EY’s audits of the defunct Wirecard payment group suffered from serious flaws over a period of years, a German investigation has found.
The Big Four firm reportedly failed to spot indicators of fraud risk, failed to fully implement professional guidelines and, on key issues, relied on verbal assurances from executives.
A special investigator who reviewed EY’s audits came to a damning verdict on the quality of the work, according to people with direct knowledge of the report. The investigator was commissioned by the parliamentary committee of the Bundestag in Berlin to investigate the accounting scandal and was given access to internal EY documents.
The report, tabled in the Bundestag at the end of this week, will dramatically increase the woes of the accounting firm. EY is already facing lawsuits from Wirecard shareholders and creditors. Legal action by the administrator of Wirecard is also likely to follow.
EY partners who have approved Wirecard’s accounts are already the subject of a criminal investigation for potential violations of the rules relating to the performance of their professional duties. Earlier this year, the accounting firm replaced its leadership in Germany and announced an organizational reshuffle.
“Report highlights failures in EY audits because professional standards were not met,” Matthias Hauer, MP for the conservative CDU / CSU parliamentary group, told FT, who suggested appointing the special investigator . He added that the report confirmed that “EY has a significant responsibility that the scandal was not discovered sooner.”
Wirecard has received unqualified audits from EY for a decade and has already been hailed as one of the few technological success stories in Germany. He collapsed into insolvency last summer after revealing that 1.9 billion euros in liquidity “did not exist”.
A team of Rödl & Partner auditors led by Martin Wambach, the parliamentary special investigator, searched 90 gigabytes of EY data which included internal working documents and 40,000 emails.
The review found that EY had thoroughly assessed Wirecard’s outsourced operations in Asia, which are at the heart of the fraud. However, the auditor did not dispute that the day-to-day operations of the so-called Third Party Acquisition (TPA) business “deviated significantly from contractually defined business processes”.
In addition, EY did not spot a series of fraud risk indicators, including unusually close ties with its Asian partners as well as high and rising margins in a lower value-added business than the core business. from Wirecard. Rödl & Partner rejects Wirecard’s argument that higher profitability reflected higher risk TPA activity; it emphasizes the fact that the higher risk never led to financial losses.
“From our point of view, there were numerous fraud risk indicators concerning the TPA activity which could have increased the critical attitude and triggered new acts of audit”, concludes the special investigator.
Rödl & Partner, like KPMG in its special audit last year, also disputes that money deposited in escrow accounts in Asia was treated as Wirecard cash. He notes that EY’s assessment of the matter was “contradictory” as internal documents showed the company initially wanted to treat the money as “other financial assets”.
EY subsequently changed its mind based on the argument that Wirecard could access the funds within three months provided it could obtain a bank guarantee. The accounting firm has said internally that, thanks to its financial strength, Wirecard can obtain such a bank guarantee at any time – but EY did not verify this proposal in its audits.
Rödl & Partner also noted that escrow account balance confirmations repeatedly suffered from inconsistencies, such as different Wirecard subsidiaries assigned to the same accounts.
“The [Rödl & Partner] report on EY is the equivalent of KPMG’s report on Wirecard. Its language is technical, but its content is devastating, ”said Jens Zimmermann, Member of the Social Democrats.
Fabio De Masi, left-wing MP Die Linke, said: “EY had a deep understanding of the illusion of TPA and to some extent was even his brain,” adding that it was not surprising that the company was not properly audited. “For me, the question is whether EY didn’t want to find out.”
Rödl & Partner did not immediately respond to FT’s requests for comment.
EY said its German subsidiary did not receive a copy of the report from Rödl & Partner and therefore was unable to comment on its content.
“The collusive acts of fraud at Wirecard were implemented through a very complex criminal network designed to deceive everyone – investors, banks, supervisory authorities, investigative lawyers and forensic auditors, as well as auditors,” EY said
“We have supported the Parliamentary Commission of Inquiry (PIC) throughout and will continue to do so. We also welcomed the decision of the PIC to consult audit experts and fully cooperated with the special investigators in their work.
“Based on our information, the auditors of EY Germany performed their audit procedures at Wirecard in a professional manner, to the best of their knowledge and in good faith.”
