Accountant must pay
EY is punished so severely
By Thomas Steinman
04/07/2023, 10:15 am
The auditing company EY has examined Wirecard’s allegedly forged balance sheets for years without finding any inconsistencies. Now EY is sanctioned – with severe consequences.
Recently, the number of people whose role in the Wirecard case was examined by the professional supervision of auditors has decreased. In the beginning there were twelve former and current employees of the testing giant EY who were targeted by the supervisory authority APAS because they had waved through the balance sheets of the payment group for many years – although there had been repeated indications of irregularities at Wirecard. But gradually, seven of them gave up their chartered accountancy licenses. Since, according to the law, APAS is only responsible for people who are approved as auditors, the supervisory procedure for these seven ex-Wirecard auditors ended automatically – without a result.
In the case of the remaining five auditors and the auditing company EY Germany itself, however, the responsible Ruling Chamber of the APAS has now made a decision after the most complex procedure in the history of the authority. For the company in particular, it is a tough decision.
As the APAS announced on Monday, the supervisors consider it proven that the EY auditors violated their professional duties when testing the Wirecard accounts for the years 2016 to 2018. The APAS imposed fines of between 23,000 and 300,000 euros on the five people. In the case of the company, the fine is 500,000 euros – the maximum of the penalty range in force at the time of the misconduct.
Another sanction is much more painful for the Big Four group, which is currently in the process of splitting up its testing and consulting divisions on a global level: As the Ruling Chamber of the APAS decided, EY Germany may for two years with companies from in the public interest – i.e. especially in the case of listed companies – do not accept any new audit mandates. In this segment, this is tantamount to a non-competition clause.
So far, however, there have been no notifications on the APAS decision. A spokesman for EY Germany said that “details of the decision” had not yet been communicated to the company. “We will review these carefully once they have been finalized and sent to us.” At the same time, he emphasized that EY had “fully cooperated” with APAS and regretted “that the collusive fraud at Wirecard was not uncovered earlier”. EY has learned “important lessons” from the Wirecard case – both at the personnel level through a new management team and through the introduction of new technologies and an improved assessment of fraud risks.
When asked, the EY spokesman declined to comment on whether the company would appeal the APAS sanctions. Those affected can appeal against decisions of the APAS decision-making chamber. In the further course, a judicial review before the district court of Berlin would be possible. In the end, the Federal Court of Justice could decide as the final instance.
In connection with the Wirecard scandal, disputes between the Bundestag investigative committee and EY had already ended up before the BGH. It was about the obligation of EY employees to testify before the committee of inquiry and the confidentiality of reports from a special investigator appointed by the committee. Martin Wambach, board member of the professional association IDW, gave the auditors of EY a devastating testimony in his reports in spring 2021.
A ban on new mandates for EY would only come into force as soon as the sanctions of the APAS are final. In the event that EY contests the decision, this would probably be the case next year at the earliest. Existing mandates, including the extension of existing mandates, are not affected by the non-competition clause, the supervisory authority emphasized. EY currently has eight test mandates in the Dax, including Deutsche Bank and Volkswagen. Since the Wirecard balance sheet scandal became known, the Big Four company in Germany has not won any new audit mandates from Dax companies – apparently also a consequence of the loss of trust after the auditors failed in what is probably the biggest fraud case in German economic history.
Numerous shareholders are suing
In fact, in the course of the processing of the scandal in the Bundestag and in the ongoing Munich criminal proceedings against ex-CEO Markus Braun and other defendants, it has become apparent that the responsible EY auditors have overlooked various indications of possible fraud over the years. Among other things, an investigation into a dubious company purchase in India was stopped in 2018, although an EY forensic scientist had raised the alarm internally because of abnormalities. In connection with this investigation, called “Project Ring”, EY auditors from Wirecard’s top management also threatened in a letter in March 2017 that they would refuse the attestation for the 2016 annual financial statements. Days later, they waved the balance sheet through without objection – without the management presenting the previously required documents. The APAS referred to these events in September 2020 in a complaint to the public prosecutor.
Because of incidents like the “Ring project”, the question remains whether the auditors at Wirecard not only acted negligently – but possibly intentionally. Since the accounting scandal blew up, EY has asserted like a mantra that employees have always checked “to the best of their knowledge and belief”. In contrast, thousands of cheated Wirecard shareholders who are suing EY accuse the auditors of deliberate action. Should courts follow this line of reasoning, substantial claims for damages could be made against EY. In its press release, the APAS emphasized that its decision “has no legal binding effect” for the civil lawsuits and for the investigations conducted by the Munich I public prosecutor’s office against individual EY examiners.
The Berlin investor lawyer Marc Liebscher evaluates the finding of the APAS Ruling Chamber that the EY auditors violated their professional duties in several Wirecard annual financial statements as an important signal. “This is a big step forward for investor lawsuits,” said Liebscher. At the same time, the capital market expert, who is also a member of the board of the investor protection association, criticizes the statute of limitations for claims at the end of 2023 that the APAS procedure, which was initiated in May 2020, dragged on too long and took place behind closed doors: “This lack of transparency prevents that other auditors and investors can learn important lessons from EY’s failure at Wirecard.”
A punishment in Germany could also have consequences for the strategic plans of the EY Group – even if the EY consulting division at Wirecard played no role. “Although the sanction only applies in Germany, it will further complicate EY’s global self-division into a consulting and an auditing area,” said consulting expert Thomas Deelmann, Professor of Management and Organization at the University of Applied Sciences for Police and Public Administration in North Rhine-Westphalia. In any case, there had recently been a problem with EY’s split plans at group level. According to Deelmann, a split into two subgroups would be “a giant step for more transparency and fewer conflicts of interest – and would also have a signal effect for other service groups”. In this respect, the APAS procedure could even become a “boomerang” in the end.