed

17 Ibid.
18 DGAP, “Wirecard AG: KPMG special review lasts until April 27 2020. Analysis so far provides no evidence of balance sheet
manipulation,” https://www.dgap.de/dgap/News/adhoc/wirecard-kpmg-special-review-lasts-until-april-analysis-far-provides-
evidence-balance-sheet-manipulation/?newsID=1319801, accessed May 2021.
19 An escrow account refers to an account where a third party holds money or assets on behalf of two other parties that are in the

process of completing a transaction. An escrow account is also a trust account.

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20 O. Storbeck, T. Kinder, and S. Palma, “EY failed to check Wirecard bank statements for 3 years,” Financial Times, 26 June

2020, https://www.ft.com/content/a9deb987-df70-4a72-bd41-47ed8942e83b, accessed May 2021.

21 Ibid.
22 Reuters, “Timeline: The rise and fall of Wirecard, a German tech champion.”
23 O. Storbeck and D. McCrum, “Wirecard offices searched as prosecutors probe management board,” Financial Times, 5 June

2020, https://www.ft.com/content/049d7f17-a99c-465d-8062-5e07fd9315b1, accessed May 2021.

24 Reuters, “Timeline: The rise and fall of Wirecard, a German tech champion.”

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 22/722C Wirecard’s Multibillion-Dollar Fraud: Who Should be Blamed for the Corporate Governance Failure?

for insolvency for owing almost USD4bn to creditors. The stock price further dropped from

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EUR11.88 on 24 June to EUR3.09 on 25 June [see Exhibit 5 for the timeline of major events
in Wirecard’s scandal].25

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Regulators26
BaFin failed to take the many warnings over irregularities at Wirecard
seriously for way too long . . . Even if BaFin lacked certain regulatory

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competencies to crack down on Wirecard, it at least should have flagged this
issue much earlier before it was too late.
- Danyal Bayaz, a member of German parliament27

Federal Financial Supervisory Authority (BaFin)

BaFin’s ban against short selling Wirecard shares was the first ban of its kind in the history of
the German stock market. As explained by BaFin regarding this move, it was to defend the

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integrity of the wider market and respond to the “compelling evidence” from Munich
prosecutors of market manipulation. Another action taken by BaFin was to make a criminal
complaint against the Financial Times journalists involved for reporting the whistleblower
allegations.28

Because of their actions, BaFin was under fire from politicians. Some argued that the regulator
wanted to protect Wirecard as a “homegrown plant” and treated any allegations of fraud as a
plot to purposefully dampen Germany’s finance sector. Others condemned BaFin’s ill-defined
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remit of its regulatory role, leading to its inability to monitor a complex environment and the
systematic failure.29

Financial Reporting Enforcement Panel (FREP)30

Enforcement of accounting standards in Germany was the responsibility of two organizations,
BaFin and FREP.31 FREP was a private-sector body with quasi-official power to monitor the
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financial reporting of listed companies in Germany on behalf of the government. In May 2020,
Wirecard stated that FREP had scrutinized its accounts in the past and found no faults. The
public was questioning the effectiveness of FREP in detecting fraud.3233

After Wirecard’s collapse in June 2020, FREP claimed that there had been no flaws in its
auditing procedure. It also claimed that its communication with BaFin had complied with
official guidelines. In essence, FREP clarified that it had no remit or resources to uncover
No

25 Yahoo Finance, “Wirecard AG (WDI.F): Historical Data,”

https://finance.yahoo.com/quote/WDI.F/history?period1=1469664000&period2=1627344000&interval=1d&filter=history&fr
equency=1d&includeAdjustedClose=true, accessed July 2021.
26 O. Storbeck and G. Chazen, “Wirecard scandal leaves German regulators under fire,” Financial Times, 24 June 2020,

https://www.ft.com/content/f62f7f56-3d45-492c-ae88-172948d21eb8, accessed May 2021.

27 O. Storbeck, “Merkel’s government pressed to release conversations with former Wirecard chief,” Financial Times, 12 July

2020, https://www.ft.com/content/1aea3609-1289-49ad-bd9c-e2c27a3d7516, accessed May 2021.

28 O. Storbeck and G. Chazen, “Wirecard scandal leaves German regulators under fire.”
29 O. Storbeck and G. Chazen, “Wirecard scandal leaves German regulators under fire.”
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30 FREP’s regulatory function was comparable to that of Public Company Accounting Oversight Board (PCAOB) in the US.

FREP examined the financial reporting of publicly listed companies in Germany, being a government-appointed privately
organized institution.
31 G. Chazan and O. Storbeck, “Head of German financial watchdog defends agency’s Wirecard role,” Financial Times, 1 July

2020, https://www.ft.com/content/fd2e1442-d35c-412e-a7a5-aa4d5b52e629, accessed May 2021.

32 O. Storbeck and G. Chazan, “Germany to overhaul accounting regulation after Wirecard collapse,” Financial Times, 28 June

2020, https://www.ft.com/content/e037d830-cfd8-4bca-853d-d49f48e67f13, accessed May 2021.

33 O. Storbeck and G. Chazen, “Wirecard scandal leaves German regulators under fire.”

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 22/722C Wirecard’s Multibillion-Dollar Fraud: Who Should be Blamed for the Corporate Governance Failure?

fraud.34 FREP had 15 employees and a BaFin-allocated35 annual budget of EUR6mn. In contrast,

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the media was told that KPMG’s special audit involved 40 employees at a cost of EUR10mn.
Given the resources, as of 2020, FREP performed audits of approximately 85 listed companies

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annually. Twenty of the audits had been found to have shortcomings. Jörg Kukies, deputy
finance minister of Germany, defended FREP for the considerable time it spent on investigating
any company. He argued that the watchdog had just not been early enough to discover and
escalate Wirecard’s fraud to BaFin.3637

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Two-tier Board System
This is modern corporate governance . . . With the rules presently in place, I
feel we’re still back in the last century. And for that we need a drastic change.
- Peter Dehnen, chair of the Association of Supervisory Boards in Germany38

The media stated that the corporate governance rules in Germany were a factor in Wirecard’s

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downfall. The same observation was made when there were scandals at other large German
corporates like Siemens in late 2000s and Volkswagen in 2015. Under German corporate law,
companies were required to have both a “supervisory board” and a “management board.” The
former was responsible for overseeing management. Market experts reckoned that Wirecard’s
supervisory board was legally obliged to intervene in the fraudulent practices of executives, but
it did not.39

Both supervisory and management board constituted what was called a “two-tier board system”
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in a German corporation. The system was different to the one-board system in certain developed
English-speaking countries like the US and UK in terms of board structure and workers’
influence on the decision-making at the top. In a one-board system, the chair could also be the
CEO.4041 Other stakeholders including employees had little to no say in the strategy that came
from the top. The company’s board members were fiduciaries who mainly acted in the interests
of shareholders. Shareholders were also a company’s main stakeholders. In a two-tier board
system, the supervisory board consisted of nonexecutive supervisors, whereas the management
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board consisted of executive officers. The former was responsible for appointing, supervising,
and advising the management board. It also made decisions in areas such as dividend strategy.
It also monitored the management board. The management board, on the other hand, managed
the day-to-day operations and decisions. The supervisory board was composed of 50%
shareholders elected in a shareholder meeting, and 50% employees elected in an employee
meeting.4243
No

34 G. Chazan and O. Storbeck, “Head of German financial watchdog defends agency’s Wirecard role.”
35 BaFin, “Financial reporting enforcement,”
https://www.bafin.de/EN/Aufsicht/BoersenMaerkte/Transparenz/Bilanzkontrolle/bilanzkontrolle_node_en.html, accessed May
2021.
36 O. Storbeck and G. Chazan, “Germany to overhaul accounting regulation after Wirecard collapse.”
37 O. Storbeck and G. Chazen, “Wirecard scandal leaves German regulators under fire.”
38 R. Browne, “‘The Enron of Germany’: Wirecard scandal casts a shadow on corporate governance.”
39
Ibid.
40 The trend in these countries was that chairman and CEO could be different persons.
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41 Harvard Law School Forum on Corporate Governance, “Separation of Chair and CEO Roles,” 1 September 2011,

https://corpgov.law.harvard.edu/2011/09/01/separation-of-chair-and-ceo-roles/, accessed May 2021.

42 Handelsblatt, “Why German corporate governance is so different,”

https://www.handelsblatt.com/english/companies/handelsblatt-explains-why-german-corporate-governance-is-so-
different/23581290.html, accessed May 2021.
43 International Corporate Governance Network, “The role and effectiveness of the Aufsichtsrat (Supervisory Board) and

stakeholder inclusiveness,” https://www.icgn.org/role-and-effectiveness-aufsichtsrat-supervisory-board-and-stakeholder-

inclusiveness, accessed May 2021.

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 22/722C Wirecard’s Multibillion-Dollar Fraud: Who Should be Blamed for the Corporate Governance Failure?

Limitations

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As of 2018, the directors44 of Wirecard’s supervisory board purported to have kept themselves

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“intensively informed” of the group’s “development, position and perspectives.” They
emphasized their position to “monitor.” As such, upon Wirecard’s downfall, the supervisory
board was criticized for its box-ticking mindset pursuant to the law. Such a mindset was said
to lead them to only passively observe rather than act.45 For instance, KPMG faced certain
obstruction from the group in performing its special audit from 2019 to 2020 [see Exhibit 4].
TCI Fund Management Ltd., the hedge fund that short sold Wirecard’s stock during 2020,

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firmly believed the supervisory board chair Thomas Eichelmann46 knew of such obstruction.
The fund questioned why Eichelmann did not intervene, pointing out that this board had a duty
of care under German Stock Corporation Act. The resulting breach of such duty could have led
to liability for damages. TCI Fund commented that the supervisory nature as prescribed in the
Act was indeed defined vaguely.47

The media also stated that the process of appointing members for Wirecard’s supervisory board
had not been transparent. In particular, the long-standing CEO Markus Braun could have

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exerted his influence on the supervisory board in two ways. Half of the supervisory board
members were employees who worked for the group. The other half were shareholders elected
in a shareholder meeting, where Braun was the largest single shareholder.48

Based on the Wirecard’s constitution, a supervisory board member could be elected for at most
15 years. The German Corporate Governance Code (the Code) recommended a maximum
tenure for supervisory board members of 12 years.495051
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Despite being recommended in the Code, Wirecard’s boards had no subcommittees. It was not
until the early 2019 that the supervisory board established the group’s first three subcommittees:
the Audit Committee; the Remuneration, Personnel and Nomination Committee; and the Risk
and Compliance Committee.52 Wirecard announced that the establishment of subcommittees
was due to its “growth and internationalization.”
tC

Last, the media suggested that German business culture had traits such as “obedience, stoicism,
pride, and a command-and-control bent” and “complacency” in varying degrees. These traits
were said to render the corporate governance under the two-tiered system impotent.53

44 In a two-tier board in Germany, an executive board comprised all executive directors whereas the supervisory board comprised
all nonexecutive directors. The chairman of the supervisory board was the equivalent of the chairman of a single-tier board,
No

while the chairman of the management board is the company's CEO or managing director.
45 C. Hughes, “Wirecard Scandal Puts German Boards on the Spot,” Bloomberg, 30 June 2020,

https://www.bloomberg.com/opinion/articles/2020-06-30/wirecard-scandal-puts-german-boards-on-the-spot, accessed May

2021.
46 Thomas Eichelmann was the chairman of the audit committee of Wirecard’s supervisory board and a former chief financial

officer of Deutsche Boerse AG, the exchange of stock and other securities in Germany.
47 C. Hughes, “Wirecard Scandal Puts German Boards on the Spot.”
48 Ibid.
49 Ibid.
50 Recommendations of the Code were indicated in the text by using the word “shall.” Corporations might depart from

recommendations, but in this case, they were obliged to disclose and explain any departures each year (comply or explain).
However, there had been no disclosure made by Wirecard as to why the departure existed.
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51 Regierungskommission: Deutcher Corporate Governance Kodex, “German Corporate Governance Code,”, accessed May

2021.
52 Wirecard, “Corporate Governance Report and Corporate Governance Statement,”

https://ir.wirecard.com/download/companies/wirecard/Hauptversammlung/18_EN_Corporate_GovernanceReport.pdf,
accessed May 2021.
53 A. Bonime-Blanc and M. Marquardt, “For its sheer scope, daring, and size, Wirecard is being compared to Enron. What

happens next seems both predictable and inevitable,” LinkedIn, 14 April 2021, https://www.linkedin.com/pulse/global-
governance-lessons-from-europes-enron-michael-marquardt, accessed May 2021.

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 22/722C Wirecard’s Multibillion-Dollar Fraud: Who Should be Blamed for the Corporate Governance Failure?

Internal Controls54

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The audits by McKinsey and KPMG shed light on Wirecard’s business model and the
corresponding deficiencies in internal controls [see Exhibit 3 for the illustrative diagram for
the relationship between Wirecard, TPA partners, and merchants in the Third-Party Acquiring
business and Merchant Cash Advance business].

TPA Business55

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Wirecard’s main businesses were the issuance of credit and prepaid cards and the processing
of contactless smartphone payments. According to KPMG’s report, the business model of the
TPA business could be described as assisting businesses, i.e., merchants, to accept credit and
debit card payments from their customers. 56 The group owned a European bank that was
licensed by the card issuers Visa and Mastercard. With this license, this bank collected money
from card issuers and distributed it to merchants. Companies that held such a license were also
called “acquirers” in the industry. Third-party acquirers that worked with Wirecard were the
group’s “TPA partners.” As of November 2019, the group worked with around 100 TPA

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partners across 60 countries.

But the majority of its TPA business was conducted through three TPA partners in Dubai,
Dublin, and Munich, respectively. The group had established subsidiaries to conduct TPA
businesses with these three TPA partners. These subsidiaries were reported to generate most of
the group’s processed transactions, revenue, and profit from 2016 to 2018.
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Wirecard did not enter into contractual relationships with merchants directly. The individual
merchants were not the group’s clients. Instead, the group’s clients were those “aggregator
merchants” or “payment facilitators” that arranged groups of merchants to use the payment-
processing services provided by TPA partners. As for the three largest TPA partners, Wirecard
referred its clients to them. Although these TPA partners were independent entities, Wirecard
booked the revenue and costs of these partners upon processing of the card payment
transactions. By pledging collateral to the escrow accounts, Wirecard undertook to cover any
tC

losses its TPA partners might incur. Such possible losses included those caused by reversed
card payment transactions or fines imposed by the card issuers.

For the accounting of TPA revenue, every three months the three key TPA partners would email
spreadsheet statements to Wirecard. The statements outlined credit card transactions processed
and the commissions subsequently due in each respective period. Two of them provided a
breakdown of the data by “account name,” whereas one sent only a summary. On the basis of
the spreadsheets, Wirecard booked revenues and costs. The group also undertook certain
No

control activities to minimize the risks of accounting misstatements. First, “plausibility

assessments”57 were conducted. Second, the group compared the spreadsheet data with its sales
forecasts.

According to the TPA business model, the control deficiencies included the stipulation that the
TPA partners pay commissions to Wirecard, reflecting a portion of the processed the card
transactions. But among the three largest TPA partners, only two actually paid a commission
to the group. The sum of EUR85bn was paid to Wirecard’s subsidiaries from 2016 to 2018.
Another sum of EUR1bn was reportedly paid from the TPA partners to the escrow accounts,
Do

54 O. Storbeck, “McKinsey warned Wirecard a year ago to take ‘immediate action’ on controls.”
55 D. McCrum and O. Storbeck, “How the paper trail went cold in KPMG’s special audit of Wirecard,” Financial Times, 5 May
2020, https://www.ft.com/content/cc64ac71-9232-4815-b2df-41c46a73a5f0, accessed May 2021.
56 D. McCrum and O. Storbeck, “Wirecard: what KPMG’s report found,” Financial Times, 29 April 2020,

https://www.ft.com/content/4bed8775-01aa-457f-9dbb-1740e67a684d, accessed May 2021.

57 The source from the Financial Times did not explain the particulars of such “plausibility assessments.”

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 22/722C Wirecard’s Multibillion-Dollar Fraud: Who Should be Blamed for the Corporate Governance Failure?

instead of the bank accounts of subsidiaries. The receipt of EUR1bn during the period was

t
booked as revenue, constituting 25% of revenues. The amount was treated as cash on the
group’s balance sheet during the period. But there was no bank statement to serve as the

os
evidence to this balance. There was also insufficient evidence to verify the source of funds.

In the spreadsheet statements from TPA partners to Wirecard, the exchange rates used and the
calculated commission payments were misstated. Moreover, certain contracts governing the
relationship between the group and its TPA partners were incomplete or lacked signatures.

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As for the escrow accounts, there were six deficiencies. First, the escrow accounts were
supervised by an “unnamed” 58 trustee that had served Wirecard for more than three years.
Second, this trustee terminated its relationship with the group around the time that the special
audit began in late 2019. Third, there was no available information on why the relationship was
terminated. Fourth, the trustee did not respond to consultants’ requests and did not cooperate.
Fifth, there was no evidence that Wirecard had assessed the reliability of this trustee or its
replacement. It was known that this replacement was engaged on the advice of their predecessor.

yo
Sixth, the money originally kept in the escrow accounts with Singaporean OCBC Bank were
moved to two Filipino banks in late 2019. This supposedly happened while the special audit
was being conducted.59

Merchant Cash Advance (MCA) Business

By late 2018, Wirecard had launched a new product line called Merchant Cash Advance [see
Exhibit 4]. This product line offered short-term loans to merchants that had to wait at least 30
days to receive the money from credit card purchases. As of the end of 2018, EUR285mn had
op
been lent. EUR250mn of such loans reported on Wirecard’s balance sheet was unsecured
lending to two of the TPA partners.

The major control deficiency was that the group was found to have not evaluated the TPA
partners’ ability to repay. Their repayment ability could not be ascertained.
tC

Other Control Deficiencies

There were also a multitude of other risk and compliance shortcomings. For instance, Wirecard
lacked any formal process for acquisitions and postmerger integration. Controls for the
enforcement of state sanctions and embargoes were found to be “non-existent” too. Furthermore,
KPMG found that the TPA partner companies lacked the licenses to operate their core
businesses in respective countries.
No

Wirecard was subject to strict anti-money-laundering regulations that required it to know the
identity of its merchants. The rationale was that the merchants were the ultimate customers
(users) of the card payment-processing services. As such, the group should have conducted the
necessary know-your-customer (KYC) checks for onboarding customers. Archives of
transaction data should also have been maintained. It was found that Wirecard solely relied on
the TPA partners to perform compliance checks. It also did not track or monitor these checks
or request that the partners get proof of completed checks.
Do

58 According to the source from the Financial Times, there was no indication of whether the trustee’s name was unknown to
KPMG, or that KPMG did not disclose the trustee’s name in the report.
59 O. Storbeck, T. Kinder, and S. Palma, “EY failed to check Wirecard bank statements for 3 years.”

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 22/722C Wirecard’s Multibillion-Dollar Fraud: Who Should be Blamed for the Corporate Governance Failure?

Auditors60

t
os
It is beyond the realms of reality that EY wouldn’t have had [the bank balance
confirmations] unless they did a very poor audit. Cash is easy to audit. If
investors can’t trust the cash number, what can they trust?
- Anonymous, the head of audit at a rival accounting firm to EY61

EY had been appointed as the auditor of annual accounts since 2008. Over the decade, EY had

rP
earned about EUR10mn for its audits of Wirecard’s accounts. From 2015 to 2019, five different
partners at EY signed the accounts.

Despite multiple allegations of fraud, EY had issued unqualified audit opinions for 10
consecutive years. As EY’s client, Wirecard was officially charged by German regulators in
June 2020. The audit firm made a statement to the public stating that the group had deliberately
committed an “elaborate and sophisticated fraud” that involved numerous parties worldwide.
EY noted that the investors and itself were both deceived by Wirecard.62 EY further claimed

yo
that a fraud of this kind could happen even with “the most robust audit procedures.” Alongside
this public statement, EY started an internal review of the audit work of its German team. The
auditor oversight body in Germany, Auditor Oversight Body (APAS), was also examining EY’s
work.

During the same month, Wirecard investors accused EY of violating its professional duties
throughout the years and brought a class-action lawsuit against EY. A small shareholder lobby
op
group in the country, SdK, also filed criminal complaints against EY for signing Wirecard’s
accounts between 2016 and 2018.

As for the Wirecard insolvency in June 2020, the media commented that the accounts at Filipino
banks played a pivotal role. That month, the Filipino banks told EY that the accounts were
spurious, meaning the alleged balances were nonexistent. But the media was informed that for
FY2016 to FY2018, EY did not request account information directly from OCBC Bank to
tC

verify the cash balance. Instead, EY relied solely on the documents, screenshots, and
representations provided by a third-party trustee and the group itself.63

Looking Forward
The fraud at Wirecard reverberated across Germany. Stakeholders including government,
regulators, auditors, and shareholders wanted to understand the reasons for Wirecard’s downfall
No

from a corporate governance angle. The ramifications of Germany’s two-tier board structure
on Wirecard’s corporate governance were one of the areas of interest.

In the future, stakeholders might well learn from the lessons of Wirecard’s multibillion-dollar
scandal. As every country or jurisdiction had its unique corporate governance structure,
stakeholders had to be mindful of and assess the corresponding implications to their
international operations. Specifically, how would a company’s stakeholders appropriately
assess the corporate governance structure of a jurisdiction at the country, market, and company
levels?
Do

60 O. Storbeck, T. Kinder, and S. Palma, “EY failed to check Wirecard bank statements for 3 years.”
61 Ibid.
62 T. Kinder and O. Storbeck, “EY prepares for backlash over Wirecard scandal,” Financial Times, 29 June 2020,

https://www.ft.com/content/ae73160b-fd9a-4313-89f9-8fd70183158e, accessed May 2021.

63 O. Storbeck, T. Kinder, and S. Palma, “EY failed to check Wirecard bank statements for 3 years.”

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 22/722C Wirecard’s Multibillion-Dollar Fraud: Who Should be Blamed for the Corporate Governance Failure?

EXHIBIT 1: YEARS OF ANNUAL REPORTS AUDITED BY EY AND THE AUDIT OPINION

t
IN THE RESPECTIVE YEARS

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Financial year ended Auditors Audit opinion
Jointly: RP Richter GmbH
31 December 200964 Wirtschaftsprüfungsgesellschaft Unqualified

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(RP Richter) and EY65
31 December 201066 Jointly: RP Richter and EY Unqualified
31 December 201167 EY Unqualified
31 December 201268 EY Unqualified
31 December 201369 EY Unqualified
31 December 201470 EY Unqualified
31 December 201571 EY Unqualified

yo
31 December 201672 EY Unqualified
31 December 201773 EY Unqualified
31 December 201874 EY Unqualified
31 December 201975 N/A N/A
op
tC

64 Wirecard, “Annual Report 2019,”

https://ir.wirecard.com/download/companies/wirecard/Hauptversammlung/GB2009_EN_2010_05%20web.pdf, accessed May
2021.
65 The long form of the name “EY” that operated in Germany was “Ernst & Young GmBH Wirtschaftsprüfungsgesellschaft”.
No

66 Wirecard, “Annual Report 2010,” https://www.wirecard.com/wp-content/uploads/2020/12/Annual-Report-2010.pdf, accessed

May 2021.
67 Wirecard, “Annual Report 2011,” https://www.wirecard.com/wp-content/uploads/2020/12/Annual-Report-2011.pdf, accessed

May 2021.
68 Wirecard, “Annual Report 2012,” https://www.wirecard.com/wp-content/uploads/2020/12/Annual-Report-2012.pdf, accessed

May 2021.
69 Wirecard, “Annual Report 2013,” https://www.wirecard.com/wp-content/uploads/2020/12/Annual-Report-2013.pdf, accessed

May 2021.
70 Wirecard, “Annual Report 2014,” https://ir.wirecard.com/download/companies/wirecard/Hauptversammlung/DE0007472060-

JA-2014-EQ-E-00.pdf, accessed May 2021.

71
Wirecard, “Annual Report 2015,” https://www.wirecard.com/wp-content/uploads/2020/12/Annual-Report-2015.pdf, accessed
May 2021.
Do

72 Wirecard, “Annual Report 2016,” https://www.wirecard.com/wp-content/uploads/2020/12/Annual-Report-2016.pdf, accessed

May 2021.
73 Wirecard, “Annual Report 2017,” https://www.wirecard.com/wp-content/uploads/2020/12/Annual-Report-2017.pdf, accessed

May 2021.
74 Wirecard, “Annual Report 2018,” https://ir.wirecard.com/download/companies/wirecard/Annual%20Reports/DE0007472060-

JA-2018-EQ-E-01.pdf, accessed May 2021.

75 There was no annual report published as of the financial year 2019. The latest financial statements of Wirecard were the

quarterly statement as of 30 September 2019.

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 22/722C Wirecard’s Multibillion-Dollar Fraud: Who Should be Blamed for the Corporate Governance Failure?

EXHIBIT 2: ILLUSTRATIVE CHART OF WIRECARD’S STOCK PRICE

t
FROM 2018 TO JUNE 202076

os
The chart illustrates the stock price of Wirecard from 2018 to June 2020, pinpointing major
events surrounding the group during the period.

Wirecard: from stock market star to scandal

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Share price (€) FT reports suspect
200
transactions in
Replaces Singapore KPMG say it was unable
Commerzbank in to verify Wirecard's
Dax Index third‐party profits
150

yo
100
Police raid Hires KPMG for
Singapore office independent audit
50 Announce $1bn
Wirecard says €1.9bn
SoftBank deal
of cash is missing

0 Markus Braun arrested

2018 2019 2020
op
Source: Wirecard AG (WDI.HM) Historical Data, created by authors, data from Yahoo Finance
and Financial Times.
tC
No
Do

76 Yahoo Finance, “Wirecard AG (WDI.HM) Historical Data,”

https://finance.yahoo.com/quote/WDI.HM/history?period1=1514764800&period2=1593475200&interval=1d&filter=history&
frequency=1d&includeAdjustedClose=true, accessed May 2021.

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 22/722C Wirecard’s Multibillion-Dollar Fraud: Who Should be Blamed for the Corporate Governance Failure?

EXHIBIT 3: ILLUSTRATIVE DIAGRAM OF THE RELATIONSHIP BETWEEN WIRECARD,

t
TPA PARTNERS, AND MERCHANTS IN THE THIRD-PARTY ACQUIRING BUSINESS
AND MERCHANT CASH ADVANCE BUSINESS77

os
The chart illustrates the relationship between Wirecard, TPA partners, and merchants in the
Third-Party Acquiring business and Merchant Cash Advance business relationship between
Wirecard, TPA parties, and merchants.

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yo
op
tC
No

Source: D. McCrum and O. Storbeck, “How the paper trail went cold in KPMG’s special audit of
Do

Wirecard”; KPMG.

77 D. McCrum, O. Storbeck, “How the paper trail went cold in KPMG’s special audit of Wirecard.”

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 22/722C Wirecard’s Multibillion-Dollar Fraud: Who Should be Blamed for the Corporate Governance Failure?

EXHIBIT 4: OBSTACLES THAT KPMG HAD CITED IN ITS SPECIAL AUDIT REPORT78

t
os
KPMG had cited a number of obstacles in its special audit report.

 There was significant delay in obtaining requested materials.

 It was difficult to secure interviews with key Wirecard employees.
 Bank statements that prove the receipt of payments of approximately EUR1bn at

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escrow agent 1 could not be obtained.
 KPMG was unable to conclusively assess the reliability of the bank confirmations
sent to Wirecard’s auditors, EY.
 In some cases, KPMG had to rely on screenshots instead of original documents, the
report added.
 For Wirecard’s transaction volumes, screenshots taken from the systems of the
Group’s business partners and minutes of quarterly talks between the Group and its

yo
partners were relied on.
 KPMG was unable to verify the existence of Wirecard’s 34 clients as the Group did
not reveal their identities. These 34 clients were those who contributed to billions of
euros of payments processing transactions in 2016 and 2017.
 KPMG was unable to identify the beneficial owners of a Mauritius fund that acted as
a middleman to earn EUR300mn of profit from Wirecard’s 2015 acquisition of Indian
businesses for EUR340mn.
op
tC
No
Do

78 O. Storbeck and D. McCrum, “KPMG unable to verify Wirecard’s third-party profits,” Financial Times, 28 April 2020,
https://www.ft.com/content/56a2057c-b975-4965-b0cf-641b83ee0f82, accessed May 2021.

14

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 22/722C Wirecard’s Multibillion-Dollar Fraud: Who Should be Blamed for the Corporate Governance Failure?

EXHIBIT 5: TIMELINE OF MAJOR EVENTS IN WIRECARD’S DOWNFALL79

t
os
Date Major Event
Wirecard was founded in a suburb of Munich, Germany. At that time, it operated as a payment
1999
processor that helped websites collect credit card payments from customers.
Wirecard almost became insolvent. Markus Braun, as a former KPMG consultant, took over as the
2002
CEO and made the decision that merged Wirecard with its rival, Electronic Business Systems.
Wirecard listed its shares on Frankfurt Stock Exchange through a reverse merger with InfoGenie
AG.80 In this way, Wirecard obtained its listing status without the need to undergo the scrutiny as

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2005
in an initial public offering. At the time, the core of Wirecard’s business was managing payments
for online gambling and pornography.
Wirecard moved into banking with the purchase of XCOM and renamed it Wirecard Bank. This
bank was licensed to issue Visa and Mastercard credit cards and handle money on behalf of
2006
merchants. Together with the payment-processing business, the group then operated both non-
banking and banking businesses.
The head of a German shareholder association publicly criticized Wirecard for its balance sheet
2008 irregularities. In response to the claims, Wirecard appointed EY for a special audit. EY was also
appointed to audit the group’s accounts for the financial year.

yo
Mr. Jan Marsalek, a protégé81 of Markus Braun, was appointed the COO of Wirecard. Wirecard
2010
also told their staff its aspiration to expand globally.
Wirecard raised EUR500mn equity and acquired large amounts or all of payments companies across
2011 to
Asia. These acquirees were described by the Financial Times as “obscure” and “oddly structured.”
2014
Headquarters of the Asian companies were in Singapore.
The Financial Times began to publish its queries about inconsistencies in the group’s accounts.
EUR250mn of short-term assets were suggested to be overstated in balance sheet. This
2015 overstatement roughly equaled to the prior three years’ reported profits.82 Wirecard rebutted the
claims using letters from its engaged Schillings, a UK law firm. The group also hired FTI
Consulting to manage its external public relations.
op
J Capital Research, a US and Hong Kong registered independent research group, published its
investigative report on Wirecard with a recommendation to short the stock. The researchers visited
the group’s Asian offices and tried to use its services in countries outside Germany. First, they
found out they were unable to load funds onto a Wirecard prepaid card or use Wirecard’s payment-
November
processing system on websites basically outside Germany. Second, only one of the group’s
2015
premises had a credible presence. The rest of the given locations were either seriously understaffed
or that they were not present at all. Third, through interviews conducted with its competitors, the
group had little or no business presence locally. Wirecard rebutted the claims.83 Some investment
tC

bank analysts gave positive feedback upon their purported visits to the group’s Asian offices.
Anonymous short sellers used a new entity incorporated in the British Virgin Islands called Zatarra
Research and Investigations to make allegations against the group. Wirecard was alleged to lack
2016 oversight and controls designed to prevent money laundering.84 Senior executives were said to have
committed money laundering, market manipulation, and defrauding Mastercard and Visa. 85
Wirecard denied all allegations. BaFin started to investigate the allegations.
Wirecard was under the suspicion for being involved in the phishing attacks for years. Parties that
had been attacked were those considered critical of or had investigated the group, such as the hedge
Late 2016
funds, short sellers, journalists, and those having investigated the group’s accounting irregularities.
No

The Financial Times was one of the attacked parties.86

79 O. Storbeck and D. McCrum, “KPMG unable to verify Wirecard’s third-party profits,” Financial Times, 28 April 2020,
https://www.ft.com/content/56a2057c-b975-4965-b0cf-641b83ee0f82, accessed May 2021.
80 R. Browne, “It was once Germany’s fintech star. Now, a missing $2 billion puts Wirecard’s future in doubt,” CNBC, 19 June

2020, https://www.cnbc.com/2020/06/19/wirecards-future-is-in-doubt-as-accounting-scandal-deepens.html, accessed May

2021.
81 A person who is guided and supported by an older and more experienced or influential person.
82
D. McCrum, “Wirecard: a rolling processor gathers no loss,” Financial Times, 17 August 2015,
https://www.ft.com/content/dc6cf703-fff9-3652-a65a-dc8d81a9439c, accessed May 2021.
Do

83 D. McCrum, “JCap on Wirecard: a search for the Asian business,” Financial Times, 20 November 2015,

https://www.ft.com/content/3cfa02ff-fd51-3594-aeda-e876b4e656ab, accessed May 2021.

84 D. McCrum, “Shares in fintech darling plunge on critical report,” Financial Times, 25 February 2016,

https://www.ft.com/content/30bcfa9b-f9fb-3343-a060-24793fd6a8aa, accessed May 2021.

85 Reuters, “Timeline: The rise and fall of Wirecard, a German tech champion,” https://www.reuters.com/article/us-germany-

wirecard-inquiry-timeline-idUSKBN2B811J, accessed May 2021.

86 P. Murphy and K. Shubber, “Hackers for hire ‘targeted hundreds of institutions’,” Financial Times, 9 June 2020,

https://www.ft.com/content/315aceba-935a-4e70-83c4-1d1fd7cf939b, accessed May 2021.

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 22/722C Wirecard’s Multibillion-Dollar Fraud: Who Should be Blamed for the Corporate Governance Failure?

EY issued a clean audit opinion for Wirecard’s accounts. Investors were drawn to the substantial

t
2017 cash generated by the group for the past financial year, so the share price doubled. The group also
announced a deal to take over Citi’s payment-processing operations across 11 countries in Asia.

os
Markus Braun personally borrowed a margin loan of EUR150mn from Deutsche Bank. Collateral
of the loan was his own 4.2mn shares of Wirecard, of the total holding of 8.6mn shares. The 8.6mn
Late 2017
shares represented 7% stake in the group. As the pledged shares amounted to EUR390mn, the loan-
to-value ratio of the loan was 40%.87
Wirecard’s legal staff in Singapore headquarters started to investigate three finance team members.
March
Such investigation came after an internal whistleblower made allegations against the group’s plan
2018
to fraudulently transfer funds to India via third parties by means of “round tripping.”

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Wirecard’s shares peaked at EUR191, giving a market capitalization of more than EUR24bn. The
August group claimed that it had 5,000 employees. The operations included processing payments for about
2018 250,000 merchants, issuing credit and prepaid cards, and providing technology for contactless
smartphone payments.
In terms of market capitalization, the group became Europe’s largest fintech, replacing
September Commerzbank to become a constituent stock in DAX.88 Since then, numerous pension funds around
2018 the world had automatically invested in Wirecard stock. Markus Braun’s personal stake in the group
was worth EUR1.6bn. He said the group’s sales and profits would double in next two years.
October Wirecard’s legal staff whistleblowers revealed that the internal investigation in Singapore

yo
2018 headquarters had already been squashed.
The Financial Times published its first investigative article on Wirecard upon its visit to Singapore.
30 The group’s integrity in accounting practice was questioned. An executive was alleged to use forged
January and backdated contracts in a series of suspicious transactions.89 In response, the group said the
2019 report was false, inaccurate, misleading, and defamatory.” 90 BaFin started to investigate the
Financial Times over its allegation.
Edo Kurniawan, the accounting head of Wirecard’s Asia-Pacific region, could not be contacted by
the Singapore’s office anymore. The Singapore police raided Wirecard’s offices.91 Wirecard’s share
Early price dropped below EUR100. BaFin then announced a two-month ban on short selling. 92 The
February regulator explained that Wirecard was important to Germany’s economy and any short selling
op
2019 would be a “serious threat to market confidence” and informed the Federal Ministry of Finance93
(BMF) of these moves. 94 Markus Braun told analysts in a conference call that the company’s
compliance was “perfect.”95
The Financial Times reported that half of Wirecard’s business was outsourced to other parties. The
group was found to earn commission from its partners who actually handled the payments
processing operations. The media attempted to visit some of these partners known to be located in
the Philippines. It was discovered that an address was a house of a “retired seaman” and his family.
March In light of the report, Wirecard filed a suit at the Munich regional court against the Financial Times
tC

2019 for misrepresentations and incorrect use of business secrets in its investigative reports. 9697 The
group also filed a case against the Singapore authorities and requested for certain seized documents
to be returned, arguing the seizure was beyond the media’s allegations. The police prosecutors,
however, reckoned Wirecard’s lawsuit and request had no legal ground, abused the legal process,
and illegally limited the police’s investigation.98

87 O. Storbeck, A. Massoudi, and R. Smith, “Deutsche Bank revealed as behind €150m loan to Wirecard founder,” Financial
No

Times, 25 March 2019, https://www.ft.com/content/ea1d6db0-4bda-11e9-bbc9-6917dce3dc62, accessed May 2021.

88 DAX was an index that represented 30 of the largest and most liquid companies listed on the Frankfurt Stock Exchange.
89 D. McCrum, “Executive at Wirecard suspected of using forged contracts,” Financial Times, 30 January 2019,

https://www.ft.com/content/03a5e318-2479-11e9-8ce6-5db4543da632, accessed May 2021.

90 Reuters, “Timeline: The rise and fall of Wirecard, a German tech champion.”
91 S. Palma and D. McCrum, “Wirecard ‘loses contact’ with executive at heart of accounting scandal,” Financial Times, 12

March 2019, https://www.ft.com/content/dcf600f2-44be-11e9-b168-96a37d002cd3, accessed May 2021.

92 Short selling refers to the market activity where a trader (short seller) borrows security from security lender and sells (short

sells) the security in the market, with the belief that the market price will drop later. Before the borrowing arrangement
expires, short seller should buy the security back from the market to return to the security lender. Short sellers are either
speculators or hedgers who bet on the drop in the security price. Therefore, they represented negative or pessimistic views
about the security, as opposed to positive or optimistic views.
93 It referred to the cabinet-level finance ministry of Germany.
Do

94 Reuters, “Timeline: The rise and fall of Wirecard, a German tech champion.”
95 O. Storbeck, “McKinsey warned Wirecard a year ago to take ‘immediate action’ on controls,” Financial Times, 14 July 2020,

https://www.ft.com/content/bfa1cafc-d8fa-4745-adef-ed99e88cb78f, accessed May 2021.

96 Reuters, “Timeline: The rise and fall of Wirecard, a German tech champion.”
97 Reuters, “Wirecard sues FT over investigative reports,” https://www.reuters.com/article/us-wirecard-stocks/wirecard-sues-ft-

over-investigative-reports-idUSKCN1R91Y0, accessed May 2021.

98 S. Palma and D. McCrum, “Wirecard ‘loses contact’ with executive at heart of accounting scandal.”

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 22/722C Wirecard’s Multibillion-Dollar Fraud: Who Should be Blamed for the Corporate Governance Failure?

The Japanese conglomerate SoftBank announced it invested in Wirecard’s bond amounting to

t
April
EUR900mn by cash, convertible into 5.6% stake at share price of EUR130. The investment was
2019
seen as a vote of confidence, so the share price was up by almost 9% to EUR134.99100101

os
The Financial Times published its investigative report on Wirecard’s outsourced TPA business.
24 April
The arrangements with three of the group’s TPA partner companies contributed about 50% revenue
2019
and almost 100% profits. Markus Braun criticized the relevant figures as “inaccurate.”102
EY approved the 2018 accounts with “minor” qualifications 103 in audit opinion related to the
Late April
Singapore entities. In response, Wirecard engaged McKinsey & Co. for a compliance audit, with
2019
the joint commission by the group’s supervisory and management board.104
McKinsey presented to the two boards, warning about the group’s “non-existent” internal controls

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over the TPA business and multitude of other compliance shortcomings that posed “significant risk”
to the group. The consultant called for “immediate action” to address the absence of controls. The
shortcomings stirred up heated discussion within Wirecard. Instead of adopting its proposed
August
enhancements in a follow-up project, Wirecard’s management board pushed for PwC to set up a
2019
new compliance program. A potential conflict of interest was suspected, as PwC was also the
auditor of the group’s Wirecard Bank. Furthermore, PwC’s scope of work did not address
Wirecard’s TPA business. Still, the position “group compliance officer” was created but this person
would not be given a seat in the management board.105
Wirecard issued EUR500mn of bonds classified as investment grade 106 by Moody’s, the credit
September

yo
rating agency. Wirecard sued the Financial Times for misusing “trade secrets” for publishing those
2019
articles.
The Financial Times published documents indicating that profits of Wirecard units in Dubai and
Dublin were fraudulently inflated. Customers listed in documents provided to EY were alleged to
be nonexistent. Wirecard responded that the published documents were unauthentic and reiterated
October
no wrongdoing on the part of its staff and executives. Under pressure from investors, the group
2019
appointed KPMG to conduct a special audit on behalf of its “Supervisory Board” in order to clarify
the media’s accusations. The audit covered four areas, namely “TPA Business,” MCA (or Digital
Lending), and business activities in India and Singapore.107
The Financial Times reported that Wirecard had included the cash held in escrow accounts 108
op
managed by trustees within its own cash balances. The media reported that throughout 2016 to
December 2018, the group recorded up to EUR1bn escrow accounts’ balances as cash in balance sheet. The
2019 bank with which the escrow accounts were opened was the Singapore-based OCBC Bank. 109
Wirecard explained that this accounting treatment had already been detailly reviewed by the EY
auditors.
Both KPMG’s special audit report and EY’s annual audit report were postponed. EY received
documents from a party that purported to be Wirecard’s trustee in the Philippines. The documents
March
stated balances totaling EUR1.9bn were held in two of the Filipino banks. Wirecard had also told
tC

2020
EY that the escrow money had already been transferred from OCBC Bank to two Filipino banks in
late 2019.110
Wirecard made a statement to investors that KPMG had largely completed the special audit. The
12 March
group purported that so far, no substantial findings resulting in correction of 2016–2018 accounts
2020
had been found. It also purported that the investigation of TPA business was still ongoing and to be

99
No

R. Smith and A. Massoudi, “SoftBank executives set to lose profits from Wirecard trade,” Financial Times, 22 June 2020,
https://www.ft.com/content/b8eec9d0-0c85-467d-8cb1-467ad87adced, accessed May 2021.
100 R. Smith, “The engineering behind SoftBank’s Wirecard bet,” Financial Times, 25 April 2019,

https://www.ft.com/content/727f97ce-6692-11e9-a79d-04f350474d62, accessed May 2021.

101 O. Storbeck and K. Inagaki, “Japan’s SoftBank to invest €900m in Wirecard,” Financial Times, 24 April 2019,

https://www.ft.com/content/d8890d2c-6659-11e9-9adc-98bf1d35a056, accessed May 2021.

102 Ibid.
103 Minor qualifications refer to when the auditor comments that the applicable accounting standards/principles were not being

followed in all financial transactions. The deviations were not pervasive, according to the auditor’s professional judgment.
104 O. Storbeck, “McKinsey warned Wirecard a year ago to take ‘immediate action’ on controls.”
105 Ibid.
106 Investment grade refers to a rating that signifies that a corporate bond presents a relatively low default risk.
Do

107 DGAP, “Wirecard AG: KPMG special review lasts until April 27 2020. Analysis so far provides no evidence of balance sheet

manipulation,” https://www.dgap.de/dgap/News/adhoc/wirecard-kpmg-special-review-lasts-until-april-analysis-far-provides-
evidence-balance-sheet-manipulation/?newsID=1319801, accessed May 2021.
108 Escrow account refers to where a third party holds money or assets on behalf of two other parties that are in the process of

completing a transaction. Escrow account is also a trust account.

109 O. Storbeck, T. Kinder,and S. Palma, “EY failed to check Wirecard bank statements for 3 years,” Financial Times, 26 June

2020, https://www.ft.com/content/a9deb987-df70-4a72-bd41-47ed8942e83b, accessed May 2021.

110 Ibid.

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 22/722C Wirecard’s Multibillion-Dollar Fraud: Who Should be Blamed for the Corporate Governance Failure?

completed by April 2020. The extensive inspection and coronavirus travel restrictions necessitated

t
an extended timeframe for annual report until April-end, according to management.111
KPMG’s report was published, concluding that the group provided insufficient documentation to

os
address the Financial Times’ allegations of accounting irregularities. The report stated that the
arrangements contributing to “the lion’s share” of Wirecard’s profits from 2016 to 2018 could not
28 April be verified. The report also questioned the group’s EUR1bn of cash balances which were only
2020 evidenced by the documents provided by a Singapore trustee of the group, but this trustee had “cut
ties with” Wirecard around the time this special audit began. “Obstacles” to their audit work were
also cited.112 Meanwhile, Markus Braun told investors that EY had “no problem at all to sign of the
audit 2019” but that EY’s publication of 2019 accounts would be postponed to June 2021.

rP
Wirecard announced that KPMG’s special audit result would be available by month-end. Similar to
22 April its March’s announcement, it was said that no substantial findings in the four areas resulting in any
2020 correction of accounts from 2016 to 2018. It was emphasized that no evidence was found for the
publicly raised allegations of balance sheet manipulation.113
BaFin filed a criminal complaint against Markus Braun and three other executive board members
for Wirecard’s misleading statements as of 12 March and 22 April 2020. Munich prosecutors
June 2020 launched a criminal investigation on the group and searched its headquarters. There were civil
lawsuits and criminal complaints filed by shareholders and short sellers. The FREP started to
investigate the group’s accounting.114

yo
16 June The two Filipino banks told EY that the documents as of December 2019 in connection to the
2020 EUR1.9bn balances in escrow accounts were “spurious,” meaning that they did not exist at all.
EY refused to sign off Wirecard’s 2019 accounts for being unable to confirm the existence of the
18 June balances which had been reported to be “a quarter of its balance sheet” before.115 Jan Marsalek was
2020 suspended. James Freis joined the management board as chief compliance officer. The stock price
of Wirecard dropped from EUR104.04 to EUR38.80.116
Markus Braun resigned. James became the interim CEO. Meanwhile, Wirecard announced that
19 June
“constructive talks” with banks were being held. The banks had the right to terminating loans of
2020
EUR2bn lent to the group.
20 June Markus Braun was arrested on suspicion of false accounting and market manipulation. Munich
op
2020 prosecutors said that the group’s former management board was also under investigation.
22 June Wirecard acknowledged the potential scale of its multiyear accounting fraud. It also warned about
2020 the nonexistence of the EUR1.9bn cash. Jan Marsalek was sacked.
25 June Wirecard filed for insolvency for owing almost USD4bn to creditors. The stock price further
2020 dropped from EUR11.88 to EUR3.09.117
End of
Michael Jaffe was appointed by a Munich court to manage the insolvency.
June 2020
Police and public prosecutors widened their investigation into Wirecard and raided its headquarters
tC

1 July in Munich and four properties in German and Austria. BaFin called the accounting scandal “a
2020 massive criminal act.” The head of the group’s Dubai-based subsidiary was arrested. Suspected
money laundering of certain individual was also investigated.
16 July
The arrested former Dubai head admitted his prior role in the multi-billion-euro fraud.
2020
German prosecutors arrested the group’s three former top executives, including Braun, for
Later in
suspected masterminding to fake the accounts and defraud creditors of billions of euros 118 for
July 2020
organized commercial criminal fraud, breach of trust, false accounting, and market manipulation.119
No

111 DGAP, “Wirecard AG: KPMG's special audit,” https://www.dgap.de/dgap/News/adhoc/wirecard-kpmgs-special-

audit/?newsID=1293369, accessed May 2021.
112 Reuters, “Timeline: The rise and fall of Wirecard, a German tech champion.”
113 DGAP, “Wirecard AG: KPMG special review lasts until April 27 2020. Analysis so far provides no evidence of balance sheet

manipulation.”
114 O. Storbeck and D. McCrum, “Wirecard offices searched as prosecutors probe management board,” Financial Times, 5 June

2020, https://www.ft.com/content/049d7f17-a99c-465d-8062-5e07fd9315b1, accessed May 2021.

115 Reuters, “Timeline: The rise and fall of Wirecard, a German tech champion.”
Do

116 Yahoo Finance, “Wirecard AG (WDI.F): Historical Data,”

https://finance.yahoo.com/quote/WDI.F/history?period1=1469664000&period2=1627344000&interval=1d&filter=history&fr
equency=1d&includeAdjustedClose=true, accessed July 2021.
117 Ibid.
118 Reuters, “Timeline: The rise and fall of Wirecard, a German tech champion.”
119 A. Bonime-Blanc and M. Marquardt, “For its sheer scope, daring, and size, Wirecard is being compared to Enron. What

happens next seems both predictable and inevitable,” LinkedIn, 14 April 2021, https://www.linkedin.com/pulse/global-
governance-lessons-from-europes-enron-michael-marquardt, accessed May 2021.

18

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