Optimism Of Auditors
Many a times we have come across the phrase, “Auditors are supposed to be watchdogs and not blood-hounds”. This is where the role of management comes in picture. Auditor is a third party to the business whereas management is the heart and soul of the organization. But how much do we really believe in this, is a matter of debate.
It’s a fact that the standards of auditing provide a directive to the auditors to form an opinion vis-à-vis the company’s financial & operational health. A long list of such directives has to be followed which helps in formation of a opinion on something of such a complex nature as the Balance Sheet of a multi million-dollar company, the primary responsibility of which lies with the management.
Auditor isn’t supposed to be expecting that the co. is going to be involved in a fraudulent practice while carrying out the business.
Such level of optimism may sometimes mislead them from information to be checked on hand. And time and again it has fallen on the auditors, be it the famous Satyam Scam or Enron.
And so, it happened with one of the Big 4 auditing giant Ernst & Young (EY) during the audit of the German based payment processing gateway, Wirecard.
Unraveling The Scam
It all came into question with when Dan McCrum, a member of the investigation team at the Financial Times wasn’t quite convinced with the numbers presented by the company in its Profit & loss statement and so the team published a study on the financial statements which in return harmed them with legal notices and public assassination of their reputation.
According to the information released by Dan McCrum, Wirecard is stretched out in Dublin, Germany & Dubai and is connected with three partner companies based in Dubai, Philippines & Singapore which were incorporated to obtain licenses to operate in various regions.
The set-up of this fraud was routed through the company’s ally Al Alam in Dubai which apparently was only run by a handful viz. mere 6-7 employees, These partner companies proved to be the biggest asset to which customers were referred by Wirecard and it was positioned in a way that it seemed, Al Alam would collect money from cardholders and process it to various merchants. Neither Visa nor Mastercard had any relation with Al alam.
The Scam: A Classic Case of Window dressing
On research done by FT, 15 of such merchants did not even exist, 8 of them shut their business down last year but still many-many fake trail of payments were processed in their name.
And on top of it, for these transactions, commission was booked by Wirecard from these sources. This amount was never actually earned by it. A classic portray of window dressing was created by Wirecard. Fake bills were booked to increase revenue to attract investors and form a rosy picture.
This commission being an inflow was reflected in the overseas escrow accounts held by the company even after owning a whole Bank by them in Munich. This in itself sounds fishy! On bank balance verification, the auditors can demand third party balance confirmations straight from the bank itself which opened up the curtain behind these malpractices and created a whole chaos as banks had no idea about the figures the auditors asked for!
The banks in Philippines reportedly said there is no existence of the bank accounts, Wirecard claimed to have money in. And this was the day when that entire notorious act had to drop revealing the fraud done by company.
This went in and forced the company to sign-up for insolvency as funds amounting to 1.9 billion euros went missing in a single day, just like that. (1.9 billion euros roughly amounts to INR 16,000 crores.)
The Aftermath
One of the crucial elements of every business is money vis-a-vis cash.
Bigger the company, more the no. of bank accounts. Each and every account is verified as balance as per books vis-a-vis balance as per bank statements. EY was provided with forged bank statements by the company for verification of balances. Let’s take for example: Bank balance as per company showed 100000€ but in reality no such bank account was in existence. The company successfully provided fake bank statements to show as balance of 100000€. Was there any 100000€? The answer to this question stunned thousands of people. This sum never existed, and the company went on forging bank statements and the position of financial statements was window-dressed by huge numbers every year which accumulated to form a mislaid balance of 1.9 billion€.
This has massively hit the company and being an employer for over 5300 people, which is approx. 0.35% of the population of Munich along with the crashing economy due to covid crises this has been another severe accident.
A Lesson From history: Greed
What actually leads to such Goliath level of frauds is answered in a lecture delivered by Padma Shri CA T. N. Manoharan whilst he was appointed on board as a director for revival of Satyam. He said that what tempts a human mind is greed, a feeling of wanting more than we already have!
The companies majorly involve themselves in such type of dubious accounting to attract investors and shareholders.
All these scandals, be it a huge IT sector Satyam Scandal or be it an Enron scandal revolved around greed of wanting more viz. increasing share price, increasing market capitalization and increasing popularity.
As compared to Enron where they window-dressed their revenue side by booking revenue on accrual basis and not on realization basis created a beautiful and shiny facade beneath which the actual secrets were cremated.
Enron was on such a high that 90% of the analysists suggested their clients to invest in Enron being a good credit rating backed co., top profits and huge expansion as well as diversification.
It was then pointed out by an analyst, John Olsan, that a company like Enron cannot earn such huge sum of profits if compared with other players in the energy market. It was technically not possibly to diverse in so varied fields and expand like it’s no one’s business.
The fastest you try to run on the steep slope the harder you will roll down. It’s not unknown that what rises easy falls even easier.
Wirecard walked on similar lines as the tangible money which was presented in the financial statements went astray.
A Big Blow Towards:
i. The share price of the company, which within few months started dipped from a highest of 138.50 in on 23rd April, 2020 to 3.30 as of 3rd July, 2020
ii. Job security to its 5300 employees is endangered in Germany, as well the Asian market viz. Singapore and Philippines.
iii. The customers faith in the company is destroyed as well as their mantra to shift from cash to cashless will once again prove precarious owing to the IT scandals happening around the place
iv. The creditors of the company and the payment towards funding key operations of the business
v. Fixed payments would be huge enough which leg is likely to collapse owing to insolvency
vi. Any monthly commitments towards debt funding might rise in the time of this catastrophe (due to credit profile going down)
Economic effects would burn a hole for Germany as approx. 70% of contribution to the GDP of the country is from Service sector wherein IT sector plays an important role in shaping this number.
Also, where the company was planning to start a new cashless phase altogether has collapsed because people might go in a state on shock being aware that so much of personal details has been shared with companies and the data can be squandered and money can “vanish”.
People have already started saying out Wirecard AG isn’t working.
A disaster is called a disaster because when the Strom hits it doesn’t level with what should be saved and what should be destroyed but what’s left after this disaster.
What Next?
Employees is the only strength currently it has, which if used efficiently can prove to be a blessing!
The company being already in the process of insolvency has been given approval by its creditors committee for international investor process involving investment banks.
This might be an anchor for the company. The revival if made cautiously can re-wire the WireCard Solutions Limited.
Among the saviours that are in the air of discussion to buy out Wirecard are Pine labs for wirecard’s Asian business, Hitachi, and Atos-backed Worldline technology as reported by ET Tech.com, though Pinelabs did not gave any clear word on the same no public statement has been made either by the latter two.
Revival might help save this sinking ship and let’s hope that the way Satyam was able to expand, Wirecard sustains this hit and then the survives to see a glorious tomorrow.
Conclusion
Today, after one of the biggest scandals in India by the well-known co. Satyam, cautious measures and conscious steps towards revival helped the company save itself with the takeover from Tech Mahindra.
Strict policies adherence can be place in order to protect public at large from such scams, as the bigger sharks makes smarter move effecting the small fish in the ocean!
So much more to be done and people get caught in the greed cycle. Time and again, frauds have happened companies had failed yet the management did not take lessons and kept making the same mistakes with the view that this time maybe their intentions won’t be discovered.
Managements fails to take a wisdom call from their experienced big brothers and expect different outcomes each time.
But the truth never remains hidden and how much ever one tries to shun it, it hits back stronger and creates more despondency in the minds of the people which creates fear towards the system as a whole.
So, it’s time to sit back and take a look at all those who involved themselves in such frauds have none the less ended up either behind bars or have lived a miserable renaming life ahead. On that note hopefully current players will take lessons and would not entail in malpractices while doing the so-called money-making!
The question everybody has to encounter with is, do we really need this additional drama in such exponential time of crises?
Let’s hope for a better outcome from this and a hope to build more TATA’s & Birla’s way of ethical business practices as a road-map for other players!
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Escrow a/c is a bank account wherein anybody related to the co. can use the money in any form of currency. It is overseen by a dedicated controller of the co. When a business operates on a international platform escrow accounts come handy!
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