Wire card scandal. In 2020 the Wirecard scandal shook Germany. From stock market favorite to fraud company. Mistakes from 90 years ago, which led to our profession, should not have been repeated. Each new scandal puts the big auditors in the spotlightScandal lost a total of 10 billion euros in market capitalization. Here question is to be asked how could it go unnoticed for so long that the payment processing company was funding its balance sheets?
Thomas Hergert said that a small investor like me can`t check whether the wire card`s statements are true. Thomas Hergert has joined a class-action lawsuit against wire card auditors. Ernst and Young, or EY, became the sole auditor of wire cards in 2011. Together with PWC, KPMG, and Deloitte, EY is one of the big four accounting firms and together they employ 1.1 million in around 150 countries. In addition, they audit the financial statements of almost all major companies.
Wirecard scandal. Auditing is something that is required and extremely important for a well-functioning market economy. Every medium or large company is required to have its annual financial results reviewed by an independent auditor. For a market economy, it`s extremely important for us as consumers and for people who are investors to trust the information we are given and their only weapon is the audit.
wire card scandal
In 1929 the start of the great depression companies and banks around the world rushed to hide their financial problems and therefore countless people lost their jobs and savings including hundreds of thousands in Germany. So in this contest, legislators introduced statutory audits for stock companies in 1931.
Globalization accelerated the economy. Companies grew quickly and formed international networks. Auditors grew too. In the 1980s, eight accounting firms dominated the international industry. They expanded and merged forming the Big Six and later owning 4 industries that have been dominated by KPMG, EY, DELOITTE, AND PwC. In Germany, the Institute of Public Auditors, or IDW helps influence auditing rules. The privately-run organization represents the interests of more than 1000 public auditing firms in Germany, including the Big Four.
The Auditors are required by law to carefully verify annual financial statements and they are also supposed to maintain professional skepticism towards the companies they audit. An audit is designed to detect errors in financial statements whether due to fraud or not is irrelevant. When a company opens its books, its business is laid bare in numbers and the auditors see where money flows in and where it then flows out therefore bigger the company, the more complicated this flow of money can be.
The auditors choose an area to focus on the one where they suspect the highest risk. They compare the company`s statements with the actual financial transactions to gain an understanding of each of the transactions. If the auditor finds no fault in a company`s annual financial statement they give what`s called an unmodified opinion a seal of approval for the company.
The auditor`s verdict on wire cards was trusted for many years and to this day, EY maintains it audited wire cards to the best of its knowledge and according to the protocol. If companies like Bluff and auditors don`t notice, it`s over because then we can no longer rely on the very foundation of business.Fabio De Masi co-chaired Germany`s wire card parliamentary inquiry committee. De Masi began investigating the German company`s collapse in October 2020. The committee questioned 110 witnesses over nine months.
This scandal was not the first time the big auditors had to face criticism. For five years horizontal boring machine company Flow tex inflated its results with fake sales and KPMG didn`t notice them either leading to damages of more than five billion Deutsh marks which was the biggest white-collar crime ever in Germany.
In the US, the energy company Enron inflated its profits for years. Its auditor, Arthur Andersen, was one of the big five back then and once again the auditor failed to detect the fraud. Enron filed for bankruptcy in 2001, and senior Andersen employees destroyed company documents without permission. Following the scandal, the auditor surrendered its license to audit listed companies but it never recovered and was eventually dissolved.
In 2008 investment bank Lehman Brothers filed for bankruptcy. Lehman had used accounting tricks to hide its financial situation for years and EY kept approving their cooked books. Lehman Brothers eventually collapsed under massive debt in 2008, triggering the largest financial and economic crisis since the Second World War. Taxpayer money was used to save banks around the world and 59 billion Euros in Germany alone.
Auditors only rarely help uncover corporate scandals and one possible explanation is that there are conflicts of interest. Companies hire and pay their auditors themselves, a practice based on a government assumption that companies have an interest in being properly audited. Sven Giegold was the coordinator of the EU Committee on Economic and Monetary Affairs until 2021. He saw lobbyists working for large auditors exert political influence in Brussels. In the end, hardly anything remained of Michel Barnier`s ideas. Member states themselves got to decide which EU auditing reforms they introduced.