Financial Statement Analysis by Martin S. Fridson;Fernando Alvarez; & Fernando Alvarez

Author:Martin S. Fridson;Fernando Alvarez; & Fernando Alvarez [Fridson, Martin S. & Alvarez, Fernando]
Language: eng
Format: epub
ISBN: 9781119457169
Publisher: John Wiley & Sons, Inc.
Published: 2022-04-19T00:00:00+00:00

Familiar‐Sounding Criticisms of the Wirecard Audit

As in previous accounting scandals, criticism rained down on the audit process in the wake of Wirecard's collapse. It turned out, according to Financial Times reporting, that just a few weeks before the insolvency Ernst & Young delivered a draft version of its official audit opinion. It reportedly rejected whistleblowers' allegations, as well as concerns raised in KPMG's special audit. Ernst & Young's draft reportedly stated that Wirecard's financial statements, including the balance sheet showing €1.9 billion cash that management later said was probably nonexistent, truly and fairly portrayed the company's net assets and financial position. According to the Financial Times, the draft opinion went on to say that Ernst & Young had found nothing problematic about the Asian business of TPA, Wirecard's third‐party payment‐transactions‐acquiring business, which was shortly thereafter exposed as a sham.

The Wall Street Journal reported in 2020 that Ernst & Young had signed off on the company's 2016–2018 financial statements despite having raised questions about unorthodox arrangements whereby Wirecard's cash was held in bank accounts that it did not control. Ernst & Young rejected criticisms of its audit procedures, saying it had been duped along with everybody else. The firm also noted that it had refused to sign off on the 2019 statements after it received fake confirmations of the balances at trustee accounts at two banks that were supposedly holding Wirecard's money.1

Wirecard's perpetration of a massive fraud despite the scrutiny of a Big Four auditor had an all too familiar ring. In 2003 came the revelation that €3.9 billion of cash held in a bank account by an affiliate of the Italian food company Parmalat was a fabrication supported by a forged document. Deloitte, Parmalat's primary auditor since 1999, subsequently agreed to pay $149 million to the company and $8.5 million to investors. PwC was fined £1.4 million, then a record for a U.K. accounting firm, after JPMorgan Chase admitted in 2010 that for seven years it had mixed as much as $23 billion in client funds with its own in an unsegregated account. PwC had certified several times that the bank was handling the clients' money properly. In 2018 KPMG was sanctioned by the U.K.'s accounting regulator for “unacceptable deterioration” in audit quality in connection with its work for Carillon, a failed construction company.

Also familiar to longtime observers of financial reporting were the structural factors that Brooke Masters of the Financial Times viewed as the root cause of all of these incidents. Auditors are selected and paid by the companies they audit. The corporate clients want audits completed swiftly and inexpensively, enabling them to release their results and move on. Failing to satisfy management's desire for quick, no‐hassle audits would be bad for business, because the clients are also prospects for highly profitable consulting and tax services. Most of the time the numbers are honest, so auditors tend to assume they will not be the unlucky guardians scorched by the fraudulent exception. Attempts have been made since the early 2000s to eliminate conflicts of interest in auditing, but with only limited success.

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