Biggest Accounting Scandal in 2020 - Wirecard Company, Germany

Hi Everyone, today we will have a look at the biggest accounting scandal of 2020 involving Wirecard company, which has shaken the entire financial market of Germany.

“If you want to view this in a short video format, you can visit my channel “Finance Insights” Link: (https://youtu.be/xV0MM5SK0cI)”   

About Wirecard company

It is a FINTECH, digital payment processing company. It basically collects customer details at merchant sites while the customer is making payment from his credit or debit cards and then it helps in settlement and processing that transaction. Wirecard saw unprecedented success when in 2018 it found a place in DAX, which is Germany’s main stock market index, bringing its stock market value to $28 bn.   

Timeline of events

On June 18th, Ernst and Young said that it was unable to trace 1.9 bn euros in the Wirecard’s accounts. Wirecard initially claimed that money was supposed to be in trust accounts in 2 Philippines banks (BDO Unibank & Bank of the Philippines Islands), however, the central bank of the Philippines said that the cash had never entered its monetary system. Finally, on June 22nd, Wirecard’s management Board admitted that the funds in all likelihood “do not exist”. Its CEO, Marcus Braun got arrested on that evening. On June 25th, failing to reach any sought to deal with its lenders it filed for insolvency. The company’s share price dropped from 104 euros to 2.65 euros. 

Now, This scandal has put the spotlight on two things:

• First, The way the German regulator has handled the critics of Wirecard since 2018. For example in 2019, Financial Times published an investigation into Wirecard’s dubious accounting practices, to which in response the regulator filed a criminal complaint against the two FT journalists.
• Secondly, I want to emphasize the importance of short selling in such matters. Short sellers are people who try to benefit by betting against listed firms – thus they make money by selling borrowed shares and buying them back later at a lower price. Short sellers can play a very important role in uncovering big frauds, as when they take short positions, they are onto something big. They also help in price correction when firms are overvalued. Clearly in this case, when the German regulator banned short selling, it warded off a very important set of whistleblowers.