Trouble is brewing in the finance and fintech sector. Payment processing outfit Wirecard is not only facing claims of potential account fraud, but they are also missing funds. As it turns out, the missing $1.9 billion seemingly doesn’t exist.
The Wirecard Story so far
It has been a very troublesome and busy week for Wirecard, The German firm is best-known for providing credit card payment processing services to third parties. Some of the transaction processing is outsourced to third parties, which is always a risky business venture to explore. More eyes on sensitive data is a recipe for disaster more often than not.
Although the business model by Wirecard has remained relatively solid, cracks appeared in the facade nearly two years ago. One whistleblower claims how the third parties handling Wirecard’s transactions are committing accounting fraud. Several clients listed in official documents reviewed by auditor EY do not exist.
A follow-up audit by KPMG confirmed the inconsistencies. In fact, the audit confirmed that half of Wirecard’s sales from 2016 to 2018 were possible thanks to third-party payment handling.
Not only is that a big problem, it was also only the beginning of bigger problems. Company chief executive Markus Braun decided to resign on Friday. An official reason was never given. Braun still claims that the company did not commit any accounting fraud whatsoever. His resignation certainly makes people think otherwise. Eventually, the truth will come to light, either for better or worse.
Making matters worse is the absence of Wirecard’s 2019 annual results. These documents are usually issued in the first quarter of the subsequent year. However, company officials have postponed its publication for the fourth time. This only fuels speculation of what might be going on behind the scenes of this company.
Cutting Costs and a Major Loan
As if all of this isn’t enough, the COVID-19 crisis happened. It has taken its toll on numerous financial institutions, including Wirecard. Following this pandemic, the company will look to cut costs and dispose of several business units and products. A restructuring of the business operations is also likely to occur in the near future.
Financial concerns are also an ongoing issue. Wirecard is “in discussions” with numerous banks to extend its outstanding €2 billion loan. Whether that effort will be successful, is a different matter altogether. Recently discovered monetary discrepancies may throw a monkey wrench into those plans.
Where is the $1.9 Billion?
Dubious accounting practices at Wirecard have serious repercussions. Last week, it became apparent that as much as $1.9 billion is missing. It seems this relates back to some of the German payment processor’s subsidiaries and third-party partners.
Normally, the $1.9 billion would be held in escrow by two Asian banks. The money is allocated to guarantee liquidity for its third-party payment processing business model. According to Wirecard’s financial accounts, this escrow money is an asset and appears on the official balance sheet.
As it turns out, this escrow account doesn’t exist. It is not held in escrow by the aforementioned banks, nor is the asset to be found anywhere else. A very troublesome situation, forcing the company to revise its financing options. That process will be completed with the help of investment bank Houlihan Lokey.
It is this latest discrepancy that forced Wirecard to delay its financial results once again. There appear to be many incorrect sets of data that will need to be rectified.
It also explains why the payment processor needs to extend its ongoing bank loan. If that deal falls through, there is no telling what will happen to Wirecard in the months to come.