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Damning report into EY audit of Wirecard fraud released

An independent report by Rödl & Partner has been released. The aim of the report was to investigate any shortcoming by accounting firm EY into the now infamous Wirecard scandal.

The house of Wirecard

Damning report into EY audit of Wirecard fraud

The Big Four firm is said to have failed to spot fraud risk indicators, did not fully implement professional guidelines and, on key questions, relied on verbal assurances from executives.

The report, filed to the Bundestag late this week, will significantly increase the woes of the accountancy firm. EY is already facing lawsuits from Wirecard shareholders and creditors and lost a number of high-profile clients.

Legal action by Wirecard’s administrator is also likely to follow.

EY partners who signed off Wirecard’s accounts are already under criminal investigation over potential violations of rules on carrying out professional duties. “The report outlines failures during the EY audits as professional standards were not met,” Matthias Hauer, an MP for the conservative CDU/CSU parliamentary group, which suggested appointing the special investigator, told the FT.

He added the report confirmed “EY has significant responsibility for the scandal not being uncovered earlier”.

Wirecard received unqualified audits from EY for a decade and was once hailed as one of Germany’s rare technology success stories. It collapsed into insolvency last summer after revealing that €1.9 billion in cash did “not exist”.

A team of auditors from Rödl & Partner led by Martin Wambach, the parliamentary special investigator, dug through 90 gigabytes of EY data that included internal working papers and 40,000 emails.

One finding refers to EY’s handling of the interim results of a forensic investigation in 2017. The probe, which was conducted by a separate EY anti fraud team and code-named Project Ring, was mandated by Wirecard’s board after a whistleblower raised allegations about accounting manipulations and attempted bribery of an auditor by Wirecard staff in India.

By March 2017, just before the audit opinion for 2016 was due, Project Ring was suffering from delays, with key questions unanswered. EY auditors warned Wirecard that an unqualified audit would be denied unless these issues were resolved.

Rödl & Partner

According to Rödl & Partner, EY received “mainly verbal and written explanations by executives” and signed off the audit. The special investigator said there was no evidence that EY evaluated the questions it had raised earlier further.

This view is in line with findings of German audit watchdog Apas, which has told prosecutors that EY may have acted criminally during its work for Wirecard.

Rödl & Partner said EY failed to spot a series of fraud risk indicators, among them unusually close links to its Asian partners as well as high and rising margins in a business that had lower value-added than Wirecard’s core business.

“From our perspective, there were numerous fraud risk indicators with regard to the TPA business which could have increased the critical attitude and could have triggered further audit acts,” the special investigator concludes.

EY said its German arm had not been provided a copy of the Rödl & Partner report and so was unable to comment on its contents. “The collusive acts of fraud at Wirecard were implemented through a highly complex criminal network designed to deceive everyone — investors, banks, supervisory authorities, investigating lawyers and forensic auditors, as well as the auditors,” EY said

“Based on our information, the EY Germany auditors performed their audit procedures at Wirecard professionally, to the best of their knowledge and in good faith.”

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