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
Emails seen by The Wall Street Journal show the auditor had
questions about aspects of the unorthodox arrangement as early as
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
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
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
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 email@example.com, Paul J.
Davies at firstname.lastname@example.org and Juliet Chung at
(END) Dow Jones Newswires
June 27, 2020 09:15 ET (13:15 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.