FRANKFURT, Germany (AP) – An accounting scandal at one of the fastest growing blue-chip companies in Germany has raised doubts about the national financial watchdog and, in addition to other high-profile fraud cases, has raised questions about the country’s ability to monitor the business titans.
About $ 1.9 billion ($ 2.1 billion) disappeared from payment system provider Wirecard, until recently announced as the emerging financial sector giant in Germany. The CEO was arrested on suspicion of market manipulation and rising financial figures.
The damage to Germany’s corporate reputation was further compounded by the reaction of the financial regulator, BaFin, when the media questioned the company’s accounts last year. Rather than investigating Wirecard, it targeted investors and forbade them to bet on a fall in the stock price, which fell more than 40%.
“That is a documented oversight by the oversight to intervene when there was clear evidence in this case,” said Florian Toncar, MP of the opposition Free Democratic Party, in an interview on Norddeutscher Rundfunk’s public radio.
He said the case was “a serious blow” to Germany’s reputation as a financial center.
“WireCard was one of the few functioning technology companies to come up with new ideas so far, and now it turns out that to a large extent these were smoke and mirrors.”
BaFin’s head, Felix Hufeld, has admitted that Wirecard’s implosion was “a disaster.” But the agency is sticking with its decisions during the scandal, details of which continue to emerge.
Wirecard provides the technology to businesses and consumers to make cashless payments, a growing and competitive market worldwide. Founder and CEO, Markus Braun, resigned last week saying “it cannot be ruled out” that the company could be a victim of fraud.
He was arrested Monday on suspicion of rising financial numbers and was later released on bail.
Under the new CEO, James Freis, the company said that previous descriptions of its activities in countries where it worked with partners – a major pillar of revenue – were inaccurate, and it was investigating whether those companies were always in the best interest were from the company. The missing $ 1.9 billion is said to be in trustee accounts, but the two Philippine banks that the company said held the money said they have no business with Wirecard. Accountant EY refused to sign the company’s annual report.
In Germany to say the least is disobedient to companies.
Volkswagen was caught manipulating diesel engines to cheat in U.S. emissions testing and paid over $ 33 billion ($ 37 billion) in fines and settlements, while the director and chairman of industrial conglomerate Siemens ended a 2006-2007 scandal about bribing foreign officials to win contracts. Banking giant Deutsche Bank has paid fines for violating money laundering rules.
Wirecard’s problems have a specific focus: they question the fairness of the financial statements that its investors and creditors rely on. In that sense, it reflects the accounting scandals of the early 2000s that rocked US equity markets, such as those around energy company Enron.
BaFin has been partially scrutinized for its decision in February 2018 to prevent traders from betting against the company’s stock. BaFin imposed the ban after the shares had been deposited on reports from the Financial Times that raised questions about the company’s accounting, including reports of obsolete sales contracts that increased revenues to meet financial targets. BaFin said the short sell ban was meant to protect market integrity and investors, not the company.
In an effort to explain what went wrong with the regulator, Toncar and others pointed to BaFin’s limited authority. As a financial supervisor, she was responsible for Wirecard Bank AG, the German banking division of Wirecard, and not for the company as a whole.
Thorsten Sellhorn, a professor at the Ludwig Maximilian University of Munich, said the German financial reporting watchdog, the Financial Reporting Enforcement Panel, was the first line of defense, not BaFin. Sellhorn, president of the European Accounting Association, said it was “too early to identify the culprits” before the criminal investigation is resolved.
However, he said he doesn’t see a “smoking gun” at BaFin.
Instead, the company’s board of directors would be “ much closer to home ” and the first stop if external auditors had questions. Germany has made what he called “slow progress” in improving board supervision, such as a corporate governance code that calls on CEOs to wait two years before taking up board seats, more women on the board and independent financial expertise among the appointed directors.
Carola Rinker, an economist and consultant who has studied accounting fraud, said several factors could have hindered BaFin and its accountants, EY. One is the complexity of Wirecard’s business model, where cash payments are handled between a complex network of credit card companies, merchants and and banks.
Another is that, unlike an industrial company, much of the value reported on Wirecard’s balance sheet was in the form of intangible financial factors such as accounting goodwill and customer relationships.
Rinker said such ‘intangible assets’ were high on Wirecard and amounted to 1.4 billion euros on a balance sheet of 5.8 billion euros. She contrasted Wirecard with the 2000 scandal over FlowTex, which borrowed $ 2 billion from drills – a tangible good – that didn’t exist. “The problem with intangible assets is that you cannot see their existence because they are not physical, so it is more difficult to demonstrate their value,” she said.
These are complexities and problems that BaFin head Hufeld will discuss shortly. He will appear next week before the finance committee in the Bundestag, the House of Representatives.
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