Wirecard woes mount for Ernst & Young as clients leave auditor

LONDON (BLOOMBERG) – KfW, Germany’s third-largest bank by assets, may drop Ernst & Young as auditor as EY continues to be plagued by its role in the country’s Wirecard accounting scandal.

The German government is taking a close look at the auditing of state-run KfW, and is considering dropping EY, according to two people familiar with the discussions. No decision has been made, and the tender remains open, the people said.

Commerzbank and DWS Group have already moved away from EY, one of the Big Four auditors. The firms, which also include PricewaterhouseCoopers, KPMG, and Deloitte, have been criticized for poor work and conflicts of interest in recent years. The industry is getting the most attention from critics since the collapse of Enron two decades ago.

Atul Shah, a professor of accounting and finance at City University in London, said he would expect more companies to change auditors as management teams look to show they are taking the allegations at EY seriously.

“I have a feeling this is more of a German board reaction, and if they change their auditor they can at least say they did their bit to protect the company and the shareholders,” Mr Shah said.

Because of EY’s role as Wirecard’s auditor, there’s a possible conflict of interest, since many of its German clients were investors in the online payments company and will try to recoup their investments. Once Germany’s stock market darling, shares of Wirecard have lost 99 per cent of their value since the company’s alleged accounting fraud made global headlines in June.

‘ELABORATE’ FRAUD

A spokeswoman for KfW said it is negotiating a four-year deal that will start in 2022, and wouldn’t comment on ongoing talks. An EY spokesman declined to comment.

EY called the 1.9 billion euros (S$3.1 billion) missing from Wirecard’s balance sheet an “elaborate” fraud that even a very rigorous probe might not have discovered. But EY has been added to a class-action style lawsuit against Wirecard and stands accused of failing in its most fundamental duty.

DWS, Deutsche Bank’s asset management arm, said on Sept 1 that it wouldn’t propose renewing EY as its auditor because of “possible future conflicts of interest.” DWS had built a Wirecard position that reached about 1 billion euros across several funds last year and has since said it plans to sue Wirecard.

On Sept 2, Commerzbank said it had agreed to propose a change of auditors at its next annual meeting in 2021. It did so to avoid conflicts of interest that would arise because Commerzbank is still among’s Wirecard creditors, a bank spokeswoman said.

In a Sept 14 letter to clients, EY chief Carmine di Sibio hinted at the problems the scandal and additional scrutiny was having on its German business, pledging assistance to the unit in any way it could.

“External reviews by local regulators of EY Germany’s audit work are likely to go on for several months,” he wrote in the letter seen by Bloomberg. “We will provide EY Germany whatever they need to continue meeting the deservedly high-quality expectations of our clients and other stakeholders.”

MORE DEFECTIONS?

“This letter tells you that something more serious is going on and they are worried about a whole spate of defections,” Shah said.

Not all of the recent defections are related to Wirecard. Heidelberg Cement in June decided to switch to PwC after having had EY as its auditor for decades, in order to comply with European Union rules on regulator auditor rotation. Bilfinger, a German engineering firm, chose to change its auditor last year for similar reasons.

The global accounting firms are facing criticism from regulators and politicians after their development of lucrative consulting divisions to provide the opportunity for revenue growth and brand building that plain vanilla auditing can’t.

Last week in the UK, Deloitte was fined a record £15 million (S$26.2 million) over the audit of Autonomy Corp, which was ensnared in an accounting scandal 10 years ago.

The Financial Reporting Council, the UK audit regulator, also fined two former Deloitte partners, after a tribunal found they failed to act with “competence and due care.” Deloitte also has to pay costs of £5.6 million.

The FRC has ordered firms to separate their auditing and consulting departments by mid-2024.

“That EY missed something so glaringly sketchy, despite all the media attention on Wirecard, suggests to me that there’s something wrong with the culture of challenge at the firm,” said Karthik Ramanna, a professor at the Universith of Oxford’s Blavatnik School of Government. “But, to be frank, this is not just an EY issue – it’s an industrywide issue for auditing.”

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