In December 2018, simply weeks earlier than doubts about one of its most high-profile shoppers started to flow into extensively, the auditor EY Germany determined to research 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 half of the enterprise as soon as valued at €24bn.
EY workers started procuring with online 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 “coins” 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 of many who EY offered to Wirecard throughout a decade of working for it. Unfortunately 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 in the billions”.
A Dubai-based Wirecard government on the centre of the fraud had helped determine 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 workers 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 can 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 pressured the as soon as high-flying German payments provider into insolvency and plunged the Big Four accountancy agency into one of the worst auditing scandals in current historical past.
Wambach, a senior auditor at Rödl & Partner, discovered that EY’s work, over a number of years, violated a quantity of accounting requirements. In a damning report, he stated that it might have carried out extra: “Numerous fraud risk indicators with regard to the TPA business . . . could have triggered further audit acts”.
Yet, simply months earlier than the collapse, EY had vigorously defended the outsourced Asian enterprise in inside conferences, in accordance with paperwork seen by the Financial Times. That was regardless of a draft forensic audit commissioned by Wirecard’s supervisory board that was unable to conclusively affirm 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 accordance 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 throughout the parliamentary inquiry that EY Germany had been “highly convinced” in regards to the existence of the outsourcing enterprise and repeatedly instructed KPMG “with inner conviction” that it existed.
Not everybody was satisfied. One week after the devastating KPMG report was printed, EY Global stepped in and put the Wirecard audit, performed by its German “member firm” below nearer scrutiny.
Yet, 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 a whole bunch of pages of inside paperwork and emails and interviewed greater than a dozen folks on the coronary heart of the failed audit to strive and discover the reply. Combined, the paperwork and first-hand testimony paint a 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 shopper in public even when Wirecard’s chief government made highly misleading statements to traders.
Several EY Germany companions are actually below investigation by each the Munich prison prosecutors and the nation’s audit watchdog Apas. EY can also be going through an avalanche of lawsuits from Wirecard shareholders who in complete misplaced billions on their investments.
“It is the nature of auditing that frauds can occur as we’ve seen across the profession in the last 10 years,” says Andy Baldwin, EY Global’s managing companion. He insists that the auditor has discovered the teachings of the Wirecard scandal.
EY denies any wrongdoing. It argues that its workers fell sufferer to an elaborate fraud which concerned corrupt financial institution staff, faux online retailers and doubtlessly even mock-up financial institution branches within the Philippines. But, says Baldwin, the agency “deeply regrets that we didn’t find the fraud sooner”, including that towards EY’s personal high quality requirements, “this audit is not one we could be proud of”.
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 information from Singapore’s OCBC Bank — the place Wirecard claimed it had as much as €1bn in money. Instead, the auditors relied on paperwork offered by a Singapore-based trustee which have been labelled “forgeries” by prosecutors within the city-state, in accordance with supplies seen by the FT.
Another inquiry into the case discovered that OCBC’s complete reported euro deposits have been smaller than the quantity of money that it was stated to have been holding in Asian escrow accounts on behalf of Wirecard — one thing that didn’t add up.
Yet no one seen. EY argued that confidentiality legal guidelines blocked it from going on to the financial institution. But, unbiased auditing consultants disagree. “EY grossly violated its professional duties with regard to the balance confirmation,” 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 resolution was key to preserving the veneer of a extremely worthwhile and cash-rich firm, which was in flip crucial 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 accordance with folks accustomed to 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 informed us this morning they have no problems at all to sign off 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 point” had EY given such an assurance. The auditor known as on Wirecard to difficulty a “corrective statement” — a demand the corporate ignored.
The monetary value of strolling away from the Wirecard audit would have been comparatively small as compared with some of EY’s different shoppers together with Siemens and Volkswagen. In 2018, the agency earned €2.3m in audit and advisory charges from Wirecard. But, folks near the choice say, EY was warned by the attorneys that resigning the mandate mid-audit would have been very tough, if not not possible, below German legislation.
Instead, 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 simply a few days to ship the €440m. Some inside EY notice 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 highly apologetic when the money did not arrive instantly,” one individual accustomed to 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 as a consequence of reveal its annual outcomes on June 18 2020, Wirecard disclosed this truth to the monetary markets. Its share worth collapsed. Within days Braun was ousted and arrested, Marsalek boarded a non-public jet to Minsk in Belarus after which he disappeared and Wirecard filed for insolvency.
“The overall assessment of EY’s audit actions supports only one conclusion,” wrote the parliamentary inquiry committee, “EY refrained from key audit procedures or was satisfied with poor audit evidence.”
Four years earlier EY had missed a chance to behave. In 2016, its anti-fraud unit had been commissioned by Wirecard to research allegations towards some of the fintech’s senior workers in Munich which have been raised by a whistleblower. The probe, codenamed Project Ring, rapidly discovered “red-flag indicators” which pointed to potential steadiness sheet manipulations.
However, Wirecard’s administration board stonewalled a thorough 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 surprised about our decision but did accept it as expected”. Some of these Wirecard workers are actually on the centre of the prison investigation.
EY has subsequently stated the anti-fraud unit’s work was unbiased of the audit. But paperwork seen by the FT present that in March 2017, EY warned Wirecard that it was near refusing to provide an unqualified audit for the 2016 fiscal 12 months, stressing that every one forensic work on Project Ring wanted to be completed.
Yet, one 12 months later, EY in its 2017 audit report neither addressed the “red-flag indicators” discovered by its anti-fraud staff nor the board’s resolution to desert the probe. It declared that Project Ring had been “completed” with out delivering “any evidence indicative of flawed accounting or other violations of law”.
Christian Muth, the forensic skilled who led Project Ring and who left EY this 12 months to hitch rival PwC, instructed MPs that his “professional 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 review” into its work for the fee processor. The investigation was performed by the legislation agency Allen & Overy working with EY auditors who had beforehand not been concerned within the Wirecard account. They sifted by way of greater than 40,000 inside paperwork and grilled the accountable EY workers. “We clearly asked ourselves: ‘Was this a systemic problem?’ We do not believe it was,” says Baldwin.
EY says it’ll spend $500m on new audit expertise over the subsequent three years. And 20,000 workers in its audit enterprise have had further anti-fraud coaching. But, says a senior companion at EY Germany, the largest lesson for the organisation ought to be to pick its shoppers extra fastidiously.
“We should never have been there in 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 never really understood what kind of milieu we were working in.”
€42m loss 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. However, it’s the second-largest Big Four 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.
Although he stays a companion, Hubert Barth was ousted as head of EY Germany after the Wirecard scandal and changed by Jean-Yves Jégourel, EY Global’s vice-chair of assurance, and Henrik Ahlers, the agency’s most senior tax companion in Germany. They are tasked with overhauling the agency’s operations within the nation.
EY misplaced €42m of annual auditing enterprise when a quantity of prestigious shoppers, amongst them Commerzbank, DWS and KfW moved their accounts within the wake of the scandal. Many of those that jumped ship had misplaced hundreds of thousands over Wirecard and some could sue EY; others are corporations like Deutsche Telekom the place the German authorities is the only largest shareholder.
But the overwhelming majority of EY’s shoppers in Germany have, to date, remained loyal to the €2.2bn enterprise. With Baldwin saying that “a number of new clients” 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.
Start of Project Ring — a forensic audit by EY into fraud allegations following Wirecard’s takeover of funds companies in India.
EY threatens to refuse to provide an unqualified audit, citing delays in Project Ring. EY ultimately offers Wirecard an ‘all clear’, and the auditor a few months later abandons Project Ring regardless of purple flags which will help 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 off Wirecard’s accounts. One week later, the corporate collapses.
However, the saga is way from over for EY. The Wirecard administrator can also be anticipated to take EY to courtroom, though, below German legislation, the hurdles for a shopper or administrator to assert 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. They additionally 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 legislation. The first lawsuits by retail traders towards 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. Documents 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 12 months the watchdog filed a prison grievance to public prosecutors in Berlin claiming that. The 4 audit companions deny any wrongdoing.
EY expects a ruling by Apas — which may difficulty heavy fines and disbar people — by subsequent spring. The Munich prosecutors are prioritising the investigation towards 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 legislation agency, is anticipating to file claims towards EY for near €1bn in damages on behalf of massive institutional traders in Wirecard, together with Germany’s third largest asset supervisor Union Investment, which says it misplaced €243m on its Wirecard investments. The instances are anticipated to assert that EY was conscious that its Wirecard audit violated its skilled duties.
“We believe that we have a strong case,” says Rudolf Hübner, a securities lawyer at Quinn Emanuel.
They may discover some sudden help inside EY. In June 2020 when the corporate obtained proof that Wirecard was a fraud, some workers have been euphoric. “Finally! We nailed them,” a senior EY companion rejoiced, in accordance with folks accustomed to the scenario.
Yet, the unanswered query of why EY didn’t “nail” the Wirecard fraud earlier stays.