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Wirecard Bites The Dust

In the midst of this whole Covid-19 brouhaha, it’s good to know that there is business as usual still being undertaken in uncovering corporate malfeasance. This year’s mega scandal emerged in Germany, when the blue chip company Wirecard’s CEO was arrested last month on suspicion of accounting fraud and market manipulation. Wirecard is a German payments services provider with offices across the world providing mobile payments, e-commerce, digitization and finance technology. Its clients included large multinational insurance companies, airlines and public transport utilities. In an August 2019 press release to the Business Insider magazine, Wirecard reported half year revenues of € 1.2 billion in revenues compared to € 882 million in half year 2018 and a 50% increase in earnings after tax of € 237 million over the same period in 2018. The company also claimed in the press release that transaction volume processed via its platform grew 37.5% to €77.3 billion in the first half of 2019 compared to €56.2 billion over the same period in 2018.

But all these numbers had already started to raise doubts after a January 2019 expose by the Financial Times (FT), a globally recognized and well respected British business newspaper, based on whistleblower reports. The FT reported on 30th January 2019 that a presentation had been made to Wirecard executives, including the CEO Markus Braun, on a string of suspicious transactions using forged and backdated contracts that led to falsification of accounts and money laundering. The whistleblower was concerned that no action had been taken against the perpetrator of the acts undertaken by Eco Kurniawan who was responsible for the payment group’s accounting in the Asia Pacific region. Wirecard took great umbrage at the FT’s reporting and sued the newspaper for unethical reporting and market manipulation as the company’s share price took a plunge on the German Stock Exchange.

Responding to the market’s reaction, the company asked KPMG, one of the Big Four global auditors, to undertake an independent audit of the firm’s Asian operations and was quick to announce in March 2019 that the audit firm had not found any discrepancies in the audit and that it would not restate its accounts for the years between 2016 and 2018. However an article by Reuters in April 2019, revealed that the independent investigation by KPMG into Wirecard had concluded that the company did not provide sufficient documentation to address all the allegations of accounting irregularities made by the FT, who continued to stand by their view that Wirecard had booked half of its worldwide revenues and much of its profits from three obscure third party acquiring partners.

In June 2020, it all went pear shaped for the CEO Markus Braun. After the delayed announcement of Wirecard’s 2019 results three times since their expected release in March 2020, the FT reported that Ernst and Young, Wirecard’s auditors, had warned that € 1.9 billion was missing from the company’s accounts. The auditors told the company that there were indications that a trustee of the company’s bank accounts had attempted “to deceive the auditor” and may have provided “spurious cash balances.” Consequently, the auditor was unable to release the much awaited 2019 financial results to the company’s board and management.

Late last month, Markus Braun was arrested on suspicion of inflating the company’s balance sheet and revenues to make it stronger and more attractive for investors and customers. He was released after his bail was set at €5 million. Another gleaming company and CEO’s reputations have bitten the dust. The academic beauty of this case is that it has followed the same trajectory of many other large ignominious corporate scandals like Enron in the United States and Satyam in India: phenomenal financial growth that leaves investors dizzy in the share price appreciation and promise of even more profits all at the expense of murky internal controls and risk management. The common thread is a leadership that more often than not gets high on its own supply having been recognized on multiple stages for having innovative and trailblazing expertise, which is ordinarily a façade that is difficult to maintain in the long run. As the disgraced Satyam CEO Ramalinga Raju aptly quoted, following his fall from disgrace after confession that nearly $ 1 billion dollars in cash was missing from the company’s balance sheet, “It was like riding a tiger, not knowing how to get off without being eaten.” How many boards are sitting ringside at a circus, watching a tiger riding CEO string them along?

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Twitter: @carolmusyoka

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Banks are the new slaves of technology

[vc_row][vc_column width=”2/3″][vc_column_text]$300 billion. Let me translate that into Kenya Shillings. Roughly, Kshs 30 trillion. Now let me put that into perspective. The Kenyan Government budget for the current financial year 2015/2016 is Kshs 2.1 trillion. So about 15 times that number. What is this $300 billion I’m going on and on about? That is the size of penalties that had been levied since 2010 to global financial institutions by June 2015 as reported by the Financial Times. These included fines, settlements and provisions for various levels of misconduct some of which is related to the global financial crisis of 2008. The culprits read like a who’s who on the red carpet to punitive pain: Bank of America, JP Morgan Chase, Standard Chartered, Citigroup, Barclays, Deutsche Bank, HSBC, BNP Paribas and on and on.

And the natural reaction for all these institutions is to tighten controls, seal loopholes, grow the compliance function and generally create enough bottlenecks internally to ensure regulatory compliance. The winners: audit and compliance teams who rule the roost over every single non-compliant new customer onboarding and new product approval process. The losers: the concept of the big, global monstrosity bank that straddles continents like a financial ash cloud. Compliance is expensive. Non-compliance is astronomically expensive. So it was with great interest that I listened to a talk by a renowned futurist called Neil Jacobson last week.

Neil paints a bleak future for the traditional global bank citing six reasons why there is a perfect storm in the global financial industry. First off, there is trust crisis. Even with pedigree board members, highly experienced (and paid) executives in management as well as world class operating systems and processes, many banks clearly can’t get the back end right. The chase for profit trumped controls many times. Secondly he cites the security and regulatory firestorm. I don’t need to harp on it as the number is clear: $300 billion and counting. Regulators are licking their chomps at the highly lucrative knuckle rapping that they have been undertaking. If nothing else, it’s a back alley way to raising more taxes. Thirdly is a technology tsunami. You don’t have to throw a stone very far today before it lands on a code writer, developing one app or the other as there are so many financial technology companies (fintechs) willing to throw money to anyone who comes up with the best app to help provide access to credit or money transfer. The classic thing is this: with the Internet, it doesn’t matter if that developer is sitting in a bedsitter in Kayole or a one bedroom flat in Silicon Valley. The one with the best solution wins. Visit iHub on Ngong road and see what I’m talking about. Facebook, as a matter of fact, is already running app competitions in Kenya. The demonetization of transactions such as matatu fare, paying for food at a restaurant, receiving payment for supplying milk or vegetables is very quickly democratizing the role of money movement beyond the traditional banking space. And banks are too clunky and too heavily regulated to make the quick changes that fintechs are able to exploit. Which brings me to the fourth reason for the perfect storm: an explosion of new, different and rude competitors who are not members of the “old boys club” (which requires academic and professional pedigree) and are alternative thinkers. At this point Neil introduced the audience to the acronym GAFA -which acronym derisively originates from French media – that stands for Google, Apple, Facebook and Amazon. None of which, with the exception of Apple, existed twenty five years ago and together virtually own the technology space. Three of these powerhouses got together in November 2015 under the auspices of “Financial Innovation Now”. Together with Intuit and PayPal, the other three giants Amazon, Apple and Google put together the coalition to act as a lobby that would help policy makers in Washington D.C. to understand the role of financial innovation in creating a modern financial system that is more secure, accessible and affordable. This is where it gets interesting as they twist the knife into the back of traditional banks, “Financial Innovation Now wants policymakers to understand how new technologies can help solve today’s policy challenges.” In other words, we need lawmakers not to be bottlenecks as we help sort out critical voter issues like access to financial tools and services as well as helping voters to save money and lower costs. Win-win for everyone, except the banks.

Once lawmakers start to understand the benefits of low cost, secure financial solutions that do not require deposit taking mechanisms, it is likely that they will apply a much lower prism of regulatory restrictions that are currently straitjacketing the financial industry. You don’t have to go far: look at the Mpesa functionality and the strict segregation of Mpesa funds from Safaricom deposits which was the regulatory compromise for accepting the service in the first place. Neil’s fifth reason for the financial perfect storm is that pressure from customers, staff, regulators and all stakeholders is growing. And his final reason was the ultimate challenge for all businesses beyond the financial industry: Customers are changing. A study presented at Europe’s Finovate 2015 showed that 30% of today’s workforce is made up of millenials, 85% of who want banking to be disrupted. Have you seen those young people whose eyes are constantly glued to their devices and would rather starve than not have data bundles? The solution is hand held and your solution had better dovetail into their solution.

Closer home, the impact may be less harsh. For now. But our homegrown financial institutions are morphing into regional powerhouses and it won’t be long before a few float to the top of the pan-African heap. The successful ones will be the ones that grow their customer base on the back of technological innovation rather than bricks and mortar. To quote Larry Page, one of the founders of Google: Companies fail because they miss the future.

[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]