EY has increased its number of multinational audit clients in Germany despite the high-profile collapse of Wirecard that saw the firm sharply criticised for failing to spot a €1.9bn fraud.

Since 2017, EY has doubled its market share of auditing for members of the country’s blue-chip Dax index, according to research by consultancy Lünendonk & Hossenfelder. By 2021, for the first time, it will have seven of the 30 Dax-listed groups as audit clients.

Among them are heavyweights like Deutsche Bank, Volkswagen, Siemens, Munich Re and Deutsche Telekom. EY also audits Lufthansa and Airbus, which are listed in the mid-cap MDAX.

Historically, the firm has had only three or four Dax clients. 

“EY in recent years successfully established itself as the third power among German blue-chips — a segment that was traditionally dominated by KPMG and PwC,” said Jörg Hossenfelder, partner at Lünendonk & Hossenfelder. 

Column chart of Dax auditing mandates (% share) showing Battle of Big Four in corporate Germany

Changing auditor is a complex and costly process that can take several years in Germany. However, audit and governance experts expect that fallout from the Wirecard scandal will limit EY’s ability to attract more clients.

The firm is now under investigation by Germany’ audit regulator Apas and faces lawsuits from Wirecard investors. 

Its Big Four rival KPMG, in a confidential addendum to a special audit of Wirecard, found EY missed the chance to look more closely into suspected accounting fraud in 2016.

“The damage to EY’s reputation will be immense,” said Hansrudi Lenz, a professor of accounting at Würzburg University.

Christian Strenger, a corporate governance specialist and former head of asset manager DWS, predicted EY will struggle to win new clients.

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“After Wirecard, supervisory boards will find it very difficult to argue in favour of the firm,” he said.

So far, only DWS and German lender Commerzbank — both listed but not members of the Dax — have said they will drop EY as auditor. Both companies suffered big losses in the Wirecard collapse and are considering suing EY.

Deutsche Bank, which switched to EY in 2020 after more than 60 years with KPMG, said it will “closely monitor all further developments and analyse their impact on the bank”.

VW chief financial officer Frank Witter told shareholders in September that the group’s appointment of EY — after 70 years with PwC — was “based on a selection process that takes several months” and added that the carmaker had “no findings that would cast a doubt on the selection process”.

Volkswagen’s auditing contract is among the most lucrative on the Dax. The group paid PwC €19m for audit work in 2019, as well as €33m for tax consultancy and other services. 

Dax-listed MTU Aero Engines, which has used EY since 2014, said it has no plans to change auditor until the end of the 10-year term.

“MTU’s business model is quite complex and it needs considerable industry expertise for auditors to exercise their duties effectively and efficiently,” the company said. “We consider the current auditors at EY as qualified in that respect. MTU’s AGM followed this view in August.”

Lufthansa said it had no plans to change its auditor. Siemens, EY and KPMG declined to comment.

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EY’s increasing dominance in the blue-chip audit market has been driven by three factors, said Dirk Hildebrandt, an independent Cologne-based auditor: new rules that oblige listed companies to change their auditor more often, aggressive pricing by EY and a lack of choice for multinational companies. 

Multinational businesses need an auditor with a global network and experience of dealing with complex corporate structures. This level of service can generally only be offered by the Big Four firms of EY, Deloitte, KPMG and PwC.

Via Financial Times