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Wirecard’s deceit went beyond its fraudulent Asian operations
Report from court-appointed administrator reveals the rest of the business was chaotic and unprofitable
September 23 2020
 © FT montageWirecard’s fabricated Asian business was not its only deception.
The rest of the once-lauded German payment provider’s business was chaotic, beset by byzantine reporting lines, hobbled by lamentable IT and racking up losses, according to a report by Wirecard’s administrator and accounts of former employees.
The picture that emerges of the Wirecard businesses that did exist is a stark contrast to the one painted by former chief executive Markus Braun, who hailed the group as a highly profitable pioneer in the payments industry. It reveals the scale on which the company, Germany’s biggest corporate fraud in decades, also misled investors about its real businesses.
“Only a few units of the group were actually involved in conducting operative business that was customer-facing and generated revenue,” the administrator Michael Jaffé wrote in his report, a copy of which was seen by the Financial Times.
On paper, the formerly high-flying company generated €1.9bn in pre-tax profits between 2015 and the first quarter of 2020. However, if its fraudulent Asian operations are excluded, the remaining businesses accumulated €740m in pre-tax losses over the same period, according to the report. The losses were never disclosed because Wirecard only reported numbers for the whole group rather than its individual operations.
Prized as a rare example of a world-beating German tech business, Wirecard was promoted into the country’s Dax index of leading companies in 2018. Even on the verge of insolvency three months ago, the group had a market capitalisation of €13bn.
However, the administrator estimates that the real value of Wirecard’s assets is just €428m, an amount dwarfed by the €3.2bn in debt that the company had at its collapse.
Mr Jaffé’s assessment of the group’s value is also at odds with internal estimates by Wirecard. Days ahead of its insolvency filing on June 25, a preliminary restructuring plan pulled together by Wirecard estimated that the group could generate €560m by selling some operations, according to a presentation seen by the FT.
The forecast turned out to be optimistic, partly because many of its customers — among them a large fintech that accounted for 40 per cent of Wirecard Bank’s revenue — quickly abandoned the company.
Formally appointed by a Munich judge last month to oversee Wirecard’s unwinding, the administrator is trying to carve out bits of the company that could be sold. Mr Jaffé declined to comment on the report.
Details of the administrator’s findings come just weeks after Germany’s parliament decided to hold a full inquiry into Wirecard’s collapse, which was triggered after its outsourced business in Asia was exposed as a sham. The group’s demise has shaken confidence in corporate Germany and the country’s financial regulators. Mr Braun denies allegations of fraud and embezzlement.
While technological prowess was central to its sales pitch to customers, Wirecard’s own IT infrastructure was a particular weakness.
Its computer systems were inherited from companies acquired over the years and never fully integrated. Wirecard Bank, for instance, is still running on software originally developed for Germany’s small co-operative banks and which will be switched off by its IT service provider by the end of this year, according to people familiar with the matter.
“If IT auditors had been professional and serious, huge risks, weaknesses and non-compliance issues would have emerged a long time ago,” according to a former Wirecard IT employee, who was scathing about the “unbelievable brittleness of [Wirecard’s] IT infrastructure”.
Even as Wirecard faced increasing scrutiny of its accounting, the group’s headcount continued to rise, climbing by a quarter from early last year to 6,300 at the time of its implosion. Over the same period, its real revenues grew at less than half that rate, according to the administrator.
The report points to bloated costs and a colossal amount of corporate waste.
“Employees never faced the necessity to reduce the services they were using to those that were really needed as cash was abundantly available in the past,” it noted, adding that the company was suffering from “excessive overhead and personnel capacities”.
“Only a fraction” of the employees were actually required to run Wirecard’s non-fraudulent business, the report found.
And as the company scrambled in June to convince its longtime auditor EY to sign off on its latest accounts, Wirecard was burning through cash.
By the time it unravelled in late June, the total was €10m a week and the company’s own internal planning predicted that figure would rise to more than €15m — some €200m for the third quarter as a whole, according to the administrator’s report. At that rate, Wirecard would have needed to raise fresh cash by the end of this year to pay its bills.
If extravagant spending is one of Mr Jaffé’s findings, another is what the report describes as Wirecard’s “totally opaque” and inefficient structure, consisting of at least 55 subsidiaries scattered over four continents.
Staff at its headquarters on the outskirts of Munich did not know what the group’s different units were doing, the administrator concluded, with neither their tasks and responsibilities — or the payments and loans between the divisions — properly recorded.
There was “a small business mentality” at many of its units, former employees told the FT, describing businesses that Wirecard had hoovered up around the world and largely left to their own devices.
The internal chaos led to bizarre outcomes. A team of IT specialists, working in Athens, but part of a subsidiary with headquarters in New Zealand, provided services to Wirecard’s German HQ that were not needed, the administrator found.
In another example, when the administrator asked managers at a different Asian-based subsidiary about how they contributed to the group, the reply was “we don’t really know”, according to a person briefed on the matter.
Hansrudi Lenz, an accounting professor at the University of Würzburg, said that EY should have picked up such failings in its audits.
“The control functions and risk management systems are a key part of any annual audit. If auditors do not spot such blatant shortcomings, things have badly gone wrong during the audit,” Mr Lenz said.
EY declined to comment.
Wirecard’s internal organisation and documentation were a far cry from “what one would expect from a company of such a size”, the report noted.
The administrator’s findings will do little to ease the shockwaves the scandal has sent through German politics and business. |
