The Penny Drops

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What's going on?

Shares of German payments processor Wirecard fell over 70% late last week after it emerged that the company had managed to mislay over $2 billion of cash.

What does this mean?

For years, “short sellers” – who bet a company’s share price will decline and sometimes campaign publicly to that end – have argued Wirecard’s stock shouldn’t be as valuable as it was: something didn’t add up in the company’s accounts. Time after time, however, Wirecard batted back the claims, silencing many naysayers.

Until now, that is. Delaying the publication of its 2019 earnings for the fourth time, Wirecard revealed that independent accountants couldn’t confirm the existence of $2.1 billion it claimed it had on hand. Two Asian banks alleged to have held Wirecard’s cash denied on Friday that the firm was a client, with one suggesting that a rogue employee might have falsified documents for Wirecard in the past. Shortly after that bombshell, Wirecard’s CEO resigned.

Why should I care?

For markets: A long way down.

Wirecard’s stock collapsed on Thursday and Friday: few dared hazard a guess at just how bad things might be for the German tech hero that was once more valuable than Deutsche Bank. Adding to the misery, some $2.3 billion worth of Wirecard’s loans may get called in if it doesn’t find its missing cash – and investment bank Morgan Stanley estimates that, absent its missing billions, the company only has $250 million in the kitty. One group benefiting from Wirecard’s demise, however, are those aforementioned short sellers

The bigger picture: Who’s to blame?

Company analysts often find it hard to call out a legit-looking earnings report even when something seems amiss – and as positive opinions mean more business for their advisory colleagues, it’s perhaps unsurprising they didn’t catch Wirecard. The role of accountancy firm EY in signing off previous results is likely to come in for serious scrutiny, though, especially given investigations for other conflicts of interest as recently as this year.

Originally posted as part of the Finimize daily email.

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