Wirecard alarm signals teach investors something

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Wirecard alarm signals teach investors something
Wirecard Alarm Signals Teach Investors Something

Wirecard shareholders could not know that € 1.9 billion of the payment company’s money was missing, but short sellers and investigative journalists uncovered numerous indications that something was going on long before the German group filed for bankruptcy. creditors last month. Its unnecessary dependence on debt, its weak board of directors and short-term bonuses for executives are signs that can teach us something.

Although its financial statements showed liquidity and solid cash flows, Wirecard was thirsty for external financing. The company, supposedly, started 2019 with 1,500 million euros of cash, excluding deposits from its banking unit, and reported that it had 487 million euros of operating cash flow until September. That would have easily covered the € 871 million of expenses, including debt payments and equity investments. However, the company generated 1,100 million of debt, including bank lines of credit.

Now that Wirecard has admitted that 25% of its balance was probably false, its dependence on debt makes more sense. Investors can avoid being fooled again by keeping a close eye on companies that use outside financing when it appears they don’t need it.

And then there is the issue of governance. Investors are increasingly frustrated by German boards of directors, increasingly numerous and full of trade unionists. And the Wirecard one was exceptionally ineffective. It only had three members before 2016, and it met five times a year on average from 2005 to 2016. A weak and distant board with few outsiders exercises little control over executives with too much power.

And the last thing is the remuneration. Former CEO Markus Braun received a € 5m bonus in 2012-2017. The scale of Wirecard fraud was difficult to detect from the outside, but investors can learn from the warning signs.

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