Until June, German payments company Wirecard AG was a hot growth story that had shaken off allegations of accounting fraud. Then came the admission that about $2 billion of company funds had gone missing. The scandal led to the resignation and arrest of the company’s former Chief Executive Officer Markus Braun, with the company filing for court protection from creditors. More executives, banking officials, auditors and even regulators may become ensnared as the broad impact of Wirecard’s potential demise rattles Germany’s financial industry.

1. What does Wirecard do?

Wirecard is a developer of software and systems for online payments and fraud protection used across the internet, processing a customer’s card details and ensuring the funds to cover a purchase are transferred to the merchant. Its technology helps handle smartphone payment transactions, issue credit cards and detect suspicious activity. Through the aggressive acquisition of at least 18 companies, Wirecard outgrew Munich’s start-up scene to report 2.1 billion euros ($2.4 billion) in revenue in 2018. That year, Wirecard replaced Commerzbank AG in Germany’s 30-company DAX stock index, alongside titans such as Volkswagen AG, Siemens AG, and Deutsche Bank AG.

2. Why has Wirecard been controversial?

The company got its start two decades ago as a provider of financial services to the gambling and adult entertainment industries, operating in murky waters. While it’s now focused on more mainstream clients, Wirecard’s business model remains complex and it has had to defend its reputation repeatedly. The shares dropped after claims were made in 2008 about accounting irregularities and again in 2016 amid fraud allegations, both of which Wirecard rebutted. But the critics never completely went away, with the Financial Times publishing a series of articles in 2019 that accused the company of improper accounting in Asia and the Middle East.

3. So what actually happened?

On June 18, auditor Ernst & Young declined to greenlight Wirecard’s long-delayed 2019 financial report, sending its shares into a tailspin. The crisis deepened a couple of days later when Wirecard admitted that 1.9 billion euros it had reported as assets probably never existed. Braun, who had led the company for more than a decade, resigned and Wirecard pulled its financial results for fiscal 2019 and the first quarter of 2020. Moody’s Investors Service cut Wirecard’s credit ratings six levels then withdrew them altogether. The company began talks with lenders and hired investment bank Houlihan Lokey to come up with a financing strategy to keep operations going. Wirecard’s banking arm, Wirecard Bank, is not included in the insolvency proceedings as it falls under the jurisdiction of German financial markets regulator BaFin, which has appointed a special representative to oversee it.

4. This was not a complete surprise then?

Not really. The reports by the Financial Times in 2019 raised questions about accounting practices at Wirecard’s units in Singapore and other Asian countries. Wirecard denied claims of irregularities and called the reports baseless. Still, the stock slid and investors placed so many bets that it would tumble further that BaFin stepped in to temporarily ban short selling of Wirecard shares -- a step it had never taken for an individual company.

5. Who are the key players?

Braun turned himself in to Munich police on June 22 as part of a probe into the company’s accounting practices. Earlier that day, Wirecard fired Chief Operating Officer Jan Marsalek, a key strategist in the company and a close ally of Braun, without giving a reason. Interim CEO James Freis, a former financial-crime enforcer at the U.S. Treasury, was hired to clean house. He told employees to expect a major restructuring that could include selling assets to salvage the company, according to people familiar with the situation.

6. How much of a blow is this for Germany’s establishment?

The whole affair has turned into an embarrassment for Germany and threatens to ensnare bullish analysts, lax auditors and inattentive watchdogs. Concerns about Wirecard have taken on increased urgency since it joined the DAX, an index that’s tracked by everyone from large pension funds to private investors. BaFin has come under fire for its ban on short sales in response to the FT allegations. The agency’s President Felix Hufeld has apologized, saying that BaFin was among institutions responsible for the “complete disaster” because it didn’t do a good enough job supervising. Economy Minister Peter Altmaier warned that the revelations risked tainting the country’s reputation as a reliable place of business and should be thoroughly investigated.

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