June 2024
Paul Merison looks at how you can use the lessons from the business world and use them to your
advantage in your exams.
The COO was in fact a Russian spy who used the company to fund covert operations. Allegedly.
If only the spy story was relevant to your exams! Unfortunately it isn’t, but obviously it is interesting so that is the bit the media highlights. That is your problem as a student, reading the business news. Everyone tells you it is a must to see the real-world application of what you are learning, but the news stories are not written for accounting students.
So let me rewrite Wirecard for students…
Wirecard, a top listed German company that collapsed in 2020, admitted that $2bn of cash in bank accounts was not there. Stolen? Or perhaps it never existed? We may never know.
The ex-CEO is being prosecuted and the COO… see above.
EY, the auditors of Wirecard, received a fine and a ban from taking on new audit clients in Germany, and perhaps more importantly suffered reputational damage due to their perceived failure to check something as basic as cash at the bank. Wirecard creditors and shareholders who lost everything are suing EY for billions.
Let’s learn from this:
- Directors who cheat go to great lengths to avoid discovery
I feel slightly sorry for EY. Yes, they failed to check balances directly with the banks, but when they tried to actually visit the overseas banks themselves they were heavily controlled by Wirecard management and the bank visits seem to have been ‘staged’, with staff paid off in advance to supply false information. Once Covid hit and actual bank visits were impossible, a video call was held where allegedly a fake bank branch with actors was used.
- Self-review threat
If auditors fail to spot a big problem in year 1, they have a big incentive not to spot it in year 2 or year 3 – as that would suggest they failed in year 1. We will never know how early EY suspected foul play, but the penalties against EY tell their own story. - When it seems too good to be true…
Wirecard grew massively and quickly and seemed very successful. It wasn’t real. The lack of scepticism (professional marks!) shown by auditors, regulators, seasoned investors, etc., is extraordinary, and can only be put down to greed and a fear of missing out on backing what most thought to be a winner. - Corporate governance matters
Good governance is no guarantee of success, but weak governance often fuels disaster. Dominant executives who ignore controls and surround themselves with supporters so as to evade being challenged – it is never a good sign. That was Wirecard, with a Chairman and other NEDs who were allies of the CEO. So much for independence.
The worrying thing is that German corporate governance regulations allowed all this to happen, as the rules were far behind that of other countries such as the UK. Germany has now tightened things up, which is nice, if a little late. - Auditors must not let directors influence their audit work
EY were taken to the actual bank by Wirecard management and escorted during meetings to confirm balances. Even worse, when testing control systems EY allowed Wirecard to select samples for them to test, and even allowed Wirecard to supply payment cards to allow them to act as fake customers (audit students… test data!). But this meant Wirecard could ensure those payments showed up where they wanted them to show up, making fake sales to fake customers appear real. - Companies with multiple ethical question marks are best avoided
Wirecard did payments processing for gambling and porn sites. Many other companies did not want to touch these industries. But Wirecard also miscoded their sales to hide the gambling and porn from regulators in countries where such sites were illegal.
To top it off, anyone who criticised Wirecard suffered online and physical intimidation or had their reputations attacked.
Red flags galore. - Companies who use shortcuts to avoid regulatory processes do so for a reason
Wirecard got listed status by ‘reversing’ into an existing listed company. They also got banking accreditation by buying a small existing bank. One has to question why they preferred shortcuts over proper regulatory applications.
The Wirecard story has so many angles it is impossible to do it full justice in this article. Students wanting to learn from this and other real-world business stories should get hold of my ‘Exam World Meets Business World’ podcast (PQ Awards Finalist 2024), freely available from Spotify, Apple podcasts and others.
- Paul Merison is the director of Professional School at London School of Business and Finance (LSBF)
