WIRECARD, EXTERNAL AUDIT AND THE PUBLIC INTEREST

There are three things in the world that deserve no mercy, hypocrisy, fraud, and tyranny.

Frederick William Robertson

Wirecard is a Fintech company founded in 1999, based in Munich and which until a couple of weeks ago was one of the stars of the German stock market. Its business model revolved around the processing of digital payments, becoming the vehicle for companies of all sizes to collect payments over the Internet. In 2018, its market capitalization exceeded $ 28 Billion USD, at one point overtaking Deutsche Bank as Germany’s largest financial institution. Today Wirecard is worth 329 million dollars, or 98.9% less than it reached at its highest point.

Last week the police arrested Markus Braun, Wirecard’s president and CEO, on charges of accounting fraud and market manipulation. Everything seems to indicate that for years the company falsified financial and accounting records to show a financial position that did not correspond to reality. At the end of the day, a shortfall of € 1.9 billion was detected, which was registered under false bank accounts and trusts. An important aspect of the Wirecard case is the aggressive way in which the company tried to dissuade journalistic sources from conducting their own investigations, reaching the point of criminally suing the Financial Times for publishing articles that questioned its business model and the transparency of its reports, as well as hiring former Libyan intelligence service agents to spy on and intimidate reporters and investigators.

The accounting and finance fraud in Wirecard is one of the largest in recent years, strongly questioning the role of regulatory agencies, but, above all, again raising doubts about the effectiveness of the external audit process under the Big Four model. Globally, strong voices are calling for a comprehensive reform to the way public companies are audited. The Wirecard case for sure will revive that debate. The investing public needs an external audit process that really works. A process that can proactively identify fraud and is truly independent. Some of the future changes in this industry could include the development of true specialists in public company audits; firms that have the multidisciplinary teams necessary to detect fraud, and that do not have the conflicts of interest that larger companies have today, originated by lucrative contracts for consulting or other services, and which in practice become a limitation when it comes to questioning their clients with professional skepticism.

It is also necessary to question whether what is expected from the audit process is reasonable. It’s impossible to ask a team of external auditors, who will be at the company a few weeks or a couple of months, to discover and stop fraud that takes years to plan and execute. This at the same time that technical, regulatory, legal, internal control and business model aspects have to be reviewed, and at the same time that engagement profitability has to be maintained by limiting the number of hours spent by the team. Today, external audit work is often an impossible mission, one that leaves neither the auditor nor the auditee satisfied, and that creates significant risks for the investing public. The accounting profession will have to find a quick and definitive way to deal with this problem, before the regulators of the world’s main financial markets impose a solution.