On 18th June Wirecard announced:
Wirecard AG’s auditor Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Munich, informed Wirecard AG that no sufficient audit evidence could be obtained so far of cash balances on trust accounts to be consolidated in the consolidated financial statements in the amount of EUR 1.9 billion (approximately a quarter of the consolidated balance sheet total).
The share price has collapsed 76% since the 17th June closing price.
Yet many people won’t find this announcement surprising. Least of all Dan McCrum at the FT who has been highlighting problems with Wirecard’s accounting since April 2015:
I’m assuming now that the auditor can’t find the cash, that it is now safe to write about the company without being in danger of the German regulator Bafin trying to put me in prison, which is what happened to one of Wirecard’s critics in 2008.
Dan did a fine job digging into the weeds, of the statutory cashflow disclosure and accounting for acquisitions that didn’t make sense. In July 2015 pointed out that receivables growing faster than payables – is not the negative working capital effect you’d expect from a payments business.
That said, I avoided Wirecard for a different reason: the story never made sense to me. I met people in the payments industry who seemed to think Wirecard management were very smart, and were very reluctant to be critical. For instance at an N26 event in Berlin, and I couldn’t find anyone who was prepared to say anything negative about the company (Wirecard had originally provided N26 with a banking licence).
Although many people who worked in payments thought it was a proper company, I couldn’t find anyone who could explain what Wirecard was actually doing that was so clever. And the company itself didn’t seem to be able to tell a good story (apart from the fact that online payments were growing and their industry was complicated). The 2018 FY investor presentation has a slide titled “Global Megatrends Driving Wirecard” – “Artificial Intelligence”, “Internet of Things”, “Frictionless customer experience” all feature in the slide. It all seemed so generic. Nowhere is there a slide which explains what the company does, the challenges it faces, what advantages the company enjoys versus the competition. Same goes for the Annual Report – on page 66 management defines their core business as “the acceptance and issuing of means of payments along with associated valued added services.”
One approach to investing is focusing on the numbers, and looking for inconsistencies. Dan McCrum, and other critics such as this anonymous blogger at https://valueandopportunity.com/2020/06/19/wirecard-the-german-enron-a-very-personal-history-2008-2020/ have done an excellent job at that. But that takes time and is hard work. Just a half hour glance at the Annual Report and the Investor Presentation which felt too fluffy, generic and non specific, was enough to put me off.
Not digging too deeply, I even wondered if Wirecard accounting obfuscation was for a different reason, the cash was real but the company relied on money laundering. For instance, the value and opportunity blogger writes about:
an M&A transaction where Wirecard bought a company in India from an SPV for 300 mn USD that was acquired just one month before for 30 mn USD. Wirecard claimed that they didn’t know who the ultimate beneficiary of the sales price was. If I ever have seen something looking like explicit money laundering at a DAX company then it was this transaction.
I expect we will hear more about such transactions in coming months as they are investigated more fully. Probably there’s a lot of information that will come out – I’ll almost be disappointed if the company is just a “normal” fraud where they’ve been making up the numbers, because the problems seem to run deeper.
Last word goes to Markus Braun, who said in 2015 “its bullshit, why should I do this, I am a shareholder of this company for 12 years, I have been running this company for 12 years, why should I take this risk?”