B2B Payments

Wirecard Saga Reignites Debate Over Auditors’ Role In Combatting Fraud

As the fallout from Wirecard‘s $2 billion accounting scandal continues, some attention has turned to the Germany-based payment company’s auditor, Ernst & Young (EY).

A report in The Wall Street Journal (WSJ) said EY is now facing claims that the firm failed to identify “unorthodox financial arrangements” dating back to 2016, and, according to emails seen by the publication, that EY may have had questions surrounding those arrangements, but signed off on Wirecard’s financials regardless.

As scrutiny over Wirecard and EY continue to grow, a broader debate is seeing a resurgence over what role, if any, auditors play in identifying and preventing corporate fraud.

Fraud Concerns Arise

While the blowback from revelations that approximately $2 billion was missing from Wirecard’s books has been swift, allegations of accounting fraud initially surfaced last year following reports by the Financial Times (FT) that the company had been manipulating its financials.

A February 2019 FT report from the publication said the firm’s operations across Asia became the subject of scrutiny after a top law firm in the region reportedly uncovered evidence of “book-padding” and “round tripping.”

As a result, Wirecard launched its own investigation but told the FT at the time that it had found no evidence of criminal misconduct.

It wasn’t the first time the company’s financials came under scrutiny either. The publication noted accusations had been leveled against the firm as far back as 2008, with multiple investigations launched by Germany’s market regulator the Financial Supervisory Authority (BaFin). In response to 2019 claims, Wirecard hired auditing giant KPMG to clear its name.

“We can totally confirm today that all of these allegations are unfounded,” Wirecard CEO Markus Braun said in a statement last November. “But still, to give an additional service to the market and to bring down all these allegations, we decided to include here a second review by KPMG … We are very optimistic that in the next month, a couple of months, this can be resolved.”

Swift Blowback

As seen in recent weeks, the review was not resolved. Rather, earlier this year, Wirecard’s Tier 1 auditor, EY, refused to sign off on the company’s 2019 accounts due to discrepancies and false statements surrounding a reported $1.12 billion missing from a Singapore bank.

Today, the majority of the company’s value has been erased, Braun has been arrested, and the company reportedly owes creditors $4 billion, according to Reuters.

“There are clear indications that this was an elaborate and sophisticated fraud involving multiple parties around the world,” EY said, according to Reuters, adding that it had not yet completed its 2019 audit.

While the auditor’s findings ultimately led to Wirecard’s downfall, the firm itself is also facing criticism for failing to draw conclusions earlier. Further, it is unclear how Wirecard was able to continue its alleged fraud scheme for several years despite audits from both EY and KPMG, and despite investigations by authorities in Germany and elsewhere.

According to WSJ, Marc Liebscher, a lawyer at a Germany firm representing Wirecard’s private investors, described EY’s auditing as “a disaster” and argued it “should stand trial” for failing to identify the fraud scheme sooner.

The Auditor’s Role

It’s not the first time an auditing company has come under scrutiny for failing to prevent similar corporate scandals in recent years.

Last year, two auditors working with Leasing & Financial Services came under fire for reported auditing violations described by India officials as “organized crime.” Deloitte Haskins & Sells and a KPMG affiliate faced a five-year ban from their auditing work in the country, with the Indian government taking over Leasing & Financial Services after accusing the auditing firms of “deliberately” failing to notify authorities of the alleged fraudulent activity.

India’s Serious Fraud Investigation Office said both auditors “miserably failed to fulfill the duty entrusted to them.”

In the U.K., the Big Four auditing giants — EY, Deloitte, KPMG and PwC — also faced heightened scrutiny following multiple corporate collapses, including that of cafe chain Patisserie Valerie and construction giant Carillion in early 2018. As a result, a movement in the U.K. government to break up the Big Four emerged, with claims that a lack of competition in the auditing arena contributed to their failure to detect or notify officials of corporate fraud.

The ensuing debate was divisive. In 2019, David Dunckley, CEO of auditing company Grant Thornton and auditor for Patisserie Valerie, faced criticism from members of parliament (MPs) in the House of Commons as he argued that auditors “are not looking for fraud.”

One MP reportedly rebutted, “what is the point of audit in the first place” if not to identify or prevent fraud?

In Australia, accountancy group Chartered Accountants ANZ called on the government to expand the auditing sector’s ability to identify fraud by lifting restrictions on the types of advisory services auditors could provide. Critics of that initiative, however, argued that the Big Four auditors accused of sub-par performance should not have their roles elevated.

“That doesn’t make sense,” said fraud investigator Guy Underwood in an interview with the Australian Financial Review last year. “What they should be doing is defining what an audit will and won’t do and improving that first.”

It’s unclear what impact Wirecard’s downfall will have on the global auditing sector, if any. But it could once again spark the debate as to whether auditors are responsible for catching cases of fraud.

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New PYMNTS Report: The CFO’s Guide To Digitizing B2B Payments – August 2020 

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