Germany's Wirecard Investigation Brings Economic, Regulatory Models Into Question

Wirecard AG WRCDF is under investigation by the European Union after the company said it could not account for $2.1 billion in cash that was listed on its balance sheet.

The European Commission has launched an independent analysis to determine the "adequacy" of Germany's financial regulator, the BaFin, DW reported Friday. 

What Happened: Wirecard announced that $2.1 billion in cash had gone missing and admitted that loans in the billions could be terminated based on additional delays in publishing its financial results, which had already been delayed four times.

The missing amount of money accounts for about 25% of the company's balance sheet. The auditing company Ernst & Young could not confirm the location of the missing cash. The company has filed for insolvency.

What's Next: The investigation is focused on whether Wirecard issued false or misleading statements or failed to disclose correct information to investors. Shares of Wirecard have traded down by 74% since the scandal broke.

Why It’s Important: The case has shocked many investors around the world.

The scandal is especially worrying because it occurred within a country, Germany, that is renowned for its strong institutions, says Professor Kenneth Amaeshi, chair in business and sustainable development at the University of Edinburgh Business School.

“Corporate scandals on the scale of Wirecard are usually the product of weak institutional contexts. Strikingly, Germany has a reputation for possessing one of the strongest sets of safeguards against corporate malpractice in the world, along with Japan,” says Amaeshi.

The professor says that Wirecard’s demise, when coupled with similar scandals in Japan in the last decade, suggests a worrying pattern: we may have to rethink our sense of the best methods of ensuring good corporate governance.

“Both Germany and Japan practice a form of capitalism often referred to as stakeholder capitalism, a system where companies are orientated to serve the interests of all their stakeholders rather than just their shareholders (unlike, for example, the US).”

He highlights an accounting scandal similar to the one now engulfing Wirecard that occurred in 2011 when the Japanese manufacturer of optical equipment Olympus fired its chief executive for whistleblowing.

“As with Wirecard today, the scale of the corporate corruption exposed at Olympus suggested widespread failings in the Japanese system of corporate governance. Together the two scandals suggest stakeholder capitalism may not be so effective at preventing corporate malpractice as often believed.”

Related Link: Wirecard Short Sellers Bank $2.2B In Profits Off Accounting Scandal

Photo by Leo Molatore via Wikimedia.