ANALYZE
The card scandal
Punishment of auditors: Sanctions hit EY hard
German fintech headquarters once hoped: A photo of Wirecard’s headquarters in Aschheim, Bavaria, from 2020
© Future / Imago Images
After years of investigation, audit authority APAS found that EY employees had breached their professional duties in the Wirecard scandal. The test group is threatened with far-reaching consequences – and defrauded investors get new ammunition for lawsuits.
Recently, the number of people whose role in the Wirecard case has been scrutinized by the professional oversight of auditors has been reduced. At first there were twelve former and current employees of testing giant EY who were targeted by watchdog APAS because they had been going through the group’s payments balances for many years – although there were repeated indications of wrongdoing at Wirecard. But gradually, seven of them gave up their accounting licenses. Since, by law, APAS is only responsible for persons who are approved as auditors, the supervision procedure for these seven former Wirecard auditors ended automatically – without result.
However, in the case of the remaining five auditors and the audit company EY Germany itself, the responsible Governing Body of APAS has now taken a decision after the most complex procedure in the authority’s history. For the company in particular, it is a difficult decision.
As APAS announced on Monday, the watchdogs consider it proven that EY auditors breached their professional duties during the testing of Wirecard accounts for the years 2016-2018. APAS imposed fines from 23,000 to 300,000 euros for the five people. In the case of the company, the fine is €500,000 – the maximum of the penalty range in force at the time of the misconduct.
EY Germany may not accept any audit mandate for two years
But 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 globally: As decided by the APAS Board of Directors, EY Germany is allowed to work for two years. with public interest companies – ie, especially in the case of listed companies – do not accept any new audit mandate. In this segment, this is equivalent to a non-compete clause.
However, so far there has been no notification of the APAS decision. A spokesman for EY Germany said “details of the decision” had not yet been communicated to the company. “We will review these carefully once they are finalized and sent to us.” At the same time, he stressed that EY had “fully co-operated” with APAS and expressed regret “that the hidden fraud at Wirecard was not discovered earlier”. EY has drawn “significant lessons” from the Wirecard case – both at 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 the decisions of the decision-making chamber of APAS. In the further course, a judicial review before the Berlin district court would be possible. In the end, the Federal Court of Justice can decide as a final instance.
Regarding the Wirecard scandal, the disputes between the Bundestag investigative committee and EY had already ended before the BGH. At issue were the obligation of EY employees to testify before the commission of inquiry and the confidentiality of reports from a special investigator appointed by the commission. Martin Wambach, board member of the professional association IDW, gave EY auditors a devastating testimony in his spring 2021 reports.
Investor’s lawyer: “Big step forward”
The ban on new mandates for EY will take effect once the APAS sanctions are final. In the event that EY contests the decision, this will probably be the case earlier next year. Existing mandates, including the extension of existing mandates, are not affected by the non-compete clause, the supervisory authority stressed. EY currently has eight test mandates on the Dax, including Deutsche Bank and Volkswagen. Since the Wirecard balance sheet scandal broke, Germany’s Big Four have not won any new audit mandates from Dax companies – apparently a result of a loss of confidence after the auditors failed in what is perhaps the biggest case of fraud in the German economy. history.
In fact, during the handling of the scandal in the Bundestag and in the ongoing criminal proceedings in Munich against former CEO Markus Braun and other defendants, it has become clear that EY’s responsible auditors have overlooked various indications of possible fraud over the years. Among other things, an investigation into the purchase of a questionable company in India was dropped in 2018, even though an EY forensic scientist had raised the alarm internally over anomalies. In connection with this investigation, called “Project Ring”, EY auditors had also threatened Wirecard’s senior management in a letter in March 2017 to refuse to certify the 2016 annual financial statements. Days later, they released the balance sheet without objection – without presenting the previously requested documents from the management. APAS referred to these events in September 2020 in a complaint addressed to the public prosecutor.
Because of incidents like “The Ring Project,” the question remains whether the auditors at Wirecard were not just negligent — but perhaps willful. Since the accounting scandal broke, EY has maintained as a mantra that employees have always checked “with their own knowledge and belief”. By contrast, the thousands of defrauded Wirecard shareholders who are suing EY accuse the auditors of deliberate wrongdoing. If the courts follow this line of reasoning, substantial claims for damages could be made against EY. In its press release, APAS emphasized that its decision “has no binding legal effect” on the civil lawsuits and investigations conducted by the Munich I public prosecutor’s office against individual EY examiners.
The APAS procedure can become a “boomerang”.
Berlin-based investor lawyer Marc Liebscher hails as an important signal the APAS Board’s finding that EY auditors breached their professional duties in some of Wirecard’s annual financial statements. “This is a big step forward for investor lawsuits,” Liebscher said. At the same time, the capital market expert, who is also a member of the board of the association for the protection of investors, criticizes the limitation of claims at the end of 2023 that the APAS procedure, launched in May 2020, has dragged on. too long and took place behind closed doors: “This lack of transparency prevents auditors and other investors from being able to learn important lessons from EY’s failure at Wirecard.”
A penalty in Germany could also have consequences for the EY Group’s strategic plans – even if EY’s consulting division Wirecard played no role. “Although the sanction applies only in Germany, it will further complicate EY’s global self-division in a field of consulting and auditing,” said consulting expert Thomas Deelmann, Professor of Management and Organization at the University of Applied Sciences for Police and Administration Public in North Rhine-Westphalia. In any case, there had recently been a problem with EY’s group-wide separation plans. 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 regard, the APAS procedure can also become a “boomerang” in the end.