Greed is not good: The case of Wirecard
July 12th 2020 - Edition #44
Wirecard has just joined the ranks of the infamous circle of companies that have committed accounting fraud on a massive scale. Enron, Worldcom, Parmalat, Espírito Santo Internacional and now Wirecard have all fallen to the temptation of cooking the books to appear bigger and more profitable than they really were and to justify undue valuations.
The biggest shock in the case of Wirecard is that it was not an American company, nor an Italian, nor even a Portuguese one but a rigorous German company and the stereotype we have of german companies is that they love order and rigour above all else and they are not prone to be greedy.
As it is customary in these cases, Wirecard was an example of success. The pride of German Fintech companies Wirecard is a sort of Paypal that handles digital payment services. Since its foundation in 1999 Wirecard was unstoppable in terms of growth, getting listed on the Frankfurt Stock exchange in 2005, buying a banking licence in 2006. The first suspicions of accounting irregularities started in 2008 but were quickly subdued with the hiring of EY. Then as it is typical in fraudulent companies, they went on a shopping spree buying small unknown payment companies all around Asia… because acquisitions make accounting comparisons across years very difficult and there are also plenty of adjustments and goodwill to scramble things.
However, in 2015, Wirecard’s luck ran out. The Financial Times started to raise questions in a series of articles called the House of Wirecard and once again Wirecard responded as someone that was reading a copy of a Fraud Manual: They placed lawyers threatening with lawsuits and insinuating that the FT was being paid by shortsellers. Surprisingly the market believed them. In 2018, Wirecard achieved its record market cap of 28 Billion Euros and even replaced Commerzbank in the top german stock market index Dax30. Their performance almost seemed too good to be true… and it was.
In January 2019 the FT restarted to write articles regarding accounting manipulation in Wirecard’s Singapure office and instead of investigating the allegations, the German regulator BaFin instead investigates FT regarding market manipulation and suspends short selling of the stock. How was it possible to dare to raise suspicions regarding the best German and European Fintech?
But finally, after a change in auditors from EY to KPMG, several more articles of the FT and several internal whistle-blowers, it is discovered that 1,9 Billion euros of cash did not exist. What this means is that almost 2 billion of profits that had been accounted were never real.
CEO Marcus Braun was finally arrested last week. The formerly known brilliant German visionary was indicted for fraud and released on a 5-million-euro bail.
Why did this happen? The obvious answer is greed. The combination between exaggerated ambition and hubris that does not let some CEOs admit that the prospects they sell to investors are not realistic and as times goes by, the gap between reality and illusion just gets wider and wider.
That is why when Warren Buffet recruits a new CEO the number one characteristic he is looking for is integrity. Of course, intelligence, initiative or energy are key but if there is no integrity the other qualities will backfire. If there is no integrity, it is preferable to have them dumb and lazy.
But integrity can be faked and most of the people can act honestly most of the time. The difficulty is to act with integrity when faced with failures and results below expectations, having the humility to admit it, and being willing to risk losing their face, money and power - things that typically define the self and public images of a CEO - in order to maintain integrity. And the problem is that the greed that gave them the energy to arrive at the highest level clouds the greedy CEO’s judgement and destroys their integrity.
Greed is not good. Irresponsible Business at its best.
Diogo Lopes Pereira
Fintech Disruption Program Director
Center for Responsible Business & Leadership
Católica Lisbon School of Business and Economics
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