DVFA Commission for Corporate Analysis: Wirecard – Anatomy of a Fraud

On Thursday, June 25, 2020, Wirecard became the first member of the DAX benchmark index to file for insolvency. Since then, three questions concern the investment community: Why was Wirecard’s fraud not uncovered earlier? Could Wirecard’s fraud have been detected earlier? What lessons can be learned from Wirecard’s fraud? The DVFA Commission for Corporate Analysis took a closer look at this unique case in the history of the German capital market.

Why was the Wirecard fraud not uncovered earlier?

The primary perpetrators are well networked and generally first-time offenders. Board criminals are people who nobody would typically suspect of committing fraud. At the same time, board fraudsters are extremely careful when it comes to manipulating or destroying evidence requested by auditors. Apparently, for Dr. Braun, it was relatively easy to manipulate auditors, who were perhaps overwhelmed by the complexity of the client. Thus, it is common practice for auditors to simply repeat the work done in the previous year. They simply do not have the time to question details or even the big picture.

But it is not only time that is scarce, but also conviction. After all, the confirmation bias theory already shows that a client who has survived the auditor’s rigorous examination process in previous years must be trustworthy.

Could Wirecard’s fraud have been detected earlier?

As in 2001 and 2008, statements are now being made everywhere as to why the scandal was foreseeable. This reveals a defect known in Behavioural Finance as hindsight bias. Hindsight bias leads to an event appearing more predictable after it is known than it actually was before. In extreme cases, there could be investors who still believed that Wirecard’s insolvency was foreseeable even though they still held shares of the financial services company in their portfolios.

Now, capital market participants are by far, not the only ones subject to hindsight bias. There are numerous scientific studies and meta-studies on this phenomenon, ranging from the assessment of the chances of success of start-ups to the election chances of top political candidates to the results of sports competitions, the occurrence of terrorist attacks or the announcement of medical diagnoses. What they all have in common is that those who succumbed to the hindsight bias would have made a different decision in retrospect than they actually did at the time of the decision. Irrespective of this, the phenomenon is difficult to convey to experienced decision-makers, in the case of Wirecard, fund managers and financial analysts.

What lessons can be learned from Wirecard’s fraud?

Fraud patterns have changed little over the past 300 years. Just like back then, fraud today consists primarily of two elements: The “Suggestio Falsi”, i.e. the insinuation of falsehood, and the “Suppressio Veri”, the suppression of truth. While criminal investigators, as noted above, are trained to think like criminals in order to catch criminals, this approach is fundamentally atypical for financial analysts and asset managers. Instead, many actors, especially in the financial sector, tend to neglect behavioural explanations for inconsistencies. Since the consequences of fraud, as shown by Wirecard, can be so severe, it would make sense to place additional training emphasis on behavioural epistemology, not only for the detection of fraud but also as a deterrent. In other words, if we want to discuss the crime itself, we must inevitably include the human factor of the criminal.


The complete publication can be found on the website of the DVFA – Commission for Corporate Analysis or downloadable here as a PDF file (in German only).

Text: © 2020 DVFA e.V.

ESG ratings are better standardised than one might think (DVFA Guest contribution in Börsen-Zeitung)

Authors: Henrik Pontzen and Gunnar Friede, both Heads of the DVFA Commission Sustainable Investing


Imagine one analyst rates a security as a buy, while another deems it a sell. Scandalous? Not at all. Isn’t it quite normal that two equally well-trained and recognized experts could reach opposite conclusions after a thorough fundamental analysis of the same company? Then, why do we hear repeated complaints about ESG (environment, social and governance) ratings, deriding them because they too can have differing conclusions?

The demand that rating agencies come to a unanimous judgement when assessing ESG standards arises from false expectations. In terms of complexity, a company’s ESG rating can hardly be seriously compared with a credit rating. The latter evaluates only one facet: what is the probability of default on the coupon and repayment of a bond?

In assessing ESG, both the observation horizon and the number of criteria taken into account are disproportionately greater, and not only quantitative but also qualitative weighting is required. In this respect, a higher spread of results is to be expected per se.

However, the variance is not only due to the complexity of the subject. It also lies in the nature of the subject. For example, the answer to the question of whether electromobility is sustainable may vary depending on the rating agency’s assessment. On the one hand, e-mobility is compatible with the goal of climate neutrality; on the other hand, rare earths are used in the production of batteries, the extraction of which is sometimes questionable from a social and environmental point of view.

The answer to whether a car manufacturer, for example, is a company that operates sustainably can, therefore, be quite different, with good reasons. Which business activities are sustainable and which are not will only be decided in the future. The divergent ratings reflect this openness of decision and give room for different assessments.

Therefore, differing results are not an argument against ESG ratings or against the goal of investing sustainably. Even the fundamental analysis of a company’s stock does not always provide clear results about its actual performance. The fact that different analysts, in good faith and with the best of intentions, arrive at different results – one advises to buy, another to sell – is generally not seen as a sufficient reason to altogether do away with these analyses. ESG ratings should be handled in a similarly relaxed manner, but with a constant desire to conduct better analysis.

Furthermore, the assertion that ESG ratings do not agree to any extent on how to measure a company’s sustainability risk must be questioned. While the argument for a low correlation between individual stocks may be justified, it is not true for the average of companies and ESG rating agencies. This is demonstrated, among others, by a recently conducted study by MIT Sloan. The study’s authors Florian Berg, Julian Koelbel and Roberto Rigobon examine the ESG ratings by leading ratings agencies Asset4, RobecoSam, Sustainalytics and Vigeo Eiris for a universe of more than 800 of the world’s largest companies and found an average paired correlation of 0.7.

E- and S-ratings consistent

The consistency of the ratings is particularly high in the E-areas and for the most part in the S-areas. However, there are larger deviations in the G-areas and when the ratings from KLD/MSCI are added. By way of comparison, the leading bond ratings show a paired correlation of about 0.9 for the MSCI AC World between Moody’s, S&P and Fitch. In other words, the dispersion of the correlation between the providers of ESG ratings is quite acceptable on average, which is all the more surprising as the providers use different rating philosophies and take into account between 38 and 238 indicators in their measurements, i.e. they differ greatly in their methodology in quantitative terms alone. The major providers of bond ratings indeed achieve higher levels of agreement in their ratings. But the correlation in ESG ratings is surprisingly high when considering their complexity.

Assessments of companies according to ESG criteria are already better standardised than their reputation. However, the informed, critical use of multiple ESG ratings and the qualitative, conclusive overall assessment by the analyst remains indispensable for sustainable investing and highlight the strength of the asset manager. Ambiguities and sometimes poor data quality do not fundamentally call into question the concept of sustainable investing. The DVFA Commission on Sustainable Investing sees these findings rather as a mandate to investors to support diversity in rating agencies and at the same time to demand better measurement methods and, in dialogue with the companies, data that is sufficiently reliable and up-to-date.


DVFA Commission Sustainable Investing:

DVFA study on Sustainable Development Goals: A Brief Overview of Providers, Methodologies, Data and Output

Alignment with the United Nations Sustainable Development Goals (SDGs) is not as easy as it seems and is still very inconsistent. A current study by the DVFA Commission Sustainable Investing on the SDG impact measurement offers a market overview of the currently available measurements, analysis tools and providers as well as some evaluations and recommendations.

The authors of the study, Christoph Klein and Dr. Rupini Rajagopalan, consider the 17 sustainability goals of 2015, although introduced to assess states, as an important milestone on the way to effective sustainable investments in companies. In their view, the SDGs have the potential to shift the focus of market participants and science to the purpose and positive effects of investments. So far, however, implementing ESG considerations has been viewed as prudent risk management.

Klein and Rajagopalan examine the following questions: How can the SDG-related effects of financial instruments and funds be measured? What is actually measured? What is the defined methodology? What types of data are needed? What is the analytical output?

The study provides an overview of the market, but is not a recommendation for a particular provider. The DVFA paper focuses on the twelve providers who, from the authors’ perspective, offer their tools to a broader customer base.


DVFA study on Sustainable Development Goals:

DVFA Commission Sustainable Investing: