Wirecard plunges into Enron-like scandal

Markus Braun, CEO of Wirecard. (Reuters)
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Updated 23 June 2020

Wirecard plunges into Enron-like scandal

  • Wirecard is in crisis talks with banks to keep the lights on

FRANKFURT: In what could be one of the biggest financial frauds of recent years, shooting star German payments provider Wirecard has admitted €1.9 billion that auditors say are missing from its accounts likely “do not exist.”

The scandal has already claimed the scalp of founder and chief executive Markus Braun, and adds to a series of recent German upsets.

Over the past decade, business headlines have been dominated by the crippling consequences of repeated financial infractions at Deutsche Bank and the globe-spanning “dieselgate” emissions fraud that has cost carmaker Volkswagen more than €30 billion.

In Wirecard’s case, the €1.9 billion ($2.1 billion) that were supposed to be sitting in trust accounts in the Philippines make up a quarter of the company’s balance sheet.

But “on the basis of further examination ... there is a prevailing likelihood that the bank trust account balances in the amount of €1.9 billion do not exist,” Wirecard said on Monday.

The admission that the sums have vanished follows more than a year of reporting, especially by the Financial Times, on accounting irregularities in the company’s Asian division.

Now Wirecard is in crisis talks with banks to keep the lights on and is “examining a broad range of possible further measures to ensure continuation of its business operations,” including restructuring and selling off or simply halting some activities.

Interim CEO James Freis has tasked investment bank Houlihan Lokey with the tough talks with creditors.

But investors’ confidence appeared to be evaporating fast, as shares in Wirecard were trading around €16 — down from almost €100 last Wednesday, before auditors’ doubts about the missing cash became public.

The scandal marks a stunning fall from grace for the Bavarian startup, set up in 1999 and once a darling of the fintech scene owing to the global increase in electronic payments.

From humble beginnings piping cash to porn and gambling sites, the firm entered Germany’s prestigious DAX 30 index with great fanfare in 2018 after elbowing out traditional lender Commerzbank.

Now Wirecard’s name is more frequently heard in association with Enron.

The Texan energy company’s early-2000s collapse featuring accounting fraud, complicit auditors and political connections shook the US economy.

There could well be further revelations to come in the Wirecard scandal.

Its board “assesses that previous descriptions of the so-called Third Party Acquiring business by the company are not correct,” the group’s statement said.

“The company continues to examine, whether, in which manner and to what extent such business has actually been conducted,” Wirecard added.

On Sunday, the Philippines central bank had said that none of the missing $2.1 billion had entered the Philippine financial system. The names of two of the country’s biggest banks — BDO and BPI — were used to try to mislead eventual investigators, it added.

Both BDO and BPI have said that Wirecard was neither a client nor a business partner, the central bank said, adding that it had warned Wirecard’s auditors Ernst and Young.

Wirecard, which employs nearly 6,000 people, has for now withdrawn its preliminary results for 2019 and the first quarter of this year as well as financial targets for 2025.

“Potential effects on the annual financial accounts of previous years cannot be excluded,” Wirecard added.

Wirecard execs initially pooh-poohed FT reporting about financial irregularities, and German financial markets watchdog BaFin said it was investigating the paper for potential ties to short-sellers betting against the shares.

But in the meantime, auditors KPMG were reviewing Wirecard’s accounts for 2016-18.

BaFin ultimately filed charges with Munich prosecutors alleging “market manipulation” by the group’s four-strong board, targeting their attempts to present intermediate steps of the audit in a favorable light.

The filings “could have given misleading signals for the company’s stock market price,” prosecutors said.

The hammer blow came when auditors Ernst and Young said on Thursday that €1.9 billion were missing from Wirecard’s accounts, and Braun resigned the next day.

Analysts urge Canada to focus on boosting the economy

Updated 06 July 2020

Analysts urge Canada to focus on boosting the economy

  • Canada lost one of its coveted triple-A ratings in June when Fitch downgraded it for the first time

TORONTO: Canada should focus on boosting economic growth after getting pummeled by the COVID-19 crisis, analysts say, even as concerns about the sustainability of its debt are growing, with Fitch downgrading the nation’s rating just over a week ago.

Canadian Finance Minister Bill Morneau will deliver a “fiscal snapshot” on Wednesday that will outline the current balance sheet and may give an idea of the money the government is setting aside for the future.

As the economy recovers, some fiscal support measures, which are expected to boost the budget deficit sharply, could be wound down and replaced by incentives meant to get people back to work and measures to boost economic growth, economists said.

“The only solution to these large deficits is growth, so we need a transition to a pro-growth agenda,” said Craig Wright, chief economist at Royal Bank of Canada. The IMF expects Canada’s economy to contract by 8.4 percent this year. Ottawa is already rolling out more than C$150 billion in direct economic aid, including payments to workers impacted by COVID-19.

Further stimulus measures could include a green growth strategy, as well as spending on infrastructure, including smart infrastructure, economists said. Smart infrastructure makes use of digital technology.

“We have to make sure that government spending is calibrated to the economy of the future rather than the economy of the past,” Wright said.

Canada lost one of its coveted triple-A ratings in June when Fitch downgraded it for the first time, citing the billions of dollars in emergency aid Ottawa has spent to help bridge the downturn caused by COVID-19 shutdowns.

Standard & Poor’s, Moody’s and DBRS still give Canadian debt the highest rating. At DBRS, Michael Heydt, the lead sovereign analyst on Canada, says his concern is about potential structural damage to the economy if the slowdown lingers too long.

Fiscal policymakers “need to be confident that there is a recovery underway before they start talking about (debt) consolidation,” Heydt said.

Fitch expects Canada’s total government debt will rise to 115.1 percent of GDP in 2020 from 88.3 percent in 2019.

Royce Mendes, a senior economist at CIBC Capital Markets, said the economy still needs more support.

“Turning too quickly toward austerity would be a clear mistake,” he said.