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Clients ditch EY amid reports it ignored Wirecard whistleblower four years ago

EY is under increasing pressure to explain the true extent of its knowledge of criminal activity inside Wirecard after reports allege it knew four years ago of fraud and attempts to bribe an auditor.

7th Oct 2020
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A whistleblower at the Big Four firm warned as early as 2016 that upper management at the German payments company may have committed fraud, but the allegations were not investigated, according to the Financial Times.

Details of the allegations were included in an unpublished section of a special audit into Wirecard by KPMG, the FT said. In the audit, KPMG said the 2016 allegations were not properly investigated by EY.

EY was Wirecard’s auditor for more than a decade and signed off on the books without hesitation every year despite growing allegations of malfeasance and the subsequent admission of the largest corporate fraud in Europe since the Second World War.

The Big Four firm’s global chairman Carmine Di Sibio recently wrote to clients to express “regret” that the fraud was “not uncovered sooner” but he claimed that EY was ultimately “successful in uncovering the fraud”.

EY is being investigated by Germany’s auditing watchdog Apas, and is fighting legal action on multiple fronts from investors who lost billions upon the collapse of the former high-flying fintech firm earlier this year.

The plot by former CEO Markus Braun and several other former executives now facing charges of fraud and embezzlement unravelled when it emerged EY did not check with Singapore’s OCC Bank to confirm it held large amounts of cash on Wirecard’s behalf. EY relied instead on documents and screenshots provided by Wirecard and a third-party trustee.

Wirecard admitted €2bn was missing, and eventually said the money did not exist, before collapsing into insolvency. A criminal investigation was opened by German prosecutors and several investors signalled their intent to file lawsuits against both Wirecard and EY.

Whistleblower ignored

According to KPMG, EY’s unnamed whistleblower wrote to EY Germany’s headquarters in Stuttgart in May 2016 regarding one of four suspect details that formed the focus of KPMG’s special audit in 2019.

These covered a handful of acquisitions in India, and concerned “Wirecard Germany senior management” that directly or indirectly held stakes in the companies and were therefore embroiled in a conflict of interest.

The whistleblower also accused senior Wirecard managers of artificially boosting the operating profit of the Indian businesses in an attempt to inflate the acquisition price, which was partly linked to future profits, the FT said.

According to the whistleblower, the Wirecard executive who held a senior position at one of the companies offered a local EY employee a “personal compensation” provided the auditor agreed to sign off on manipulated sales numbers.

A later investigation by EY’s anti-fraud specialist later closed prematurely and left several key questions unanswered, according to KPMG.

Similar allegations were made public, however EY continued to give Wirecard’s accounts a clean bill of health accounts. Later, KPMG found that EY’s 2017 audit of Wirecard’s accounts was potentially flawed.

Investigations and client fallout

Danyal Bayaz, a member of the German Parliament from the Green Party, said the allegations against EY are “grave” and would be investigated in a parliamentary inquiry.

Fabio De Masi from the Die Linke party called it an “Arthur Andersen” moment referring to the Enron auditor that collapsed after the energy group was revealed to be a fraud nearly 20 years ago.

Berlin lawmakers are considering whether to bar the firm from public contracts.

Lawsuits by German law firm Tilp on behalf of investors are progressing into Wirecard, EY and the German financial regulator BaFin, which oversaw the debacle and tried to prosecute FT journalists for investigating the firm.

German regulators will need at least two to three years to understand all aspects of the case, said Felix Hufeld, president of BaFin.

“We are faced ... with a probably unprecedented case of balance sheet fraud and criminal activity ... and we have only scraped the surface of understanding what actually happened,” Hufeld said during an interview at a recent conference.

Clients are also ditching EY in the wake of the scandal, which is likely to have a far bigger impact on the firm’s future than any short-term regulatory investigations.

KfW, Germany’s third-largest bank by assets, is considering whether to drop the EY as its auditor, while Commerzbank and DWS Group have already moved away from the firm.

Atul Shah, a professor of accounting and finance at City University in London, said he expected more companies to change auditors to show they are taking the allegations at EY seriously.

“I have a feeling this is more of a German board reaction, and if they change their auditor they can at least say they did their bit to protect the company and the shareholders,” Shah said.

DWS, Deutsche Bank’s asset management arm, said in September that it wouldn’t propose renewing EY as its auditor because of “possible future conflicts of interest.” DWS had built a Wirecard position that reached about €1bn across several funds last year and has since said it plans to sue Wirecard.

Big Four troubles

In what has amounted to the largest industry scandal since Enron went bust in 2001 and took down auditor Arthur Andersen, global accounting firms are facing widespread criticism from regulators and politicians after their development of lucrative consulting arms to provide opportunities for revenue growth and brand building that straightforward auditing can’t.

The UK accounting regulator has ordered firms to separate their auditing and consulting departments by mid-2024 in an attempt to improve competition and break conflicts of interest.

“That EY missed something so glaringly sketchy, despite all the media attention on Wirecard, suggests to me that there’s something wrong with the culture of challenge at the firm,” said Karthik Ramanna, a professor at the University of Oxford’s Blavatnik School of Government. “But, to be frank, this is not just an EY issue -- it’s an industry wide issue for auditing.”

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By jon watkin
08th Oct 2020 10:49

This is simply unbelievable. You can do all the analyticals and offer whatever ‘value-added services’ you want but what’s the point if the underlying data is not verified by independent evidence obtained directly, such as that provided by the bank, the bank comfort letter as it is quaintly known. That’s day 1 of any auditing course. This could well be another Arthur Andersen moment. Add in the other allegations above and it undermines so much that is being done to present the profession in a positive light.

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By Ben Alligin
08th Oct 2020 11:32

This is the same auditor that covered up painting gold bars silver, and there are plenty of other examples of their recent audit failings. What does it take to produce another Arthur Andersen moment?
Mind you having shredded all their Enron files (the weekend before they collapsed), AA were subsequently found to have done nothing wrong in their audit of Enron as there was no evidence of their wrong doing. You can't make this up if you tried.
EY need to get out there and buy some shredders!

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By tedbuck
08th Oct 2020 10:50

In the real world of little people it rather makes you wonder how reliable some written confirmations really are - definitely food for thought there.

But how on earth could EY not react more sensibly to the whistleblowers comments? I appreciate that there is always a tendency to treat the wbs as a bit of a nuisance but with huge sums at stake you would have thought that someone might have seen the emergency flag waving.

It really suggests that there should be a separate Auditing body for very big firms - independent of the accounting firms. On the other hand the FCA and the BaFin don't seem to be much good at their jobs so where would you look to establish such a body? I still think that a different approach is required with perhaps an external internal auditor present throughout the year.

But there does seem to be a bit of a problem with imaginary bank accounts these days which you would have thought could have been more satisfactorily addressed even under the present system.

Glad I don't really do many audits and that they are small.

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