Journalists, whistleblowers and skeptical investors had all questioned Wirecard’s accounting for years, but executives were able to brush aside their allegations. Wirecard (WCAGY) received cover from the country’s banking regulator, which pushed back forcefully against critical hedge funds and investigative reporters, but failed to spot anything amiss at the company.

In the end, the collapse took only seven days. Wirecard admitted last week that roughly a quarter of its assets — €1.9 billion ($2.1 billion) in cash — probably never existed. CEO Markus Braun resigned and was quickly arrested on suspicion of artificially inflating the firm’s balance sheet and sales through fake transactions. Wirecard filed for insolvency on Thursday.

Braun, who has been released on bail, has consistently denied wrongdoing, suggesting instead that Wirecard was the victim of a highly sophisticated fraud. But a picture is emerging of a prized tech company that was cheered on by authorities instead of scrutinized, and of a supervisory board that failed to act as a check on a chief executive many regarded as a visionary. Accounting firm EY precipitated Wirecard’s downfall by refusing to sign off on its final results for 2019, after more than a decade of auditing the company.

“You have a multitude of evidence of sinners, of overlookers, of all kinds of various guilty parties,” said Christian Strenger, academic director of the Corporate Governance Center at HHL Leipzig Graduate School of Management.

Wirecard is the first member of Frankfurt’s elite DAX stock index to file for insolvency. But its implosion follows a series of scandals over the past five years that have embarrassed Germany’s government, regulators and business community, raising questions about the strength of corporate governance and financial regulation in the world’s fourth-largest economy.

Volkswagen (VLKAF), the world’s biggest carmaker and champion of German manufacturing, admitted in 2015 that millions of diesel vehicles had been equipped with software to cheat on emissions tests. Deutsche Bank (DB), the country’s biggest lender, has paid tens of billions of dollars in penalties related to its sale of toxic mortgage assets, interest rate manipulation and a Russian money laundering scheme.Two more German corporate snafus have generated global headlines this week: more than 1,500 workers tested positive for coronavirus at a plant owned by meat processing giant Tönnies Group, forcing local officials to reimpose a lockdown on more than half a million people in the surrounding region; and Bayer (BAYRY) agreed to pay over $10 billion to settle claims that Roundup, a product it owns thanks to its acquisition of Monsanto, causes cancer.

The outbreak at the Tönnies plant highlighted the poor working and living conditions faced by foreign workers in the industry, and the German government responded by promising to ban the use of subcontractors and to double fines for breaching rules on working hours.

The Bayer settlement comes after investors voiced deep concerns about the acquisition of Monsanto, and questioned whether management had properly understood the legal risks. Shares in Bayer have lost roughly a third of their value since the purchase of Monsanto was announced in September 2016.

The firms operate across different industries, but with the exception of the Tönnies Group, they are publicly listed and are run by a management board with responsibility for daily operations and overseen by a supervisory board that includes worker representatives. Critics say oversight breaks down when the boards become too cozy, which can happen when top executives move into supervisory positions. Investors complain that their interests are too often subjugated to other considerations, such as politics or internal corporate dynamics.

Strenger said that German corporate governance has improved significantly in recent decades, but that shortcomings by executives and directors are still too common. Additional safeguards would be relatively simple to install, he said, such as changing stock market rules to prevent companies from delaying their financial results, as Wirecard had done.

“We’ve made good progress … but there is still room for human error, or for trying to believe in people that are appearing in a convincing fashion. [Wirecard] was traded in the analyst and investor society as the next SAP (SAP), and who wouldn’t want to be on that bandwagon?” he said, referring to the software giant that is also listed on the DAX.The collapse of Wirecard is making waves far beyond Germany. A frantic search for the missing funds reached the Philippines, where the central bank denied the money had entered the country’s financial system. US card issuers Mastercard (MA) and Visa (V) are reconsidering whether to allow Wirecard to continue processing payments on their networks, according to Bloomberg, and a UK regulator has moved to safeguard the funds of Wirecard clients.

Germany’s government is now paying close attention. Finance minister Olaf Scholz described the Wirecard scandal as “extremely worrying,” saying the country must act quickly to improve oversight. “Critical questions arise over the supervision of the company, especially with regards to accounting and balance sheet control. Auditors and supervisory bodies do not seem to have been effective here,” Scholz said in a statement.

Germany’s Federal Financial Supervisory Authority, or BaFin, is actively investigating whether Wirecard violated rules against market manipulation. But the regulator is now coming under heavy scrutiny, with critics arguing that it should have done a better job overseeing Wirecard’s banking unit, even if it didn’t have direct oversight of the larger firm.

Observers also want to know why BaFin issued a temporary ban in 2019 that prevented investors from borrowing Wirecard shares to sell them in anticipation of prices falling, and why it filed a criminal complaint against journalists at the Financial Times, which published a series of articles that exposed accounting and management irregularities at the company. BaFin chief Felix Hufeld described the scandal earlier this week as a “total disaster.”

The European Commission has asked its top market supervisor to conduct a preliminary investigation of BaFin. Valdis Dombrovskis, the EU official in charge of financial services policy, told the Financial Times that the bloc should be prepared to launch a formal probe if necessary.

“We need to clarify what went wrong,” he said.

EY, which already faces a criminal complaint from German shareholders’ association SdK, said Friday that Wirecard’s collapse was the result of an “elaborate and sophisticated fraud, involving multiple parties around the world in different institutions, with a deliberate aim of deception.”

“Collusive frauds designed to deceive investors and the public often involve extensive efforts to create a false documentary trail,” the auditor added in a statement. “Professional standards recognize that even the most robust and extended audit procedures may not uncover a collusive fraud.”

— Chris Liakos, Eoin McSweeney and Stephanie Halasz contributed reporting.



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