Once upon a time, around 1999, there was a small company called Wirecard that operated as a payment processing business. The company grew, became publicly traded on the Deutsche Börse, and eventually its share price reached €191.3, attaining a market valuation of €26 billion (U.S. $31 billion) that made it one of Germany’s top 100 companies. Seemingly, all was going very well at Wirecard, but not everyone was convinced by the numbers. Some people determined they were too good to be true.

In the meantime, Deutsche Bank, Germany’s biggest bank formed back in 1870, was suffering from years of poor risk management, and its share price was falling. The burdens of significant regulatory penalties, losses incurred through bad practices, bad loans, and restructuring costs were taking their toll. Having once traded at €159.59 a share in 2007, the price had fallen to as low as €4.47 in 2019.

What we all now know is that the Wirecard skeptics were correct: The company’s impressive numbers were built upon a fraud. We have recently learned former executives at Wirecard, including CEO and founder Markus Braun, reportedly engaged the management consultants McKinsey & Company to develop a strategy for Wirecard to buy Deutsche Bank. Imagine the prospect of a major, global bank being owned and controlled by fraudsters.

The moral of this story is that we should always seek to establish what an audit report states, as opposed to what it does not state.

What an audacious proposal, the young upstart buying the biggest bank in Germany. Actually, it was a smart idea; had Braun and Wirecard pulled it off, they might still be in business today. What we know for sure is that Braun knew his business was in financial straits, and he was looking for a remedy. He had put a temporary solution in place by asserting fictitious escrow accounts in the Philippines held $2 billion. I have never found an explanation as to why it was so readily accepted there was a logical reason for such funds to be held in escrow.

According to media reports, Braun had played the victim’s card and persuaded others, including the German regulator, to attack and intimidate the journalists that unveiled the alleged fraud with threats of legal action. Braun was now caught in a vortex of lies and deceit, but for a while his strategy was working, and he retained the confidence of many investors, the regulator, and some—but not all—members of the board of directors.

We must assume his thinking around Deutsche Bank stemmed back to the advent of the global financial crisis, when it was discovered banks had misled investors and regulators, but they were deemed to be too big to fail and too big to jail. Size matters, and Braun likely assumed it would be his escape route and safety net. All was going well until some board members representing significant shareholders insisted an independent audit be undertaken to validate the company’s numbers and to refute the allegations in the media. Only then could the acquisition of Deutsche Bank proceed.

KPMG was appointed to undertake this special audit, and immediately it set about analyzing the figures and asking questions. One important question was asked time and time again: “Show me the money.” There were promises, copies of documents were provided, and the auditors were reportedly even introduced to a person stated to be a trustee of the funds in escrow, but they were not shown the money.

The publication of the audit was put back; female members of the Wirecard supervisory board of directors sought the immediate removal of Braun as CEO, but the male members of the board rejected it. Notwithstanding the delay, the auditors were not presented with proof the money existed.

In announcing a delay to the publication of the KPMG report, a spokesperson for Wirecard stated that “no evidence was found for the publicly raised allegations of balance sheet manipulation.” Some members of the board were shocked at this misrepresentation, and it has been reported that one considered resigning immediately.

The moral of this story is that we should always seek to establish what an audit report states, as opposed to what it does not state. The real manipulation here was being carried out in Wirecard’s public relations exercise, not in KPMG’s audit.

While all of this had been going on, Wirecard recruited a new head of compliance: James Freis Jr. He was asked to take up his appointment earlier than had been agreed, because, as one director put it, the company was “in crisis mode.”

After further delay, the KPMG audit report was eventually published and stated that no evidence of the escrow funds had been found and detailed the constant obstruction of the audit by Wirecard and its business partners in Asia. Once again, the public statement from Wirecard emphasized what the report did not state, asserting KPMG had found no evidence of fraud and was not seeking a restatement of prior published accounts.

Meanwhile, Wirecard’s financial auditor, EY, was also saying “show me the money,” but it too was obstructed and frustrated. In the end, EY corresponded directly with the banks who were supposedly holding the funds and was told the documents were false. EY concluded the money did not exist. This was devastating to the board of directors, who debated the dismissal of Braun and his second in command, Jan Marsalek. Braun survived, and Marsalek was only temporarily suspended. Braun went back on the offensive and replayed the victim card. In a video message to staff he said, “At present it cannot be ruled out that Wirecard has become the aggrieved party in a case of fraud of considerable proportions.”

The new chairman of the board gave Freis copies of the EY and KPMG reports. Once he had read them, he told the directors there had been a fraud. Subsequently Braun resigned, before he was arrested along with three other executives. All four are now in custody, each sitting in a room without a view in a German prison. Marsalek is on the run, and today Wirecard’s shares trade at less than €1.

For a while, Braun thought he could hide the fraud within Deutsche Bank, perhaps creating yet more fictitious accounts and/or temporarily misappropriating client funds to create false balances in the Wirecard accounts. He nearly pulled it off, because he was bullish; when faced with yet another damaging allegation and/or fact, he told yet another lie, and far too many people, including investors, believed him, because they wanted to believe him.

So what have we learned here?

  • Women on boards are vital, but too often they are not listened to.
  • Diversity and gender balance are good for investors and market confidence.
  • Investors should pay more attention to what audit reports do state, rather than what they do not state.
  • If a company claims “the check is in the mail,” it is likely not in the mail.
  • Serious allegations need to be taken seriously by investors, regulators, and directors of companies.
  • Time is truly independent, and companies should be held to timelines and commitments.