Dax group Wirecard: Clarification in installments

Frankfurt / Munich Markus Braun can breathe a sigh of relief, at least for the time being. The special test by KPMG relieved Wirecard to a large extent. Clarification is still pending in other areas. It is therefore quite possible that the CEO of the payment service provider from Aschheim near Munich will have to answer further questions in April. The group initiated the special audit in October. Their goal: finally draw a line under the serious allegations that the British business newspaper Financial Times (FT) had made against Wirecard.

In 2019, she examined four areas in a series of articles: an expensive takeover in India, financial irregularities in Singapore, the pre-financing business (MCA, Merchant Cash Advance) and working with third parties. The FT suspected abysses everywhere – and incriminating details at hand. In the end, the pressure became so high that Wirecard brought KPMG’s auditors on board. As a result, around 40 experts re-examined the balance sheets of previous years.

Wirecard presented an interim result on Thursday night. It brings partial relief: In the first three areas of India, Singapore and MCA, the auditors see no effects on the annual financial statements for the years 2016 to 2018. However, the investigation of the controversial business with third parties is ongoing and should not be completed until April 22.

Wirecard had actually promised the final report for the end of the first quarter. However, on Thursday evening, the six-member Supervisory Board advised the new chairman Thomas Eichelmann and approved the interim announcement.

Relieved investors

For the first time, investors were given an insight into the special audit that has been running since October 21. The burden of serious allegations of dirty accounting practices, money laundering and possibly fake customer relationships has now become at least a little easier.

And although the KPMG auditors have not given full absolution, many investors reacted soothed. At the start of the stock exchange on Friday, Wirecard shares rose by almost 30 percent after having been one of the biggest losers the previous day with a minus of more than 18 percent. The significant plus also continued during the day, at least 4.5 percent remained at the end of trading.

Traders did not attribute the growth to renewed trust alone: ​​instead, they also blamed the price drop to EUR 83.50 on Thursday. The share price had been lower than the low point around a year ago when the first serious allegations of irregularities in Singapore had caused the price to fall.

Several hedge funds, which had bet in the past few weeks on a fall in price, would now have sold some of their positions with high profits, according to a trader. That relativizes the significant price increase on Friday.

Criticism of extended examination

Volker Brühl, Managing Director of the Center for Financial Studies at Frankfurt University in Frankfurt, cannot recognize the hoped-for liberation in the communication. “As an investor, the announcement would not calm me down,” says the ex-investment banker. “The fact that the testing period was extended over several weeks shows that there is obviously still a considerable need for testing in the area of ​​critical third-party business.” This is astonishing in view of the audit procedures that have been going on since October.

The analysts who deal with Wirecard also give a differentiated picture. Your course goals range from 136 to 270 euros. At the latest price level of just under 90 euros, this would still offer plenty of potential even in the worst case. Hannes Leitner from the major Swiss bank UBS, one of the most sober analysts, had only retained his assessment this week after a specialist conference with CEO Braun.

The day after the partial relief was nevertheless for the optimists: analyst Knut Woller from Baader Bank saw the first encouraging insights into the unfinished special test and maintained his high price target of EUR 240.

In the eyes of observers, there are signs that the group is finally opening up: Wirecard promised in the message that “in the sense of transparent processes, the complete KPMG investigation report would be published on the homepage immediately upon receipt”.

In the past few weeks there had been various messages about the manner in which the KPMG special report would be published. Would it go public in whole or in part? And would a deeper or only a filtered insight be possible for investors? The speculation continued.

For a long time, when the incidents in the important branch in Singapore had been investigated by the external law firm Rajah & Tann (R&T), it was said that Wirecard would publish the complete report. In the end, however, there was only a thin message from around two pages, which had criticized the German Association for the Protection of Securities (see interview).

Problematic third party business

Despite some positive signals: The crux of the current publication remains the previously unexplained section on business with third parties. These so-called “third party acquirers” handle payment transactions in countries where Wirecard does not have its own licenses.

This is where Wirecard’s biggest problem was recently. The trigger for the special inspection by KPMG was ultimately a ten-page FT article in October. Enriched by internal and external documents, payment flows from Wirecard via partners in Dubai and Ireland were questioned.

The focus was on Wirecard’s partner Al Alam from Dubai. According to the FT, around half of the company’s profit before interest, taxes and depreciation was achieved in 2016. According to internal documents, the Dubai company was responsible for sales of EUR 265 million and an “Ebitda effect” of EUR 173 million.

According to FT, the business of 34 key Wirecard customers was processed through Al Alam in 2016. They come from the United States, Europe, the Middle East, Russia and Japan. According to the Wirtschaftszeitung, it tried to contact all of these business partners. Accordingly, 15 of them had never heard of the Al Alam name, six did not answer, five could not be identified, and eight of them stopped doing business. Wirecard sharply contested this representation.

The interim status of the special audit now published does not provide any clarification regarding these particularly serious allegations: the third-party business is to be examined for a further six weeks. Only then is this part of the investigation still to be completed.

Difficult coordination

A key sticking point for the examination of the third party partners “at exotic locations” was that some of them did not want to open the books for KPMG, insiders report. Here one is in intensive discussions. In addition, there were also numerous language barriers and technical restrictions with the cooperative partners. Accounting documents for the years between 2016 and 2018 are not available in a uniform format from third parties. Accordingly, data would have to be elaborately determined.

The auditors at EY, who have been checking Wirecard’s books for more than a decade, are now waiting for the auditing of the 2019 annual accounts for KPMG’s special auditors to finalize their investigation. For this reason, the publication of the balance sheet originally planned for April 8 was postponed by around three weeks to April 30. A year ago, the announcement of the balance sheet also had to be postponed.

An indication of problems? “The fact that the presentation of the 2019 annual financial statements is also postponed indicates that the auditors cannot rule out a need for correction,” concludes at least finance professor Brühl.

However, there is no pressure on KPMG, says Wirecard. The auditors made their own decisions regarding the progress of the audit. Apparently they would have seen the chance to clarify open questions in the third-party business in the extension of the examination period. The new supervisory board chairman Thomas Eichelmann has repeatedly welcomed a particularly thorough examination.

The global outbreak of the corona crisis had also hindered the review. According to corporate circles, the willingness of KPMG auditors to travel had dropped significantly since the first cases at the beginning of the year. Flights to the Middle and Far East were particularly affected. Particularly there, however, particularly intensive tests with third-party partners were necessary. However, the situation in Asia has now calmed down. Currently in Dubai are being checked, KPMG representatives were also traveling with a Wirecard board in the Philippines, insiders report.

However, the corona virus itself has no noticeable impact on Wirecard’s business. At a conference a few days ago, CEO Braun admitted that the pandemic had a certain negative impact on his company. Failures in air traffic and tourism, however, would be offset by higher sales in online trading.

The message from Thursday night was received very positively by Wirecard employees. “This is the hoped-for liberation. The mood with us is relaxed, ”said a manager of the payment service provider on Friday. Although it was clear: “It would certainly be good if the exam had been completed earlier.” However, one had to see the large scope of the task.

The final clarification will probably only bring the publication of the KPMG final report. Until then, at least in-house, Wirecard boss Braun can be lenient when organizing the investigation.

More: Many questions remain unanswered for Munich investor Daniele Bergdolt in the Wirecard case.

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