Wirecard auditor EY in spotlight

Auditor Ernst & Young GmbH’s signing off on questionable Wirecard bank accounts is now under a legal spotlight.

In what could be one of the biggest financial frauds of recent years, German payments provider Wirecard admitted billions of dollars are missing from its accounts Picture: AFP

Ernst & Young GmbH, auditor to insolvent German fintech company Wirecard, had questions ­related to unorthodox arrangements under which the company’s cash was held in bank accounts it didn’t control as far back as 2016, according to emails seen by The Wall Street Journal.

The auditor subsequently signed off on three years of Wirecard’s financial results with those arrangements in place.

Now $US2bn ($2.9bn) that was held in those accounts has disappeared. Wirecard says the money probably doesn’t exist. On Friday, a German shareholder association filed a criminal complaint in Mun­ich, where Wirecard is based, accusing EY auditors of missing the alleged fraud.

“We feel Ernst & Young’s auditing work was a disaster,” said Marc Liebscher, whose Berlin-based law firm is representing the private Wirecard investors who filed the complaint. “Our clients are convinced, Ernst & Young should stand trial.”

EY said it had been duped along with everyone else.

“There are clear indications that this was an elaborate and sophisticated fraud, involving multiple parties around the world in different institutions, with a deliberate aim of deception,” it said.

Wirecard’s fall from being regarded as a shining star of the European tech scene has been spectacularly quick. On Thursday, it filed for insolvency in a Munich court. The company’s value has all but evaporated.

Markus Braun, a large shareholder and chief executive officer until last week, has been accused by prosecutors of inflating Wirecard’s sales volume with fake income. He was arrested and then released on bail on Tuesday. Mr Braun has consistently denied wrongdoing at the company.

On Saturday, Wirecard said it and its units plan to continue operations. It said it was taking measures to resume business in Britain, after financial regulators froze its operations there on Friday. The company issued prepaid card and electronic wallets for consumers, among other things.

At the centre of its downfall is the disappearance of $US2bn in cash Wirecard said it had, but kept in trustee-controlled accounts because of an oddity in how Wirecard supposedly conducted a large part of its business.

Wirecard used third-party partners to process payments for it in markets where it didn’t have ­licences. Wirecard’s revenue from those businesses was deposited in the trust accounts rather than paid straight to Wirecard.

The money held back in these accounts is equivalent to more than one-quarter of total group revenue for Wirecard in the years 2016 through 2019. Emails seen by the Journal show the auditor had questions about aspects of the unorthodox arrangement as early as in 2016.

Wirecard’s explanation for the arrangement was that much of the money was kept in the trustee accounts as a form of risk management. The cash was available to provide refunds and chargebacks to customers for things such as cancelled airline tickets or disputed charges.

In October 2016, a senior manager at EY agreed to visit one of the third-party partners the following February, according to the emails seen by the Journal. He was to attend with one of EY’s audit partners, who had responsibility for signing Wirecard’s accounts.

The manager included a note to a Wirecard executive who looked after another third-party partner. The note said EY was preparing a presentation that would ask questions about a trustee account, similar to questions it had raised about the trustee account of another of Wirecard’s third-party partners.

Markus Braun, former CEO of financial services company Wirecard Picture: AP

EY declined to comment on the specifics of these emails. Last week, EY said it refused to sign off on the company’s accounts for 2019 after being given fake balance confirmations for the trustee accounts at two banks meant to be holding Wirecard’s money.

Wirecard has said recently it could no longer be sure that its trustee relationships had ever been reliable. It warned that ­accounts from previous years could also be affected.

Investors who bet Wirecard’s share price would fall have been sending detailed complaints to EY for years, flagging their concerns and media reports that raised questions about the company’s accounting and business practices, based on letters reviewed by the Journal.

“They’ve basically turned a blind eye toward the critics that raised very serious allegations,” said Fraser Perring, who with his former partner, Matthew Earl, published an early report critical of Wirecard in 2016.

Ernst & Young GmbH is the German affiliate of Ernst & Young Global Limited, the global umbrella organisation for EY firms. Like other big accounting firms, country-based affiliates that provide audit services to companies, such as Ernst & Young in the US, are legally separate and independent from other entities in the global network.

EY’s relationship with Wirecard began in 2008, when it was hired by the company to conduct a special audit in the midst of allegations from the German shareholder association that Wirecard had deficiencies in its financial statements. It cleared the company. From 2009, EY became ­Wirecard’s group auditor.

Last year, Wirecard hired another audit firm, KPMG, to look into allegations a large share of Wirecard’s reported revenue and the bulk of its profits between 2016 and 2018 actually came from a trio of third-party partners.

In April, KPMG said it couldn’t verify the arrangements with the third parties because of lack of co-operation. After that, EY informed Wirecard’s board that it was unable to obtain sufficient evidence to confirm cash balances on trust accounts. EY’s repeated sign-off of Wirecard’s financials adds to a number of instances in recent years in which EY affiliates have seemed to miss signs of fraud.

In China, Ernst & Young Hua Ming has audited Luckin Coffee since the coffee group’s founding in 2017.

In April of this year, several months after a short-seller circulated an anonymous report alleging much of Luckin’s revenue was fabricated, Luckin disclosed as much as 2.2 billion yuan ($US310m) of its 2019 revenue had indeed been fabricated.

In Denmark, two EY auditors were investigated for what was said to be faulty auditing of Danske Bank’s 2014 accounting statements related to a $US200bn money-laundering scandal.