For months Wirecard had confidently predicted KPMG would vindicate its accounting and deliver a final riposte to its sceptics.
Instead, the publication on Tuesday of a report from the accounting firm caused shares in the Dax 30 company to crash 26 per cent as investors learnt that KPMG’s investigators had faced obstacles in their attempts to verify that large parts of the business were real, and publication of full-year results would be delayed again. The shares fell again on Wednesday, to close down another 8 per cent.
Wirecard has long been viewed as Germany’s next great technology company. Like software giant SAP it claimed a global business and offered services indispensable to the future of commerce.
Its products sit deep in the financial plumbing, helping online merchants take payments from customers, but rapid growth in sales and profits made it a stock market sensation. The message to investors was that as cash fell out of fashion, it would be in prime position to succeed, and enthusiasm for that prospect prompted pension funds and investors to snap up its stock.
Then last year it was rocked by an accounting scandal. Singapore police raided its operations in a probe of alleged accounting irregularities at several subsidiaries in Asia following FT reports of problems raised by whistleblowers. Wirecard sued the FT in Munich, claiming misuse of trade secrets, and said that while some staff may face criminal liability, the financial impact of their actions was limited and lessons would be learnt.
In October 2019 the FT published internal documents that indicated sales and profits at key Wirecard units may have been invented. The company said the files scrutinised by the FT were fake and anyway misinterpreted, and that KPMG’s special audit would prove it. Only last month it told investors that if the probe had produced material findings, it would have been obligated to inform them.
Missing bank records
KPMG’s 74-page report has highlighted weaknesses in record-keeping at a regulated financial institution and raised new issues about the group’s accounting.
For instance, KPMG’s report revealed Wirecard’s senior managers did not record minutes when holding executive board meetings, and they did not sign a so-called declaration of completeness, stating that anything relevant to KPMG’s inquiry was fully disclosed.
KPMG reported some essential documents for its review arrived at the last minute, while many never arrived. Among the desired but absent information: original bank records detailing €1bn of payments.
A trustee in charge of key bank accounts had quit shortly after the special audit was launched, the report said. The so-called escrow agent terminated the relationship in late 2019, then did not co-operate in the audit afterwards, creating an obstacle for KPMG.
In terms of the accounting, while KPMG found no evidence for manipulation, it cast doubts over several areas: how Wirecard calculated its cash reserves; how it booked the revenue generated by third-party business partners; about its know-your-customer procedures; its risk management; and about the willingness of staff to co-operate with KPMG.
‘Unable to fully comprehend’ accounting
At the heart of the report was the question of third-party business. Wirecard is licensed by the big payment networks, such as Visa and Mastercard, to help retailers accept credit card transactions. When it lacks a licence in a particular country, Wirecard uses a third-party payment processor to handle the transactions on its behalf.
Wirecard had dismissed FT reports that three such partners were at times responsible for half of the group’s sales and most of its profits. KPMG said three partners had in fact “comprised the major part” of Wirecard’s operating profit between 2016 and 2018, but it was not able to offer an opinion on whether the business was genuine: verification attempts “proved to be impossible, as we were not given access to the relevant data for the investigation period”, the report said.
The report said KPMG could not confirm “that the sales revenues exist and are correct in terms of their amount, nor can it make any statement that the sales revenues do not exist and are incorrect in terms of their amount”.
The report also revealed a contradiction between the level of knowledge claimed about the underlying clients. Wirecard “would neither track nor monitor these Know-Your-Customer compliance checks carried out” by its partners, the report said, a vital requirement under rules to prevent money laundering. The relationship was arm’s length and the third parties with the data did not provide it.
Yet when it came to accounting for the activity, Wirecard treated the third parties as an extension of its own business. Their sales were counted as its sales, their costs as its costs. The validity of Wirecard’s published accounts was not within the scope of KPMG’s remit, but the report questioned the approach. “We were unable to fully comprehend Wirecard’s ‘gross accounting’ of revenue generated with [third-party acquiring partners],” wrote KPMG, pointing out that it did not receive the necessary documents to do so.
When KPMG requested minutes of quarterly meetings between the German company and its third-party business partners, Wirecard wrote that such minutes were not taken in 2016 and 2017. However, on April 23, Wirecard’s accountant EY handed over the minutes Wirecard had said did not exist.
The auditors also took issue with Wirecard’s practice of counting money held in escrow accounts as cash that it can readily use — an issue the FT reported about in December. “There are arguments against Wirecard’s accounting of escrow accounts as cash or cash equivalents during the investigation period of 2016 to 2018,” wrote KPMG, arguing that they might not have met key requirements of IFRS accounting standards.
Wirecard, the report said, provided KPMG with an opinion from a separate advisory firm stating that the approach to cash was appropriate.
Judgment on the matters now moves to KPMG’s top tier rival EY, which has signed off on Wirecard’s accounts as fit and proper for a decade, and was expected to do so again this week.
Publication of full-year results was planned for April 30, but was delayed on Tuesday due to the coronavirus pandemic, according to an upbeat Markus Braun, Wirecard’s longstanding chief executive and largest shareholder.
He told a conference call for investors that “we can fully reject all the allegations”, that no need for corrections had been found, but that some “weaknesses in processes need to be addressed”.
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