In December 2018, simply weeks earlier than doubts about one among its most high-profile shoppers started to flow into broadly, the auditor EY Germany determined to analyze Wirecard’s operations extra intently. It wished to scrutinise the German fintech group’s inside processes for funds settled by outsourcing companions in Asia — an integral a part of the enterprise as soon as valued at €24bn.
EY employees started procuring with on-line retailers recognized as shoppers of Wirecard’s Asian companions. The auditors splashed out on a €9.95 seven-day-subscription to an Asian porn web site, purchased “cash” for the soccer online game Fifa 19 price $23.08, ordered a breathalyser for €33.45 and spent ¥1,000 on bitcoin.
The procuring journey gave a clear invoice of well being to the Munich-based group — one among many who EY offered to Wirecard throughout a decade of working for it. Sadly the retailers didn’t exist. All had been arrange by Wirecard executives to dupe the auditors and assist disguise what Munich prosecutors now name “a fraud within the billions”.
A Dubai-based Wirecard government on the centre of the fraud had helped establish the retailers for use by EY to check the system — one thing that ought to have set off alarm bells on the auditor, says Martin Wambach, the particular investigator for a German parliamentary inquiry into the scandal. The EY employees used pay as you go playing cards provided by Wirecard for the procuring train. That enabled executives on the funds group to control the transactions, a separate inquiry discovered.
It could be one other 18 months earlier than EY lastly realised that half of Wirecard’s income and €1.9bn of firm money linked to the so-called third social gathering buying enterprise (TPA) didn’t exist. The revelations compelled the as soon as high-flying German payments provider into insolvency and plunged the Huge 4 accountancy agency into one of many worst auditing scandals in latest historical past.
Wambach, a senior auditor at Rödl & Companion, discovered that EY’s work, over a number of years, violated quite a lot of accounting requirements. In a damning report, he mentioned that it might have performed extra: “Quite a few fraud threat indicators with regard to the TPA enterprise . . . might have triggered additional audit acts”.
But, simply months earlier than the collapse, EY had vigorously defended the outsourced Asian enterprise in inside conferences, in keeping with paperwork seen by the Monetary Instances. That was regardless of a draft forensic audit commissioned by Wirecard’s supervisory board that was unable to conclusively verify that these operations existed. The audit, carried out by KPMG, had been triggered by a 2019 FT investigation into whether or not Wirecard’s Asian enterprise was actual.
In late April 2020, EY Germany audit companions Andreas Budde and Martin Dahmen instructed Wirecard that KPMG’s draft description of the TPA enterprise lacked “context” in keeping with paperwork seen by the FT.
Daniel Steinhoff, Wirecard’s former head of compliance who’s now working with the corporate’s court-appointed administrator, instructed MPs through the parliamentary inquiry that EY Germany had been “extremely satisfied” in regards to the existence of the outsourcing enterprise and repeatedly instructed KPMG “with interior conviction” that it existed.
Not everybody was satisfied. One week after the devastating KPMG report was printed, EY International stepped in and put the Wirecard audit, performed by its German “member firm” below nearer scrutiny.
But, the boldness displayed by EY Germany seems to be on the coronary heart of the nonetheless unanswered query: why did its audit of Wirecard go so badly flawed?
The FT has scrutinised lots of of pages of inside paperwork and emails and interviewed greater than a dozen individuals on the coronary heart of the failed audit to try to discover the reply. Mixed, the paperwork and first-hand testimony paint an image of missed alternatives to uncover the fraud earlier, a failure by EY to correctly scrutinise the enterprise it was auditing and a reluctance to problem its consumer in public even when Wirecard’s chief government made highly misleading statements to traders.
A number of EY Germany companions at the moment are below investigation by each the Munich felony prosecutors and the nation’s audit watchdog Apas. EY can be going through an avalanche of lawsuits from Wirecard shareholders who in whole misplaced billions on their investments.
“It’s the nature of auditing that frauds can happen as we’ve seen throughout the occupation within the final 10 years,” says Andy Baldwin, EY International’s managing accomplice. He insists that the auditor has discovered the teachings of the Wirecard scandal.
EY denies any wrongdoing. It argues that its employees fell sufferer to an elaborate fraud which concerned corrupt financial institution staff, pretend on-line outlets and doubtlessly even mock-up financial institution branches within the Philippines. However, says Baldwin, the agency “deeply regrets that we didn’t discover the fraud sooner”, including that in opposition to EY’s personal high quality requirements, “this audit just isn’t one we could possibly be happy with”.
When the numbers don’t add up
EY’s work for the disgraced funds firm was painstakingly dissected by the parliamentary inquiry, which laid naked a collection of shortcomings within the audits.
For years EY had did not request essential account data from Singapore’s OCBC Financial institution — the place Wirecard claimed it had as much as €1bn in money. As an alternative, the auditors relied on paperwork offered by a Singapore-based trustee which have been labelled “forgeries” by prosecutors within the city-state, in keeping with supplies seen by the FT.
One other inquiry into the case discovered that OCBC’s whole reported euro deposits have been smaller than the amount of money that it was mentioned to have been holding in Asian escrow accounts on behalf of Wirecard — one thing that didn’t add up.
But no one observed. EY argued that confidentiality legal guidelines blocked it from going on to the financial institution. However, unbiased auditing consultants disagree. “EY grossly violated its skilled duties with regard to the stability affirmation,” says Hansrudi Lenz, professor of accounting at Würzburg college, calling its explanations for not doing so “unconvincing excuses”.
The auditor’s resolution to deal with the cash listed on the Asian escrow accounts as Wirecard’s money additionally drew criticism from KPMG and Wambach. That call was key to preserving the veneer of a extremely worthwhile and cash-rich firm, which was in flip vital to perpetuating the fraud, says Lenz.
After the damning KPMG report was printed EY employed exterior attorneys to advise on whether or not it might resign mid-audit, in keeping with individuals acquainted with the matter. The auditors in Germany had been horrified by a public assertion that the Wirecard chief government Markus Braun made hours after the KPMG report was printed on April 28, 2020. Braun claimed on an investor name that “EY knowledgeable us this morning they haven’t any issues in any respect to log out the audit 2019”.
Braun’s feedback have been fictitious. In a terse memo to Wirecard chair Thomas Eichelmann and Braun, EY got here near calling the chief government a liar, declaring that “at no level” had EY given such an assurance. The auditor referred to as on Wirecard to concern a “corrective assertion” — a requirement the corporate ignored.
The monetary value of strolling away from the Wirecard audit would have been comparatively small compared with a few of EY’s different shoppers together with Siemens and Volkswagen. In 2018, the agency earned €2.3m in audit and advisory charges from Wirecard. However, individuals near the choice say, EY was warned by the attorneys that resigning the mandate mid-audit would have been very tough, if not unattainable, below German regulation.
As an alternative, after the KPMG report was printed, EY demanded that Wirecard switch €110m from every of the 4 separate Asian escrow accounts to Germany and gave the fintech group just some days to ship the €440m. Some inside EY observe that 110 is the emergency police quantity in Germany, and say it was a disguised name for assist by the auditor.
“Jan Marsalek [Wirecard’s chief operating officer] was extremely apologetic when the cash didn’t arrive immediately,” one individual acquainted with the main points inside EY says.
When the cash did not arrive within the German accounts, an exasperated EY turned to the administration of the Asian banks. In separate statements two of these banks instructed EY that the confirmations offered by Wirecard as proof that the €1.9bn of corporate cash existed have been “spurious”.
Hours earlier than it was resulting from reveal its annual outcomes on June 18 2020, Wirecard disclosed this reality to the monetary markets. Its share worth collapsed. Inside days Braun was ousted and arrested, Marsalek boarded a personal jet to Minsk in Belarus after which he disappeared and Wirecard filed for insolvency.
“The general evaluation of EY’s audit actions helps just one conclusion,” wrote the parliamentary inquiry committee, “EY kept away from key audit procedures or was glad with poor audit proof.”
4 years earlier EY had missed a possibility to behave. In 2016, its anti-fraud unit had been commissioned by Wirecard to analyze allegations in opposition to a number of the fintech’s senior employees in Munich which have been raised by a whistleblower. The probe, codenamed Project Ring, rapidly discovered “red-flag indicators” which pointed to potential stability sheet manipulations.
Nevertheless, Wirecard’s administration board stonewalled an intensive investigation and in mid-2017 instructed EY that it wished to desert the probe. In an e-mail, Marsalek briefed his fellow board members that “[EY was] a bit stunned about our resolution however did settle for it as anticipated”. A few of these Wirecard employees at the moment are on the centre of the felony investigation.
EY has subsequently mentioned the anti-fraud unit’s work was unbiased of the audit. However paperwork seen by the FT present that in March 2017, EY warned Wirecard that it was near refusing to present an unqualified audit for the 2016 fiscal yr, stressing that each one forensic work on Challenge Ring wanted to be completed.
But, one yr later, EY in its 2017 audit report neither addressed the “red-flag indicators” discovered by its anti-fraud workforce nor the board’s resolution to desert the probe. It declared that Challenge Ring had been “accomplished” with out delivering “any proof indicative of flawed accounting or different violations of regulation”.
Christian Muth, the forensic knowledgeable who led Challenge Ring and who left EY this yr to affix rival PwC, instructed MPs that his “skilled honour” had been damage after its findings have been discounted by his audit colleagues, including that he discovered this resolution “incomprehensible”.
After Wirecard’s insolvency, EY started an intensive “integrity evaluation” into its work for the cost processor. The investigation was performed by the regulation agency Allen & Overy working with EY auditors who had beforehand not been concerned within the Wirecard account. They sifted via greater than 40,000 inside paperwork and grilled the accountable EY employees. “We clearly requested ourselves: ‘Was this a systemic drawback?’ We don’t consider it was,” says Baldwin.
EY says it should spend $500m on new audit expertise over the following three years. And 20,000 employees in its audit enterprise have had extra anti-fraud coaching. However, says a senior accomplice at EY Germany, the most important lesson for the organisation must be to pick out its shoppers extra rigorously.
“We must always by no means have been there within the first place,” he says, elevating questions in regards to the agency’s due diligence of shoppers, arguing that EY ought to have shunned an digital funds processor working in high-risk sectors like pornography and playing and which had outsourced half of its enterprise to opaque Asian companies. “We by no means actually understood what sort of milieu we have been working in.”
€42m lack of enterprise
EY Germany is a comparatively small cog within the agency’s international empire that introduced in €34.4bn in revenues in 2020-21. Nevertheless, it’s the second-largest Huge 4 agency within the nation and in recent times grabbed market share from each PwC, the market chief, and KPMG, which have traditionally dominated the audits of German blue-chip corporations.
Though he stays a accomplice, Hubert Barth was ousted as head of EY Germany after the Wirecard scandal and changed by Jean-Yves Jégourel, EY International’s vice-chair of assurance, and Henrik Ahlers, the agency’s most senior tax accomplice in Germany. They’re tasked with overhauling the agency’s operations within the nation.
EY misplaced €42m of annual auditing enterprise when quite a lot of prestigious shoppers, amongst them Commerzbank, DWS and KfW moved their accounts within the wake of the scandal. Lots of those that jumped ship had misplaced tens of millions over Wirecard and a few could sue EY; others are corporations like Deutsche Telekom the place the German authorities is the one largest shareholder.
However the overwhelming majority of EY’s shoppers in Germany have, up to now, remained loyal to the €2.2bn enterprise. With Baldwin saying that “quite a lot of new shoppers” have mandated the agency as auditors.
Wirecard and EY — a longstanding relationship
An EY particular audit, commissioned by Wirecard, dismisses allegations of accounting manipulations raised by activist shareholders.
EY audits Wirecard’s annual outcomes for the primary time, initially with the funds agency’s earlier auditor RP Richter, a small agency.
EY turns into sole auditor of Wirecard.
Begin of Challenge Ring — a forensic audit by EY into fraud allegations following Wirecard’s takeover of funds companies in India.
EY threatens to refuse to present an unqualified audit, citing delays in Challenge Ring. EY ultimately offers Wirecard an ‘all clear’, and the auditor a number of months later abandons Challenge Ring regardless of crimson flags that will assist allegations.
FT raises doubt over existence of shoppers in Asia. Wirecard mandates KPMG.
In April, KPMG’s forensic audit is printed, Wirecard’s outsourced enterprise in Asia can’t be verified. Two months later, EY learns that financial institution paperwork displaying €1.9bn of money purportedly held in Asia are forgeries. On June 18, EY refuses to log out Wirecard’s accounts. One week later, the corporate collapses.
Nevertheless, the saga is much from over for EY. The Wirecard administrator can be anticipated to take EY to courtroom, despite the fact that, below German regulation, the hurdles for a consumer or administrator to say damages from an auditor are excessive, and any compensation is capped at €4m.
Wirecard shareholders can solely anticipate compensation for his or her damages if they will show that EY deliberately broke auditing guidelines. In addition they want to indicate a direct causality between the auditor’s acts and their very own losses — in that case, the €4m cap on an auditor’s legal responsibility falls away below German regulation. The primary lawsuits by retail traders in opposition to EY have already been thrown out by German courts as judges concluded that these situations weren’t met.
Munich’s public prosecutors and Apas are focusing their separate investigations on EY’s 4 foremost audit companions on the Wirecard enterprise — two of whom nonetheless work for the auditor. Paperwork seen by the FT present that Apas suspects that the 4 EY companions knowingly issued factually incorrect audits — one thing the auditor denies — and final yr the watchdog filed a felony criticism to public prosecutors in Berlin claiming that. The 4 audit companions deny any wrongdoing.
EY expects a ruling by Apas — which may concern heavy fines and disbar people — by subsequent spring. The Munich prosecutors are prioritising the investigation in opposition to Wirecard’s former executives. Neither investigation has but led to anybody being charged. Braun, the previous chief government who’s in police custody, denies any wrongdoing and any data of misconduct on the funds firm.
Quinn Emanuel, a enterprise litigation and arbitration regulation agency, is anticipating to file claims in opposition to EY for near €1bn in damages on behalf of huge institutional traders in Wirecard, together with Germany’s third largest asset supervisor Union Funding, which says it misplaced €243m on its Wirecard investments. The instances are anticipated to say that EY was conscious that its Wirecard audit violated its skilled duties.
“We consider that we’ve a robust case,” says Rudolf Hübner, a securities lawyer at Quinn Emanuel.
They could discover some surprising assist inside EY. In June 2020 when the corporate acquired proof that Wirecard was a fraud, some employees have been euphoric. “Lastly! We nailed them,” a senior EY accomplice rejoiced, in keeping with individuals acquainted with the scenario.
But, the unanswered query of why EY didn’t “nail” the Wirecard fraud earlier stays.