Castle Hall publishes white paper on Wirecard’s lessons for asset management due diligence

Castle Hall, the Due Diligence Company, published a timely white paper outlining four key observations from the failure of Wirecard AG, the high profile German fintech payment services company. Wirecard filed for insolvency on June 25, three days after the firm’s CEO, Markus Braun, was arrested on suspicion of false accounting and market manipulation.

“The implosion of Wirecard has the potential to become one of the most stunning corporate failures in recent years,” said Chris Addy, Castle Hall’s CEO. “Our team has identified four themes from the Wirecard debacle which are relevant to the asset management industry. As investors conduct due diligence, be it on hedge funds, private equity, real estate, infrastructure or long only funds, Wirecard provides valuable insights which can be applied to our own industry.”

The white paper can be downloaded at www.castlehalldiligence.com/white-papers, and discusses:

• Audit failure. Media reports in the Financial Times allege that Wirecard’s auditor, EY Germany, failed to independently confirm cash balances held with Asian trustees. The Financial Times reports that the auditor allegedly “relied on documents and screenshots provided by a third-party trustee and Wirecard itself.”
• Quality of Business Operations. Another audit firm, KPMG, conducted an inconclusive forensic examination into Wirecard’s operations in early 2020. Among the KPMG findings was apparent reliance on basic spreadsheets as the source document to support the recording of material revenue generated from third party “acquirors.”
• Does the Business Pass the Common Sense Smell Test? Corporate frauds such as Theranos and Sino-Forest have shown that sometimes businesses present results that are simply too good to be true. In the asset management industry, investors should always understand the source and drivers of outperformance from a particular manager.
• The Cult of the CEO. Markus Braun, recently described by the Wall Street Journal as a “self-styled visionary,” led the firm. In asset management, key person risk around dominant investment professionals is common: however, investment managers should always seek to build a bench of both investment and business management professionals to support the organization.

“As more facts about Wirecard emerge, there are clearly lessons for investors,” said Anne Coady, Castle Hall’s Managing Director. “We continue to offer investors a range of tools to support their due diligence workflow across asset classes, notably Castle Hall’s completely free DiligenceExpress service, which allows review and monitoring of diligence information on more than 20,000 asset managers and 60,000 private funds. Investors can then progress to a reputational due diligence review on the asset manager or key executives, review fund audited financial statements, initiate OpsMonitor coverage, or complete a full OpsReview due diligence report. Castle Hall is also pleased to see a new level of investor focus on ESG Due Diligence, which is supported by the firm’s Responsible Investment Manager and Responsible Investment Strategy due diligence services.”