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After Wirecard: The lessons for Britain’s audit shake-up | accountingweb

Wirecard: EY sheds jobs as more controversies emerge


EY Germany’s attempts to free itself from the tangles of Wirecard include cutting hundreds of jobs as it fights multiple lawsuits while the partners responsible for auditing the collapsed payment firm have quit the profession to avoid regulatory sanctions.

2nd Feb 2023
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EY is firing hundreds of staff and cutting costs in Germany in response to the failings that led to the shock collapse of payment processor Wirecard.

Managers at EY Germany are making “various structural changes subject to co-determination,” the company said. “The focus is on personnel measures and reductions of non-personnel costs.”

The Financial Times reported that the Big Four firm’s German arm is to shed 40 partners and sack 380 staff to improve profitability.

Wirecard went bankrupt in 2020 following allegations of widespread malfeasance, as it emerged cash amounting to €2bn was missing from the balance sheet, and may never have existed.

The implosion quickly spiralled to become one of the most spectacular corporate frauds in European history, revealing a string of deficiencies in the conduct of auditors, regulators and banks.

Investors were left with losses amounting to multiple billions of euros, while EY lost major audit clients including Commerzbank, DWS, and KfW in the wake of the scandal.

Most of the axed partners are from EY Germany’s audit practice, while the remaining cuts are from back-office positions in business development, finance, legal, human resources and marketing roles.

Under German law, workers have the right to participate in management decisions under the ‘Mitbestimmung’ (co-determination) principle.

EY Germany has opened talks with the relevant body and “the planned adjustments should preferably take place in the form of voluntary solutions under a mutual understanding,” the firm said.

“The planned measures are intended to put EY Germany in the strongest possible position for future success,” it added.

Trouble at every turn

Despite best efforts to extract itself from the tangle, the lawsuits heading EY’s way show no signs of slowing, and other controversies related to the failings have emerged.

Commerzbank has filed a €200m claim against the auditor, and another class-action case on behalf of Wirecard’s investors was recently lodged over claims the business breached its duties by “aiding and abetting” the payment processor in filing “false annual reports”.

German law firm TILP has filed a lawsuit in Munich on behalf of the fintech’s shareholders, as former Wirecard chief Markus Braun was charged with fraud, breach of trust, and accounting manipulation.

EY has at all times maintained it was duped as part of a “widespread and sophisticated” fraud conducted and bears no responsibility for the alleged fraud.

“We continue to regard claims against EY Germany as unfounded,” an EY spokesperson said. “The auditor would only be liable in relation to investors in the event of intent. Our audit teams performed their audit procedures to the best of their knowledge and belief.”

Heading for the exits

Four current and former auditors for EY Germany involved in checking Wirecard’s books have evaded censure by quitting the profession.

Under domestic law, Germany’s audit watchdog Apas can only investigate and punish instances of misconduct by active accountants who are publicly enrolled. By returning their professional licences and leaving the firm, the quartet have avoided further action.

According to the Financial Times, the three EY audit partners who managed the Wirecard audit since 2016 resigned, while the fourth was a junior working on the account.

Apas said the cases were closed as the four handed back their licences

EY confirmed that “individual auditors have decided to renounce their licences as auditors”, declining to comment further.

Missed opportunity

It has also emerged that EY nearly uncovered the fraud back in 2016, when a Singapore trustee let slip to an auditor that he did not hold any money on behalf of Wirecard despite statements to the contrary from the firm.

The details were revealed by a chief witness in the ongoing Wirecard trial in Munich.

In 2016, Wirecard’s accounts fraudulently stated that Citadelle Corporate Services in Singapore oversaw escrow accounts in Asia containing approximately €150m in cash.

Four years later, the amounts in the accounts had swollen to €1.9bn, until Wirecard admitted the money didn’t exist and it quickly collapsed soon after.

Court papers show Citadelle director Shan Rajaratnam let EY know in March 2016 he did not hold any money, but worried Wirecard managers intervened and the trustee later told EY that the cash was present.

Rajaratnam has also been charged with 14 cases of falsifying documents and sharing them with Wirecard and EY, according to Singapore police.

EY declined to respond.

Oliver Bellenhaus, a senior executive on trial for the fraud but now aiding the prosecution, said Citadelle’s initial response “caused a lot of action” at Wirecard given it could expose the fraud.

The forged documents “falsely represented that Citadelle held large sums of money in its escrow accounts at various points in time between 2015 and 2017, when Citadelle did not maintain such accounts or hold such balances in its accounts”, the Singapore police said.

Auditing the auditors

Industry reaction to the latest twists concerned the role auditors play when fraud emerges and how EY’s German partners at the centre of the controversy have seemingly ducked professional punishment by walking away.

“The question is, should we audit the auditors? There are no peer reviews or industry penalties for malpractice,” said Shuba Narasimhan, CFA consultant at Tata.

Technology and finance expert Peter Oakes, founder of Fintech Ireland, said the ease at which the partners avoided sanction reflected poorly on Germany’s professional practices.

“If they held senior roles in Irish or UK financial services firms, the Central Bank of Ireland and the Financial Conduct Authority could still go after them,” Oakes said. “Makes you think whether the trust which boards, investors and stakeholders put in these folks is appropriate.”

Business consultant David Foster, a former engineering giant CFO, said he believes the rules finance professionals must follow have made the job of auditing a no-win when things go awry.

He said: “Accounting standards have become so complex and inward-looking that, frankly, something so obvious as a bank reconciliation may well be overlooked. Back to basics, perhaps?”


Replies (8)

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By TB93
03rd Feb 2023 09:37

I've said this before and I'll say it again, audits are not worth the paper they're written on.

Thanks (4)
Replying to TB93:
By flightdeck
03rd Feb 2023 12:21

The issue for me is that "you just can't know if this this audit is good". I am sure many excellent audits are done but also we know some bad ones are done too. But if the net result is you've lost confidence in all audits then something has to be done. I'm not sure how we can solve this?

Thanks (1)
By ColA
03rd Feb 2023 09:38

Ah, the days of responsibility being pushed down to those at the coalface whilst seniors & partners waltz away are far from gone.
Well remember inheriting permanent files crafted by erstwhile ‘stars’, some moving on to academia & publishing successes, only to find what was recorded was utter fiction.
Watchdogs in the profession often never even sniff at the scent, let alone being bloodhounds!

Thanks (4)
By meadowsaw227
03rd Feb 2023 10:00

Interestingly the other day we were talking about not allowing any non qualified people be accountants ! .

Thanks (1)
By 2TunTed
03rd Feb 2023 10:07

The position in Germany seems to be almost the reverse of what would have happened in the UK. Germany - Company officers in court and facing serious charges, Auditors have headed for the hills and are nowhere to be seen.
UK - Auditors being clobbered by the FCA, professional institutes and the FRC, partners sacked and fined, Company officers nowhere to be seen.
Time the one size fits all Audit was binned. The officers of an entity are responsible for what goes on and what is reported. About time they were held responsible then.

Thanks (1)
By AndrewV12
03rd Feb 2023 11:37

'Despite best efforts to extract itself from the tangle, the lawsuits heading EY’s way show no signs of slowing, and other controversies related to the failings have emerged.'

Interesting it appears in the UK, Companies associated with poor Audits normally go into administration, then liquidation, and that's it, lenders/ shareholders/ stakeholders put up with it.

Thanks (0)
By Nefertiti
03rd Feb 2023 11:55

LOL another day and another major fraud, this time with a clever twist where the accountants handed in their licenses and quit the profession to avoid punishment. The accountancy profession once regarded as a highly respectable and honest one has now been permanently tarred by these non stop, high profile scandals that seem to come up almost monthly.

Just remember as you anxiously try to keep abreast of every little change in tax law and try your best to act professionally and ethically to maintain your small or medium sized clients in this recession, there are many amongst us who simply don't care about such basics anymore and will happily break the rules as long as they don't get caught. It is only about money now folks - the only question is what sort of amount would tempt you to walk away forever and start a fresh, new life without spreadsheets and whinging clients?

Thanks (0)
By Hugo Fair
03rd Feb 2023 13:51

Whilst at school, many moons ago, a teacher (in what subject I don't recall) posited the following question to pupils:
"How much money would it take to persuade you to flee to some non-extraditable country (Argentina I recall being mentioned) with no option to ever return?"

The common if simple answer then was £1m which would presumably be nearer £100m now, but those German auditors have come up with a cunning alternative ...

Thanks (1)