Wirecard scandal: Ernst & Young listener in the crosshairs
Sunday, 28.06.2020
news-single-imgcaption" style="width:240px;">Wirecard, a company listed on the Dax in Frankfurt which filed for bankruptcy on Thursday, is suspected of having inflated its accounts with fictitious funds in the Philippines.
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The global auditing giant Ernst & Young (EY) finds itself in turn driven by the bankruptcy scandal of the German company Wirecard, whose accounts it was responsible for verifying.
The first lawsuits were launched against the consulting firm, following the resounding bankruptcy this week of the provider of electronic payments and its 6,000 employees.
The German shareholder association SdK has filed a criminal complaint against two current auditors and a former EY auditor in Germany.
Wirecard, a company listed on the Dax in Frankfurt which filed for bankruptcy on Thursday, is suspected of having inflated its accounts with fictitious funds in the Philippines for an amount of 1.9 billion euros, representing a quarter of the size of its balance sheet.
“Unparalleled scandal”
Finance Minister Olaf Scholz spoke of a “scandal without equivalent in the financial world” and ensured a tightening of controls in the still little-watched sector of electronic payments.
No one, neither the listeners, nor the German financial gendarme (Bafin), saw the catastrophe coming.
However, since 2015, the press has been buzzing with rumors of irregularities in Wirecard’s business model. And the Financial Times had at the beginning of 2019 published an extensive investigation into suspected fraud in Asia. Without consequence.
This week the British business daily hit the nail on the head by accusing EY of not having seriously done its job.
According to the newspaper, EY failed to request crucial banking information from a Singapore bank, where Wirecard claimed to hold up to € 1 billion in cash. A routine audit procedure, however.
The verification of bank deposits “is one of the easiest tasks” for an auditor and is done according to a “highly regulated procedure”, also accuses the association SdK about EY.
The Berlin law firm Schirp & Partner began legal action against EY at the start of June. EY has been unable to certify Wirecard’s accounts for years “without violating an auditor’s control obligations,” accuses the firm on its site.
While the Wirecard share has melted by 98% over the past ten days, its shareholders have been invited by the Schirp firm to regroup around a collective legal action targeting EY.
Complaints outside Germany
Outside Germany, the Dutch investor association European Investors (VEB) has invited EY to reach an amicable settlement, failing which it too is threatening legal action, reports the German daily Handelsblatt.
The audit firm, which refused to certify the company’s balance sheet for 2019, recognized “clear indications of a large-scale fraud, involving several parties around the world and various institutions, with a desire to deceive”.
The problem: this shocking statement could backfire.
Because EY, which has been certifying the accounts of the Bavarian group since 2009, is criticized for not having informed the public earlier of the problems at Wirecard, as the VEB association is already doing.
Previous Arthur Andersen
The audit firm must also fear the wrath of Softbank. Japanese conglomerate plans to sue EY for role in scandal, says weekly The mirror.
Softbank had purchased Wirecard convertible bonds in the spring of 2019 for € 900 million, expecting to invest in a reliable company.
EY indicated that no complaints had yet reached it and that it was not yet able to respond to them.
The comparison is increasingly necessary in the Wirecard case and the fall of Enron in the early 2000s.
The American energy group, whose accounting firm Arthur Andersen supervised the accounts, had made up its balance sheet before sinking.
Arthur Andersen then found himself charged and convicted of obstructing justice, precipitating the fall of formerly the fifth largest auditing company in the world. (awp)
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