Yahoo Finance Why Wirecard could become EY’s Enron
The dominance of the Big Four accounting firms seems unassailable. They audit every last FTSE 100 company, enjoy similar strength across the globe and their supremacy has left regulators wondering whether they should be broken up to boost competition.
Two decades before Wirecard’s collapse, the same seemed true of accounting’s Big Five.
The scandal that brought down Texan energy titan Enron in 2001 forced its auditor Arthur Andersen to hand in its licences. It left one less rival for Deloitte, Ernst & Young (EY), KPMG and PriceWaterhouseCoopers to compete against for lucrative accounting and consulting contracts at blue-chip firms.
In 1999, Enron launched EnronOnline, an electronic trading platform it hoped would revolutionise the energy industry and turbocharge profits by letting it insert itself in transactions for commodities and financial derivatives. Sold off after endemic fraud was uncovered at Enron, the platform was shut down by 2002.
In the same year that EnronOnline was launched, a financial services startup was founded in Germany. Wirecard’s website claims it has spent the past 21 years “reinventing payment”.
Similar to Enron’s ill-fated platform, Wirecard’s strategy was to insert itself into the infrastructure between buyer and seller by providing the technological plumbing needed to support card payments.
The spectacular demise of Wirecard after auditors at EY refused to sign off on its accounts because €1.9bn (£1.7bn) of cash was missing has already been widely compared to the Enron scandal.
While it was EY’s refusal to approve the accounts that ultimately sparked Wirecard’s nosedive into insolvency last week, the fiasco raises uncomfortable questions for the firm.
EY auditors failed to confirm Wirecard’s cash balances with its banks for three years prior to the company’s collapse and instead relied on other documents and screenshots, the Financial Times reported.
“On every audit you should get bank confirmations,” says a senior auditor at another firm. “These need to come directly from the bank. Cash is so critical that this isn’t a ‘nice to have’, but a cornerstone of the audit.”
Muddy Waters, the Californian hedge fund run by Carson Block, tweeted last week that EY’s “shoddy” cash confirmation procedures were all the more amazing given the size of the balances being claimed. “The size and oddity of these claimed deposits should’ve been huge red flags,” Muddy Waters said.
The saga has sparked a blizzard of problems for EY. It is already facing a €1bn shareholder class action lawsuit in Germany. The country is considering a shakeup of how it regulates accountants and any post mortem will no doubt scrutinise EY’s work closely.
An EY spokesman says the firm was maliciously duped: “We’ve established that third parties, with a deliberate aim to deceive, provided EY with false documentation in connection with its 2019 Wirecard audit. The extent and sophistication of these suggest a large-scale international fraud at Wirecard.
“Collusive frauds designed to deceive investors and the public often involve extensive efforts to create a false documentary trail. Professional standards recognise that even the most robust and extended audit procedures may not uncover a collusive fraud.”
The defence is unlikely to stop more hard questions being asked of the auditors. “Of course they’re to blame. That's what they get paid for,” says Mark Tluszcz, chief executive of venture capital firm Mangrove Capital Partners.
More damaging than any sanctions or legal judgments could be the blow to EY’s reputation. The firm has provided partners with “summary talking points” if they are asked tough questions by clients, the FT reported.
EY had managed largely to steer clear of trouble in recent years while its rivals were hit with a series of investigations and sanctions by watchdogs. That has changed in the past eight months.
In the UK, investigations are underway into EY’s work checking the books of Thomas Cook before it fell into liquidation and at London Capital & Finance, the mini-bond company whose failure left 11,600 ordinary investors at risk of losing £237m.
EY earned almost £14m as auditor of NMC Health, the FTSE 100 hospital operator that went into administration in April after billions of dollars of off balance sheet liabilities were discovered sparking allegations of fraud. Muddy Waters likened NMC to “a retirement plan for former Ernst & Young partners”.
Overseas, Luckin Coffee – a Chinese challenger to Starbucks – also managed to inflate revenues on EY’s watch. A former partner in the Dubai branch won $11m in March after he refused to cover up a client’s gold-smuggling operation. The High Court ruling challenged EY’s attempts to build legal walls to protect operations in one jurisdiction from being tainted by misconduct in another. EY is appealing.
The mounting problems both in Britain and abroad overshadow the swansong this week of EY’s UK boss Steve Varley – who, as it happens, joined the firm in 2005 from Andersen Consulting, an offshoot of Enron auditor Arthur Andersen.
EY remains firmly one of the Big Four but, as one auditor points out, Varley’s successor Hywel Ball has been handed a “steaming in-tray”.
