It was June 2020 when James Freis Jr. was promoted to CEO of Wirecard. Freis had been set to begin a role on the company’s management board that included oversight of compliance on July 1, but it was evident the company was in trouble and sought a safe, reliable pair of hands to try and save the business. Freis was aware of media allegations related to the accounts at Wirecard, so once he got called in early, he quickly studied said accounts.
In a recent interview with the Wall Street Journal, Freis said he rapidly concluded there had been a significant fraud within the company. Moreover, he told the WSJ, “So many people could have and should have stepped up and said something.” The obvious question, then, is why did these people not step up and say something? Once again, we return to the subject of culture; at Wirecard there appears to have been an intolerance of dissent, speaking up, criticizing, and challenging those who led the business.
The fraud may have begun at Wirecard, but that is not where it ends. Why did the external auditors not step up and say something? Did the regulators see nothing wrong, or did they too determine not to intervene?
Interestingly, Freis is critical of those who failed to blow the whistle, whereas many firms and their CEOs seek to challenge, discredit, and criticize whistleblowers (Freis left Wirecard in December). Among other things, Wirecard is a story of failed management, processes, and people.
Since Wirecard filed for insolvency in June there has been further fallout from the fraud, leading to questions about the effectiveness of laws and regulations, the competence of regulators, and reliability of auditors. Class-action lawsuits have been initiated against Wirecard’s auditor EY as investors seek to limit or recover their losses. In simple terms, these investors relied upon the apparently incorrect findings articulated within EY audit reports when making investment decisions.
Last month, Felix Hufeld, the head of the German financial regulator BaFin, resigned because of the regulatory failings attached to Wirecard. Discussions are ongoing in relation to potential loopholes and inadequacies within both German national legislation and wider EU regulation.
The ripple effects are being felt far and wide at the highest levels of government and regulation. Consequently, laws may change to ensure compliance for regulated businesses is not undermined or compromised by an unregulated parent or holding company. This could have far-reaching implications for companies with a small trading business, such as major oil and energy firms. Shareholders and customers need to be protected, and in the event auditors cannot be relied upon, governments may be forced to take action.
Investors will seek more information and place reduced reliance upon third parties. Some investors may decide to stay away from regulated financial service businesses that have been audited by EY. Others will seek to identify the specific partners who undertook the Wirecard audit and then carefully scrutinize other firms audited by them.
At the end of this sorry saga, Freis may be one of the very few former senior Wirecard employees who can hold his head high.
Editor’s note: Compliance Week originally misstated Freis’ intended role at Wirecard. It was since been corrected, and CW apologizes for the error.