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.

Just the first step – Comment by Christopher Kalbhenn in the Börsen-Zeitung

On Monday, 24 August 2020, the DAX will finally be Wirecard-free. Following a rule change adopted by Deutsche Börse, in the future shares of insolvent companies will be immediately removed from the DAX family of indices, which in the case of Wirecard will happen on 21 August 2020, after the close of trading. The decision to accelerate the removal of Wirecard was unavoidable. After all, given the enormity of the balance sheet fraud scandal, it was unacceptable for the stock to continue to spoil the blue-chip index, which is a figurehead of the German economy, well into the next month.

Wirecard is also unworthy of DAX membership because of its plummeting share price and the resulting free-float market capitalization, which is far too low for the index, as well as the enormous daily fluctuations of the share. Wirecard has degenerated into a gambling stock that no longer has anything to do with solid investments. The stock is an imposition for market participants, especially for those who operate index-matching products and are therefore forced to hold the company.

As welcome as the decision is, it is ultimately just a first step. A more detailed review of the rules and regulations announced by Deutsche Börse, who will present the results before the end of this year, must lead to further changes in order to reduce the risk of further damage to the company’s reputation. Corporate governance aspects must also be taken into account.

What would happen, then, if Wirecard had not gone into insolvency after admitting that the reported EUR 1.9 billion did not actually exist? Assuming that the market capitalization and sales criteria were met, the stock would have continued to qualify for one of the select indices, as already happened in the Steinhoff case. The management of the retail furniture group, which went public in Frankfurt in 2015 and whose shares were temporarily one of the largest MDAX stocks, was shown to have fraudulently inflated its balance sheet. However, the company was able to avoid insolvency. The share price collapsed, and the stock dropped into the SDAX. In December 2019, it was removed from the index, to be later reinstated in March of this year. These events must not happen again. Proven balance sheet fraud must lead to exclusion from the index and a ban for several years.


Source: Börsen-Zeitung, 14. August 2020, Christopher Kalbhenn, © All rights reserved.

Image: Gerd Altmann/Pixabay