Wirecard Fraud Case

Issue

Summary of facts 

Established in 1999, Wirecard was a global company offering payment and transactional services along with risk management, virtual and physical card services on a digital platform. Its services in several different continents were popular until its collapse on 25 June owing in a $4 billion creditor debt. At its initial days, the company was at a peak value of $28 billion which entitled the company under the list of 30 most recognized DAX stock companies in Germany (Audit Regulator Who Bought Wirecard Shares Faces Scrutiny, 2020). The company started to face financial disputes and following the controversies of the stock giant, Wirecard confessed to having encountered bankruptcy. The company owed its creditor $4 billion after disclosing that a gaping lacunae in its budgeting books following which its EY auditor stated that the issue facing Wirecard was the outcome of a complex globalized fraud. 

Legal issues 

The company’s management and creditors were already talking in terms of crisis but the actuality of the fraud was due to an imminent insolvency and over-the-margin debt issue. The Wirecard scandal was considered as a massive blow ever since the 2005 Volkswagen’s Dieselgate crisis as well as the scandal regarding Siemens corruption in the latter half of 2000s (Audit Regulator Who Bought Wirecard Shares Faces Scrutiny, 2020). The Wirecard scandal was called ‘Germany’s Eron’ as a reference to the accounting fraud in Eron, an energy company based in the US. The accounting fraud in Wirecard raised several questions about governance within the corporate sector since the scandal was more massive than any other in the specific year. 

Wirecard breached its financial statements 

The actuality of the scandal for several years, Wirecard had been facing issues regarding irregularities in its accounting procedures which came to surface when the Financial Times published a report in 2019, a chain of investigations concerning the scandal claims in Wirecard. Whistleblowers and media reports alleged that Wirecard had impersonated its sales and transactions to inflate or hike its profits and revenues. Accusing Financial Times of false claims, Wirecard had defended itself and sued the media company for the same. In the latter half of 2019, KPMG, an accounting company, was entitled as an external auditor to carry out an independent investigation against Wirecard’s acquisitions (Makortoff, 2020). Following the investigations, in 2020 April, KPMG had dropped news which came as a surprise to all anticipating the latest news, that Wirecard’s monetary balance of 1 billion Euro could not be verified as well as massive amounts of transactions made to its merchants could not be traced. After the findings were made public and verified as true, Wirecard’s CEO, Markus Braun was removed from his position in the company (Audit Regulator Who Bought Wirecard Shares Faces Scrutiny, 2020). In 2020 June, Wirecard’s auditor, EY accounting firm refused to be the signatory to the company’s accounts in 2019 claiming that the balance of 1.9 billion Euros in the company were doubtful of its existence and that the claims made against the company were false. Facing several accounting scam, Wirecard imposed that the missing sum of money was transferred to two Phillipian banks. Both the Phillian banks and the Central bank refuted the claim stating the money never entered into their system. 

Rule

Regulatory authorities 

State and Federal governmental authorities in Australia are responsible for establishing authorities that oversee accounting scandal and monetary frauds. The Intelligence Commission has endowed the Auditors of each company with the responsibility to look after financial matters concerning the companies it is related to. 

Another regulatory body, Certified Public Accountant (CPA) body issued in public interest is also responsible to look after accountancy fraud (Francalanza and Buttigieg, 2016). CPA acts as a financial regulatory body overseeing companies’ audits and financial markets. CPA is entitled to a series of duties and responsibilities such as to oversee the fairness and functioning of the financial forms and markets that are engaged in cash and credit services. The financial regulatory bodies like CPA functions on the primary motive to investigate and prevent fraud, to keep firms and financial markets from engaging in fraudulent activities for keeping them transparent and efficient in their functioning, and to ensure that their customers and clients are treated ethically and fairly. 

Apart from the CPA, the Australian Securities and Investment Commissions (ASIC) in Australia is endowed with the responsibility of influencing cash and credit, liquidity and other concerned financial matters. The ASIC along with the Australian Federal Police are responsible to make investigations regarding financial fraud in companies and firms and issue its reports in the Australian Financial Review reports. 

Application

Relevant laws and legislations 

Under the Federal Register of Legislation, the Auditing Standard ASA 240 is responsible for fraud in audits of financial reports concerning the company (Chen et al., 2018). Section 1 of the ASA 240 introduces the scope of the auditing standard, stating the auditor’s responsibility in dealing with audit frauds. The characteristics of fraud are defined in Section 2 and 3 stating that fraud can either be misappropriation of financial reports and unintentional errors or misappropriation resulting from financial frauds and misappropriation resulting from fraudulent asset activity. Section 5 of ASA 240 defines the responsibility of the auditors stating that an auditor is eligible to obtain justified assurance regarding financial reports that are either misinterpreted due to error or fraud. Concerning the inevitable regulations on audit, misappropriation is often not detected even if the Australian Auditing Standards are well-planned. In such cases, the auditor's responsibility to detect the fraud makes a higher significance since when fraud or error is not detected, it may be because either it is extremely sophisticated or well-organized for the purpose of concealing the actual commitment of the fraud. Concealment and collusion when occurring together makes it more difficult for audit officers to detect the occurrence of fraud (Alexander and Cumming , 2020). The risk factor regarding the auditor’s inability to detect a material misappropriation occurring from fraud management is higher than employee fraud since the management is proportionally or disproportionally related to accounting, cash and credit balances, and other financial records.

Relevant case studies 

Massive GST fraud in Australia, 23 November 2020

After an investigation carried out by the Australian Taxation Officer (ATO) and the Australian Federal Police (AFP), a syndicate member was convicted to have committed a fraud felony in defrauding the Commonwealth of GST refunds, amounting to over $5 million, in the Melbourne County Court. Michael Ray, the senior associate in the scheme where confidential data and information about the taxpayers were illicitly obtained and used for the creation purpose of impersonation or fake entities and false Australian Business numbers (ABNs) for them to be registered for GST. the banks received refunds of the GST. Later, the scan syndicate lodged several Business Activity Statements (BAS) claiming fake refunds on GST. The refunds that were generated were directed towards the accounts that had been created using identity theft. The huge scam was unfolded by few taxpayers when they conducted a search on google and found their identities and personal details discoverable in a spreadsheet named ‘wolf2012’. The discovery uncovered several other deceitful activities taking place in the same syndicate. The investigation was carried out for eight years before the members pleaded guilty, under the joint collaboration of the AFP and ATO. 

Dual agency case over two decades, 17 August 2020

In this particular case, Philip Northam was convicted under the jurisdiction of the Brisbane District Court for being involved as a primary promoter in a complex stripping arrangement. Philip along with four other men endorsed that every law regarding the taxes were invalid and that none needed to pay the taxes under legal obligations. The clients of the companies that were under the obligation to pay the taxes discovered that in spite of the claims made, the companies were being pursued to recover the tax they owed. The fraudsters established a complex asset arrangement to strip the companies in Australia of their assets and to put them in the position where they are not in the position to be liable to taxes. 

This particular case determines the commitment for maintaining the integrity of the tax system when taxpayers evade their implications to pay taxes. The Australian Taxation Officer and the Australian Federal Police’s investigation stands primary to prove that the fraud has actually taken place. 

Conclusion

A major crime in the financial sector is the commitment of financial fraud and scams which have a heavy implication on the fraudsters. Misappropriation of financial records, sales transactions and other financial scams result in long-term imprisonment and heavy fine. Eron, Cedant, Wirecard, WorldCom, are the most recognized examples of global fraud that has shook the financial world apart. The occurrence of financial fraud has been enlisted in the Crimes Act 1990 in which the Crimes Amendment (Fraud, Identity, and Forgery Offences) Act 2009, was amended to improvise new legislations against the crime. Financial fraud impacts a company to the extent of going bankrupt and also causes employees to lose out on their jobs and bounded payment. While some financial fraud arises from forgery and identity theft others arise from misuse of taxes and sometimes digital money like bitcoin. The reputed fraud cases give an explanation as to how well the financial department has to be vigilant of the ongoing transaction within the business for which a financial officer has to be appointed.

References 

BOOK: Alexander, C. and Cumming, D., 2020. Corruption and Fraud in Financial Markets: Malpractice, Misconduct and Manipulation. John Wiley & Sons.

ARTICLE: Chen, W., Khalifa, A.S., Morgan, K.L. and Trotman, K.T., 2018. The effect of brainstorming guidelines on individual auditors’ identification of potential frauds. Australian Journal of Management, 43(2), pp.225-240.

Francalanza, C. and Buttigieg, E., 2016. Maltese certified public accountants and whistle-blowing: Traits, influences and propensity. Journal of Applied Accounting Research. 

Makortoff, K., 2020. Wirecard Files For Insolvency Amid German Accounting Scandal. [online] the Guardian. Available at: [Accessed 12 December 2020].

WEBSITE: MSN. 2020. Audit Regulator Who Bought Wirecard Shares Faces Scrutiny. [online] Available at: