On June 24, 2020, the Wirecard logo can be seen at the payment company headquarters in Aschheim near Munich, southern Germany.
Christof Stache | AFP via Getty Images
Wirecard’s sharp decline from the grace period has already attracted German corporate governance and industry regulations.
The Munich-based payment processor filed for bankruptcy on Thursday and allegedly owed creditors 3.5 billion euros ($3.9 billion). Before the company went bankrupt, the Financial Times published a series of investigation reports, saying they had requested accounting violations.
Last week, it was revealed that 1
The Wirecard legend and its broader meaning raise many questions, and some experts describe the scandal as “German Enron.”
According to German company law, a company must have both a supervisory board and a management committee. The board of supervisors is responsible for supervision and management.
Chris Hohn, head of the US$24 billion hedge fund TCI, called for Wirecard’s supervisory board to fire former CEO Markus Braun in late April.
He wrote in an open letter published on April 28: “We believe that the board of supervisors is legally obligated to intervene. We believe that the necessary intervention now is to remove the CEO from all management positions.”
Nevertheless, Braun resisted the pressure to leave. He resigned last week after 18 years at the helm and is currently on bail after being arrested in Munich last week. The fiasco raised new questions as to why Wirecard’s supervisory board did not act in advance.
“What you saw on Wirecard was a disaster,” Peter Dehnen, chairman of the German Supervisory Board, told CNBC’s “Squawk Box Europe” program on Thursday.
Dehnen called for reforms to German corporate governance rules. Although the German Corporate Governance Code was only recently updated, Dehnen believes that there is a need for “new” and “dialogue driven” communication between the company and all stakeholders (not just shareholders).
He said: “This is modern corporate governance.” “With the current rules, I think we are back in the last century. For this, we need to make a radical change.”
The Wirecard scandal is far from a precedent that shocked the German business community. Siemens was hit by corruption scandals in the late 2000s, and Volkswagen’s reputation was severely damaged by the so-called “diesel door” emissions scandal in 2015.
Attorney Maximilian Weiss of the law firm TILP Litigation told CNBC’s “Squawk Box Europe” program last week: “We are in one of the biggest corporate scandals we have seen in Germany.”
Weiss said on Wednesday: “I think there are still many things to do.” “Look at the United States, what happened after the Enron incident. I think Wirecard is the German Enron.”
Enron, an energy services company, went bankrupt in 2001 after news of systematic accounting fraud was revealed. The scandal was a factor enacted in the Sarbanes-Oxley Act of 2002, and was designed to protect investors from fraudulent financial practices.
Weiss said Germany needs “better laws” to incentivize whistleblowers. He added that the Sarbanes-Oxley Act can provide a blueprint for what happens next in the country: “I think this will become a political issue.”
The scandal also brought renewed attention to how the German regulator handled charges against Wirecard. Many hedge funds criticized BaFin, a German financial regulator, for temporarily prohibiting short-selling of Wirecard stock, and filed a criminal lawsuit against two Financial Times reporters who reported whistleblower allegations about the company.
BaFin President Felix Hufeld (Felix Hufeld) admitted that this situation is a “scandal” and “total disaster.” On Tuesday, the regulator filed a case of “suspicious market manipulation” against the company.
Neil Campling, a technical, media and telecommunications analyst at Mirabaud Securities, told CNBC on Friday: “Bafen doesn’t have a glorious performance at all.” “They should be regulated-all they do is give in Any company requirements.”
Watchdogs are also the object of criticism by German lawmakers. Finance Minister Olaf Scholz told Reuters on Tuesday that the scandal “triggered key issues regarding corporate regulation” and called for regulatory reforms.
“Is BaFin really a financial regulator? Or is it a puppy?” Weiss of the TILP lawsuit said. “I think what they do in this matter must be very critical.”
However, Jan Pieter Krahnen, scientific director of the Institute of Finance at the Leibniz Institute of Finance in Frankfurt, believes that the problem may be a cultural issue, not a legal one. He said that German regulators are lax on issues affecting capital markets.
Krahnen told CNBC: “This is basically a product of culture, it does not really care about the rights of investors.” “In fact, there is no real culture to pursue those who may not disclose everything in the right way to make investors A company that feels safe.”
Klein believes that the EU may also play a role in such capital market issues. He said this may be under the leadership of the European Securities and Markets Authority (ESMA). He added that the current watchdog is more like a rule maker.
Brussels now calls on ESMA to investigate potential regulatory failures from BaFin. Valdis Dombrovskis, executive vice president of the European Commission, told the Financial Times on Friday: “We need to figure out what went wrong.”
Analysts say it’s not just BaFin that needs to be reviewed. Another question is why Ernst & Young (EY), Wirecard’s long-term auditor, did not choose to go back to accounting violations a few years ago.
Campling of Mirabaud Securities said: “There must also be some responsibility for the auditors.” He claimed to have conducted a two-year investigation into the Wirecard case. “It is the auditor’s responsibility to support the credibility of accounts and documents.”
Kampling said he suspected that 1.9 billion euros of missing funds “do not exist at all.” Wirecard said that the lost cash is likely not to exist.
Ernst & Young faced increasing legal pressure in auditing Wirecard accounts. The German shareholder association SdK has instituted criminal proceedings against Wirecard’s auditors. The object of the complaint was two current employees and one former employee of EY.
Prior to this, the law firm Schirp & Partner, on behalf of Wirecard investors, filed a class action lawsuit against the accountant, alleging that the company failed to mark incorrect scheduled payments in Wirecard’s 2018 account.
Ernst & Young said in a statement on Thursday: “There are clear signs that this is a well-designed and complex fraud involving multiple parties in different institutions around the world, deliberately deceiving each other.”
“Complicity fraud aimed at deceiving investors and the public often requires a lot of effort to create false documentation. Professional standards recognize that even the most powerful and extended audit procedures may not detect collusion fraud.”
The company told CNBC that it did not comment on the “pending litigation.”