Over the past few months, Wirecard, the German payments group, has been at the centre of an accounting scandal that has shaken the corporate world. The company, valued at £21.7bn in 2018, has committed Germany’s biggest accounting fraud, with €1.9 billion of cash missing from its accounts and the former CEO arrested on suspicion of market manipulation and falsifying data.
The discovery of an accounting black hole as big as this one has increased regulatory and media scrutiny on both the company and its auditor. Cash is the most fundamental of all accounting measures – it is the one that matters the most and should be the easiest to identify. With nearly two billion missing from the balance sheet, accusations have been made about who is to blame and when the fraud should have been identified.
Wirecard was one of Germany’s first digital payments firms, founded in 1999. Seemingly going from strength to strength, it introduced virtual credit cards for online payments in 2008, and also launched a fraud prevention suite to safeguard transactions. Over the next decade, it expanded its operations across the globe.
It was not without criticism, however. There have been repeated allegations from numerous whistleblowers that its revenue and profits had been inflated through fake transactions. The most recent criticism came at the beginning of 2019 from the Financial Times, who began to investigate allegations of forged financial accounts in the company’s Singapore office.
In October, the publication revealed further news that Wirecard had tried to deceive its auditors by trying to fraudulently inflate profits, and it was ultimately announced that €1.9bn of cash was “missing”. This was the beginning of the story unravelling for Wirecard, with shares plunging 62 per cent.
The failure to spot the missing cash will no doubt raise questions about the strength of the audit, but it would be remiss to overlook the role that internal obscurity played in this scandal. Wirecard had a responsibility to have a control framework in place that would have allowed it to spot the errors a long time ago, which clearly would have made a massive difference to the outcome.
It is equally key to remember that the regulators themselves made mistakes here. The German Financial Reporting Enforcement Panel actually had its contract terminated by the German government, in light of its failure to review the financial operations of Wirecard. Clearly, this shows that the regulator also had responsibilities that they did not fulfil.
Solving the problems
Auditors are there to check the numbers are correct, but this involves trusting companies to provide accurate accounts in the first place. If a financial team are determined to attempt to dupe their auditors, it will be impossible for auditors to uncover this deception without the right tools.
This is where technology can help. Applying automated bank reconciliation would remove the manual monitoring processes and automate the comparisons of data between different systems and applications, allowing auditors to spot errors immediately and see where the figures don’t quite add up. Analytics technology is crucial for achieving improved transparency within financial accounts of businesses, providing real time analysis of accounts, which allows errors to be flagged as and when they occur rather than months after the event when nothing can be done.
Auditors are not getting it wrong because they don’t care; they are getting is wrong because identifying these black spots is getting much harder to do, and accounting treatments are too complex to provide any clarity. Add to that the reliance on the human element of trust and it’s no wonder we are seeing so many of these issues crop up.
Lessons from the scandal
There are lots of entities that could have stopped this fraudulent activity but failed to. The fact that billions of dollars of cash went missing shows there had been multi-year accounting fraud to boost the value of the business. Yes, the auditors should have spotted it earlier, but the ability to commit fraud is the real issue here.
While there are many parties at fault, there is one clear solution that would have stopped Wirecard with getting away with the fraud for so long – and that is introducing a more technology-based model into the auditing industry. A huge part of the problem is that the audit firms are still relying on people to do the audits, and that leaves room for human error and accusations of unethical behaviour. Until we see the model change, we’ll still see fraud and accounting failures causing serious challenges for the business world.
Simon Bittlestone, CEO of Metapraxis