Wirecard’s Collapse – EY missed 11 key issues over many years
Largest Fintech Collapse now has EY is serious trouble
Wirecard collapsed in June 2020 costing investors US$12.5 billion.
The ramifications for all parties continue today, with auditors EY in the gun!
As well as investor lawsuits, EY is facing German government action in response to its apparent failure to conduct credible audits, which allowed years of fraud to continue.
Wirecard is now considered Germany’s ‘Enron” and those familiar with the collapse of the US energy trading company in 2001 costing US$64 billion will recall it cost auditors Arthur Anderson dearly. (Arthur Anderson declared bankruptcy in 2001 and returned licences in 2002).
EYs troubles don’t end there – as auditors for Danske Bank it has questions regarding the world’s largest money laundering case – between 2007-2016 US$223 billion was laundered through a small Estonian branch of Danske Bank and no one noticed, least of all the auditors EY.
EY exposure to Fintech’s is wide and other issues are involved – one example is UK Finablr which was caught up in an accounting scandal that brought down former FTSE 100 hospital business NMC Health. NMC and Finablr were both founded by Middle Eastern billionaire businessman BR Shetty. NMC collapsed after hidden debt was uncovered on its balance sheet. In May 2020, Finablr said it too had uncovered US$1 billion (￡771.4m) of hidden debt on its balance sheet – guess who the auditors were? EY which now faces a billion dollar lawsuit – read the FT link
https://www.ft.com/content/6978e876-1fc2-4a1d-887c-30b0d9dd1c9a
For those who think Fintech investing is risk free and secure – think again!
A decade of public Fintech company collapses total US$59.8 billion and this does not include VC losses which are hidden from public view.
EY’s Wirecard Audits Faulted by German Parliament Investigator
BLOOMBERG Birgit Jennen April 18, 2021
A special parliamentary investigator lists far-reaching shortcomings in Ernst & Young’s audits of Wirecard AG before the German financial technology company collapsed last year, a person familiar with the report said.
The investigator lists about 11 incidences where EY failed to take measures to uncover the multibillion fraud, said the person, who spoke on the condition of anonymity because the report is classified as secret. It concludes the quality of the documents presented to EY were not very reliable as they came from the company’s verbal or written statements and not from neutral third parties such as the banks, the person said.
The investigator also comes to the conclusion that a systematic analysis of fraud patterns, particularly in relation to Wirecard’s third-party acquirers business, would have added more critical perspective and could have helped to uncover the fraud, the person said. The Financial Times reported on the findings earlier Saturday.
EY has come under fierce criticism for its auditing of Wirecard, with Germany’s audit watchdog filing a criminal complaint against the firm. EY audited Wirecard’s books until the money-transfer company collapsed last year with a 1.9 billion-euro ($2.3 billion) hole in its books. The firm argues it was the victim of an elaborate fraud.
The special investigator also noted that EY signed off on the 2016 account although the audit had raised some 20 issues, some of which had a substantial impact on the accounts. EY signed off the 2016 books on the basis of belated answers from Wirecard’s board without following up to secure documented proof.
The parliamentary investigation will meet next week when German Economy Minister Peter Altmaier, Finance Minister Olaf Scholz and Chancellor Angela Merkel will question how the biggest fraud in the country’s post-war period took place without authorities stepping in.
EY’s Wirecard audits suffered serious shortcomings, German probe finds
FINANCIAL TIMES - Olaf Storbeck in Frankfurt APRIL 17 2021
EY’s audits of defunct payments group Wirecard suffered from serious shortcomings over a period of years, a German investigation has found.
The Big Four firm is said to have failed to spot fraud risk indicators, did not fully implement professional guidelines and, on key questions, relied on verbal assurances from executives.
A special investigator who scrutinised the EY audits came to a damning verdict about the quality of the work, according to people with first-hand knowledge of the report. The investigator was commissioned by the Bundestag parliamentary committee in Berlin looking into the accounting scandal and had access to internal EY documents.
The report, filed to the Bundestag late this week, will significantly increase the woes of the accountancy firm. EY is already facing lawsuits from Wirecard shareholders and creditors and lost a number of high-profile clients. Legal action by Wirecard’s administrator is also likely to follow.
EY partners who signed off Wirecard’s accounts are already under criminal investigation over potential violations of rules on carrying out professional duties. Earlier this year, the accountancy firm replaced its leadership in Germany and announced an organisational reshuffle.
“The report outlines failures during the EY audits as professional standards were not met,” Matthias Hauer, an MP for the conservative CDU/CSU parliamentary group, which suggested appointing the special investigator, told the FT. He added the report confirmed “EY has significant responsibility for the scandal not being uncovered earlier”.
Its language is technical, but its content is devastating
SPD MP Jens Zimmermann on the R?dl report
Wirecard received unqualified audits from EY for a decade and was once hailed as one of Germany’s rare technology success stories. It collapsed into insolvency last summer after revealing that €1.9bn in cash did “not exist”.
A team of auditors from R?dl & Partner led by Martin Wambach, the parliamentary special investigator, dug through 90 gigabytes of EY data that included internal working papers and 40,000 emails.
One finding refers to EY's handling of the interim results of a forensic investigation in 2017. The probe, which was conducted by a separate EY anti-fraud team and code-named Project Ring, was mandated by Wirecard's board after a whistleblower raised allegations about accounting manipulations and attempted bribery of an auditor by Wirecard staff in India.
By March 2017, just before the audit opinion for 2016 was due, Project Ring was suffering from delays, with key questions unanswered. EY auditors warned Wirecard that an unqualified audit would be denied unless these issues were resolved.
According to R?dl & Partner, EY received “mainly verbal and written explanations by executives” and signed off the audit. The special investigator said there was no evidence that EY evaluated the questions it had raised earlier further.
This view is in line with findings of German audit watchdog Apas, which has told prosecutors that EY may have acted criminally during its work for Wirecard.
Project Ring was terminated by Wirecard in 2018 despite EY’s anti-fraud specialists arguing that “red-flag indicators” required further investigation.
The R?dl & Partner review found that EY had assessed in detail the outsourced operations in Asia, which sat at the heart of the fraud. However, it did not take issue with the fact that the day-to-day operations in the so-called third-party acquiring business (TPA) “deviated substantially from contractually-defined business processes”.
R?dl & Partner found that EY in 2015 brought in its anti-fraud team to check PayEasy, a Philippines-based TPA that on paper generated a lot of revenue for Wirecard but at the time lacked audited results.
Wirecard provided its auditor with a false address for PayEasy, the partner's website was down, and PayEasy staff did not answer the phone. Eventually, the Asian company emailed information “in a piecemeal way and shortly before the audit” which in R?dl & Partner's view did not represent third-party confirmations “in the proper sense” and represented weak audit evidence.
R?dl & Partner said EY failed to spot a series of fraud risk indicators, among them unusually close links to its Asian partners as well as high and rising margins in a business that had lower value-added than Wirecard’s core business.
“From our perspective, there were numerous fraud risk indicators with regard to the TPA business which could have increased the critical attitude and could have triggered further audit acts,” the special investigator concludes.
EY accepted that Wirecard published incomplete and potentially misleading notes to its 2016 annual report. Back then, the payments firm sat on €55.3m of receivables that were in arrears — more than a quarter of all its receivables. EY compiled a list of the problematic items, but Wirecard did not include it in its annual report. EY internally discussed the “missing disclosure” but ruled it was not material — based on arguments that R?dl & Partner said were incomprehensible. “It cannot be ruled out that information, which had been relevant for [investor's] decisions, is lacking in the notes to the 2016 annual report.”
R?dl & Partner, like KPMG in its special audit last year, also takes issue with the fact that the money deposited in escrow accounts in Asia was treated as Wirecard cash. It notes that EY’s assessment of the matter was “contradictory” as internal documents showed the firm initially wanted to treat the money as “other financial assets”.
Wirecard fraud ‘started more than a decade ago’
EY later changed its mind based on the argument that Wirecard could access the funds within three months on condition it could get a bank guarantee.
The accountancy firm stated internally that, thanks to its financial strength, Wirecard could obtain such a bank guarantee at any time — but did not check that proposition during its audits.
R?dl & Partner also noted balance confirmations for the escrow accounts repeatedly suffered from inconsistencies, such as different Wirecard subsidiaries attributed to the same accounts.
The FT reported last year that EY failed for more than three years to request crucial account information from the Singapore bank where the cash was supposedly held.
Jens Zimmermann, a Social Democrat MP said the R?dl & Partner report on EY backed up the KPMG Wirecard report. “It’s language is technical, but its content is devastating.”
Fabio De Masi, an MP for the leftwing Die Linke, said: “EY had a deep understanding of the TPA illusion and to some extent even was its mastermind. “For me, the question is EY did not want to uncover anything.”
R?dl & Partner did not immediately respond to FT requests for comment.
EY said its German arm had not been provided a copy of the R?dl & Partner report and so was unable to comment on its contents.
“The collusive acts of fraud at Wirecard were implemented through a highly complex criminal network designed to deceive everyone — investors, banks, supervisory authorities, investigating lawyers and forensic auditors, as well as the auditors,” EY said
“We have supported the parliamentary inquiry committee (PIC) throughout and will continue to do so. We also welcomed the PIC’s decision to consult auditing experts and fully co-operated with the special investigators in their work.
“Based on our information, the EY Germany auditors performed their audit procedures at Wirecard professionally, to the best of their knowledge and in good faith.”
Major listed Fintech collapses since 2008 -
Wirecard’s fraud destroyed US$12.5 billion.
Ezubao fraud lost US$9.9 billion
Lending Club stock collapse lost US$9.8 billion
Greensky Inc stock collapse lost US$4.2 billion
On Deck Capital stock collapse lost US$ 1.8 billion
Funding Circle stock collapse lost US$1.5 billion
Finablr stock collapsed losing US$1.4 billion
Other ‘smaller’ collapses have lost US$18.7 billion
Giving US$59.8 billion in losses!!
Important to remember these are losses are from public companies. The vast majority of Fintechs are not public and 9 out of 10 start-ups fail - so actual sector losses would be 6-7 times higher. These losses are hidden from public view as VCs do not report on them - yet another example of the 'wild west' of investing.