At its peak, German payments company Wirecard was worth €24bn ($25.4), more than Deutsche Bank. It was the darling of the German fintech industry — proof that German fintech startups could compete with the world’s biggest tech companies. 

And then it all unraveled. In June 2020, the company was forced to admit that half of its revenues and almost €2bn ($2.1) of cash it previously claimed was sitting in bank accounts in Asia did not actually exist. Wirecard immediately collapsed into insolvency, causing billions of euros in losses. CEO Markus Braun was subsequently charged with fraud, while chief operating officer Jan Marsalek is still a fugitive on Europe’s most wanted list.

The fraud lays bare a litany of systemic failures across multiple institutions, from a lack of internal accountability and external and internal auditors who were caught napping, to regulators who were too eager to believe and investors who were blindly following the herd. 

As the court case plays out in Germany and the finger pointing about who is to blame continues, the autopsy on what went wrong and why is starting to shed some light on events.

“Germany is now finding exactly what the UK found during the financial crisis of 2008, which was if you have a dominant personality on a board, then effectively the entire structure breaks down.”

Sara George, partner, Sidley Austin

The first line of defense that failed was Wirecard’s own internal controls. While it can be challenging for lower-level risk managers to police the c-suite if they are conspiring to hide a fraud, the management board should have sufficient independence to provide proper oversight and question if something seems off.

“It is the duty of the board to establish a compliance system and make sure it works,” says Gunther Friedl, a professor of management accounting at the Technical University of Munich. “One of the problems was that the internal controls did not develop at the same speed as the growth of the company.”

Internal controls

Internal controls are also likely to fail if the person at the helm of a company has an overbearing character who makes it difficult for others to push back against.

“Germany is now finding exactly what the UK found during the financial crisis of 2008, which was if you have a dominant personality on a board, then effectively the entire structure breaks down,” says Sara George, head of white collar crime and partner at Sidley Austin. 

“If you have dominant personalities who dictate everything and there is nobody around them who’s willing to go and challenge or kick the tires, then this is what can happen.”

External auditors also failed to uncover what was going on, missing at least one opportunity to catch the fraud by not checking balances in those bank accounts in Asia.

“The whole of BaFin and everyone around Wirecard, including [the then Chancellor] Angela Merkel, were being told the emperor was fully clothed.”

Jane Jee, The Payments association

“Essentially, [auditors] EY used the information provided by Wirecard to contact bank personnel and verify the billions of dollars in cash that was supposedly in these accounts rather than independently confirming it,” says Mason Wilder, a research manager at the Association of Certified Fraud Examiners. “The analogy I like to use is that EY fell for the time-honored ruse of giving your roommate’s number as a job reference and saying this was my boss at my last job and he’ll tell you all about how great I am.”

The German banking regulator BaFin also failed to identify the fraud. Indeed, when the scandal was first reported in the Financial Times newspaper, instead of investigating Wirecard, the regulator filed a criminal complaint against Dan McCrum, the journalist who broke the story following a tip-off from whistleblower Pav Gill, a former in-house lawyer at Wirecard. Incredulous that the country’s global fintech star was a fraud, BaFin claimed Wirecard was the victim of a scheme hatched by short-sellers. That reaction mirrored a broader blind spot in Germany — everybody wanted to believe that Wirecard was the country’s answer to the tech successes that were coming out of the US and China.

“The whole of BaFin and everyone around Wirecard, including [the then Chancellor] Angela Merkel, were being told the emperor was fully clothed,” says Jane Jee, who leads the financial crime project at The Payments Association. “I’m sure some of them had doubts, but they didn’t want to be the one that said he hadn’t got any clothes.”

Too eager to buy in

Save for some determined short-sellers who were unconvinced about Wirecard’s purported numbers, many investors were also eager to buy into the company’s story without asking too many difficult questions.

“There was a lot of fear of missing out and some of those pitches sounded pretty good, which the average investor might not have the technical expertise to dissect,” says Wilder. “If you combine that with the willingness of leadership to conduct financial statement fraud to make those numbers look even better, it’s easy for investors to get taken advantage of — especially when you’ve got one of the biggest accounting and consulting firms in the world signing off on things.”

One lesson from the Wirecard case and other frauds involving supposedly innovative companies is that in their high-tech complexity, regulators, auditors and investors sometimes focus on the wrong things and fail to ask simple questions.

“There is no such thing as a question that is too basic,” says Jee. “You must ask them how they make money. Asking what their business model is doesn’t necessarily involve telling you how they make money.”

“Wirecard was really on the front end of this series of fintech issues and scandals that we have seen with some of these crypto companies and decentralized finance platforms that have since gone under.”

Mason Wilder, research manager, Association of Certified Fraud Examiners

Another sign something could be awry is if a company seems to be performing unfathomably better than its peers. 

“Wirecard was doing too well,” says Jee. “I’ve worked at WorldPay and I’ve worked at Trust Payments, and I understand payment processing and the money that comes in from it. So you have to ask, what was Wirecard doing that was so different from its competitors and why was it making so much more money?”

Researchers at Friedl’s university are currently developing technology that could identify potential future frauds by searching for hidden fingerprints in a company’s accounts that may signal something is suspicious and should be investigated further.

“This algorithm would have been able to detect the Wirecard case with an 80% probability,” says Friedl. “It’s looking at the balance sheet data, profit and loss data and cash flow data and then comparing it to other fraud cases. It couldn’t be identified by simply looking at the individual balance sheet but it can be identified by looking for patterns that are similar to previous fraud cases.”

While the full implications of the Wirecard fraud are still playing out in the courtroom, George believes there should be an investigation in Germany into the regulatory response.

“BaFin really has to show some willingness to examine and be self-critical about how this was able to happen and why the fraud wasn’t identified,” she says.

Far-reaching implications

The case is also likely to have far-reaching implications for EY and the other big accountancy firms, which were already under scrutiny for the lack of separation between their audit and consulting arms.

“Conflicts of interest were endemic in the accountancy industry, where audit work was seen as a way of introducing other services. The consequences of that are now being realized,” says George. “Most audit failures are very simplistic. Often the relationship is a little too cozy and they don’t independently verify information. There has been a real recognition that what people think an auditor is doing and what auditors actually are doing are quite different when it comes to fraud.”

While Wirecard might leave a lasting legacy on the regulatory and audit front, the recent collapse of crypto exchange FTX underscores the ease at which high-flying tech startups promising to revolutionize their respective markets continue to dupe a broad range of stakeholders.

“Wirecard was really on the front end of this series of fintech issues and scandals that we have seen with some of these crypto companies and decentralized finance platforms that have since gone under,” says Wilder. “Regardless of what else happens now with Wirecard, it’s always going to be a big cautionary tale. If something sounds too good to be true, it generally is.”