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Wirecard Bombs Again Following A Devastating KPMG Special Audit Report

May 04, 2020 8:30 AM ETWirecard AG (WCAGY), WRCDF45 Comments
Stefan Redlich profile picture
Stefan Redlich


  • More than a year after the Financial Times had launched serious allegations at Wirecard, a highly-anticipated KPMG special audit report was finally released after multiple delays.
  • The report is mostly a disaster as it failed to conclusively rule out any balance sheet manipulation at Wirecard and instead contained some crushing language regarding transparency and cooperation.
  • As a result, Wirecard's stock dropped over 33% last week and is gearing up for even more selling given that the 2019 financial statements have been postponed again.
  • Despite all the negativity in the report and Wirecard's behavior before, during and after the investigation, it also contains one silver lining for investors.

Germany's scandalous stock of 2019 is back with a bang. More than a year after the Financial Times brought forward a series of serious allegations in January 2019 and more than half a year after Wirecard (OTC:WRCDF) (OTCPK:WCAGY) contracted KPMG to conduct a special audit to thoroughly, forensically in some aspects, investigate these allegations, the KPMG special audit report has been released and Wirecard stock managed to punish me and fellow investors yet again. Wirecard KPMG Crash

Source: Wirecard

The report paints a very bleak picture on Wirecard in terms of accounting, reporting and transparency, and while it was not able to find evidence for the publicly raised allegations of balance sheet manipulation, it also was not sufficient to rule them out once and for all.

Wirecard's stock dropped over 33% over the next two days and is currently back where it was a year ago after the FT launched its initial allegations.

Wirecard crash

Source: Onvista.de

Given that the report so far has only been published in German but is of crucial importance to investors, I am going to paraphrase key messages, opine on them and also provide a much needed silver lining, although Wirecard remains a "black-or-white investment" for me personally.

Objective of the KPMG report

Released on April 27, 2020, once markets closed, the KPMG special audit report was released.


The investigation was triggered by the following allegations against Wirecard published in the press and on the internet:

  • Alleged increase in sales revenues through fictitious customer relationships, especially in third-party acquiring (TPA) with a third-party acquiring partner.
  • Incorrect presentation of the Merchant Cash Advance business.
  • Irregularities in connection with the accounting of subsidiaries in Singapore.
  • Allegations concerning business activities in India where an allegedly excessive purchase price was paid to the seller for the acquisition of the payment business and allegations concerning "roundtripping."

This article was written by

Stefan Redlich profile picture
I am working as a Business Analyst and Data Engineer in Germany and have started to build up a portfolio focused on Dividend Growth, both on the high and low-end yield spectrum. Primary focus is on Blue Chips with long-reaching dividend track records. I have been investing for 2 years and have been standing on the sidelines for way too long before. I love developing spreadsheets in Google and Excel to analyze financial performance and integrate these two sources with each other!Happy to connect on the various channels!

Analyst’s Disclosure: I am/we are long WRCDF, WCAGY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am not offering financial advice but only my personal opinion. Investors may take further aspects and their own due diligence into consideration before making a decision.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (45)

TreDrier profile picture
I'm a buyer of Wirecard. I love losing money. LMAO!!!
ISLAND INVESTOR profile picture
#1 Short Sellers vs. Activist Investors
Activist Investor Christopher Hohn has called on Wirecard AG to remove Chief Executive Officer Markus Braun (bloomberg)

Short sellers’ have one single overriding goal which is maximize financial gains by driving down the price of a particular stock (of Corp 1) that they sold short (short equity). Consequently, they have no interest in any improved organizational structure, processes and business performance of Corp 1.

Activist investors are usually long equity with a single overriding goal of maximizing gains by forcing the board of the particular company to improve the organization, processes, cost structure, balance sheet etc. which should result in an increased share price and creates value for shareholders.

In case of Wirecard, Christopher Hohn is a Short Seller and NOT an Activist Investor! This means that he obviously values the CEO (Dr. Markus Braun) as a critical asset for Wirecard and expects that the CEO’s departure would have a negative impact on Wirecards business / stock price.

Unfortunately, most articles / headlines related to this have been misleading and don’t summarize the intention of short-seller Hohn’s request.

#2 From the huge list of accusations there is only one pending issue left which Wirecard should be able to address within the next couple of weeks.

#3 Communication & Processes need significant improvement. This should be addressed by the supervisory and mgmt. boards after the public response to the KMPG report.

#4 Cooperation between WDI & KPMG was clearly unacceptable. WDI should have assigned a dedicated senior manager to support the KPMG team on completing the report in a timely manner. However, KPMG’s wording does not reflect well on KPMG and might have a negative impact on their business. I would have expected a rational, facts-based report with the usual disclaimers on a single page (without any sugar coating). I have never read such an “emotional” audit report from a Big Four accounting firm which is simply unprofessional.

#5 The most recent pressure on the stock price seems to be primarily driven by an increase in short interest (source S3 Partners). Check the increase in short interest and trading volume during this period. This means that the majority of share holders are not selling at current levels.

#6 The compliance rules set by the FT for WDI should apply to all companies in the payments processing industry. Just looking into this, interesting findings, stay tuned…..
Behavior “Unheardfull for a DAX company”??

Well, just do some research about the “Deutsche Bank“- and the Penalty they had to pay for admitted fraud in the US Subprime years.
Yeah this investigation really turned out to be a huge boomerang for Wirecard. I view the internal process and compliance failings as bad but nothing that cannot be solved. Whats worse is that the CEO touted for months how nothing had been found so far leaving investors to believe that they were going to be totally exonerated.

Only for KMPG to then state that they can neither prove or disprove half of the accusations because documents and data aren't available. That kind of communication is not worthy of a DAX company and destroyed a lot of investor trust.

Still positive for the business model of the company provided they get their house in order and KPMG finds that the Dec. 2019 numbers are without issue.
Stefan Redlich profile picture
@ms0154 Great comment which perfectly summarizes the article in my view, couldn't have said it better. Yeah, the behavior of the CEO is really disgraceful of a DAX company but then he build the whole company from the ground so Wirecard without Markus Braun would be like Tesla without Elon Musk. If you can't fire him, at least make sure he does act so foolishly and the statement from Wirecard today is also no improvement since they are basically saying that none of the allegation were confirmed but that also means none of them have been 100% rejected.

We need that December 2019 full review from KPMG. I think I am going to listen to their annual shareholders meeting if it is broadcast free for everyone ;)
Well from what I understand, after having read the report, the allegations regarding the Merchant Cash Advance business as well as those centering on the Singapore Unit (Round-tripping) were in fact dis-proven.

The one centering on the Indian unit (again round-tripping) was inconclusive as the financial beneficiary of the PE fund "fund 1" whom they bought the company from isn't known. But they also found no evidence of it being connected to any Wirecard employees and officers so I'll go with innocent unless proven otherwise.

The big fish, however, was the TPA business and here investors were basically slapped hard in the face by all the documents missing, minutes of meetings only being kept since I think 2018?! and data not being available for testing as it wasn't kept in-house and the TPA's are unwilling to provide it. Data protection legislation might certainly be a valid part of the 'why' but it leaves a very very bitter aftertaste and room for even more allegations.
Stefan Redlich profile picture
@ms0154 Yes, it does. Pressure mounting on CEO Markus Braun to step down from institutional investors like Deka Bank now. He lost all trust and credibility with his entire handling of this crisis and his communication. Just does not live up to any standard in terms of communication, compliance and cooperation. The biggest risk is not that some numbers may be wrong but rather that Wirecard's operational business will get hurt if customers also lose trust.
Kiril Kapital profile picture
Thanks for the write-up. Why didn't you remove the bullish rating on the stock?

The tail risk lies IMO on outright fraud, and not that Wirecard is not capable of getting its books into order. As such, you can go and buy a lottery ticket, at least it saves you some transaction costs.
Stefan Redlich profile picture
Well, because I am more bullish than bearish on Wirecard's prospects but I highly dislike how management is still behaving. Supervisory Board needs to step up and they need external consulting and expertise how to manage accounting and reporting processes in such a large firm.

Well, if not even KPMG after an in-depth forensic evaluation can find any material fraud, who else could or should do it? It is a toxic stock and one that totally tortures investors right now for sure but I am not one of those people downgrading a stock when it has just collapsed without at least thinking about a potential brighter future.

What happened, happened, it is time look forward. The preliminary assessment of Dec 2019 is encouraging. Also, Wirecard has large institutional investors, they will make life very uncomfortable for executives, and deservingly so, until they get their house into order.
"who else could or should do it?"

maybe someone who can seize forcefully documents, instead of having to ask Wirecard to kindly provide them?
Kiril Kapital profile picture
So if I had you beliefs, I would pile heavily into Wirecard then.

I would love to own this business, no doubt about it. But not with the potential of it being a fraud.
Stefan Redlich profile picture
@thorkild27 We posted at the same time ;) Nice one!
Stefan Redlich profile picture
Two new developments:
1) KPMG special audit report has been conveniently translated by Wirecard and can be found here: www.wirecard.com/...
2) Wirecard released a statement on that KPMG report here: www.wirecard.com/...

Both happened after I had submitted the article so I couldn't incorporate it anymore but Wirecard remains confident and understandably also stresses the silver lining I mentioned
Regardless the strong operational performance would continue and the mentioned sliver lining will eventually convince investors to be abit forgiving.
Stefan Redlich profile picture
@FadG Yes, we think alike
Thank you for this article. I haven’t seen that silver lining, but I agree. Even with that bad news the share price is unlikely to fall below 85€. There might have been wrong behavior but Wirecard is not Luckin Coffee. Greetings from Germany
Stefan Redlich profile picture
Yeah, everybody is just jumping right into the headline findings and this KPMG quote and that presents opportunity even though not for the faint-hearted ;)
Who cares. at worst i see them paying a small fine and business continues.

Cash flow is there, they have billions of money and 30+ per cent growth continues
The market does not price a company 50-30% of what its fundamentals would suggest, unless the risk is much bigger that a small fine.

The market is pricing the risk of an Enron-like outcome.
Business is very real and doing extremely well. Short sellers and headlines like this are creating exceptional buying opportunity.
Value Investor90 profile picture
I don't see anything more negative come out of this. I'd rather like to read an article on the question: "What is Wirecard's moat?" Greetings from Germany.
bluescorpion0 profile picture
Their moat:
Excellent customer service
Amazing transparency.
World renowned communication
Stefan Redlich profile picture
@Stephan Fischer
I continue to believe in Wirecard's strengths such as technological leadership, impressive regional diversification, high profitability and economies of scale, but I have become very skeptical about the over-reliance on its CEO, Markus Braun, who still hasn't managed to establish adequate transparency, compliance and governance communication at Wirecard
Value Investor90 profile picture
What do you mean by "technological leadership"? Obviously this is not the only electronic payment company.
pointblank profile picture
no offence but all the cheerleaders didn t see the wood for the trees. Imho: Not investible without a complete management overhaul.
Stefan Redlich profile picture
speculative for sure but given that their business is firing this stock could shoot up as quickly as it dropped if for instance such management overhaul takes place or the extended audit will confirm the preliminary December 2019 results. By then a lot of upside is already gone
pointblank profile picture
Really amazing - despite of KPMG Forensics (imho) being exceptionally clear, most of the cheerleaders keep ignoring the real issues ...
@pointblank can you be more explicit about what Wirecard shareholders are risking in a worst-case scenario?
bluescorpion0 profile picture
very bearish.
bluescorpion0 profile picture
Me. They are in over their heads. But their refusal to admit the frauds and or wrong behaviour is troubling. What are they afraid of? or do they really believe their own lies?
Stefan Redlich profile picture
Surely concerning but it is not as if the whole business was just thin air, KPMG could evaluate 87% of TPA sales and the Dec 2019 preliminary results also are plausible, cash flows exist. Their governance, transparency and maybe even arrogance though is troublesome at this stage but I am confident it will change. It is a toxic stock but once the cure has been found it will change I believe
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