Journalist
Share this content
EY  Tower in downtown Toronto. EY (Ernst & Young) is a multinational accounting firms headquartered in London, England.
istock_JHVEPhoto

EY Wirecard lawsuit escalates as legal quagmires mount for Big Four firm

by

German politicians are mulling full publication of an investigation into EY’s Wirecard failings. Thousands of potential litigants have been lined up to sue the Big Four firm, and it is now battling claims another company it audits is embroiled in fraud.

26th May 2021
Journalist
Share this content

More than 20,000 victims of the Wirecard collapse have been gathered as litigants to take on EY, as pressure mounts on Germany’s parliament to release a report detailing the Big Four firm’s failed auditing of the notorious payment company. 

Litfin, a European litigation financier, said it has collected the names of shareholders and creditors who lost money when the Munich company liquidated last year with a $2bn hole in its balance sheet. It has commissioned law firm Pinsent Masons to take on the bundled cases. 

The majority of the lawsuits are aimed at EY Germany, which approved Wirecard’s books for a decade despite the long-running fraud Munich prosecutors described as “gang-like” at the heart of the payment company.

Last June, Wirecard admitted that €1.9bn in corporate cash linked to its Asian arm did not exist and it became insolvent days later. Arrests of senior management were made, although former COO Jan Marsalek, who allegedly masterminded the plot and looted the company before it crashed, is still on the run and wanted by Interpol.

German prosecutors estimate the damage to banks who lent to the firm, payment and fintech companies that used Wirecard’s technology, and consumers, totalled more than €3bn.

More than 280 lawsuits from Wirecard investors against EY have been filed at the Stuttgart Regional Court, claiming around €42m in total, according to LitFin. Stuttgart judges have referred 140 of these proceedings to Munich, with reference to the Code of Civil Procedure regarding jurisdiction.

In Munich, EY claims six lawsuits against the company have now been dismissed, but the courts have not confirmed that number.

To publish or not to publish

German lawmakers have been presented with a confidential report by the country’s special investigator that blames EY for not fully scrutinising Wirecard’s Asian business, which later emerged to be the centre of the fraud.

The report, seen by the Financial Times, alleges that Wirecard also potentially violated international reporting standards as it disclosed minimal information about the size and nature of the Asian business. 

A team of auditors dug through more than 90 gigabytes of EY data that included internal working papers and 40,000 emails. The report found that 2014 to 2016 audits were particularly weak, as EY’s auditors missed multiple fraud risk indicators, did not fully implement professional guidelines and often relied on verbal assurances from management over-performing their own checks. 

Although the German report is confidential, such is the scale of the meltdown and embarrassment to Germany, its financial and accounting regulators and its media, MPs pushing the courts to force its publication.

“The German Parliamentary report highlights many EY failings,” said fintech advisor and payment technology expert David Parker. “Enron took down Arthur Andersen, will Wirecard take down EY? There is a real possibility of it being significantly hit. The shareholder lawsuits are just starting and this will provide oxygen to the fire.”

The findings will heap further shame on EY, which has repeatedly denied any wrongdoing and said it is the victim of “collusive fraud” designed to fool investors and auditors. It is trying to suppress publication of the unredacted report.

“If only the UK had such forensic and timely investigation of their corporate failures,” said Professor Atul K. Shah, accountancy expert and visiting lecturer at City, University of London, “Shambolic audit is torn apart in Germany, but rarely in the UK.”

Shah told AccountingWEB the UK “specialised” in avoiding audit investigations and “we do decide to investigate we specialise in delaying them”. “The HBOS failure, which remains the largest corporate collapse ever in British history, had the same auditor throughout: KPMG. Guess what? There has been no thorough investigation of the audit and all attempts were made by the Financial Reporting Council to delay and avoid investigation.”

Solutions 30 dispute

EY has also found itself entangled in more fraud-related controversy after refusing to sign off the books of Luxembourg-based technology services company Solutions 30. 

Solutions 30 has been warned by France's financial regulator to publish its 2020 audited results, but said it was considering appointing new auditors. Shares in the firm resumed trading on Monday after being suspended since May 10, but crashed more than 70% by the close.

“The group’s annual report will be published after receiving EY’s final audit report. As a result, the company is still unable to provide a precise timetable for the publication of this report," Solutions 30 said in a statement.

The company, which has corporate headquarters in Luxembourg and shares listed in Paris, said it planned to hire investment bankers to find long-term shareholders.

EY Luxembourg sent around a media note outlining that the IT company’s financial statements could contain “undetected misstatements [that] may be both material and pervasive.” EY said its attempts to investigate further were blocked by Solutions 30.

“We have not been able to obtain sufficient and appropriate evidence supporting the nature, the substance, the value and the compliance with laws and regulations of certain transactions of the Group and to determine if these transactions were made with related parties including with members of Management,” EY said.

Solutions 30, worth around $1.34bn (£0.95bn), claims to have more than 11,000 service engineers who handle tasks such as cable installations and general technical support. 

It has been accused of having links to organised crime and fraud in reporting of its transactions, and its operations have been the target of noted short selling hedge fund Muddy Waters.

“It is obvious to us that EY found serious issues in its audit of Solutions 30's 2020 financial statements,” said Muddy Waters founder Carson Block to media. Referencing EY’s note, he said: “This outcome bolsters our confidence that [Solutions 30] is likely involved in money laundering and is a fraud.”

Declining standards and trust

Asked if EY’s refusal to sign off the accounts of a company suspected of fraud was proof of its commitment to cleaning up its act, a former Big Four forensic services partner told AccountingWEB the comparison was “understandable, but overstating”.

“The line will be that EY is now practicing caution after Wirecard, but I’d suggest it’s more likely that as Solutions 30 stinks of something, EY decided to do its job,” the accountant said.

“Imagine a doctor saying that they will only treat certain patients and not even look at those who have certain illnesses? That would be medical racism,” Prof. Shah added. “What if the doctor then goes onto say they will only examine low risk high reward patients? That will be medical racketeering.”

Shah said this appears to be the way UK audit is heading, which is a bad sign for standards and upholding trust. “Professionals will only pass judgement on ‘good’ clients and avoid sick ones,” he said

Replies (2)

Please login or register to join the discussion.

Red Leader
By Red Leader
26th May 2021 17:26

Can quagmires "mount"?

Thanks (0)
Replying to Red Leader:
avatar
By Ben Alligin
27th May 2021 14:18

If you chose to name your stallion Quagmire, then yes it can mount, and indeed can even be mounted, though ideally not at the same time.

Thanks (0)