How Wirecard misled investors over KPMG’s special audit

On April 22, Wirecard’s investors and short sellers were nervously awaiting a special audit from KPMG.

Due that day, results of the accountancy firm’s forensic investigation into Wirecard were supposed to resolve once and for all the persistent questions over the payments group’s accounts, rewarding either its faithful shareholders or the sceptical hedge funds betting against the stock.

But not until 9.03pm, more than three-and-a-half hours after trading on the Frankfurt stock exchange had closed, did Wirecard say anything at all.

A statement then asserted that the company “had just been informed by KPMG” that the special audit would be delayed until April 27. That unsettling news was caveated with much more reassuring comments: “to date no substantial findings have been made” and the company’s annual results would be published as planned on April 30.

The next day, Wirecard’s shares shot up more than 11 per cent, pushing the group’s market value to more than €17bn.

The relief rally did not last for long. Only two months later the company filed for insolvency after the spectacular fraud at the heart of its operations was revealed. Prosecutors are investigating fraud and embezzlement on a grand scale. Former chief executive Markus Braun and three other ex-managers are in police custody. Mr Braun and two of the men deny all wrongdoing, while a fourth suspect has become the prosecutors’ chief witness.

Although it has been overtaken by the fast-moving and sensational events, the April statement that boosted Wirecard’s share price remains an important part of the criminal investigation.

Some of the more serious allegations of fraud and embezzlement are complex and may be hard to prove in court. A key suspect — chief operating officer Jan Marsalek, who was in charge of Wirecard’s fraudulent Asian business — has disappeared.

By contrast, documents seen by the FT and interviews with people with first-hand knowledge of the matter indicate there was market manipulation, which under German law is a crime that can be punished with up to five years in prison.

The actions of senior Wirecard staff in the run-up to the April 22 press release give a unique insight into the company’s tactics of delay and deceit. They also highlight shortcomings in the German corporate governance system, where responsibility is split between management and non-executive supervisory boards.

Late on April 21, the supervisory board had supplied executives with “minimum content” that it expected to see in a statement, including the fact that KPMG had run into an “obstacle to the investigation” as well as the assessment that the auditors were “unable to rebut the allegations raised against the company with regard to [operations outsourced to external partners in Asia] during the investigation period”.

The supervisory board also said that the release needed to disclose that missing documents, grave organisational deficiencies at Wirecard and a lack of co-operation by Wirecard’s outsourcing partners were to blame for the issues.

None of it made the final cut.

The board’s instructions were shared in a memo with Mr Braun and the three other members of the executive board. However, the executives totally disregarded it. Instead of disclosing the devastating preliminary results of KPMG’s special audit, the final statement suggested that no substantial findings had been made. That impression was bolstered by prior comments from chairman Thomas Eichelmann, who had told Manager Magazin in January that any problematic findings would be disclosed immediately, adding that “you can draw your conclusions from the fact that we have not yet issued an ad hoc announcement”.

Thomas Eichelmann, Wirecard chairman © Getty Images
Markus Braun, chief executive of Wirecard © Bloomberg

The statement that did appear was misleading — not only for its omissions. Internal Wirecard documents show that — in contrast to Wirecard’s statement — KPMG was not responsible for the delayed publication of the audit results. In fact, it was Wirecard’s supervisory board that unanimously decided to give KPMG auditors five additional days to conclude their work.

In addition, Wirecard’s language about the timing of the decision was false. The statement noted that Wirecard had “just” learnt about the delay. In fact, the supervisory board had decided to extend KPMG’s mandate on the evening of April 21 — some 24 hours before the delay was disclosed, the documents show.

Under German law, companies are obliged to disclose market-moving insider information as soon as possible to investors. Yet Mr Braun, who was formally responsible for Wirecard’s capital market communication, sat on the news for a full trading day.

When Wirecard eventually published the misleading statement on the evening of April 22, the supervisory board was in a meeting on another matter, according to people familiar with the matter. According to them, when they saw the language of the press release Mr Eichelmann and other directors were “shocked” and “in utter disbelief” that Mr Braun had ignored their directions.

Yet under German corporate governance rules, there was little the supervisory board could actually do. The non-executive directors did question Mr Braun and were left dissatisfied with his explanation, according to people familiar with the matter and documents seen by the FT. Under German law, however, the executive board is responsible for communication to capital markets — and it is not obliged to take orders from the supervisory board.

“The only real option at hand had been to fire Mr Braun,” one of the people involved in the matter told the Financial Times. Yet the majority of the supervisory board feared that this step would destabilise Wirecard even further. Moreover, employment lawyers warned that Mr Braun could successfully challenge his dismissal in court.

Eventually, the supervisory board decided to remove Mr Braun’s authority to issue communications to the market. In a management reshuffle announced on May 8, chief financial officer Alexander von Knoop was put in charge of investor relations.

Munich prosecutors and Wirecard’s former chairman Mr Eichelmann declined to comment. A lawyer for Mr Braun did not answer specific questions from the Financial Times but stressed that the former CEO “is vehemently rejecting all allegations raised against him”.

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