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The Wirecard scandal casts a shadow over governance

The Wirecard logo is visible at the payment company’s headquarters in Aschheim, near Munich, southern Germany, on June 24, 2020.

Christof Stache | AFP through Getty Images

Wirecard’s dramatic fall from grace has firmly shone the spotlight on corporate governance and industry regulation in Germany.

The Munich-based payment processor filed for insolvency on Thursday, due to creditors of 3.5 billion euros (3.9 billion dollars). The company̵

7;s collapse follows a series of investigative reports from the Financial Times regarding accounting irregularities.

Last week’s revelation that € 1.9 billion had disappeared from Wirecard’s balance sheet saw the company’s share price drop 98% and former CEO Markus Braun was arrested on suspicion of counterfeiting.

The Wirecard saga and its wider implications raise many questions, with some experts describing the scandal as “Enron of Germany”.


Under German company law, companies are required to have both a supervisory board and a board of directors. The supervisory board is responsible for supervising management.

Chris Hohn, the head of the $ 24 billion hedge fund TCI, had called on Wirecard’s supervisory board to fire former CEO Markus Braun in late April.

“We are of the opinion that the supervisory board is legally obliged to intervene,” he wrote in an open letter published on April 28. “In our view, the necessary action now is to remove the CEO from all management duties.”

However, Braun had resisted the pressure to leave. He resigned last week after 18 years at the helm and is currently on bail after being arrested in Munich last week. The fiasco led to new questions as to why Wirecard’s supervisory board didn’t act early.

“What you see with Wirecard is a disaster,” Peter Dehnen, president of the Association of Supervisory Bodies in Germany, told CNBC’s “Squawk Box Europe” today.

Dehnen calls for reforms of German corporate governance rules. Although the German corporate governance code has only recently been updated, Dehnen believes that something “new” and “dialogue-oriented” is needed to make companies communicate with all their stakeholders, not just shareholders.

“This is modern corporate governance,” he said. “With the rules currently in place, I feel that we are still behind in the last century. And for this we need a drastic change.”

The Wirecard scandal is far from the first to upset the German corporate world. Siemens was hit by a corruption scandal in the late 2000s, while Volkswagen’s reputation was significantly damaged by the so-called “Dieselgate” emissions scandal in 2015.

Maximilian Weiss, attorney at TILP Litigation, who filed an investor suit against Wirecard in May, told CNBC’s “Squawk Box Europe” last week: “We are at the beginning of one of the biggest corporate scandals we have seen in Germany. “

“I think there is a lot to do,” said Weiss on Wednesday. “Take a look at the United States, what happened after Enron. I think Wirecard is Germany’s Enron.”

Enron was an energy services company which collapsed in 2001 following revelations of systemic accounting fraud. The scandal was a factor in the promulgation of the Sarbanes-Oxley Act, introduced in 2002, to protect investors from fraudulent financial practices.

Weiss said that Germany requires “better laws” to incentivize whistleblowers. He added that the Sarbanes-Oxley Act could offer a model for what will happen next in the country: “I think this will become a political problem.”


The scandal also renewed attention to how German regulators handled the charges against Wirecard. Many hedge funds criticized the German financial regulator, BaFin, for temporarily banning short sales in Wirecard shares and for filing a criminal complaint against two FT journalists who denounced allegations about the company.

Felix Hufeld, BaFin president, admitted that the situation was a “scandal” and a “total disaster”. On Tuesday, the regulator filed an updated case against the company seeking “suspected market manipulation”.

“BaFin hasn’t covered itself in glory at all,” Neil Campling, a technology, media and telecommunications analyst at Mirabaud Securities, told CNBC today. “They should rule – all they did was bow down to any company request.”

The watchdog was also criticized by German lawmakers. Finance Minister Olaf Scholz told Reuters on Tuesday that the scandal “raises critical questions about the company’s oversight” and calls for regulatory reform.

“Is BaFin really a financial watchdog? Or is it a puppy dog?” said Weiss of TILP Litigation. “I think they must be very critical when it comes to what they have done in this matter.”

However, the problem may be a cultural rather than a legal one, according to Jan Pieter Krahnen, scientific director of the Leibniz Institute for Financial Research SAFE in Frankfurt. He said that German regulators are missing teeth when it comes to problems affecting capital markets.

“It’s basically a growth of a culture that isn’t really looking at investor rights,” Krahnen told CNBC. “There is really no real culture of looking for companies that may not divulge everything in the right way, so that an investor can feel safe.”

Krahnen believes that there could also be a role for the EU in relation to these capital market problems. This could fall within the wing of the European Securities and Markets Authority (ESMA), he said, adding that the watchdog is currently considered more of a settlement of rules.

Brussels is now inviting ESMA to investigate the potential failures of BaFin’s supervision. “We need to clarify what went wrong,” said Valdis Dombrovskis, executive vice president of the European Commission, on Friday.


It is not only BaFin that must resist control, analysts say. There are also questions as to why EY, Wirecard’s longtime auditor, did not detect accounting irregularities dating back to years ago.

“There must also be some responsibility to the auditor,” said Campaba of Mirabaud Securities, who says he has been following the Wirecard case for two years. “It is up to the auditor to support the credibility of the accounts and documentation.”

Campling says he suspects that € 1.9 billion of missing funds “never existed.” Wirecard said that lost money is likely not to exist.

EY has faced growing legal pressure on Wirecard’s auditing. The German shareholder association SdK has filed a complaint against Wirecard’s auditors. The complaint concerns two current employees and a former EY staff member.

It comes after the Schirp & Partner law firm filed a lawsuit against the accounts on behalf of Wirecard investors, claiming that it failed to mark improperly booked payments on the 2018 Wirecard accounts.

“There are clear indications that it was an elaborate and sophisticated fraud that involved multiple parties around the world in different institutions, with a deliberate purpose of deception,” said EY in a statement on Thursday.

“Collusive fraud designed to deceive investors and the public often involves significant efforts to create a false documentary track. Professional standards recognize that even the most robust and extensive audit procedures may not discover collusive fraud.”

The company told CNBC not to comment on “pending litigation”.

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