Eight ways Wirecard exposed cosy ties between auditors, big business, & political elites
The insolvency of the German payment processor & fintech company Wirecard AG has been described as ‘the Enron of Europe’, and by far the biggest accounting fraud case in Germany’s post-war history. With €3.5 billion of debt and €1.9 billion in cash unaccounted for, Wirecard is suspected to have engaged in accounting fraud to inflate its profit numbers before its collapse in the summer. Large parts of the company’s balance sheets were also misrepresented for years.
At its heart, the Wirecard scandal goes beyond systematic fraud; the political elite is complicit, as is the notorious auditing firm EY. Then there’s the question why Germany is at the centre of another massive financial scandal. After Luxleaks, cum-ex, Wirecard and FinCen, the German system seems extremely susceptible to white collar, financial crime, allowing criminal activities to thrive.
Taxpayers and ordinary shareholders have been left counting their losses.
1) Systematic failures were well known
Wirecard may have gone under only this summer, but its shady balance sheets and less-than-transparent activities had long been an open secret, with a company whistleblower revealing financial irregularities at the Munich-based company back in 2016.
From inflating its own profits, to deliberately not keeping accounts and records transparent, the German government and the country’s federal banking supervisory authority, BaFin, knew all along that Wirecard was conducting fraudulent activities on a massive scale.
Not only did BaFin do next to nothing, it even took legal action against the Financial Times for its investigation into Wirecard’s activities. Furthermore, German Finance Minister Olaf Scholz defended BaFin by saying it had always acted in accordance with the law. What he failed to mention is that the legal system itself is flawed and proper supervision of corporate activities is all but impossible.
However, it wasn’t just BaFin: the German Audit Office for Accounting (DPR) also looked the other way. That shouldn’t come as a surprise given it only had one employee working on the Wirecard file, and that most of the associate members represent banks, industries, chambers of commerce and insurance companies. Likewise, the Financial Intelligence Unit (FIU), which is supposedly responsible for tackling money largely sat on its hands despite clear evidence of criminal wrongdoing.
2) Friends in high places…
Who do you think oversees BaFin and the FIU? None other than German finance minister Olaf Scholz.
Even before Wirecard’s collapse, Scholz had been battling allegations of wrongdoing over his ties as mayor of Hamburg with a banker linked to the multibillion tax fraud scheme, cum-ex.
It has also emerged that Scholz had been aware that Wirecard was being investigated for alleged market manipulation as early as February 2019.
He wasn’t the only minister who had questions to answer at the Bundestag. Germany’s Economics Minister Peter Altmaier was also asked about the Wirecard scandal over the summer, as was the Justice Minister and others from the Federal Chancellery. As Wirecard was based out of Munich, the Bavarian State Ministry also had questions to answer. Representatives from the Bundesbank, the DAX stock exchange and a host of supervisory bodies have been hauled in front of German parliament, too.
How was systemic financial crime tolerated by all levels of government in Germany? What signal does it send to law-abiding citizens, and the potential perpetrators of tomorrow?
Rather belatedly, Scholz pointed the finger in the other direction: auditing firm, EY.
3) Scratch my back…. I scratch yours….
Yep, central to the Wirecard debacle was the role played by the auditing firm, EY, and it once again underlines how conflicts of interests can be so devastating in the financial sector.
EY had audited Wirecard’s balance sheets from 2011 to 2018, and according to the Financial Times, provided unqualified audits throughout this time without raising the alarm. Now with Wirecard’s demise, EY’s chair even boasts that the company was ultimately “successful in uncovering the fraud”.
However, we know what was happening at Wirecard back in 2016 because one of EY’s own employees blew the whistle, and revealed in a report by rival auditor KPMG that senior managers at Wirecard “may have committed fraud whilst another had attempted to bribe an auditor”.
Even though KPMG watered down the report in the end, the allegations were damning. Yet no action was taken at Wirecard: Jan Marsalek, then the company’s deputy head and now a white-collar fugitive wanted by Interpol, made sure of that, and he shut down any attempt by EY to investigate the allegations.
This entire scandal underlines the cosy, lucrative and symbiotic relationship between audit firms, big companies and the political elite. The mantra is simple: don’t bite the hand that feeds you. According to Fabio De Masi, Bundestag member for Die Linke and a former MEP, the German government has paid €400m in assignments to the Big Four auditors in the past five years alone.
After the 2008 financial crash, barely any auditor was fined or punished over their failure to warn the public. That secretive and evasive culture remains endemic to this day.
Auditing firms are rarely held accountable. This must change.
4) Corporate revenge
Back in 2008, when the vice chair of the German Association for the Protection of Capital Investors (SdK) claimed that Wirecard was manipulating its balance sheets, the fintech company took legal action against him. In 2015, when the FT published a series of investigative reports entitled ‘House of Wirecard’, Wirecard smeared its reporters Dan McCrum and Stefania Palma. In 2016, a financial analyst called Matthew Earl posted a 100-page ‘Zatarra Report’ online about Wirecard, but he did so anonymously for fear of Wirecard’s reprisal.
As mentioned above, not only did Germany’s supervisory body take no action, BaFin even sided with the company and filed criminal complaints against those who ‘defamed’ Wirecard.
This culture of fear, legal lawsuits, allies in the right places, and corporate dominance gave Wirecard the muscle not only to silence critics and whistleblowers, but also to continue to defraud investors, the markets and many others for years.
5) Poster child
In his blog, Nicolas Véron wrote that much of the scandal could be blamed upon Germany’s economic nationalism, which discouraged any attempt to talk down a home-grown, success story like Wirecard.
Véron accused national politicians and industry leaders for their “impulse to protect and promote national corporate champions whose success is somehow deemed to be aligned with the national interest”. Such blinkered nationalism and protectionist attitude, he wrote, dissuaded the country’s regulatory authorities from doing what they are supposed to do: protect investors and ensure the integrity of the German securities market.
6) White-collar crime hub
With the Wirecard scandal dominating headlines in Germany, and recent FinCen and cum-ex stories still fresh in people’s minds, questions must be asked of the German government whether it is soft on corporate crime?
The Wall Street Journal certainly thinks so, pointing out it was California that first uncovered car giant Volkswagen’s emissions-cheating scandal. In addition, the U.S. had imposed more money-laundering fines on Deutsche Bank than Germany has. The list of companies, which have broken corporate law, includes all the familiar German brands: Siemens, Deutsche Telekom and Daimler.
No wonder Transparency International Germany is calling for a “fundamental reform of financial supervision and a comprehensive whistleblower protection law”. The Wirecard scandal, it argues, is not only a matter of damaged reputation, but “reveals structural problems in the German legal system”.
7) Respect for public money?
Soon after Wirecard’s collapse, the European Commission said that changes are needed to the bloc’s rules on “transparency requirements for listed companies, accounting norms and existing regulation aimed at stamping out market abuses.”
However, the level of supervision by regulators also needs to be examined. More of an immediate concern is that with loosened EU rules on state aid due to Covid-19, private firms have received a total of €3 trillion in public money since the start of the pandemic, including Germany’s troubled Commerzbank, which later revealed it had been badly exposed to Wirecard’s collapse.
Greater flexibility in state aid therefore requires greater scrutiny of private firms’ balance sheets.
8) Cheated out of millions
Perhaps one of the most damning hangovers of the Wirecard scandal is the damage to confidence in the political system.
There is now a moral duty to investigate how such corporate crimes could be so common and go unchallenged for so long.
Small savers bore the brunt of Wirecard’s collapse and subsequent delisting from the German stock exchange. Wholesale regulatory and legal changes are urgently needed.
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