One inspector, many scandals: are EY inspectors incapable?

For many years, EY blessed Wirecard's final reports – until the fraud committed by the German financial darling was exposed. But the payment service provider is not the only EY client that has a bang. Aggressive growth and dumping prices are becoming a problem.

In 2015 Dan McCrum wrote about inconsistencies at Wirecard for the first time in the "Financial Times". But nobody wanted to hear the British journalist's allegations of fraud, the story of the German financial darling who revolutionized electronic payments worldwide read too well.

Five years later, the tide has turned: the former Wirecard boss Markus Braun is in custody and is silent on the allegations; Dan McCrum tells the Bundestag investigative committee how the scandal came about. Why the German financial supervisory authorities have investigated him and not Wirecard. He doesn’t skimp on criticism; he says of the EY (Ernst & Young) auditors, for example, that they “failed spectacularly”.

Accounting expert Carola Rinker sees it similarly. A lot went wrong during the audit of the consolidated financial statements, she says in the ntv podcast "Another thing learned". Among other things, she trains the Federal Criminal Police Office in questions of balance sheet cosmetics and balance sheet falsification, and at the beginning of November just like Dan McCrum testified in the Wirecard investigation committee. And she wonders why, despite numerous reports in the "Financial Times", EY has not asked any more critical questions, has not restricted or refused the certificate. Because the examiners also noticed inconsistencies.

"Not worked properly"

Carola Rinker reads from her reports, in which EY, like any other auditor, has to explain what information has actually been dealt with, that "the work was not done properly". "If you look into the last audited financial statements for 2018, you can see that the very topics in which Wirecard was accused of manipulation were among the particularly important examination content," says the accounting expert. Even the ongoing investigations in Singapore were mentioned, but the subject of trust accounts did not arise. EY refrains from further inquiries and issues an unqualified certificate.

The fraud only flies up when the Wirecard Supervisory Board wants to wash itself clean in October 2019 after renewed allegations of fraud and, following renewed allegations of fraud, engages EY competitor KPMG for a special audit. In April 2020, however, the accounting experts surprisingly announced that there was a lack of evidence of sales of around one billion euros. Just two months later, it's EY's turn again and suddenly comes to the same conclusion: The certificate for the 2019 annual financial statements is refused, and now Wirecard's documents are missing receipts for 1.9 billion euros. A little later, the company files for bankruptcy.

One would agree with Dan McCrum when he says that EY "failed spectacularly". Carola Rinker points out, however, that the work of auditors is made more difficult by two fundamental problems. On the one hand, they are paid by the very companies that are supposed to audit them. "If they are too critical, they might lose the attractive mandate of a Dax company," she says. On the other hand, they get comparatively little money for the laborious work in Europe. The fee that EY received from Wirecard for the final examination was relatively manageable, says the accounting expert. In comparison with the USA, one could also speak of price dumping.

It pops several times

That is why the "Big Four", the four major auditing companies Deloitte, EY, KPMG and PWC, are turning more and more to the more lucrative sector consultation to. However, if there is advice and control at the same time, another conflict of interest arises. This is exacerbated in the case of EY because less money is charged than the competition for the time-consuming but prestigious balance sheet checks.

The reason? Growth. EY has expanded particularly strongly in recent years, says Carola Rinker. In Germany, for example, until recently, the company had no Dax mandates at all; in the meantime, Deutsche Bank or Deutsche Telekom have been secured. "The question arises as to whether there were growing pains that meant that EY did not check carefully," says the balance sheet expert. "That you just tried to generate sales and were a little more generous in some points."

Because, according to the "Wall Street Journal", Wirecard was not the only EY client who had a bang in the past few years.

EY also checked the books at WeWork, for example. Similar to Wirecard, the coworking and office space provider was once an absolute shooting star in the corporate sky, valued at $ 47 billion. When it was about to go public, however, possible investors first got an insight into companies and books, and in them they discovered one thing above all else: gigantic losses and an adventurous management style. The IPO was called off, the valuation fell to a sixth.

"Culture of Professional Skepticism"

Or Luckin Coffee, the Chinese answer to Starbucks. The coffee house chain was only founded in 2017, but three years later it had more branches in China than its American competitor. In spring 2019, EY helped the growth miracle go public. Only a year later, there was gossip in the ideal coffee world: The short seller Muddy Waters published an explosive report in which he accused Luckin of tweaking his sales figures. The EY experts, busy with the next final exam, tried unsuccessfully to calm down. After some back-and-forth, the company admitted: Yes, a board member and some of its employees have faked sales of about $ 310 million on the balance sheet.

In response to a request from the "Wall Street Journal", EY announced that it would change its examination strategy and develop a "culture of professional skepticism". It is not just Carola Rinker who thinks that this insight comes very late. After all, it is an auditor's job to be skeptical.

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