Friday, July 24, 2020

"Spotting red flags: Wirecard edition"

If you are new to this stuff a dandy primer is Howard Shilit's "Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports".
I loaned my copy to a slightly shady acquaintance with the admonition "This is not meant to be a how-to guide"
He stole the book and I haven't seen him since.

From FT Alphaville, a guest author who is a step or two beyond the primer stage, July 22:

Dr Jacek Welc is lecturer of corporate finance at the Wroclaw University of Economics and Business and author of a new book called ‘Reading Between the Lines of Corporate Financial Reports: In Search of Financial Mis-Statements’. In this post, Dr Welc picks out some red flags in Wirecard’s financial statements which investors might have identified before the payment company’s subsequent collapse.
Much has been already said and written about Wirecard’s alleged accounting fraud.
But while FT journalists did a really good job warning the global financial community about the dangers of the “House of Wirecard”, the focus of their work was on red flags buried in the company’s complex financial reports which may have been a tad incomprehensible to the lay reader who lacks deep accounting knowledge.

Of course, all those warning signs have turned out to be accurate but I am sure that they are very difficult to understand for most investors (or other interested stakeholders) who lack deep accounting knowledge. So below I would like to exemplify some additional (and much simpler) red flags that could have been observed in Wirecard’s financial statements.
With hindsight, however, it seems there may have been other more notable and comprehensible red flags hiding in plain sight all along.

One of them was borrowing for no clear purpose at all.
As can be seen, the table below presents selected accounting numbers and accounting ratios extracted from Wirecard’s consolidated balance sheets:
© Wirecard’s accounts and the author’s own calculations.
Some observations....