Wirecard AG
Recent Developments and
How to Proceed as an Investor

On 18 June 2020, Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft (EY) announced that it found no sufficient proof of the existence of bank balances held in escrow account amounting to 1.9 billion Euro while acting as the auditor of Wirecard AG (Wirecard). Subsequently, it emerged that Wirecard has been manipulating its balance sheets for years and the company is in the middle of a fraud case of spectacular proportion.

Many years before the accounting scandal became known to the public, Wirecard has regularly been accused of a variety of accounting problems, including not properly disclosing and even falsifying its balance sheets. New and serious allegations were made from the beginning of 2019 especially by the British newspaper Financial Times. Fictitious revenues (third party acquiring), inflated purchase prices of companies to enrich managers, incorrectly booked merchant cash advance loans, as well as round-tripping by its companies in the United Arab Emirates, in the Philippines, and in Singapore make up only one part of the accusations leveled against Wirecard.

As a result of these public accusations of irregularities and questionable transactions, Wirecard shares repeatedly suffered substantial losses. Wirecard denied these accusations frequently. The Federal Financial Supervisory Authority (BaFin) had temporarily imposed a ban on short selling Wirecard shares.

Because of the persistent criticisms, the payment service provider tasked KPMG AG Wirtschaftsprüfungsgesellschaft (KPMG) to produce an additional special financial audit. This special audit, according to Wirecard, was supposed to definitively and independently dispel all accusations leveled against the company by the Financial Times. The publication of this special audit was delayed repeatedly though.

When the special audit was made public at the end of April 2020, Wirecard’s share price fell sharply by around 40%. In contrast to the expectations of the financial market, it emerged that the accusations could not be dispelled completely. On the contrary, the independent auditor claimed in the report that it did not have access to all the necessary files and was obstructed in its investigations. Many questions remained.

For example, KPMG could not confirm the existence of revenues from the so-called third party acquiring business relationships. Payments amounting to one billion Euro allegedly held in escrow accounts could also not be traced.

In the end, EY, which has acted as the auditing firm for Wirecard for many years, refused to confirm an auditing opinion for the first time on 18 June 2020. According to EY, there was no sufficient proof for a credit balance amounting to 1.9 billion Euro held in escrow accounts. On 22 June 2020, Wirecard announced that these accounts probably do not exist. This supposition was proven correct a short time afterwards. The Chief Operating Officer Jan Marsalek was then dismissed by the company. On 25 June 2020, Wirecard filed for insolvency. On 25 August 2020 the District Court in Munich opened insolvency proceedings for Wirecard and six of its subsidiaries. Shareholders suffered substantial losses.

Even though many indicators of wrongdoing by Wirecard were present, BaFin nevertheless did not undertake to do anything for a long time. The auditing firm EY, despite bringing to public the accusations of balance sheet manipulation, had certified the balance sheets of Wirecard for years. The prosecutor is now investigating and some members of the executive board are on the run or are remanded into custody.