A little over a year ago, warning bells went off when a whistleblower alleged fraudulent accounting practices at the German payments company Wirecard. Wirecard dismissed the allegations and later inked a lucrative deal with Softbank, a Japanese tech holding company, in the spring of 2019. This week Softbank ended the partnership with Wirecard only days after the disgraced German firm filed for bankruptcy following the disclosure that it had fabricated the existence of over $2 billion on its balance sheet. Can Wirecard escape a near-certain death? Can Wirecard’s accounting firm, Ernst and Young, escape liability for not verifying cash balances at the firm for at least three years? Why did Germany and its regulators miss such a major red flag following the massive Volkswagen fraud scandal that took place on their watch only a few years ago?
The Wirecard story isn’t shocking because of the amount of fraud. Some 1.9 billion euros ($2.1 billion) is nothing compared with Bernie Madoff’s fraud, for example, but a publicly traded company with a big-four accounting firm pulling off such a brazen act of deception will only lead to more skepticism by investors already burned several times in recent years. The lie itself here is also of concern. Booking revenues that haven’t materialized or inflating goodwill or company assets that are subjective are all classic instances of fraud, but lying about the cash in a bank account is as simple to uncover as verifying a few figures. Ernst and Young will undoubtedly face civil lawsuits from investors who relied on their oversight, especially following the allegations of impropriety in 2019.
The Softbank-Wirecard deal is also of note not only because of the fraud but because of how it was structured. Softbank opened up its portfolio of companies and made a $1 billion investment into a convertible bond but didn’t actually invest in the bond itself. It used funds from a sovereign wealth fund and of individual Softbank employees to buy the bonds. With the credit injection, Wirecard’s bonds were upgraded to investment grade, at which point the investors turned around and apparently immediately sold them to clients of Credit Suisse who had advised Softbank on the Wirecard deal. So not only did Softbank not risk any funds, it made a hefty profit, along with the actual investors, and dumped the exposure on someone else immediately after the deal closed. The profit from the bonds arose from the investment itself, as it was seen as a vote of confidence in the company. Confused? The reasoning behind all of this is not yet clear and may never be uncovered.
The Wirecard scandal is yet another accounting scandal in a string of many and at least the second for Germany in the last five years. Since the Volkswagen fraud scandal broke, no German executives have been convicted of any wrongdoing and Wirecard’s CEO is currently free on bail pending a trial. It’s a shame that so much fraud can go undetected for so long, but if fraud continues to be so lucrative, expect many more cases of white-collar crime in Germany and elsewhere.