Wirecard has for the first time acknowledged the potential scale of a multi-year accounting fraud, as the German fintech group warned that €1.9bn (NZ$3.3 billion) of cash on its balance sheet probably does "not exist".
The payments company said it had previously mischaracterised its biggest source of profits and that it was now trying to work out "whether, in which manner and to what extent such business has actually been conducted for the benefit of the company". It withdrew its most recent financial results and said other years' accounts may be inaccurate.
As Wirecard's shares resumed their precipitous fall — down 33 per cent on Monday and more than 80 per cent since the collapse began on Thursday — the German establishment began its own reckoning.
• Premium - The fund managers who kept faith with Wirecard
• Wirecard NZ carries on amid investigations in Singapore over false accounting claims
• Premium - Wirecard says $3.3 billion of cash is missing after EY probe
• Premium - KPMG unable to verify Wirecard's third-party profits
Felix Hufeld, the president of German financial watchdog BaFin, said the Wirecard scandal was "a complete disaster" and "a shame" for Germany — a market that "should be governed by quality and reliability". But he defended a two-month short-selling ban the regulator imposed last year after Wirecard's Asian headquarters were raided by Singapore police.
Christian Sewing, Deutsche Bank's chief executive, told the Frankfurt Financial Summit: "For the overall share culture and the overall corporate governance in Germany, this is obviously a serious issue that will affect all of us."
Equity holders will be left with nothing when all is said and done.
Josh Levin, analyst with Autonomous ResearchBut Olaf Scholz, Germany's finance minister, rebuffed calls for tighter regulation as a consequence from the Wirecard case. "The supervisory institutions worked very hard and did their job, which we see today," said Mr Scholz in a video interview at the summit.
Munich police said that a criminal investigation into Wirecard had been launched. The Munich prosecutors' office declined to comment.
Meanwhile, Wirecard was trying to salvage its payments processing business, licensed by Visa and Mastercard and responsible for tens of billions of euros in annual transaction volume, having called in restructuring experts during a weekend of negotiations with lenders.
At the centre of the affair is Wirecard's so-called "third-party acquiring" business. The group is an acquirer in Europe, meaning it handles credit card payments for businesses. It had also claimed to outsource some payment processing to third parties.
For the past 18 months the Financial Times has reported whistleblower allegations of accounting fraud related to such third-party business. In October the FT published documents that indicated that clients listed in documents prepared for auditor EY did not exist.
A KPMG special audit was unable to verify the arrangements were genuine. Between 2016 and 2018, roughly half of Wirecard's sales and "the lion's share of its profits" were attributed to such third-party acquiring, according to KPMG's report, published in April, and documents seen by the FT.
Wirecard's longtime chief executive, Markus Braun, who had always denied wrongdoing, resigned on Friday. The company had delayed the publication of its 2019 annual results for the fourth time on Thursday.
In its statement on Monday, Wirecard withdrew the preliminary, unaudited results for 2019 and the first quarter of 2020 that it published earlier this year. "Potential effects on the annual financial accounts of previous years cannot be excluded," the group said.
Wirecard said "constructive discussions" with a consortium of banks over the extension of €2bn in loans to the company were continuing. The loans can be terminated after the company missed a June 19 deadline for the publication of audited annual results.
The company said it was looking at cost cuts, the disposal of business units and products and restructuring steps "to ensure the continuation of business operations".
Josh Levin, an analyst with Autonomous Research, on Monday morning lowered his price target for Wirecard from €39 to zero, warning that "equity holders will be left with nothing when all is said and done". Mr Levin said it seemed unlikely that Wirecard's creditors would extend the loans if the company "does not have much of a real franchise that generates real cash flow".
Moody's, which downgraded Wirecard to junk last week, on Monday withdrew its credit rating, saying it had "insufficient or otherwise inadequate information to support the maintenance of the ratings".
- Financial Times