It should not have been left to journalists and short sellers to expose Wirecard
Healthy financial systems should not rely on short sellers and journalists to expose accounting scandals at large, publicly listed companies. Regulators and auditors should have been the heroes of the Wirecard story but their inability to see what others saw plainly paints them as the villains in this edition of German corporate noir.
On Tuesday Markus Braun, the turtle-necked wearing former chief executive of Wirecard, was arrested by Munich officials under suspicion of false accounting and market manipulation. The prosecutors have said they are investigating the company's management en masse too.
Since Thursday, when its auditor EY refused to sign off on its 2019 accounts, Wirecard’s share price has fallen by more than 80%. On Monday, Wirecard said it was likely that €1.9bn of its assets did not exist.
But the idea that things were not quite right at Wirecard had been well documented for years. Not by regulators, auditors or bank analysts, but by a merry band of outsiders — short sellers, some of whom have been betting against its shares since the mid-noughties, and journalists.
The Financial Times published its first story on Wirecard in April 2015, which began with an enticing line: “Wirecard is a little known German tech stock worth €5bn, and a puzzle.”
Since then, it has written roughly 50 stories on the company. For that, the main journalist responsible received a torrent of abuse on social media and the newspaper was investigated by the German regulator, BaFin.
For years, establishment figures, particularly in Germany, have scoffed at the stink surrounding Wirecard. Management defended itself aggressively and EY kept signing off on its accounts.
Bank analysts continued to recommend Wirecard. Notoriously, Heike Paul, an analyst at Commerzbank, called one of the FT stories “Fake News”.
BaFin appeared fiercely protective over the firm, banning short-selling the Dax 30-listed company for two months, as its offices in Singapore were raided, and filed criminal complaints against FT journalists and a number of short sellers, accusing them of market manipulation.
What inspired this level of confidence in the company? Groupthink? Idleness? Or simply that everyone was making money from the effort?
The answer to that is unclear but one of the most puzzling things about this case is, in the end, how easy certain parts of it were to check.
If journalists could go to the Philippines and check whether Wirecard’s affiliates in Asia were legitimate, why couldn’t the auditor? If they could find a near-empty office in Dubai at one of Wirecard's third-party acquirers, why couldn't those paid to do so give assurance that the company was doing what it said it was?
Over the weekend, two Philippine banks told the FT that Wirecard did not hold cash in their vaults. The governor of the Philippines’ central bank said Wirecard’s cash had not even entered the country. Why couldn’t regulators or auditors have found that out?
Auditing should not just be adding up figures given by management and reviewing submitted documents. It has to involve checks that circumvent any possible attempt to deceive, such as direct phone calls or visits.
Big auditing firms are vast enterprises with a lot of resources at their disposal. Regulators have the power of the law behind them.
The point of the latter is to shore up the reputation of its jurisdiction as a safe place for investors to do business by maintaining high standards of financial behaviour. It is not to tear into anyone who dares question why the latest corporate emperor rising up its stock indices appears to be naked.
And for every audit that turns out not to be worth the paper it is written on — much less the fee the auditor charged to produce it — the more pointless such an exercise becomes. An external audit should guarantee quality and probity, not merely be a corporate box ticking exercise.
Short sellers are easily painted as villainous. According to Breakout Point, the top eight hedge funds with short exposure to Wirecard made over $1bn in its collapse. But it is not the short sellers who lost German retail investors money — it was Wirecard, and the financial establishment that supported it for so long.
Ernst & Young did not immediately respond to requests for comment. Wirecard said it is currently making no further comments.