The Wirecard scandal casts a bad light on the auditors. Everyone relied on them – and they failed. But German financial supervisors also have to put up with critical questions.
Germans fell for a huge fraud. Until June 18, Wirecard was considered a beacon of hope for the economy, which had made it into the German share index Dax. The group was worth twelve billion euros. The payment service provider filed for bankruptcy on Thursday. Wirecard is now worth 176 million euros.
It is now clear that much of the fantastic story was made up. The Wirecard name stands for the largest balance sheet fraud the Dax has ever experienced.
Martin Dahmen, Andreas Budde, Andreas Loetscher and Ralf Broschulat should have noticed that too. As the auditors, they had approved Wirecard AG’s balance sheets since 2013 and signed the corresponding attestations. All four were or are partners of Ernst & Young, which is now only called EY.
Ernst & Young has also audited the UK operation of Wirecard AG.
Holes in the balance sheet are probably even larger than previously known
The tests of these men and their assistants are the starting point for a huge system failure. Authorities, financial market professionals and thousands of retail investors have relied on the fact that the business figures that documented tremendous growth are correct. They probably weren’t.
Last Monday, the new Wirecard boss James Freis had to admit that balances in the amount of 1.9 billion euros did not exist in the balance sheet for 2019 “with a high probability” and that parts of the business did not take place as his predecessor Markus Braun claimed .
The holes in Wirecard’s numbers are likely to be even bigger. Otherwise the company would not have filed for bankruptcy as the banks were actually prepared to initially keep the company alive with a credit line of EUR 1.75 billion.
The fact that this thriller could happen under the eyes of all inspectors has a lot to do with the system in which examiners such as Dahmen, Budde, Loetscher and Broschulat work.
All four have spent almost their entire professional life at EY and two of them switched to other employers in 2018. The scene is small and they know each other and the supervisors and this is especially true for the partners at EY, KPMG, Deloitte or PwC, the so-called Big Four.
It is often criticized that companies not only check and audit the books but also provide advisory services.
“There are numerous conflicts of interest among the auditors. They are paid by the companies they are supposed to check, ”says Fabio De Masi, deputy parliamentary leader in the Bundestag. In addition to the failure of the authorities, he criticizes that the liability of the auditors is too low. In fact, the gentlemen of EY are threatened with modest penalties as The German Commercial Code capped “the obligation to pay compensation for people who acted negligently” to four million euros per case.
EY denies all guilt. At Wirecard, “there is clear evidence that it is a comprehensive fraud involving several parties around the world and in various institutions with deliberate intent to deceive,” says EY. “Even with extensively expanded audit procedures, it may not be possible to detect this type of conspiratorial fraud.”
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