The internet a recent case that caught my attention. The case of the
German public company "Wirecard" who hided they real financial
situation, with the blessings of EY, who ignored many incorrect
practices. Incredible but true, unfortunately the Big-4 are in the news
worldwide and an important part of this news are because they bad
practice and lack of independence in they services. By 2016 Wirecard
acquired a dubious Indian business group paying a lot of money, and
almost immediately many comments that some Wirecard's Directors
had gotten rich right after the transaction. EY was asked to perform
the pertinent reviews and under a Project called "Project Ring" in
Wirecard, but the management had no explanation as to why they
acquired a group of dubious companies from India in 2016, for a lot of
money. In 2017, EY sent a letter to the president of the
administration of Wirecard, where they demanded the declarations
still absent, of: what was the reason to this negotiation that involved
a huge payment of a lot of money? Even, EY threatened the company
to present a limited opinion of the financial situation of 2016, or do
not present anything if Wirecard does not respond this letter. An
audit report with the financial results full of restrictions or limitations
would cause serious damage to any company, because puts into
question the reputation and trust that shareholders, investors, and
banks, among others, have had. No one explained how, but a week
later after this letter to the president of Wirecard's administration,
the completely clean EY report, without any type of disagreement
and within an environment of control reasonable was presented by
EY. Then, in the evaluation of the results of 2019, EY again manifests
itself in front of Wirecard, questioning the integrity of the
administration. That can be worth mentioning that this is a very
serious declaration, especially if it is coming from auditor; However
again EY issued its final report, approving all the financial information
that was being presented. EY only mentioned that some Wirecard
employees from another location (Singapore) were under
investigation, but without much detail and importance in this regard.
In that exercise, a very stable financial position was shown, but later it
was discovered that they were hiding the real numbers, because
counting the trust funds as an available funds, products of the
business. There was not any confirmation letter issued from any
financial entity, and 1,900 million Euros was reflected only in paper.
There were only a few confirmations from the trustees, and it was
enough for EY to trust 100% in the figures presented by the
management of Wirecard. Unfortunately, EY ignored all the red flags
that were found over the years of its audit services to Wirecard. The
acquisition of the group of Indian companies for a lot of money
without any explanation, or the doubt about the integrity of the
board of directors who continued to make decisions on behalf of the
company among other things, unleashed a series of events that has
caused damages in the image and credibility to EY. Companies such
as Commerce bank and Deutsche Telekom (T-Mobile) among others,
decided to cancel their contracts with EY, who was the auditing firm
in charge of evaluating annual finances as soon as they knew of the
bad practice they incurred. Lastly, EY decided not to sign Wirecard's
2019 financial statements, and Wirecard did a bankruptcy. EY's
action of not signing Wirecard's financial statements was too late,
there was no longer time to exempt itself from responsibility, having
turned a "blind eye" to many alarms throughout their relationship.
I believe that the problem with EY and many other auditing firms,
whether Big4 or not, comes from a lack of independence. It is
contradictory that the same company who advises you, is the same
company that criticizes the internal controls and result of the financial
statements. Another point is the perpetual relationship between
company-auditors. As the years go by, independence is lost, and
things that could be detected in field work become "normal" by
managers or partners. It is difficult to objectively examine the
company if the auditors fear of losing the service relationship to
them. Political influences or the hiring of ex-big 4 to managerial
positions within companies, normally guarantees a safeguard pass at
the time of the review, since there is that fear of the field examiner, in
front of the investiture of an ex-manager from the same firm, an in
many times it won't matter what they find... if at the end of the day
some auditors would become "external employees of the company".
References:
https://www.bbc.com/news/world-europe-55004864
https://www.ft.com/content/bcadbdcb-5cd7-487e-afdd-
1e926831e9b7
https://www.reuters.com/article/us-germany-wirecard-inquiry-
timeline/timeline-the-rise-and-fall-of-wirecard-a-german-tech-
champion-idUSKBN2B811J
https://www.france24.com/es/20200626-escandalo-wirecard-
alemania-dax-quiebra
https://www.nytimes.com/2020/06/26/business/wirecard-collapse-
markus-braun.html
https://www.losrecursoshumanos.com/avanza-megademanda-
contra-ernst-young-por-la-quiebra-del-gigante-wiredcard/
