EY Prepares For Backlash Over Wirecard Scandal - Financial Times

EY prepares for backlash over
Wirecard scandal
Senior partners advised to tell clients objective
of fraud was to ‘deceive investors and EY’
yesterday
EY auditors failed for at least three years to request crucial account information from a Singapore bank
about Wirecard © Hayoung Jeon/EPA
EY has told its partners how to prepare for difficult conversations

with clients about its audits of Wirecard, the German payments
company that has filed for insolvency after admitting that €1.9bn of
cash probably never existed.
In an internal note to senior partners on Friday, EY advised them to

tell clients that the “objective” of the large international fraud at
Wirecard was to “deceive investors and EY”.
It also provided partners with “summary talking points” about the

scandal — the largest accounting fraud in German postwar history
— and said they should contact Sajid Hussein, EY general counsel
for Europe, or Jonathan Blackmore, head of risk management for
the region, “to assist with client discussions”.
The Financial Times revealed last week that Wirecard’s auditors in

EY’s German office failed for at least three years to request crucial
account information from a Singapore bank where Wirecard claimed
it had up to €1bn in cash, a routine audit procedure that could have
uncovered the fraud.
James Freis, Wirecard’s new chief executive, has in recent days told
supervisory board members that basic checks should have been
enough to spot the scandal, according to people briefed on the
discussions. Mr Freis, Deutsche Börse’s former head of compliance,
joined Wirecard only this month,
The company said on Saturday that its business activities would

continue despite the insolvency and that Wirecard Bank, which
holds most of the group’s licences to process credit card payments,
is not part of the insolvency proceedings.
However, it has suspended the payment of June salaries to its

employees in Germany, France, Luxembourg and some other
countries, according to people with first-hand knowledge of the
matter, while the bulk of the 5,400 staff employed by subsidiaries
elsewhere have received this month’s pay.
Wirecard and the missing €1.9bn: my story
Mr Freis told the board he did not understand how the fraud could
have remained undetected for so long. The comments by Mr Freis
were first reported by Süddeutsche Zeitung. Wirecard and Mr Freis
declined to comment.
In its memo to senior partners, EY claimed responsibility for

discovering the fraud, despite signing off Wirecard’s accounts for
more than a decade in the face of growing questions about its
accounting practices from journalists and certain investors.
European Investors VEB, the Netherlands-based shareholder rights

group, on Friday called for a “thorough investigation” of EY’s work at
Wirecard to be led by Germany’s financial watchdog BaFin.
“EY’s performance is unacceptable,” said Paul Koster, chief

executive of the group, adding that it would seek compensation “for
the significant damages caused by EY”.
EY said it would not comment on internal communications or

pending litigation. It said: “We’ve established that third parties, with
a deliberate aim to deceive, provided EY with false documentation in
connection with its 2019 Wirecard audit. The extent and
sophistication of these suggest a large-scale international fraud at
Wirecard.”
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EY informed Wirecard’s board in June that €1.9bn of cash
apparently held in bank accounts in the Philippines probably did not
exist, after special auditors at KPMG — brought in by Wirecard’s
supervisory board last year to investigate allegations reported by
the FT — said they were unable to verify significant account
balances.
The audit firm advised its partners to tell their clients: “There are
indications that this was an elaborate and sophisticated fraud with
the deliberate aim of deceiving our audit team in Germany.
“The CEO is accused of having inflated the balance sheet total and
sales volume of Wirecard, likely in co-operation with other
perpetrators, by feigning income . . . to make the company more
financially powerful and more attractive for investors and
customers.”
A number of people close to EY said the scandal had caused dismay

among some partners around Europe, particularly in non-audit
teams, who feared that a backlash would affect client relationships
and undermine EY’s brand.
The fraud is just one of several international accounting scandals

that have emerged this year where EY audits are under scrutiny,
including at NMC Health and Luckin Coffee. EY has declined to
comment on NMC Health and Luckin Coffee.
The firm is already facing a lawsuit in Germany brought on behalf of
Wirecard investors by Wolfgang Schirp, a Berlin lawyer. About 1,500
investors have joined the case, which is seeking up to €1bn in
compensation from EY, according to Mr Schirp.
One EY partner based in the UK said the matter could encourage

non-audit partners to push harder for separation from the audit part
of the firm.
The Big Four auditors have been under pressure from UK regulators
and politicians to move towards this type of reorganisation.
The EY partner said: “Wirecard is unlikely to bring down the German

firm in my view, but it has stoked many fires across the business
and, depending on the nature of regulatory interventions, I wonder if
this will accelerate calls for separation from within, not just from the
outside. Some partners have already had enough.”

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EY prepares for backlash over

EY has told its partners how to prepare for difficult conversations

In an internal note to senior partners on Friday, EY advised them to

It also provided partners with “summary talking points” about the

The Financial Times revealed last week that Wirecard’s auditors in

The company said on Saturday that its business activities would

However, it has suspended the payment of June salaries to its

In its memo to senior partners, EY claimed responsibility for

European Investors VEB, the Netherlands-based shareholder rights

“EY’s performance is unacceptable,” said Paul Koster, chief

EY said it would not comment on internal communications or

A number of people close to EY said the scandal had caused dismay

The fraud is just one of several international accounting scandals

One EY partner based in the UK said the matter could encourage

The EY partner said: “Wirecard is unlikely to bring down the German

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