Accountants Wirecard seem to make the same mistakes as in previous frauds

Two weeks ago it was news that EY did not approve the annual accounts of the German payment company Wirecard. The accountant suspected that a third party had provided manipulated figures to him. In such a case, it is correct in itself that the accountant puts on the brakes. But in this case, there is no reason to assume that the accountant played a heroic role. On the contrary: the Wirecard affair only raises questions about the actions of accountant EY.

The affair is reminiscent of the fraud committed by Parmalat, an Italian dairy giant. An alleged bankruptcy of nearly five billion dollars at the Bank of America turned out to be hot air. Wirecard is said to have a bank balance of 1.9 billion euros, held by two Philippine banks. Documents showing that amount would have been forged. In accountant circles you soon hear that the accountant has been misled and that no herbs have been washed against counterfeit banknotes. According to accountants, fraud is simply not detectable.

With such a defense, they focus on the debit side of the balance sheet, where the cash and cash equivalents are positioned. By pointing out the forgery, they shift attention to the client instead of focusing on the accountant. The Financial Times reported (June 26) from a source close to the fire that EY had not verified bank balances directly with relevant banks for three years. However, the accountant relied (among other things) on screenshots made by Wirecard. If that’s true, it’s too bizarre for words. Incompetence at its best.

However, the balance sheet also has a credit side, with equity on it, which was mainly the result of profits from the turnover achieved. The question is therefore how that profit came about and whether there was actually any turnover.

It is not uncommon for fraudulent companies to mix up their assets – such as bank credit with Wirecard – with fictitious turnover and profit. Fictitious by setting up internal freight carousels and transactions with affiliated and specially created entities. With which transactions may take place, but viewed from a group perspective, it is in fact internal turnover. In other words: doing business with yourself. That does not yield any profit.

We saw this, for example, with the Italian Parmalat, the Belgian speech technology company Lernhout & Hauspie, the Dutch inventor Innoconcepts and relatively recently with the South African accounting scandal concerning the furniture group Steinhoff. These examples seem to be repeated at Wirecard. But also the criticism of involved accountants. European Investors, the European branch of the Association of Stockholders (VEB), has already sharpened the knives and threatens to file claims against EY.

In any case, the key question is not whether the accountant has been misled by his client with forged bank documents. The key question is how EY has controlled Wirecard’s turnover in the past ten years – the period in which a profit would have been realized with the amount of the funds now missing. All the more so since the regulations for accountants state that the revenue recognition concerns a fraud risk, to which the accountant must pay attention.

A look at Wirecard’s financial numbers and performance raises even more questions related to fraud risks. For example, Wirecard recently had to repay or renew a credit line of 1.75 billion euros. But why does a company with enough liquid assets borrow such a high amount and pay interest on it? And why is an amount of 1.9 billion euros actually placed with relatively unknown Philippine banks? Moreover, a country where Wirecard has only limited activities and where it has achieved relatively little turnover and profit.

As said, this affair was not uncovered by an accountant who performed a heroic role. The affair has come to light by journalists from the Financial Times. They had a good informant in a whistleblower. Their publications prompted a forensic investigation into Wirecard, conducted by another audit firm (KPMG).

The Financial Times and the KPMG report ultimately formed the trigger until further investigation by EY (and therefore not a thorough audit), which eventually put the brakes on. That was too late to prevent the profit figures previously approved by them from going up completely. EY itself meanwhile maintains an “extensive and sophisticated fraud”. For the time being, the accountant has the appearance against.

This column is also published in the FD of June 29, 2020.