WIRECARD SCANDAL 1

Wirecard scandal

BBA team 2
Department of Business, Algoma University
ADMN2406P Social and Ethical Issues in Business
Kareem Roberts
November 19, 2023
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Case Study

Introduction/Overview

Wirecard, established in 1999, rapidly became a global force in electronic payment

outsourcing and white-label solutions, earning a spot in the prestigious DAX index in 2018.
Operating across three key segments, the company provided payment processing, risk
management, acquiring and issuing services, and communication solutions (Wikipedia, 2023).

However, Wirecard's ascent was abruptly halted by allegations of fraudulent activities,

including inflated profits through fictitious transactions and financial mismanagement. These
unethical practices tarnished the company's reputation and triggered investigations by regulatory
authorities. The fallout was severe, leading to a significant decline in stock prices and,
ultimately, Wirecard's declaration of bankruptcy in July 2020 (Reuters, 2022).

The scandal not only shook investor confidence but also prompted a reevaluation of
regulatory frameworks within the fintech industry. Wirecard's downfall is a stark reminder of the
critical importance of transparency, accountability, and ethical conduct in maintaining trust in the
rapidly evolving landscape of electronic payments.

Problem Statement

Wirecard encountered a severe ethical crisis as it was accused of inflating revenue and
manipulating profits through fraud. The scandal raised concerns about the reliability of financial
information, casting a shadow on the company's corporate governance and accountability. Key
issues include the alleged creation of fake sales contracts, manipulation of accounting records,
and the substantial unaccounted amount of approximately two billion Euros in Wirecard's
financial records.

SWOT Analysis

Strengths:

1. Unique Global License Framework

2. Extensive Partnerships and Corporate Customers

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3. Simplified Payment Process

Weaknesses:

1. Accounting Controversies and Litigation Involvement

2. Financial Figure Manipulation via Round Tripping

3. Heavy Reliance on Adult Entertainment and Gambling for Revenue

Opportunities:

1. Rising Cashless Demand

2. Digital Currency and E-commerce

3. Expansion into Non-European Markets (China and Russia)

Threats:

1. Intense Market Competition

2. Regular Scrutiny by The Financial Times

3. Tough Global Economic Regulations

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Alternatives Pros Cons

Protect • Encourages reporting • Potential backlash against

Whistleblowers • Protect members who whistleblowers
follow rules & regulations • Put in place systems and
procedures for Whistleblowers
to reach out to

Strengthen Audits • Thorough examination • limited by the information

• Prevent future unethical provided by the company
accounting fraud • More money is spent on
researching and hiring
reputable auditors.

Improve Internal • Prevents fraudulent • Resistance to increased

Controls activities oversight
• Assign responsibilities and • Employees complain about
accountabilities to more regulations to follow
wrongdoers

Effective Market • Independent monitoring • The creation of a new

Oversight • Effective following of regulatory body may face
market’s regulations challenges

Collaborate with • Consistent oversight • Coordination complexities in a

European Regulators • Force top management to multi-jurisdictional approach
be transparent • Will require time and money
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Recommendation Plan for Addressing the Wirecard Scandal:

Short-Term (Now to 1 year): Strengthen Audits and Protect Whistleblowers

In the immediate aftermath of the Wirecard scandal, it is crucial to take swift action to
rebuild trust and ensure financial accountability. One short-term strategy involves strengthening
audit practices and protecting whistleblowers. Regulatory bodies should collaborate with
auditing firms to enhance audits and utilize advanced technologies such as blockchain for
transparent and secure financial transactions. This approach aligns with deontological ethical
theory, emphasizing the importance of following rules and fulfilling duties (Boise, 2023).
Another name for deontology is Universal Ethics, as introduced in Chapter 3 of Business Ethics
(2020). Companies are accountable for accurate financial reporting by reinforcing auditing
standards and promoting transparency and integrity.
Simultaneously, implementing robust whistleblower protection measures is essential.
Establishing an independent body, separate from corporate influence, to receive and investigate
whistleblower complaints is vital (Ghillyer, 2020). This is consistent with the utilitarian ethical
theory, which focuses on maximizing overall well-being, once again as mentioned in Chapter 3
(Ghillyer, 2020). Encouraging employees to report misconduct without fear of retaliation
contributes to a culture of compliance, safeguarding against fraudulent activities. An example of
successful whistleblower protection is the Sarbanes-Oxley Act in the United States, which
enhanced protections for corporate whistleblowers and strengthened audit requirements (Véron,
2020) (Ghillyer, 2020).

Medium-Term (1-2 years): Collaborate with European Regulators and Improve Internal
Controls
To address the complexities of the Wirecard scandal in a global context, a medium-term
strategy involves collaborating with European regulators. Establishing consistent oversight
mechanisms across jurisdictions ensures comprehensive monitoring and enforcement. Though
coordination complexities may arise, adopting a virtue ethics perspective encourages the
cultivation of virtues like cooperation and collaboration for the greater good. The European
Securities and Markets Authority (ESMA) can play a pivotal role in harmonizing regulatory
efforts and fostering a collaborative approach to prevent financial fraud (Véron, 2020).
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Simultaneously, improving internal controls within companies is crucial for sustained integrity.
Internal control frameworks like COSO (Committee of Sponsoring Organizations of the
Treadway Commission) can help prevent fraudulent activities despite potential resistance to
increased oversight (COSO, 2023). Implementing internal controls aligns with virtue ethics by
promoting responsible corporate behavior. Companies can also follow the OECD Guidelines for
Multinational Enterprise which is explained in Chapter 9 of Business Ethics Now. The
Guidelines promote principles and standards for human rights, information disclosure,
anticorruption, taxation, labour relations, environment, competition, and consumer protection
(Ghillyer, 2020). An example is the successful adoption of internal control frameworks by
multinational corporations like IBM, contributing to their sustained financial integrity.
Another company, Siemens, was embroiled in a corruption controversy and worked with
regulators to rectify the situation. Access to critical data and staff was granted by the corporation,
aiding regulatory inquiries. Siemens' strategy included open and honest engagement with
authorities (Schubert & Miller, 2008). Wells Fargo strengthens its compliance and governance in
response to unauthorized account concerns. To emphasize ethical behavior, the corporation
engaged experienced compliance officers, changed corporate regulations, and improved staff
training programs (Kelly, 2020).

Long-Term (2 years+): Effective Market Oversight and Preventive Measures

In the long term, the focus should be on building an effective market oversight system
and developing preventive measures to avoid similar scandals. Creating an independent
regulatory body dedicated to market oversight, free from political and corporate influence, is
crucial. Drawing on social contract theory, this represents a collective effort to protect the
interests of market participants. An example is the Financial Conduct Authority (FCA) in the
United Kingdom, which operates independently to regulate financial markets, contributing to
market stability and investor protection (FCA, 2023). To prevent future occurrences, companies
should develop robust operational and audit procedures and develop an effective compliance
program, establish a Code of Conduct, train employees to understand and how to follow the
Code, and hire Ethic Officers for employees to turn to whenever they have a question or face a
dilemma (Ghillyer, 2020). Every employee should attend bi-annual ethics classes to refresh their
memory on the Code of Ethics, the processes, and who to contact when they suspect unethical
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business behaviours. Establishing audit committees with a diverse set of skills and expertise
ensures comprehensive scrutiny. Drawing on the duty-based deontological ethical theory, this
approach emphasizes the responsibility of companies to conduct thorough self-examination
(Ghillyer, 2020). For instance, implementing an effective audit committee played a pivotal role
in rehabilitating the reputation of Enron after its accounting scandal.
The well-known car manufacturer Toyota, stands as an example of a global company
putting in preventative measures. Toyota’s corporation value took a hit after recalls and safety
problems for their vehicles due to intentionally manufacturing vehicle parts that they “knew
were deadly.” They undertook a rebranding and corporate culture overhaul to improve their
image and to rebuild the public’s trust. To repair its image, the corporation changed its mission
statement, launched ethical training programs, and emphasized integrity as a fundamental
value (ABC News, 2014). GlaxoSmithKline, which was fined for bribery in China in 2014, is
another multi-national company in the global market. The company learned from this costly
mistake and took on the task of confronting ethical issues in worldwide marketplaces. The
corporation reevaluated its worldwide expansion plan to ensure local and international
legislation compliance. This procedure included consultation with legal and compliance
professionals (BBC News, 2014).

In conclusion, addressing the Wirecard scandal necessitates a multifaceted approach,

integrating short-term, medium-term, and long-term strategies. Strengthening audits, protecting
whistleblowers, collaborating with European regulators, improving internal controls, and
establishing effective market oversight are interlinked components of a comprehensive plan. The
proposed recommendations aim to rebuild trust, foster transparency, and prevent future financial
scandals by applying ethical theories and drawing on examples from successful regulatory
frameworks. A business’ first goal is profit. However, there are still ethical and moral guidelines
that people and businesses have to uphold for countries and the global market to sustain their
operations. Business has a financial responsibility to their shareholders to be transparent in
presenting their financial statements, legal responsibilities to their local communities and
governments, and doing the right things to all business stakeholders (Ghillyer, 2020).
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