The Wirecard fiasco

The watchdogs are not vigilant enough. The latest incident that has caught them napping is the €1.9 billion missing from the bank accounts of the fintech firm, Wirecard. A payments giant in Europe, Wirecard is in the eye of an accounting storm that has taken the world by surprise. It provided services for cashless financial transactions through cards, point of sales solutions, mobile payments, as well as offered banking services to its clients.

The company achieved new heights in 2018 when it made its way into the prestigious DAX index of the Frankfurt Stock Exchange.

What went wrong?

The company is at the centre of the controversy because its auditing firm Ernst & Young (EY) withheld publishing of the company’s annual report for 2019. EY said that the report could not be issued because it has not been able to confirm the status of €1.9 billion (roughly ₹163 billion) that, as per Wirecard, was parked in two Philippine banks.

Reports have indicated that EY had failed to ensure one of the basic checks of verifying the bank balances of Wirecard for the last three years. EY had relied on third-party agencies to verify the bank balance, instead of independently verifying on its own. This incident has sent shockwaves to the German financial supervisory authority, BaFin. The regulatory body has come under severe scrutiny for the way it limited itself to regulate only the small bank subsidiary of Wirecard. However, the parent company was exempted as it was registered as a technology firm.

BaFin and, by extension, any national financial regulatory and supervisory authority need to expand their scope to similar firms which deal in public finance. The working of banks, card companies, payments firms, and the likes need to be covered under the ambit of the top financial regulatory and supervisory bodies of the nation.

Policies need to be put in place to govern the operations of the firms in the finance space, and then their implementation needs to be monitored stringently.

The functioning of the auditors has also come under critical scrutiny. The famous maxim which says auditors are watchdogs, not bloodhounds, needs to change. It is the auditors’ responsibility to present a true and fair view of the business to the general public. The auditors must highlight any material information that may have significant financial ramifications to the stakeholders so that appropriate steps can be taken to mitigate the risk.

It is the auditors’ fiduciary responsibility to ensure that the financial statements reflect the actual position and performance of the firms. The auditors need to go above and beyond what is laid down in the regulations. They ought to enquire into any transaction or financial information which may be exploited by the managers for their private gains and ensure that such loopholes are sealed.

The new-age working style of auditing by just checking boxes to ensure the auditing firm is out of any legal wrongdoings, while not actively pursuing the task of verifying the work of the client firm can no longer be the norm.

Enron, Lehman Brothers, Satyam, and now Wirecard, we are witnessing regulators, auditors, and other institutions not performing the duties they were assigned to safeguard the interests of the common public, at alarming regularity. Any financial system is as robust as the faith reposed by the people in it.

Saravanan is Professor of Finance and Accounting at IIM Trichy, and Banerjee is a doctoral candidate at IIM Trichy.