What Wirecard teaches us about financial governance
In a scandal which many have dubbed the ‘Enron of Germany’, the evolving downfall of fintech Wirecard has put a spotlight on those who should have held it to account and also the role of corporate governance and the need for it to encompass the interests of all stakeholders – such as employees and customers – and not just shareholders.
Wirecard’s exposed wrongdoing which led to its insolvency filing, with a reported €3.5 billion owed to creditors, represented a financial scandal of magnitude not witnessed since the 2008 financial crisis. Thrusting corporate governance, and issues of trust in financial institutions to the forefront once more. At a time when financial institutions – both traditional and Fintech – are working overtime to try to build trust among consumers, blows like this can leave the industry as a whole on the backfoot and in need to reassure customers of their processes and protocols.
By now details are plentiful of this elaborate scheme which involved a fictitious web of trustee counterparties across Asia which, left unchecked, enabled an estimated €1.9 billion to have been falsified on its balance sheet. Following a 98% share price collapse and the arrest of the Bavarian payment processor’s CEO, Markus Braun, the attention has now turned to those who acquiesced to its questionable accounting treatment. With calls for the auditors and regulators to stand up to scrutiny.
The fallout begins
Many investors are now vociferously criticising Germany’s financial watchdog, BaFin, for inadequate oversight and negligence. As Wirecard overtook Deutsche Bank to become Germany’s most valuable financial services firm on the DAX index, it was heralded in local media as a ‘rising star’, a ‘David’ juxtaposed against incumbent ‘Goliaths’.
It is the reputation of EY, and by association the wider audit industry, that now hangs in the balance. This scandal has reignited conjecture around the conflicts inherent in paying an auditor to sign off on your accounts in the first place. Executives at EY, will be reminded of the fate of disgraced Arthur Andersen, the world’s biggest accounting firm at the time and one of the ‘big five’ – doomed as a casualty of the Enron accounting fraud scandal.
Just as the collapse of Enron rippled instability through the broader financial and energy markets, the ramifications of the Wirecard fiasco for the wider payments industry are also less than savoury. At Ding, governance is high up at the agenda and it is not only a CFO role but it is the tone from the very top so it permeates throughout the organisation. We see Ding’s position as delivering airtime globally and driving connectivity as a cause for good. There are many things that can de-rail that cause but there are also hurdles that are in our control such as governance and compliance and as such, we ensure that these are a priority and are part of the solution to our mission and not a possible de-railer.
Wirecard’s clients and counterparties including Curve, Revolut, and Crypto.com are believed to have been affected, as the FCA conducts its investigation into the now frozen Wirecard UK subsidiary. German legislators are exploring ‘radical solutions’ to overhaul the regulatory oversight of accountancy firms, with Jörg Kukies, Germany’s deputy finance minister, admitting that ‘self-regulation by the auditors doesn’t work properly’. Thousands of Wirecard employees have also been left fearing for their jobs in the fallout from the scandal. And thousands of customers have been hugely inconvenienced with money and services frozen.
Perhaps more pertinently it is also raising the question of whether corporate governance should encompass the interests of all stakeholders – not solely company shareholders – but customers, employees, suppliers etc and they should be communicated too as regularly and conclusively. It’s a timely reminder of the need for a multi-stakeholder approach and knowing that the best decisions are made when all stakeholders are considered and catered for. This leads to a need for a wider accountability and also forces a much needed ethical dimension to the financial industry, and the burgeoning global industry that is fintech.
So what led to such a travesty in a Germany that is still recovering from the embarrassment of the 2015 Volkswagen emissions scandal, and, more importantly, what is required to minimise the likelihood that sophisticated frauds of this nature can arise again?
Many analysts have cited a reticence amongst regulators to intervene in matters which may spin the capital markets into disarray – a key stakeholder. Others have emphasised the failure of the market to see through a founder who was celebrated as a ‘visionary’, and a supervisory board who neglected to scrutinize the conduct behind the charisma – much as was the case with Adam Neumann of WeWork or the well-publicised Elizabeth Holmes of Theranos. What is clear is that we need to rethink corporate governance to encompass the interests of all stakeholders – not solely company shareholders. Or we will simply be propelled from one crisis to the next.