Wirecard has all the expressed all the hallmarks of an Enron calamity. The company was the darling of the DAX stock market and a symbol of Germany’s pivot to fintech. Today the payment processing company has the infamous title of being the only member of the DAX30 to go into liquidation as a result of fraud of considerable proportions.
Wirecard is a pertinent reminder to the asset management industry on the impact of audit failure. In the case of Wirecard, the auditor did not obtain independent confirmation of cash balances and instead relied on documents given to them by intermediaries and Wirecard itself.
At Castle Hall, we have seen examples where auditors accept documents given to them by the asset manager as audit evidence. These examples include materials such as portfolio company financial statements and budgets used to support private equity valuations, provided by the asset manager or general partner, rather than sourced independently.
Investor due diligence should verify that an asset manager has adequate books and records in place and an accounting and operational control environment. In Wirecard’s case, a DAX30 public company was relying on third party spreadsheets with little to no underlying detail to book millions of dollars of revenue.
What happened to good old-fashioned common sense? Do we understand how a strategy makes money? Is the investment process sustainable, and are the drivers of performance attribution transparent? Wirecard worked with acquirers, who held banking licenses in various countries where Wirecard itself was not regulated. And this allowed Wirecard to conflate or consolidated acquirer revenues as their own. That is notwithstanding that whether some acquirers existed at all. The Financial Times reported that a retired Filipino seaman, living two hours north of Manilla, had no idea why a company called ConePay International (a supposed counterparty of Wirecard) had its head office in his house.
Lastly, the cult of the CEO is never far from a significant corporate blow up. The Wall Street Journal described Wirecard’s Markus Braun as an “instantly recognizable fixture at tech conferences, recently adopting Steve Jobs-style black turtlenecks” who was “known for grand predictions on the future of payments, big data and artificial intelligence”.
Perhaps the most obvious lesson from the sorry tale of Wirecard, though, is one that investors should always remember – if it looks too good to be true, it probably is.
To listen to the full interview with Alex Wise on the Market Narratives podcast click above or find the series and episode on Apple Podcasts, Google Podcasts or Spotify.
