Wirecard: At the heart of the biggest German financial scandal of the 21st century

March 7, 2022 by Louis DETALLE

Wirecard: At the heart of the biggest German financial scandal of the 21st century

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains what happened with Wirecard, the German company that caused a major scandal in the German financial place.

Quick review of the Wirecard company

The Wirecard case takes its name from a German start-up specializing in online payment solutions. Listed on the Frankfurt stock exchange in 2018, this company has experienced a meteoric growth with more than 300,000 corporate customers at its peak in June 2020.

Wirecard’s logo

However, as early as 2015, doubts were raised about the effectiveness of the Wirecard model and suspicions of irregularities arose. It was not until June 2020 that the management admitted that €1.9 billion of its consolidated balance sheet did not exist.

Several actors bore the brunt of the scandal

The consequences of this announcement were terrible for several actors:

Firstly, for the company, whose share price lost 90% of its value in a few days (see chart below). Rating agencies such as Moody’s are removing Wirecard’s rating due to the falsification of the information on which the rating was based. At management level, the former CEO of Wirecard, Markus Braun, resigned and was arrested by the German justice system. He ended up in prison along with two other executives of the German company. Jan Marsalek, another Wirecard executive, has been wanted since June 2020 by Interpol to be brought before the Munich court.

Evolution of Wirecard’s stock’s value.

For EY, Wirecard’s auditor, this case is reverberating through the financial ecosystem. Indeed, the auditor EY is also in great difficulty since the teams of the big firm of the Big 4 have been certifying the accounts of the company for several years and missed important frauds. The Financial Times, for example, accused the firm of failing to check for accounting irregularities in the balance sheet, which should have been done. There are numerous legal actions against the auditor for malpractice, such as the complaint by the German law firm Schirp & Partner. The German authorities have also launched a preliminary investigation against EY, whose head of the German branch has announced his resignation following the scandal.

Finally, the Federal Financial Supervisory Authority, the regulatory and supervisory body for the financial sector in Germany, is also affected by the affair. The German Minister of Finance therefore announced a plan to reform the BaFin, which also saw its director step down.

Conclusion

In conclusion, the Wirecard affair is considered to be one of the most important scandals of the 21st century as it has called into question the structures and statutes of a company, a Big 4 firm as well as German regulatory bodies.

Useful resources

La Tribune (21/04/2021) Scandale Wirecard : Merkel et son ministre des Finances contraints de se justifier (in French).

About the author

The article was written in March 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

The 3 biggest corporate frauds of the 21st century

March 7, 2022 by Louis DETALLE

In this article, Louis DETALLE (ESSEC Business School, Programme Grande Ecole – Master in Management, 2020-2023) presents three major corporate frauds of the 21^st century.

Enron (2001)

Enron was a leader in the raw material and energy sector in 2000. Kenneth Lay and Jeffrey Skilling were the two leaders of the group who have disguised the accounts of the company for years. As an example, Enron’s Directors hid never-ending debts in subsidiaries so as to display a healthy Head company whose liabilities were very limited because hidden in the subsidiaries’ accounts. In 2001, when hiding the truth was not possible anymore, Enron collapsed and dragged down the auditing firm Arthur Andersen as well as the pension funds designed for the retirement of its employees that were all made redundant at the same time.

enron-stock-price
The stock price and logo of Enron

Parmalat (2003)

Parmalat was an Italian company that was rocked in 2003 by a financial scandal that forced it to declare bankruptcy. During 1990s, Parmalat had been losing over $300 million per year, and decided to wipe this debt off the company’s financial records by using 3 shell companies situated in the Caribbean. However, a €14 billion euro hole was discovered in the Parmalat books. Calisto Tanzi and the financial director, Fausto Tonna had set up six shell companies in Luxemburg and falsified banking documents stating the company had accounts with millions of dollars at Bank of America…

Parmalat logo Logo of Parlamat

Volkswagen and the DieselGate (2015)

In fact, Volkswagen had launched in 2006 a project that aimed at manufacturing engines adapted to the American emission norms that were tougher than Europe’s. As they couldn’t implement their solution, the employees and engineers developed a software that enabled cars to bypass the control. In fact, the car’s software was able to detect when it was being measured and it curbed the car’s emissions accordingly. In 2014, an American study measured the emission levels of Volkswagen that reached nearly 40 times the authorized levels. The DieselGate exploded in 2015 when the US Environmental Protection Agency accused Volkswagen of having bypassed the anti-pollution regulation with a software able to bypass the control.

Events accelerate and Volkswagen admits to having equipped 11 million of its vehicles worldwide with fraudulent software. Volkswagen’s CEO, Martin Winterkorn, is pushed out and resigns and the German justice system opens a criminal investigation against the Group. As a result of this scandal, Volkswagen’s share price falls by 50% (see chart below), the Group records its first annual loss for 20 years and commits to paying a fine of 1 billion euros, the largest ever paid by a company in Germany.

Volkswagen stock chart

Conclusion

As a conclusion, one can identify 2 different types of mechanism at stake: for Enron & the Parlamat, the fraud occurred because the leaders falsified accounting documents & financial statements. For Volkswagen, it’s a bypass of the US authorities that ended up having the German Group sanctioned. Board of Directors are often tempted to manipulate the financial statements or their knowledge of the sector to have the better of the regulators and the markets, however, as evidenced by the stock charts of the 3 companies, when the fraud is unveiled, the firms lose a lot as investors’ confidence plummet.

Useful resources

AM Today (30/09/2019) Origine et conséquences : ce qu’il faut savoir sur le dieselgate

Le Monde Diplomatique (February 2004) Le scandale Parmalat

About the author

The article was written in March 2022 by Louis DETALLE (ESSEC Business School, Programme Grande Ecole – Master in Management, 2020-2023).

Quick review on the most famous trading frauds ever…

February 20, 2022 by Louis DETALLE

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) reviews on the most famous trading frauds ever…

Jerôme Kerviel and Société Générale

In 2008, the French bank Société Générale announced having been defrauded by one of its traders, Jérôme Kerviel whom you might have heard about. This fraud cost Société Générale € 4,9 billion and Jérôme Kerviel was accused by the bank of having held positions up to € 50 billion on financial markets without permission. Jérôme Kerviel, on the other hand, accused the bank of having known about his practices since the beginning and of confronting him about them only because he had lost a lot of money. As a consequence, Société Générale’s share lost nearly half his value when the issue was brought to light and the trial is still ongoing…

JP Morgan and Bruno Iksil: The whale

Bruno Iksil joined JP Morgan Chase in 2005 after a short time at Natixis. This French trader got his nickname because of his risky multi-million-dollar bets on credit default swaps (CDS), insurance contracts designed to protect against a country or company default.

In April 2012, the Wall Street Journal and Bloomberg were alerted by brokers on “huge” and “very risky” positions taken in the credit market. A trader had bet on the good health of American companies and sold, in very large quantities (several tens of billions of dollars), insurance contracts to cover themselves against their bankruptcy.

His bets were all the riskier since the US economy was showing major signs of slowdown. Other investors and banks, attracted by this opportunity, did not hesitate to take Iksil on, which quickly created an untenable situation for JP Morgan. The losses generated by the “whale” positions amounted to 6.2 billion dollars for JP Morgan.

As a result, the bank’s quarterly results were down by 660 million dollars, while its share price fell by 20% on the New York Stock Exchange.

Nick Leeson & the Barings Bank

Nick Leeson was a 28-year-old trader who had made a name for himself at Barings, England’s oldest investment bank. He became the head of the bank’s Singapore subsidiary by making high-risk, speculative bets. Nick Leeson took advantage of a loophole in the bank’s trading system to conceal his financial activities.

Unfortunately, Nick Leeson’s luck ran out and he suffered huge losses. Nick Leeson took advantage of a loophole in the bank’s trading records to hide his losses. With each trade, Nick Leeson hoped to mop up the previous losses to the point of no return. One evening, Leeson placed a trade betting that the Nikkei exchange rate would remain stable overnight. This seemingly low-risk trade turned out to be a disaster as an earthquake in Kobe caused the Nikkei and all Asian markets to collapse.

As a result of the massive losses, management realized that Leeson had been hiding a lot of money, and Barings, which had lost more than a billion dollars, more than twice its capital, went bankrupt.

About the author

The article was written in February 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

Quick review of the most famous investments frauds ever…

February 20, 2022 by Louis DETALLE

Quick review of the most famous investments frauds ever…

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains what a tax specialist works on, on a daily basis.

The most famous amongst all frauds ever: Charles Ponzi

Born in 1882, this Italian man has built himself quite a reputation in the fraud industry due to his invention: the Ponzi Pyramid. That consisted of a financial business plan that promised a 50% interest rate within 45 days to the investors that picked his solution. You may wonder how it was possible to reach such rates, well it was possible because Charles Ponzi reimbursed the old investors their initial investment plus the interests with the money collected from newer investors and so on… In fact, Ponzi developed an idea that he encountered in the “Banca Zarossi” in Montreal, that relied on a similar principle that made it impossible to reimburse all the clients if they came altogether asking for their savings.

At the end of his fraud, in 1919, Charles Ponzi had managed to convince nearly 40 000 investors to commit to his business plan for $15 million which account for several dozens of current billion dollars. To this day, Ponzi is still considered the father of financial fraud and several others drew from his example.

The Great Bernard Madoff

Bernard Madoff was a New York hedge fund manager who promised the most experienced investors his hedge fund would provide a 7% annual growth whatever the economic conjuncture. His fund relied on the same principle as the Ponzi system that Bernard Madoff hid successfully thanks to his fame in the finance sector. In fact, his renown made all this fraud possible and explains how institutions such as HSBC, Santander, BNP Paribas or Nomura got played. In 2008, when the trick was no longer viable, a 65 billion dollar fraud was unveiled…

The unviable mechanism behind this type of fraud: the Ponzi pyramid

A Ponzi pyramid is a fraudulent financial scheme that enables its creator to offer investors unusually high rates for very limited risk. The offer may seduce lots of investors which will only see their money back if newer investors contribute later. The scam is named after its inventor, Charles Ponzi, has been repeated several times.

However, it must be stated that a Ponzi scheme cannot last… Indeed, let’s consider the following example: Investor A invests 10 euros. The fraud promises to pay back twice as much two months later. Two months later, the company approaches new investors with the same promise. Investors B & C invest 10 euros. Their money is used to pay back the 20 euros promised to Customer A and so on…

In the example, for each round of new investors which corresponds to the maturity of the round of investments, the fraud must convince twice as many investors to invest as during the last row, in order to multiply the funds by 2 (so that the previous row of investors be reimbursed). In the following example, after 20 rounds of investors, the fraud will have to gather 10 485 760 € in order to reimburse the 19^th round of investors. As you can see, the scheme had already exceeded its viable size due to an exponential growth which can only cause the loss of the last round of investors and the dreadful financial consequences that comes with it.

About the author

The article was written in February 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

Ethics in finance

February 14, 2022 by Louis DETALLE

Ethics in finance

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) talks about ethics in finance.

With huge sums of money at our fingertips, the temptation to manipulate a few euros in order to put them in our pockets is great. Thus, the question of ethics in finance takes on its full meaning insofar as the human mind and its faculty of discernment are put to a severe test.

Definitions of ethics

Ethics comes from the Greek “ethikos” which means moral. Ethics is a branch of Philosophy that reflects on the aims and values of existence, on the conditions for a happy life, on the notion of “good” or on questions of morality.

Ethics can also be defined as a reflection on the behaviour to be adopted in order to make the world humanly habitable. In this sense, ethics is a search for the ideal of society and the conduct of life.

Difference between ethics and law

Ethics is a human science concerned with the behaviour of individuals in society. Law refers to the regulation of behaviour by written law, whereas ethics refers more broadly to the moral distinction between right and wrong, to what we should do independently of our purely legal obligations.

As a result, corporate ethics has developed

Indeed, given the stakes of which companies are the actors, and given that the diversity of profiles that constitute these companies is colossal, it seems clear that the question of corporate ethics arises. Let’s take shareholders for example, a shareholder holds part of a company through his share portfolio and therefore has an interest in seeing the companies of his portfolio succeed. This goes even further: in the event of bankruptcy, for example, the shareholder is only reimbursed after the creditors, if there are any funds left… The shareholder therefore has a strong incentive to do everything possible to ensure that the company in which he or she holds shares is successful in the long term.

Control and regulation mechanisms have been put in place so that the temptation to behave unethically is increasingly reduced, given the difficulties of circumventing the procedures. The banking sector, for example, has undergone an explosion of regulations over the last 20 years. Banks for example, have been struck by a wave of KYC “Know your customer” which consists in long questionnaires aiming at analyzing who are the people behind every financial actor. By doing that, banks prevent the financial actors such as companies from financing terrorism or companies sanctioned by international authorities. Other measures that lower the risks exist such as the ALM measures (“Anti-Laundering Money measures”) that identify precisely the source of capitals in order to make sure that the funds are not illegal.

New challenges for a new form of ethics

However, new challenges are emerging for our societies and financial actors seem to be key players in meeting them. Questions of government stability, leadership, social and ecological issues have gained importance in the public debate in recent decades. And financial players, because of their almost unlimited power to act, want to be the driving force behind the major changes in contemporary society. ESG criteria, for example, have been introduced as new instruments for evaluating companies, which can no longer be satisfied with good economic results but must also fulfil a certain number of ethical obligations. Without these ethical obligations, their financing, promotion and activity would be simply made impossible.

The three circles : economic performance, law and ethics.
img_Business_Ethics_Law
Source: Harvard Global Collection.

Why should I be interested in this post?

If you are a business school or university undergraduate or graduate student, you may have heard about the ever-increasing ethical topics in finance. As such, one may not ignore these issues that will surely keep on gaining space in the field. Ethics is now a dimension in the way business is or should be conducted as evidenced by the ESG criteria that we mention in the article. In addition, the CFA emphasizes the ethical aspects in its series exams as a large part of the questions tackle these aspects.

About the author

The article was written in February 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

My professional experience as a Credit Analyst at Société Générale

February 7, 2022 by Louis DETALLE

My professional experience as a Credit Analyst at Société Générale

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) relates his internship at Société Générale as a Credit Analyst.

Source: Wikipedia.

Quick presentation of the bank and its activities

Société Générale is one of the three main French banks and one of the oldest. Created in 1864, Société Générale is famous for both Investment Banking activities and Retail Banking. The business department I was a part of deals with the daily relationship between the bank and its clients whatever they need. That’s what made my internship so interesting because I was able to work on a huge variety of topics.

When was it?

My internship took place between July 2021 and December 2021. So it represented a 6-month internship which is the duration for which students with few professional experiences should aim for. Bear in mind that the longer the internship, the better for the recruiters you will encounter later: a long professional experience shows that you are able to work for a long time and that can be committed.

What were my missions during this internship?

As for what I was asked to do, my job consisted mainly of preparing credit analysis in order to facilitate the approval of the loan request. Indeed, as you may know, banks cannot agree on any credit demand the client asks, they must conduct a close and thorough analysis of the company: its business plan, its strategy, its past and above all, its financial health…

The commercial team I was involved with works hand-in-hand with the clients and cannot necessarily conduct the financial analysis as thoroughly as a person whose main job would be to do so. Therefore, my team would often provide me with some files concerning a company, explaining me what they had been asked to implement by the client and I would work on that topic for 2 or 3 days. Genuinely, I always started with some sector analysis, “has a watershed occurred recently and can it unsettle the client’s business and perhaps its ability to reimburse the credit it is asking for?”, then I had to work on the overall overview of the company, its history, its management, its strategy for the foreseeable future and what have the previous strategies yielded. Last but not least, I was asked to work on the financial analysis of the company that I always divided into 3 parts. First, I would analyze the P&L account and assess the profitability of the company over the past 3 years, “what is the core business?”, “how does the firm produce value?”, “how has the profitability evolved over the past 5 years and why?”… Second, I would check the global equilibrium of the firm balance sheet with a close look at the liabilities part. Hence, I would compute the financial ratios that you will learn in this course and study: 1) have they evolved significantly? 2) compared to other firms from the same sector, how do they look?

Finally, I would work on the cashflow statement which gives a key information to the bankers: the ability of the client to manage its cash and allocate its resources to the different expenditure items.

What skills have I acquired during this internship?

On the hard skills side, I developed strong analytical skills in financial analysis, accountancy and in terms of synthesis. On the soft skills side, I was able to develop my discussion skills through several meetings at C-level. In overall, I think the biggest advantage of my internship was that it helped me understand the functioning of a bank-credit approval.

Why should you be interested in this post?

If you are considering a career in finance, learning about one of your fellow alumni’s first internship in the finance industry can be of excellent help. In addition, you’ll learn what’s to be expected for your first internship, that you cannot skimp on !

Useful resources

Société Générale Website

About the author

The article was written in February 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

ESSEC Transaction

February 3, 2022 by Louis DETALLE

ESSEC Transaction

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) presents ESSEC Transaction, the first Student Finance Association in France.

What is ESSEC Transaction?

ESSEC Transaction is the leading student finance association in France and the official finance association of ESSEC Business School. Created in 1987, we organize unique, high added-value events for students interested in both corporate finance and market finance. Our student association consists of 45 active members each year, 7 of which lead the association, I personally am the Chief Editor.

Logo of ESSEC Transaction students’ association.

Logo de ESSEC Transaction

Source: ESSEC Transaction.

What are our missions?

The missions of ESSEC Transaction are defined around

Discover: Through the organization of a wide range of events, from workshops to conferences – including contests, networking breaks and visits – we help bridge the gap between theory and real-world experience.
Engage: ESSEC Transaction allows students to sharpen their skills and knowledge thanks to our quality content and events that approach finance from beginner to advance level.
Network: We provide students the opportunity to create and enlarge their network, as “we believe there is no better way to get true insights than through informal discussion with actual professionals” (Louis Villalta, current President).
Create: Because creation entails reflection, we encourage students to decrypt economic and financial news by giving them the opportunity to read, write, register and publish articles and podcasts on our website.

What events do we organize at ESSEC Transaction?

Each year, ESSEC Transaction offers a unique experience to nationwide students from top schools by organizing the largest financial events for students in France. We organize 3 kinds of events:

Flagship events: Perhaps the most famous one being the Paris M&A Summit, but also the Private Equity Summit, the Trade’XTrem, the Finance Discovery Month and the Women In Finance.
Theme-oriented events: The France-China investment conference, the Lawyers vs Bankers: who will shape the finance of tomorrow or the Fintech.
Discovery events: The Rothschild & Co tour or the Jefferies presentation for ESSEC Student, organized also by ESSEC Transaction.

Equipe de l’Association ESSEC Transaction (2021-2022).

Equipe de l’Association ESSEC Transaction

Source: ESSEC Transaction.

In a nutshell, “we aim at empowering students and helping them break into the world of Finance through workshops, competitions, conferences, visits, networking cocktails and a wide range of creative events” (Alrick Babilon, former President of ESSEC Transaction). Our members also enjoy the knowledge of their elder that thrive in the finance sector and can be of excellent help when it comes to preparing oneself for the job interviews.

Why should I be interested in this post?

If you are considering a career in finance, ESSEC Transaction must ring a bell. If you don’t want to miss any opportunities on our events, read this short post and you will have all there is to know about us!

Useful resources

ESSEC Transaction’s website

ESSEC Transaction’s Facebook Account

ESSEC Business School

About the author

The article was written in February 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

Wirecard: At the heart of the biggest German financial scandal of the 21st century

Quick review of the Wirecard company

Several actors bore the brunt of the scandal

Conclusion

Related posts on the SimTrade blog

Useful resources

About the author

Enron (2001)

Parmalat (2003)

Volkswagen and the DieselGate (2015)

Conclusion

Related posts on the SimTrade blog

Useful resources

About the author

Jerôme Kerviel and Société Générale

JP Morgan and Bruno Iksil: The whale

Nick Leeson & the Barings Bank

Related posts on the SimTrade blog

About the author

Quick review of the most famous investments frauds ever…

The most famous amongst all frauds ever: Charles Ponzi

The Great Bernard Madoff

The unviable mechanism behind this type of fraud: the Ponzi pyramid

Related posts on the SimTrade blog

About the author

Ethics in finance

Definitions of ethics

Difference between ethics and law

As a result, corporate ethics has developed

New challenges for a new form of ethics

Why should I be interested in this post?

Related posts on the SimTrade blog

About the author

My professional experience as a Credit Analyst at Société Générale

Quick presentation of the bank and its activities

When was it?

What were my missions during this internship?

What skills have I acquired during this internship?

Why should you be interested in this post?

Related posts on the SimTrade blog

Useful resources

About the author

ESSEC Transaction

What is ESSEC Transaction?

What are our missions?

What events do we organize at ESSEC Transaction?

Why should I be interested in this post?

Related posts on the SimTrade blog

Useful resources

About the author