Where Did All The Payments Go?

Nearly two decades after the Enron scandal, another big company is embroiled in a scandal over irregular accounting. M ore than $2 billion in missing funds led to the resignation and arrest of Wirecard’s CEO recently.

The scandal broke when the company’s external auditors couldn’t find the money in trust accounts and refused to sign off on the digital payment company’s financial statements.

The missing amount equates to one-fourth of Wirecard’s assets and set off a global search for the funds. German authorities suspect that former CEO Markus Braun used fake transactions to inflate Wirecard’s revenues and balance sheet.

The company says the missing money may never have existed and has withdrawn preliminary results for 2019 and the first quarter of 2020. At the time of Braun’s resignation, he said the company had been the victim of a massive fraud. Wirecard has since fired its chief operating officer.

Lessons Learned

This story about Wirecard’s financial scandal may bring make memories for internal auditors. The infamous 2001 case of Enron and its CEO, found guilty of accounting fraud, became a major driver of the U.S. Sarbanes-Oxley Act of 2002 financial regulatory reform. Germany’s finance minister summed up the essence of the Wirecard scandal, saying, “Critical questions arise over the supervision of the company, especially with regards to accounting and balance sheet control. Auditors and supervisory bodies do not seem to have been effective here.”

So what can internal auditors learn from this case?

The Association of Certified Fraud Examiners defines accounting fraud as “deception or misrepresentation that an individual or entity makes knowing that the misrepresentation could result in some unauthorized benefit to the individual or to the entity or some other party.”

Financial statement fraud can take multiple forms, including: Overstating revenues through outright falsifications, manipulations such as recording future expected sales, or irregular accounting practices.

An example is when a company understates revenues in one accounting period and maintains them as a reserve for future periods with worse performances to reduce the appearance of volatility. Inflating an asset’s net worth by knowingly failing to apply an appropriate depreciation schedule. 

Hiding obligations and liabilities from a company’s balance sheet. Incorrectly disclosing related-party transactions and structured finance deals.

Several actions are key to reducing the threat of Where Did All the Payments Go?

Strengthen and rigorously implement internal controls over balance sheet account reconciliation.

Efforts to sustain a timely and accurate account reconciliation process should include: A strong management focus. Sufficient understanding of the process. Written policies and procedures. Adequate employee training. Identifying and addressing any weaknesses in this process can help auditors and companies detect and correct errors before they file their reports. Organizations need to reconcile all high- and medium-risk accounts that could contain a significant or material misstatement and make all necessary adjustments to the general ledger timely.

Because account reconciliations are so important, organizations also should adopt a continuous improvement process aimed at reconciling all accounts before the post-closing adjustment review process. Pay close attention to the work of external auditors.

That scrutiny should include the audit committee asking questions of the external auditor and regularly reviewing the renewal process for selecting the auditor.

The company also should be listening to its investors’ concerns and complaints. The focus in the Wirecard case has turned to its external auditors, who reportedly failed to report the company’s unorthodox financial arrangements in the past.

Wirecard missing $2 billion allegedly involved an unconventional measure in which the company used third-party partners to process payments in countries where it wasn’t licensed. Those businesses deposited revenue in trust accounts rather than pay it straight to the company. Wirecard explained that the money was kept that way to manage risk, saying it could be saved to provide refunds or chargebacks if needed.

External auditors need to be vigilant in self-regulating the quality of their work. The external auditors allegedly did not confirm that Singapore’s Banking Corp. held large amounts of cash on Wirecard’s behalf. Instead, they relied on documents and screenshots provided by a third-party trustee and Wirecard, itself.

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