The German probe found that EY’s Wirecard inspections had serious deficiencies
EY’s defunct Wirecard payment group auditors have experienced serious deficiencies over the years, a German investigation has found.
The fact that the Big Four has failed to identify indicators of fraud risk, has not fully established professional guidelines, and has relied on key guarantees provided by executives on key questions.
A special investigator who examined the EY audits gave a horrific judgment about the quality of the work, according to people who knew the report first-hand. The investigator was ordered by the Berlin Bundestag parliamentary committee to look into the accounting scandal and was able to obtain documents including the EY.
A report to the Bundestag later this week will significantly exacerbate the accounting firm’s problems. EY is already facing lawsuits from Wirecard shareholders and creditors. It is likely that the legal actions taken by the Wirecard administrator will also be followed.
The EY members who signed the Wirecard accounts are already under criminal investigation for breaches of their professional duties. Earlier this year, the accounting firm replaced the German leadership and announced an organizational reorganization.
“The report explains the failures in the EY inspections because professional standards were not met,” said Matthias Hauer, a member of the Conservative parliamentary group CDU / CSU, which suggested appointing a special investigator. The report confirmed that “EY has a great responsibility for not knowing the scandal beforehand.”
Wirecard received qualified audits from EY for a decade and was one of the rare stories of technological success in Germany. It he fell into insolvency last summer 1.9 billion euros in cash after appearing to be “not”.
A team of Rödl & Partner auditors led by special parliamentary investigator Martin Wambach traversed 90 gigabytes of EY data containing internal work papers and 40,000 emails.
According to the review, EY accurately assessed Wirecard’s subcontracted operations in Asia, which are at the heart of the fraud. However, the auditor had no problem with the so-called day-to-day operations of a business acquiring a third party (TPA) that “significantly deviated from the business processes specified in the contract”.
In addition, EY has not identified any indicators of fraud risk, including unusual close ties with Asian partners and high and higher margins in a business that has had lower added value than Wirecard’s core business. Rödl & Partner rejects Wirecard’s argument that the higher profitability reflected the higher-risk TPA business; he stated that greater risks will never lead to economic losses.
“From our point of view, there were numerous indicators of fraud risk with respect to the TPA business, which could have exacerbated a critical stance and led to further audit action,” the special investigator concludes.
Rödl & Partner, as in its special audit by KPMG last year, also notes that the money saved in Asian bond accounts has also been treated in Wirecard cash. He noted that the valuation of EY was “contradictory” as internal documents showed that the company initially wanted to treat the money as “another financial asset”.
EY later changed its mind, arguing that Wirecard could access the funds within three months on the condition that it could obtain a bank guarantee. The accounting firm stated internally that, thanks to its financial strength, Wirecard could obtain such a bank guarantee at any time, but EY did not verify this proposal in its audits.
Rödl & Partner cautioned that the confirmation of bond account balances has repeatedly resulted in inconsistencies, such as the various Wirecard subsidiaries attributed to the same account.
“The [Rödl & Partner] The EY report is equivalent to the KPMG report on Wirecard. Its language is technical, but the content is destructive, ”said Social Democrat MP Jens Zimmermann.
Left-wing MP Fabio De Masi Die Linke said: “The EY had a deep understanding of the TPA’s enthusiasm and to some extent was itself,” he added that it was not surprising that the business was not properly inspected. “For me, the question is whether EY didn’t want to find anything.”
Rödl & Partner did not immediately respond to FT’s comments.
EY said it had not provided a copy of the Rödl & Partner report to its German arm and therefore could not comment on its contents.
“Wirecard’s collusive fraudulent acts were carried out through a complex criminal network designed to deceive everyone: investors, banks, supervisors, investigating lawyers and forensic auditors, as well as auditors,” EY said.
“We have supported and will continue to support the Parliamentary Committee of Inquiry (PIC). We were also pleased with the decision taken by the PIC to consult audit experts and collaborated with special investigators in their work.
“Based on our information, the German auditors of EY performed their Wirecard audit procedures professionally, according to their knowledge and in good faith.”