Wirecard, once a German-FinTech darling, was plunged into turmoil back in June 2020 with the admission that the €1.9 billion (US$2.1 billion) missing from it’s balance sheet likely does not exist. The German payments provider, which rapidly expanded and grew since its founding in 1999, most recently received a huge vote of confidence in the form of a US$1 billion investment from SoftBank in April 2019. The fallout was swift. The CEO, Markus Braun, resigned and then was arrested three days later by German authorities on fraud. The share price plunged as much as 80% in a matter of days.
So how does US$2 billion just magically disappear? This is a classic case of corporate fraud stemming from corporate misgovernance. Corporate governance is an essential aspect of a financial institution’s success. In the US, the Office of the Comptroller of the Currency (OCC), the primary regulator supervising all national banks, as well as federally-licensed savings associations and federally-licensed branches of foreign banks, provides guidance in the Comptroller’s Handbook on Corporate and Risk Governance. Successfully implementing strong corporate governance not only keeps the bank on the right side of the regulators, but also out of the front pages on the Wall Street Journal.
The controversies started in early 2019 when the Financial Times reported senior executives forging and backdating contracts. Although the subsequent independent audit from KPMG did not find any discrepancies, this coincided with the delay in the publication of Wirecard’s 2019 annual report from EY. The auditor refused to sign off on the report due to its inability to confirm the existence of €1.9 billion in cash balances. This was the beginning of a spectacular fall from grace.
News media outlets were quick to coin the scandal, the “German Enron”. Following the Enron disaster, new regulations and legislations were created, and accounting standards were enhanced. The biggest corporate scandal led to Sarbanes–Oxley or SOX. The impact of SOX on corporate governance was profound, including the strengthening of audit committees and increasing management’s responsibility on financial reporting.
Bundesanstalt für Finanzdienstleistungsaufsicht, or BaFin to those across the Atlantic, is the primary financial regulator overseeing Germany’s financial system. Questions have been raised over whether BaFin could have done more to prevent the failure. But what is clear is that strong corporate governance was severely lacking at Wirecard. There had to be multiple levels of failure in order for fraudulent transactions to go unnoticed from the management-level all the way up to the CEO and the Board.
This is a lesson for any new burgeoning FinTech and tech startup not to lose sight of corporate governance. As a startup scales and grows with new users, new funding, and new features, it is paramount that decision makers scale and grow corporate governance at at least a parallel rate. This may mean creating new reporting cadences, developing internal controls, and hiring talented risk and compliance professionals.
The founder and CEO often promulgates the startup’s culture and charts the startup’s rapid growth journey. From a risk management point of view, the expectation from the OCC for incumbent banks is to set the tone from the top, meaning the Board, the CEO, and senior management setting the expectation, culture, and ethical climate. It would be wise for new FinTechs to instill this mindset from day one.
