EY faced a mounting backlash from investors and German politicians across the political spectrum after it emerged that one of the accountancy firm’s own employees flagged potential fraud at Wirecard four years before the company collapsed.
“It has just become significantly more likely that we are going to sue EY,” said a former top-5 investor in Wirecard on Wednesday, calling the auditor’s handling of the whistleblower’s allegations “just unbelievable”.
Danyal Bayaz, a Green MP, said allegations against EY were “grave” and they would be closely investigated in a parliamentary inquiry, which is due to begin next week.
Fabio De Masi, an MP with the leftwing Die Linke party, said: “In a worst-case scenario, EY could face its Arthur Andersen moment.” Arthur Andersen, the auditor of Enron, collapsed after the energy group was revealed to be a fraud nearly two decades ago.
Wirecard, a once high-flying German payments group, crashed into insolvency this summer after admitting that €1.9bn in cash was missing and that large parts of the business had been misrepresented.
EY had signed off the company’s financial accounts without reservations for more than a decade.
The FT revealed this week that, in 2016, an internal whistleblower at EY had flagged potential fraud at Wirecard as well as an attempt to bribe an EY employee in India.
The details were included in an unpublished “info addendum” to a special audit into Wirecard by KPMG, seen by the FT. In the report, KPMG said that the 2016 allegations were not properly investigated by EY.
Marc Liebscher, a Berlin-based lawyer who has filed hundreds of lawsuits against EY at a court in Stuttgart, said: “Wirecard investors who suffered losses now have an even better reason to sue EY for damages.”
Under German law, the financial liability of auditors to a client is limited to €4m as long as there is no evidence of complicity. However, there is no such cap on potential payouts to third parties, which could expose EY to large financial risks.
Janne Werning, head of ESG Capital Markets & Stewardship at Union Investment, Germany’s third largest asset manager which until April was one of Wirecard’s largest investors, said that the fund was “evaluating claims against EY in the Wirecard case”.
DWS and Deka Investment, two other large Frankfurt-based asset managers, declined to comment. DWS in early September decided to dump EY as its new auditor, given that it was considering suing the accountancy firm over Wirecard.
That underlines a broader problem for EY: even companies unaffected by the Wirecard scandal are reconsidering their relationship with the firm. In September, German lender Commerzbank said it would replace EY as its auditor.
Policymakers in Berlin are also considering whether to bar the firm from public mandates. “If [Germany’s auditor oversight body] finds that EY violated its professional duties, the German government should exclude EY from its public tenders,” said Mr De Masi. Over the past five years, the German government has paid €400m in assignments to Big Four auditors.
“The new revelations are likely to make it much harder for EY to prove that its annual audits were conducted properly and that the audit opinions were in line with the law,” said Heribert Hirte, a law professor at Hamburg University and an MP for Angela Merkel’s conservative CDU.
Hansrudi Lenz, an accounting professor at Würzburg University, said the KPMG report suggested that EY’s audit opinions on Wirecard’s results in 2017 and 2018 may be flawed. “If the events happened as described, in my view, [EY’s] description of the ‘Whistleblower India’ topic in the audit reports for 2017 and 2018 is inadequate,” Mr Lenz said.
In these reports, EY mentioned there had been an allegation but did not disclose that the whistleblower was one of its own employees and omitted that it was the target of an attempted bribe. “An independent investigation by a third party was necessary,” said Mr Lenz. “KPMG’s criticism of EY Audit’s behaviour is justified.”
However, he also criticised KPMG, saying it should not have left damning material out of the main published report. “KPMG’s publicly available report was watered down,” he said. KPMG declined to comment; in the report it pointed out that EY’s actions were outside its remit but that it felt obliged to highlight them.
EY told the Financial Times on Tuesday that “issues relating to potential fraud and bribery concerns in India” were raised by an employee who was following “established protocols”.
The firm stressed that the allegations “were investigated by the company as well as the EY Germany audit and forensics teams” and that their observations were reported to Wirecard. “Based on the information available to us, we believe that personnel from EY India and elsewhere performed their procedures professionally and in good faith,” said EY. The accountancy firm declined to comment further on Wednesday.