WIRECARD, a fantastic case study for business schools

WIRECARD, quintessence of the financial fraud

WIRECARD is probably the most beautiful case study imaginable as it represents everything that should be avoided. It is the quintessence of what it takes to avoid doing everything. Even the ENRON case seems less complete (although interesting too). With this German case, given all the financial regulations in place, it seems unlikely, if not impossible, to achieve what they have done. They certainly benefit from the weaknesses and incompetence of regulators, supervisors, auditors (internal and external) and many other gullible and incompetent people. The inquiry and coming daily revelations will confirm the whole story. But still one wonders, without the Financial Time (FT) and the insight of its excellent journalists, when one would have discovered the “pot-aux-roses”. Maybe not right now. Investors would have lost even more millions of EUR. What audacity, what strength, what conviction, what criminal organization! WIRECARD's leaders were world champions of financial fraud. We are left speechless. They have managed to combine so many factors, convince so many investors and demonstrate that the bigger the lie and the fraud, the easier the pill is to swallow. WIRECARD did not things by halves ...

They combined tax, accounting, financial, stock market, criminal and civil crimes, fooled investors and eventually stole millions of euros. They corrupted or attempted to bribe auditors, falsified documents, truncated financial accounts and mislead investors and financial markets. They have likely benefited from weaknesses or dysfunctions with their external auditors. We are now talking about a whistleblower that would not have been heard. You think you are dreaming. I pointed out to you, earlier WIRECARD is the pinnacle, the Everest, or the gold medal of financial fraud. It cannot reasonably be thought that this is just management fraud. External complicities? Corruption? Incompetence? Probably.

Investigation journalism may save investors

As after ENRON or WORLDCOM, it will correct a lot of errors and strengthen the regulatory arsenal. However, the competence of certain parties, which undoubtedly lacked lucidity and control, is questionable. It is hoped that this will be a school case, an exemplary trial by these sentences not just for dishonest leaders and that it will make the whole system more resilient in the future.

We will write one or more books on this case that reminds me of LERHOUT & AUSPIE or MONEYTRON, in Belgium, or the art of accounting fraud and hiding its technological shortcomings. Finance can also be a farce of which turkeys are investors and especially small investors. It also proves the value of powerful, independent, and determined investigative journalism. We can only salute the FT, which was so decried and threatened. Well done to you we forget to say it too often.

The worst is never certain

For Chief Risk Officers (ERM), this is an example of the worst that can happen. This proves that the worst is never certain. It demonstrates the refusal to disclose the inherent risks. For behavioral analysis theories in finance, this is a "must." The sheep of Panurge de Rabelais would be the investors, even the professionals, who for too long believed in this German unicorn, the DAX heavyweight who even wanted to phagocyte Deutsche Bank. The ox and frog from the fable of La Fontaine is perfectly transcribable here. When the market is wrong and does not want to see the reality, it is the whole that goes wrong and like a TGV starts from a block to the fault and derails. Blindness? Credulity? Willingness not to see the obvious and to believe in legends? It is a bit of all of that at once. The mistake was enormous and collective. The nerve pays... up to a point.

One can regret the lack of professionalism of the agencies responsible for monitoring or verifying. Having seen so many external auditors and been audited many times, I cannot think that we cannot see the absence of billions of EUR, as the amount is enormous. And what about the very naïve supervisor in Germany. This reinforces my idea that Directors and members of the Board of Directors should be competent, critical, independent, selected with precaution, and active. They are not always. These mandates should be professionalized, and Directors should be made aware. “There is no smoke without fire”, as rightly confirms the popular saying. They should have reacted and asked the right questions to follow up on this "bad press" at WIRECARD. Their incompetence has cost investors billions. They must pay for their mistakes once justice has shed light on the actions. But it can be said, without going much further forward, that they did not do their job properly. Alas, this incompetence comes at an incredibly high price. In the U.S., the leaders would go to jail for a century. We will find out one day soon that the fraud was organized, controlled, collective (up to a certain point) and huge. They did not do things halfway. They bet everything on the carpet, like in a poker game.

WIRECARD story will be a future best-seller

We will blame ourselves, pretend that the fraud was so well organized that no one could see anything, that dishonesty was in the sole head of the leaders and that the third parties were competent but deceived as well. I do not believe it and think that responsibility is collective to some extent. We will surely see the European Commission wanting to further regulate finance to prevent fraud. We must all thank WIRECARD for this non-necessary and very heavy screw turn that awaits us. We will make books out of it, make a film of it and talk about it in finance textbooks, like the example of the century.

I hope that we will not find any more WIRECARD's or other cases of large-scale fraud for a long time. The arrogance of WIRECARD's German leadership was exaggerated and did not justify lifting the controls. The fraudster can be blamed for defrauding but also the controller for not controlling (enough). The key question was raised: who controls external auditors and the "big four"? By selling off the prices of the external audit function, we reduce the quality and depth. This company will have managed to cover up its flaws, hide its lack of technology, falsely develop turnover in Asia and divide, internally, to better settle. It was a faltering dictatorship but had decided to move forward, no matter what. It was a kind of blindness or conviction that nothing could stop them. The bigger the lie, the more credible it becomes. Let us keep following this horrible but how interesting case (if luckily you have not lost money).

François Masquelier - SimplyTreasury