Is Poor Auditing Increasing Corporation Failure?



[A]


In 2020, the globe saw the descent of financial technology company, Wirecard. It was formerly known as a European technology champion [1], however mid last year it had to file for insolvency. Their downfall was based on suspicion of having engaged in a series of fraudulent accounting activities to inflate its profit, which had been happening for over a decade. [2] Despite previous allegations being made towards them, little action was taken until the final collapse, which undoubtedly left the world-wide financial community questioning why.


The red flags were raised as early as 2008 when the company was attacked for having irregularities in its balance sheet. To combat these criticisms, the Big Four firm, Ernst and Young, conducted a specific audit and consequently took over as the main auditor for Wirecard for the rest of the company’s life. Another difficulty faced to judge the financial status of Wirecard, was the fact that investors had to rely on an adjusted version of the financial statements of the company because of its combined banking through its subsidiary bank and non-banking operations. These adjusted versions caused inflated earnings and cash flow figures, which were naturally far from the truth of the situation. Following this, the Financial Times too reported a visual gap between the short-term assets and liabilities in Wirecard’s payment business in 2015. This was due to the fact that Wirecard only took a small commission from its payment processing volume. The transient payment flow through their accounts were adjusted to reflect this. Furthermore, in 2015 a research company published a report recommending shorting Wirecard’s stock as they theoretically assumed the company’s asian operations to be much smaller than claimed.


The auditors under examination of this case claimed that even though their auditing procedures are held to a very high standard, they should not be blamed, as some things can still go unnoticed. Ernst and Young stated “clear indications that this was an elaborate and sophisticated fraud, involving multiple parties around the world in different institutions, with a deliberate aim of deception” and continued on saying “even the most robust and extended audit procedures may not uncover a collusive fraud.”. However, the catalyst that finally pushed the company over the edge was a missing 1.9 billion euros of cash and this could have been prevented by the auditors. This was known as the black hole in the company's balance sheets. In this case, they failed to request crucial account information from a bank in Singapore where the German company claimed it held this cash sum. [3] This easily avoidable mistake was the final nail in the coffin for the company. Consequently, several investors are ready to sue Ernst and Young too for this involvement.


Ernst and Young expressed great regret that they were unable to unmask the fraudulent practices sooner. The chairman even pledged that he would raise the standards on audits but I believe that the answer rests in regulated financial governance within the auditing of the firm as they should be trusted as the most licensed people to uncover such a fraud. The chairman claimed to understand that “The public interest clearly requires that much more be done to detect fraud at its earliest stages” and that the use of technology would be developed further when covering fraud prevention. However, in this case it was the people who chose not to investigate nor ask about the Singapore bank status, so whilst increasing technology may increase efficiency, the issue rests within the financial handling of the auditors. The claims made that even their forensic auditors, specialising in this kind of work, were deceived, creates more doubt when questioning if they are in the interest of the public. The roles of auditors in company failures has been increasing over the recent decades and leads the public to be deceived by the image of Big Four firms like Ernst and Young.


References:

[1] - https://www.ft.com/content/ac949729-6167-4b6c-ac3f-f0aa71aca193

[2] - https://en.wikipedia.org/wiki/Wirecard_scandal#Accounting_irregularities

[3] - https://markets.businessinsider.com/news/stocks/ey-chairman-expresses-regret-over-wirecard-audit-failures-2020-9


Graphics:

[A] - https://finshots.in/archive/wirecard-accounting-scandal/