Ernst & Young has been checking Wirecard's books since 2009. But despite numerous references to inconsistencies in the press and from investors, the EY auditors wave through the balance sheets year after year. Only this year will it be too much for them: Have you slipped for years before?
For Federal Finance Minister Olaf Scholz, the matter is clear: the auditors are to blame for the Wirecard scandal. After all, they did not object to the annual financial statements of the former favorite investor for years, he criticized at his hearing in the Bundestag finance committee.
The impression that the federal government wants to pass the blame on to EY is confirmed just under a week later: Apas, the auditor oversight, is investigating EY. Starting in 2015, she will examine all of the company's annual and consolidated financial statements at Wirecard for "compliance with legal and professional requirements," it said at the beginning of August.
Because the inspectors are also checked. The auditors. The big four are best known: Ernst & Young, which today only calls itself EY, KMPG, Deloitte and PricewaterhouseCoopers, also known as PWC. They watch over the books of the large and well-known companies and sound the alarm if something is wrong with their numbers. "That seldom happens," says Kai-Uwe Marten in the ntv podcast "Learned again". He heads the Institute for Accounting and Auditing at Ulm University.
"Significant Facts"
In Germany, all medium-sized and large corporations are obliged to appoint an auditor to check the annual financial statements. In practice, it affects all companies that are listed on the stock exchange, so that investors know: Everything is going well here. "The legislator expects the auditor, on behalf of the public, to issue a judgment as to whether the submitted financial statements are in accordance with the statutory provisions," says Marten. The so-called unqualified audit opinion is proof of this.
Wirecard also received it every year. Since 2009, the company's Supervisory Board has commissioned Ernst & Young with the audit. The experts have approved the books, although the "Financial Times" first reported in 2015 about inconsistencies at the payment service provider. Over the years, the allegations become sharper and more specific. In early 2019, the financial newspaper Wirecard accused a company manager in Singapore of money laundering and forgery of accounts. Further research will follow. It says that Wirecard falsified its balance sheets.
EY followed up on these indications when it checked the annual financial statements for 2018 in spring 2019. In their report, which is attached to the figures, the auditors even declare the allegations to be the "most significant facts" with which they have dealt. "You can expect that too," says Kai-Uwe Marten. Because the information from the press increased the audit risk for EY – the risk that essential errors are not discovered.
No find despite forensic experts
However, nothing changes in the result: In its report, EY emphasizes that it even used its own forensic experts to investigate the allegations, but that irregularities were not discovered in Wirecard's annual financial statements. In April 2019, the auditors gave the scandalous company an unqualified audit certificate for 2018. So everything was great, nothing to complain about. The auditors fell for Wirecard. But did you slouch too?
Not necessarily. It may well be that EY simply looked for inconsistencies in the wrong places in the balance sheets. The allegations were very specific, but the figures are extensive. And the legislature deliberately does not require a full audit, said Kai-Uwe Marten. The auditor must be able to do his work effectively on the one hand, but also efficiently on the other. "And of course that can mean that errors go undetected."
Nobody can control everything, is the approach. That would be impossible with thousands of invoices, documents and receipts. That is why the auditor's report is only determined with "sufficient assurance", not with absolute certainty, says Marten. "There is always a residual risk."
But this practice has consequences: the Wirecard fraud remained undetected despite the audit, the German control authorities instead targeted the critics. In the same month as the company presented its approved annual financial statements for 2018 to the public, the German financial supervisory authority Bafin reported the journalists of the "Financial Times" and critical investors. She accuses them of market manipulation.
Did EY get KMPG on the trail?
The house of cards does not collapse until a year later: In October 2019, the Wirecard Supervisory Board ordered a special audit in order to dispel the allegations of the "Financial Times" once and for all. This time the order is not going to EY, but to KPMG. Another of the four large test houses. Six months later, the experts present their results. Evidence is missing for some sales. It's about deposits in trust accounts of around one billion euros that may not exist.
Does KPMG work more carefully than EY? Not clear. This is difficult for outsiders to judge. But there is a big difference between taking a normal statutory audit or looking specifically for fraud, says Kai-Uwe Marten. He assumes that EY brought the special test on the way: Presumably, one has "drilled deeper than a usual final examination", encountered suspicious numbers, but could not prove any wrongdoing, he says. EY reported this to the supervisory board, which then commissioned the special audit. It was then no longer a matter of checking accounting standards, but of clearing up allegations of manipulation.
The regular annual financial statements for 2019 were then taken over by the EY auditors. And thanks to KPMG, this time the auditors probably also knew where to look for inconsistencies. In mid-June, just two months later, they finally refused the certificate: Now Wirecard's balance sheet was missing receipts for 1.9 billion euros that were supposed to be in trust accounts in the Philippines. A little later, the company filed for bankruptcy.
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