Wirecard is one of the great frauds of our times. So much so that it fooled even the company's auditor, EY, which has now just been banned from taking on new clients for a couple of years in Germany as a result. But even given the ongoing trials it's worth having a look at what really happened in simple terms, For knowledge of how the markets were spoofed will aid us in making sure that we're not spoofed again.
Frauds are always simple in that they depend upon someone, somewhere, lying about what has been happening. Exactly who at Wirecard is one of those things being determined by those ongoing court cases. But what was lied about we do know. In fact, we explained it elsewhere a couple of years back when the Wirecard news first broke, then again when folk speculated that really, Wirecard could have been that simple, could it? The answer being that yes, Wirecard really was that simple.
Wirecard share price from Google
Wirecard was a payments processor, nothing wrong in that. Part of the financial plumbing of the online world. It started out gaining business in the odder corners of the online world. People that larger processors didn't want to seem to deal with. Also nothing wrong with that. Picking up business others don't want can be very profitable.
What seems to have gone wrong is that business growth did not match up with predictions of what business growth was going to be. That makes as share price sad so certain inaccuracies about the real business numbers were perpetrated. So far nothing very unusual about this fraud - it's a common enough method.
It's how and where the numbers were massaged that's different here. A credit card or online payment processor always has a chargeback account. We all know that sometimes fake cards are presented, or the retailer charges twice, even though there can be real and unforced errors. So, the retailer doesn't gain 100% of the sales revenue immediately. Some are held in suspense. How much is decided by the payment processor and can be different over time, geography and specific retailers. This is normal. Where Wirecard became unnormal is that the chargeback accounts kept rising in value. Well, if business is booming then they should. But we've no one single metric by which to decide how large those accounts should be - for the above reason that how large the holdback is is a matter for the credit management of the processor.
But what was really happening is that the untruths about how high sales were were being hidden by those chargeback accounts? After all, accounts must balance. So, if sales are said to be higher than reality then where is the money? In the chargeback provisions. So it was said.
The problem there is that those deposits were at odd banks which were difficult to audit and EY missed that they largely didn't exist at all. They weren't cash at the bank, they were the balancing items to make the exaggerated sales balance.
The lesson for all of us from this is be wary of those claiming cash deposits and large bank accounts where it's difficult to check the reality of the size of the cash or the account. Not a terribly difficult or even exciting lesson but one that we do need to be reminded of now and again.