The collapse of the wire card reveals cracks in the heart of Germany, Inc.

The collapse of the wire card reveals cracks in the heart of Germany, Inc.

Journalists, whistleblowers and skeptical investors have been questioning Wirecard’s accounting for years, but executives have been able to withdraw their accusations. Wired card (WCAGY) he received cover from the country’s banking regulator, who pushed hard against critical hedge funds and investigative journalists, but failed to spot anything wrong with the company.

In the end, the collapse lasted only seven days. Wirecard admitted last week that about a quarter of its assets – 1.9 billion euros ($ 2.1 billion) in cash – probably never existed. Director of the Directorate Marcus Brown resigned and was quickly arrested on suspicion of artificially inflating the balance sheet and selling the company to fraudulent transactions. The wire card filed for insolvency on Thursday.

Brown, who was released on bail, persistently denied the violations, suggesting that Wirecard was the victim of a very sophisticated scam. But a picture emerges of a esteemed technology company cheered by the authorities instead of carefully scrutinized, and a supervisory board that failed to scrutinize the CEO who was considered by many to be a visionary. Accounting firm EY caused Wirecard to decline by refusing to cancel its final results for 2019, after more than a decade of auditing the company.

“You have a wealth of evidence of sinners, overlookers, all kinds of different wrong parties,” said Christian Strenger, academic director of the Center for Corporate Governance at HHL Leipzig Graduate School of Management.

Wirecard is the first member of the elite Frankfurt DAX index to file for insolvency. But its implosion follows a series of scandals over the past five years that have embarrassed the German government, regulators and the business community, raising the question of the power of corporate governance and financial regulation in the world’s fourth-largest economy.

Volkswagen (VLKAF), the world’s largest carmaker and champion of German production, acknowledged millions in 2015 diesel vehicles was equipped with cheat software on emission tests. Deutsche Bank (DB), the largest lender in the country, paid tens of billions of dollars in penalties related to the sale of toxic mortgage assets, manipulation of interest rates and the Russian money laundering scheme.
Two other German corporate snafus generated global headlines this week: more than 1,500 workers tested positive for coronavirus at a plant owned by meat processing giant Tönnies Group, forcing local officials to reintroduce locking to more than half a million people in the area; i Bayer (BAYRY) agreed to pay more than $ 10 billion to settle claims that Roundup, a product it owns thanks to the acquisition of Monsanto, is causing cancer.

Immediately at the plant in Tönnies, they pointed out the poor working and living conditions faced by foreign workers in the industry, and the German government responded by promising to ban the use of subcontractors and double the fines for violating working time rules.

The Bayer settlement comes after investors have expressed deep concern on the acquisition of Monsanto and examined whether management had properly understood the legal risks. Shares at Bayer have lost about a third of their value since the purchase of Monsanto was announced in September 2016.
A huge meat packaging company in the heart of Germany a new point for the coronavirus

The companies operate in a variety of industries, but with the exception of the Tönnies Group, they are publicly listed and run by the management responsible for day-to-day operations and overseen by a supervisory board that includes employee representatives. Critics say oversight breaks down when boards become too comfortable, which can happen when top executives move into oversight positions. Investors complain that their interests are too often subject to other considerations, such as policy or internal corporate dynamics.

Strenger said German corporate governance has improved significantly in recent decades, but that the shortcomings of executives and directors are still too common. Additional safeguards would be relatively easy to install, such as changing stock market rules to prevent companies from delaying their financial results, as Wirecard did.

“We have made good progress … but there is still room for human error or for trying to believe in people who appear in a convincing way. [Wirecard] traded in the company of analysts and investors as follows SAP (SAP), and who wouldn’t want to be in that belt? “he said, referring to the software giant that is also listed on the DAX.
Former Wirecard director Marcus Brown was considered by many to be a technological visionary.
The collapse of Wirecarc is creating waves far beyond Germany. The enemy’s search for missing funds reached the Philippines, where the central bank denied the money to enter the country’s financial system. American card issuers Mastercard (MA) i Visa (V) are reconsidering whether to allow Wirecard to continue processing payments on its networks, Bloomberg reports, and the British regulator has switched to protection of Wirecard customer funds.

The German government is now paying close attention. Finance Minister Olaf Scholz described the Wirecard scandal as “extremely worrying”, saying the country must act quickly to improve oversight. “Critical questions are being asked about the company’s supervision, especially in terms of accounting and balance sheet control. Audit and supervisory bodies do not seem to be effective here,” Scholz said in a statement.

The German Financial Supervisory Authority or BaFin is actively investigating whether Wirecard violated anti-market manipulation rules. But the regulator is now under great scrutiny, with critics arguing it should have been a better deal to oversee Wirecard’s banking unit, even if it didn’t have direct oversight of the larger company.

Mastercard and Visa reportedly reconsidered their relationship with Wirecard following an accounting scandal

Observers also want to know why BaFin issued a temporary ban in 2019 preventing investors from borrowing shares of Wirecard to sell them in anticipation of falling prices and why it filed criminal charges against a Financial Times reporter who published a series of articles published by accounting and management irregularities in the company. BaFin chief Felix Hufeld described the scandal earlier this week as a “complete disaster”.

The European Commission has asked its top market supervisor to conduct a preliminary investigation into BaFin. Valdis Dombrovskis, the EU official in charge of financial services policy, told the Financial Times that the bloc should be ready to launch a formal investigation if necessary.

“We need to clarify what went wrong,” he said.

EY, which is already facing criminal charges from the German shareholders’ association SdK, said on Friday that the collapse of Wirecard was the result of “a complex and sophisticated fraud involving several parties around the world in various institutions, with the deliberate aim of deception”.

“Agreed frauds intended to deceive investors and the public often involve great efforts to create a false documentary clue,” the auditor added in a statement. “Professional standards recognize that even the most powerful and longest audit procedures cannot reveal a secret fraud.”

– Chris Liakos, Eoin McSweeney and Stephanie Halasz contributed to the reporting.

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