Do you know the different warning signs of fraud?
As an accountant, you’re in an optimal position to assist businesses with their internal controls, including identifying fraud. When a company commits fraud, they have the option to admit it in order to mitigate financial losses, or they can continue to conceal their wrongdoing, which worsens the situation. The Wirecard scandal is a fascinating example of a company that refused to admit wrongdoing, and as a result, they’re now experiencing severe legal and financial repercussions.
Gusto, along with our partners at CPA Academy, presented an edifying webinar covering the warning signs of financial fraud and two informative case studies. We presented our webinar, “Fraud: Wirecard’s Missing $2 Billion and Airbus’s Massive Bribes,” and you can watch the full presentation here.
In addition to this webinar, Part One in the article series, you can also read Part Two to learn about the 2020 Airbus bribery scandal.
The webinar featured the accounting and fraud expertise of Greg Kyte, founder of Comedy CPE, and Caleb Newquist, Gusto’s Editor-at-Large. Greg and Caleb discussed the details of the Wirecard scandal, the importance of company transparency and internal controls, and the Association of Certified Fraud Examiners‘ (ACFE) warning signs of fraud.
The Wirecard scandal
Greg and Caleb went in-depth in discussing the 2020 Wirecard scandal. Wirecard demonstrated many notable red flags outlined in the ACFE’s Report to the Nations. Accountants can understand more about fraud and be on the lookout for perpetrators by studying Wirecard’s case.
Wirecard is a German company that processes consumer and business payments, and they also sell data analytics. The company reached immense success in the 2010s and was featured on Forbes‘ list of the 100 Most Innovative Companies.
“[Wirecard was] touting the fact that they were going to help usher the world into a cashless new world. … They were a darling of the tech world, [and] they were on Germany’s list of top 30 companies. They were listed on the German top stock exchange, and they had been experiencing just some explosive growth.”
– Greg Kyte
In June 2020, the accounting and professional services company Ernst and Young revealed that Wirecard had $2.1 billion in missing funds.
“Ernst and Young, their auditor … said the confirmations that they had been receiving [from Wirecard] were spurious and that they thought they were fake.”
– Greg Kyte
Wirecard attempted to explain the mistake by stating that the money was in the Philippines, but Ernst and Young revealed that this statement was false. The tech company then attempted to shift the blame by saying that they were victims of theft.
“Wirecard actually published a video that was quickly removed, and in that video, they said, ‘Wait a second. We must have been the victim of a massive fraud where someone stole our $2.1 billion.’”
– Greg Kyte
Shortly after Wirecard removed the video, their CEO, Markus Braun, resigned and was arrested for accounting fraud and market manipulation.
Questioning explosive growth
Although Wirecard experienced great success in the 2000s and 2010s, the London-based newspaper Financial Times published multiple articles indicating that Wirecard’s growth may be too good to be true:
“The Financial Times started exposing some concerns about Wirecard’s financials that were brought up in 2008, 2015, and 2016. … Then things started getting really serious starting in 2019 when there was a whistleblower within the company who talked … [about] backdated contracts, suspect transactions, falsified accounts, and even money laundering.”
– Greg Kyte
In response to the 2019 whistleblower, the Financial Times published an expose including Wirecard’s internal spreadsheets and correspondences that indicated that the company had inflated profits.
Although it’s apparent that Wirecard committed fraud, it’s unclear whether they committed asset misappropriation or financial statement fraud.
“I’m seeing correspondence that says, ‘Hey, there’s probably inflated profits.’ That probably means [financial statement fraud], … but then that doesn’t seem like where the prosecution is going in this case. They’re trying to say, ‘Hey, where’s the cash?’ and in that case, it would be an asset misappropriation scheme. … It’s still undetermined which type of fraud it is.”
– Greg Kyte
Rather than offer transparency when the Financial Times questioned Wirecard’s profits, they attacked the newspaper and the primary writer covering their questionable growth, Dan McCrum. Wirecard successfully convinced the German securities regulator to investigate the Financial Times and Dan McCrum of purposefully misreporting in order to manipulate the market. According to McCrum, Wirecard also engaged in nefarious behavior in an attempt to delegitimize his reporting:
“[Dan McCrum] also detailed in a column he wrote about all the intimidation, tailing, and even hacking of his computer. They got some of his emails, and then they doctored his emails and all kinds of crazy stuff. Wirecard was aggressively countering their critics.”
– Caleb Newquist
Although the ACFE doesn’t list countering critics as a red flag, it’s reasonable to suspect that a company may be hiding unethical practices if they refuse transparency. Greg noted that when a person or a company is accused of wrongdoing, they have the choice either to encourage closer inspection or become defensive. Years ago, an anonymous source accused Greg of stealing from his business, and rather than become defensive, he welcomed an inquiry.
“It was this crazy accusation against me, and there [are] two ways that you can respond. … [I thought], ‘None of this is true. … If any of them have any concerns about this, … let’s use this as an opportunity.’ I was just like, ‘Let’s dig into this as deep as anybody wants to because I’m squeaky clean.’ In my view, the response of an innocent person is, ‘I’ll go deeper than you want to go into the financials because it’s all tiptop,’ and that was a hundred percent not the response of Wirecard.”
– Greg Kyte
Wirecard’s response toward their critics indicated that they had something to hide. Although they could avoid an investigation temporarily, they were ultimately caught. They could have mitigated the financial and legal damage if they had come forward with their wrongful actions—whether it was asset misappropriation or financial statement fraud. Instead, the company is insolvent, and Markus Braun is in jail.
Wirecard fraud warning signs and statistics
In addition to Wirecard attacking its critics, other notable warning signs indicate fraud. The ACFE stated that almost a third of companies that commit fraud have poor internal controls. Something notable about Wirecard that indicates poor internal control is that its CEO, Markus Braun, was also its largest shareholder. He owned 7% of Wirecard, and he purportedly controlled the company’s inner workings.
“The company was run in such a way that Markus Braun called all the shots. He was the man in charge, [and] he said how everything was going to get done at the company. … [A] former board member said that … the internal controls at Wirecard were [terrible]. She said they were more like internal controls that she [would] find at the startup rather than at a company that’s listed on the stock exchange.”
– Greg Kyte
Another significant red flag is control issues, and Markus Braun illustrated control issues by how he managed Wirecard. Additionally, the ACFE notes that poor leadership tone contributes to 8% of fraud cases.
Markus Braun’s heavy involvement in controlling Wirecard and his role in the fraud also aligns with the ACFE’s statistic indicating that fraud is more likely to be committed by owners and executives:
“20% of frauds are perpetrated by owners or executives. … What percentage of a company’s workforce is owners or executives? It’s way less than 20%, so owners and executives are actually much more likely to be the perpetrators of fraud based on their … representation in the general population of the company”
– Greg Kyte
When owners or executives perpetrate fraud, the median loss skyrockets from $125,000 to $600,000. Wirecard greatly surpassed the median loss with $2.1 billion.
Additionally, 40% of fraud cases involve the creation of fraudulent documents. Ernst and Young revealed that they were given falsified confirmations from Wirecard.
Learn more from fraud case studies
The Wirecard scandal illustrates how fraudulent activities are often perpetrated by the top executives at a company. Markus Braun was involved in the $2.1 billion scandal, but it’s not yet clear as of 2022 whether the missing $2.1 billion resulted from asset misappropriation or financial statement fraud.
When auditing a company, you need to be on the lookout for the ACFE’s warning signs, including lack of internal controls, controlling personalities, and poor leadership tone. Your clients can mitigate losses by coming forward rather than attempting to continue hiding fraudulent behavior.
If you’re ready to learn more about fraud, read Part Two of this webinar article series, which discusses the 2020 Airbus bribery scandal. You can also watch the entire webinar here.
Looking for more ways to grow in your accounting knowledge? Consider joining Gusto Pro! Gusto Pro is a doorway into the future of accounting. Tap into our expert resources and certification program so you can build a resilient firm and support your clients into the future. Learn more about Gusto Pro.
More Fraud Case Studies
- A Fraud Case Study: Steinhoff International
- A Fraud Case Study: NC Firefighter Embezzlement
- A Fraud Case Study: Dane Cook and Darryl McCauley
- A Fraud Case Study: $8.5 Million Stolen from ING
- A Fraud Case Study: Rita Crundwell and the City of Dixon, Illinois
- A Fraud Case Study: The Wild Turkey and Pappy Van Winkle Heist
