Wirecard, a Germany-based Fintech company listed in Germany’s prestigious Dax 30 index, had their share priced plunged 60% in a single day on 18th June following a scandal that €1.9bn could not be located by their auditor. As more details of the scandal continued to unfold, its share price continued to drop and its market value eventually evaporated more than 90% in less than 1-month time. This is nightmare for investors. Whether you actually invest in Wirecard or not, there are lessons that we should learn as investors.
Background of Wirecard
Cited from Wikipedia here, Wirecard is a payment processor and financial services provided in Germany, offering electronic payment transaction services, risk management, issuing & processing of physical cards. It was also described by many people in Asia as Europe version of Alipay (leading mobile and online payment platform in China).
Wirecard was founded in 1999 and listed in Frankfurt stock market in 2005 through reverse IPO (Cited from Wikipedia here, reverse IPO is acquisition of a public company by a private company so that the private company can bypass the lengthy and complex process of going public). In 2018, Wirecard made it to Germany’s Dax 30 index, which is a blue ship stock market index consisting of 30 biggest Germany companies trading on Frankfurt Stock Market Exchanger.
Lesson learned 1 – Value allegations from media with good reputation
British media Financial times started published “The House of Wirecard” series of reports, questioning inconsistencies back in 2015. These articles from Financial Times are available on their website here. Financial Times has particularly questioned around Wirecard’s expansion in Asia region, such as paying large amount of down payment even before the deal was completed, true value of the acquired Asian companies as assets from acquisition was classified as intangible assets and customer relationships, mismatch of different sets of accounts etc.
Nowadays there are just too many medias and platforms that we can obtain our information from. Judging credibility of information is becoming increasingly important for investors. However, when there is any negative news coming from media with good reputation, it is worth digging into the details for sure. By saying this, it is not intended to ask you an investor to blindly believe the news when it comes from trusted media. Instead, you must scrutinize and take the risk into account when making investment decision.
Lesson learned 2 – Delay in publishing financial reports is an alert
Before the scandal erupted, Wirecard has delayed its publication of annual report by multiple times. Wirecard was initially due to publish its annual financial report of 2019 on 8th Apr 2020. The deadline was postponed multiple times from initial date of 8th Apr, to 30th Apr, to 4th June, to 18th June. On 18th June, Wirecard made further announcement that “Date for publication of annual and consolidated financial statements 2019 delayed due to indications of presentation of spurious balance confirmations”.
There could be various reasons why a company delays issue of its financial report, but it is often one of the bad signs when a company is caught in trouble. We have to be more cautious especially when a company is delaying its publication of AUDITED financial annual report.
Lesson learned 3 – Audit failure
Ernst & Young (EY), auditing firm appointed by Wirecard for their financial reports, has failed to uncover fraud of Wirecard for years. While it is disappointed that EY signed off those financial statements, it does not mean that audit report does not have value for investors.
In 2019, Wirecard hired KPMG to perform an independent audit to address allegations by Financial Times. However KPMG’s audit report released in Apr 2020 raised more questions than answers. Official response from Wirecard here on KPMG’s audit report says “No incriminating evidence was found for the publicly raised accusations of balance sheet manipulation. No substantial findings were found which would have led to a need for corrections to the annual financial statements for the investigation period 2016, 2017 and 2018”. If we look into KPMG report available here, it mentions “KPMG can neither make a statement that the revenue exist and are correct in terms of their amount, nor make a statement that the revenue do not exist and are incorrect in terms of their amount. To this extent, there is an obstacle to the investigation.”
If you read special audit report by KPMG carefully, a big red flag has already been raised. Audit failure could be one of last red flags for investors to cut loss before the real trouble is finally unfolded.
Lesson learned 4 – Know your investment
Know what you are investing!
Let’s take the Wirecard as an example. Wirecard is a Fintech company and Fintech is a relatively new industry. Compared to conventional finance industry, it is likely that most people still lack of knowledge of how Fintech works. In addition, regulatory framework for Fintech is still immature from many aspects in comparison to conventional finance industry, which in turn implying a bigger risk. In companion with operation and cash flow of Wirecard across different continents, countries and subsidiaries, it increases difficult for investors to obtain a thorough insight.
To be clear, it is not meant to tell you not to invest in Fintech or other new businesses. The point is, know your investment and understand your risk!