Wirecard AG (LON:0O8X) (OTC:WCAGY) stock plunged more than 60% after the company said that $2.1 billion appears to have been misplaced. In a statement today, Wirecard said it has delayed the release of its annual and consolidated financial statements for 2019 because its auditor wasn’t able to confirm the existence of $2.1 billion in cash that was supposedly on its balance sheet.
Missing cash on Wirecard's balance sheet
The company's auditor, Ernst & Young GmbH, reportedly informed it that there was "no sufficient audit evidence so far of cash balances on trust accounts." According to The Wall Street Journal, the amount of cash that was missing amounts to approximately 25% of the value of Wirecard's balance sheet.
"There are indications that spurious balance confirmations had been provided from the side of the trustee respectively of the trustee's account holding banks to the auditor in order to deceive the auditor and create a wrong perception of such cash balances or the holding of the accounts for to the benefit of Wirecard group companies," Wirecard said in a statement.
It also said it is working with EY to clarify the matter of the missing money. The company also said that the delay in its auditor signing off on its accounts could mean that its loans amounting to about €2 billion could be called in early.
Wirecard AG stock plunges
Wirecard AG stock plummeted after the news was announced, falling by as much as 64% by 8:40 a.m. Eastern. In 2018, the company's market value surpassed that of Deutsche Bank AG (NYSE:DB), the biggest lender in Germany. According to CNBC, the company was worth over €24 billion at one point last year. In fact, Wirecard replaced Commerzbank (DE:CBKG) in Germany's blue-chip index. Its market capitalization has now plunged to only €6.5 billion.
The Financial Times has been investigating the German firm's accounting practices since at least January 2019 after hearing from a whistleblower. The news outlet alleged that the company's office in Singapore attempted to inflate its revenue using backdated and forged contracts.
In October, the Financial Times alleged that Wirecard staff seemed to have been conspiring to inflate the firm's profits and sales at subsidiaries in Dublin and Dubai. The newspaper also alleged that the company may have been trying to mislead EY.
The WSJ said KPMG flagged the trust accounts as a potential problem in a special report published in April. The accounting firm specifically mentioned problems gathering evidence about the balances in the trust accounts.
Battleground stock
Wirecard AG stock has been a battleground name for years. Short sellers like Whitney Tilson targeted the firm for its accounting practices, including alleged issues pertaining to the valuation of an Indian acquisition it made. However, the company repeatedly denied doing anything wrong.
Wirecard CEO Markus Braun issued a follow-up statement today emphasizing that the money that couldn't be verified was managed by a reputable trustee and held in investment-grade-rated banks. He said it's "currently unclear whether fraudulent transactions" have occurred. He also said the company will "file a complaint against unknown persons."
Braun also said EY no longer recognized confirmations of the deposits that were issued previously by the banks. It's unclear if that remark just refers to the company's 2019 bank statements or if it also applies to previous years' statements.
The WSJ said the Munich prosecutor is investigating some Wirecard executives after Germany's financial regulator, BaFin, filed a criminal market manipulation complaint against them. Someone familiar with the BaFin case told the WSJ that the regulator examined statements made by the company before KPMG published its special investigation in April.
Officials said the statements falsely misled investors into believing that the report would disprove the allegations that had been made against it. However, the report did not.
Wirecard hired KPMG in October to do a special audit in response to the allegations about fake revenues and its accounting practices. The accounting firm said neither the payment processing company nor its third-party partners cooperated with the special audit. It added that the company didn't give it many documents or gave them very late. Further, KPMG said many of the documents were unverifiable electronic copies.
The accounting problems cause Mastercard (NYSE:MA) and Visa (NYSE:V) to withdraw Wirecard's operating licenses, the WSJ added. Neil Campling of Mirabaud Securities expects Wirecard AG stock to keep falling.