In the latest episode of Fraud Talk, Mason Wilder, CFE, ACFE senior research specialist, and Brian Fox, vice president of strategic partnerships at Thomson Reuters and president & founder of Confirmation, discuss the rise and fall of the German payments group, Wirecard.

Below is an excerpt from the full transcript, where Wilder and Fox discuss the impact of financial statement fraud and how some of the recent schemes like Wirecard affect more than just the bottom line. Download the full transcript in PDF form or listen to the episode at the bottom of this post.

Mason: Have you run into situations that are similar to this in terms of some of those cash assets stashed in foreign jurisdictions? And if so, how have you handled the challenges associated with confirming those account balances?

Brian: Great question. Confirmation fraud really dates back a hundred years at this point. The very first confirmation fraud documented was McKesson & Robbins way back in the 1920s and '30s. That same fraud technique where you inflate revenue and have the offsetting journal entry to cash receivables then therefore circumvent the auditor's confirmation procedures, is the same fraud that we see, unfortunately, that I've seen over and over and over again. As I mentioned, HealthSouth, while it had a couple, I think $2.5 billion of fraud, $400 million was fake revenue, and therefore $400 million of fake cash.

We've seen it really in certain fraud. Anytime you see a company where they have inflated revenue, because the offsetting journal entries should go to either cash or receivables, typically in those inflated revenue scenarios or where cash is missing, significant material amounts of cash are missing, the way the company got away with that was by circumventing the auditor's confirmation procedures.

We've seen that here in the United States with the Peregrine Financial Group fraud, where the CEO of that business stole $200 million over a 20-year period. The big one now that we're talking about obviously is Wirecard with $2 billion in missing cash, but the Parmalat fraud, they had $4.9 billion of fake cash. In the Olympus fraud, which was in — Parmalat was Europe's largest fraud ever. Olympus was Japan's largest fraud ever. It was a confirmation fraud. Satyam was India's largest fraud ever. Again, another receivable confirmation fraud, but circumvented the auditor's confirmation procedures there. About half the reverse Chinese merger frauds in 2009 dealt with inflated revenue and phony confirmation procedures.

We continue to see it over and over. More recently, we've seen Luckin Coffee, which inflated a third of their revenue, over $300 million of fake revenue. You look at NMC Health, which is a Middle Eastern company, and TAL Education, another Chinese company. The facts are all still coming out for some of the more recent ones, but it appears it at the forefront at this point that inflating revenue by circumventing the auditor's confirmation procedures are really what the technique was used to commit fraud in each of these cases.

Mason: Right. You talk about these massive frauds with these huge losses. This does kind of fit in with the data that we get consistently on our Report to the Nations that we put out every two years and that survey, we have financial statement fraud as the most expensive average loss by far, well above corruption and asset misappropriation. In our most recent 2020 Report to the Nations, based on our survey results, the average loss in financial statement fraud was just under a million dollars. When you're talking about company balance sheets and everything, these schemes, the losses tend to get a lot bigger than just your average fare of frauds.

Brian: Then really what ends up happening, certainly with the public company frauds, and even with a lot of the private company frauds, where we have private investors or lenders. What ends up happening is they're the ones that really take the biggest hit. In the case of Wirecard, what we've seen is an estimate of over $20 billion in total investment and loan losses because of the $2 billion of fake revenue and fake cash. The company has gone into insolvency, which is Germany's version of bankruptcy. The stock typically tanks, the investors lose billions of dollars of money lent. Sometimes they get pennies on the dollar back. The true financial damage, even beyond the specific fraud amount that was manipulated, are the investor in debt losses that everybody else ends up incurring because of that fraud.