By Patricia Kowsmann, Paul J. Davies and Juliet Chung 

Ernst & Young GmbH, auditor to insolvent German fintech company Wirecard AG, 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 $2 billion 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 to the prosecutors' office 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 Tuesday. Mr. Braun consistently denied wrongdoing at the company.

At the center of its downfall is the disappearance of $2 billion 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 licenses. 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 Wall Street 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 like canceled 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.

EY declined to comment on the specifics of these emails. Last week, EY said it refused to sign off 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 organization for EY firms. Like other big accounting firms, country-based affiliates that provide audit services to companies, such as Ernst & Young LLP in the U.S., 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 amid 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 LLP, to look into allegations raised by the Financial Times that 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 released a 74-page report saying it couldn't verify the arrangements with the third parties due to lack of cooperation.

After that, EY informed Wirecard's board that it was unable to obtain sufficient evidence to confirm cash balances on trust accounts.

Ernst & Young GmbH's repeated signoff of Wirecard's financials adds to a number of instances in recent years where EY affiliates have seemed to miss signs of fraud.

In China, Ernst & Young Hua Ming LLP has audited Luckin Coffee Inc. since the coffee group's founding in 2017. In April 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 of its 2019 revenue had indeed been fabricated. Its shares have since collapsed.

In Denmark, the business watchdog brought two EY auditors before the Danish Disciplinary Board of Auditors earlier this year over what it said was a faulty auditing of Danske Bank's 2014 accounting statements related to a $200 billion money-laundering scandal.

The Public Company Accounting Oversight Board, a U.S. watchdog that polices audits of public companies, in a May 2019 report said its 2018 reviews of "portions of two issuer audits" by Ernst & Young GmbH didn't identify any audit-performance issues. The regulator said it didn't have inspection oversight over Wirecard audits.

Ernst & Young GmbH disclosed to the PCAOB in March this year that it or a member of the firm was either a defendant in or subject to a criminal or regulatory action in three instances. One instance had been settled with BaFin and the others were for proceedings before the German audit authority.

Write to Patricia Kowsmann at patricia.kowsmann@wsj.com, Paul J. Davies at paul.davies@wsj.com and Juliet Chung at juliet.chung@wsj.com

(END) Dow Jones Newswires

June 27, 2020 09:15 ET (13:15 GMT)