EY auditors failed to scrutinise Wirecard’s operations in Asia that lay at the heart of the payment group’s fraud, according to a confidential report from the German parliament.
The classified report into EY’s audit of Wirecard’s 2018 results – filed to parliament earlier this week – also concluded that Wirecard potentially violated international reporting standards as it disclosed so little information about the size and nature of the Asian business.
The findings from a special investigator for the German parliament’s inquiry committee add to the legal and reputational woes for EY, which is facing an avalanche of lawsuits.
Investors and creditors lost billions of euros when Wirecard collapsed last summer in one of Europe’s biggest accounting frauds.
The Asian “third-party acquiring” business on paper generated half of Wirecard’s revenue and all of its profits. Last June, the company disclosed that €1.9 billion in corporate cash linked to that business did not exist and crashed into insolvency shortly afterwards.
An investigation by Wirecard’s administrator later found that the TPA business, notionally revenues derived from outsourced payments handled by partners in Asia, probably did not exist at all.
EY’s work for Wirecard, which received unqualified audits for almost a decade in the run-up to the collapse, is one focal point of the parliamentary inquiry committee.
A team of auditors from Rödl & 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.
In the report Wambach found that the 2014 to 2016 audits suffered from serious shortcomings. The firm failed to spot fraud risk indicators, did not fully implement professional guidelines and, on key questions, relied on verbal assurances from executives.
In an addendum to that report, which focuses solely on the 2018 audit, Wambach argued that the data available at Wirecard, and used by EY in its work, was not sufficiently detailed to check individual transactions that were purportedly processed by the Asian outsourcing partners.
“The existence and the amount of the revenue appears to have been validated only indirectly through balance confirmations by the TPAs and the trustee,” the report pointed out, adding that a number of inconsistencies in those documents could have raised alarm bells at EY.
Florian Toncar, an MP for the pro-business Free Democrats, said: “The addendum consists of 50 pages of dynamite for EY. The auditing shortcomings exceeded the committee’s worst expectations.” Toncar, a former Freshfields lawyer, said he would have believed such a failure to be “impossible”.
The findings were presented to MPs in a non-public session on Thursday. Lisa Paus, an MP for the Greens, afterwards called the special investigator’s findings “appalling”. “After today, it is hard to imagine that courts won’t see gross negligence with regard to EY,” she said.*
In the addendum, first reported by Der Spiegel, Rödl & Partner also takes issue with Wirecard’s disclosure of the TPA business, pointing to new IFRS reporting standards that were put in place in 2018 and required more transparency.
While the outsourced business was “very material” for Wirecard, the annual report lacked “further information (in particular quantitative information)”, the report said. Wambach highlighted that Wirecard failed to disclose that the reported TPA revenue never resulted in actual cash inflows.
“It is questionable to what extent the reporting lives up to the goal of the new reporting standards,” he noted. Details of the TPA business were officially disclosed for the first time only in April 2020, when the report of KPMG’s special audit into Wirecard was published.
Moreover, EY should have checked the electronic payment systems of Senjo and Al Alam, two of Wirecard’s supposed partners, Rödl & Partner points out. “A consistent and complete audit of the payment systems of the TPAs Senjo and Al Alam did not occur during the 2018 audit.”
EY said in a statement that it “has not been provided a copy of the [most recent] special investigator’s report and is, therefore, unable to comment on its contents”. The firm pointed to the fact that the document “is to be treated as confidential by law and is currently not public”.
Under German law, it is illegal to leak such classified material to the press, but the media face no restrictions in reporting about it. EY said that it would “also carefully consider the additional report of the special investigator as soon as it is received”.
The accounting firm said it had “fully supported the investigations of the parliamentary inquiry committee from the beginning and will continue to do so”.
EY has repeatedly said it was deceived by the fraud and that “the EY Germany auditors performed their audit procedures at Wirecard professionally, to the best of their knowledge and in good faith”.
MPs are turning to Germany’s highest court in a bid to force the publication of the unredacted report, which is opposed by EY. – Copyright The Financial Times Limited 2021