An EY anti-fraud team warned in 2018 that “red-flag indicators” at Wirecard pointed to potential accounting manipulation and required further investigation, according to documents seen by the Financial Times.
Wirecard, a once high-flying German payments group, this summer collapsed into insolvency in one of Europe’s biggest postwar accounting frauds.
Munich prosecutors are already investigating three current and former EY partners after Germany’s audit watchdog said they may have acted criminally by knowingly issuing a “factually incorrect” audit opinion in 2017 and 2018.
Among other issues, the audit watchdog suspects that EY audit partners in 2018 failed to properly take into account the findings of a forensic audit into alleged accounting manipulation. In that probe, which started in 2016 and was code-named “Project Ring”, an EY anti-fraud team investigated fraud allegations raised by a whistleblower in India.
Project Ring was commissioned by Wirecard’s management board and was conducted by EY Forensic & Integrity Services, an arm of the Big Four firm that specialises in white-collar crime.
New documents seen by the FT show that in the months to March 2018 EY’s anti-fraud team repeatedly pointed out problematic “observations” it had made during the inquiry.
For instance, EY had discovered that one-off items such as proceeds from the sale of internet domains and IT infrastructure were added to operating profits with no clear justification. It also found that interest income was added to a gauge of operating profit that explicitly excludes interest.
The investigation discovered two copies of an invoice by an Indian Wirecard subsidiary that were issued on the same day for the same transaction, but were on letterheads showing two different corporate logos for the firm and stated different sums.
EY’s anti-fraud team said that these “red-flag indicators . . . could potentially sustain” the allegation that profits were inflated and should be investigated further. In a “status memorandum” issued in late March 2018, it recommended “comprehensive additional investigation steps” into the matter.
The fraud team pointed out that most of the forensic audit was still at an early stage and it had so far relied only on “open-source background research” without yet using “further forensic investigation procedures, e.g., interviews and email review”.
Less than three weeks after EY’s fraud team summarised these issues in a 63-page status slide deck that was shared with Wirecard’s board, EY’s audit team came to a different view about “Project Ring”, documents seen by the FT show.
In an internal note, the auditors asserted that “nothing has come to our attention that causes us to believe that any of the items raised in the whistleblower letter are of such substance that further extended procedures are required”, according to a document seen by the FT.
EY’s audit team subsequently issued an unqualified audit for Wirecard’s 2017 financial report, stating that “Project Ring” had been “concluded” without delivering “any evidence indicative of flawed accounting or other violations of law”.
In fact, “Project Ring” had been terminated by Wirecard’s second-in-command Jan Marsalek days after he received the “status memorandum” from EY’s anti-fraud team — a fact that was not mentioned in EY’s audit opinion.
Documents seen by the FT show that EY’s audit team was briefed about “Project Ring” on an ongoing basis and was aware about the “red-flag indicators”.
KPMG, which revisited “Project Ring” during its own special audit into Wirecard, concluded this year that “key questions were left unanswered” by EY and that the problematic “observations” were not “conclusively processed” during EY’s annual audit.
In a letter to Germany’s audit watchdog, which was seen by the FT, lawyers for EY argued that the forensic inquiry into the whistleblower allegations was independent of the annual audit.
“The audit team planned and executed independent audit procedures which were addressing all questions relevant for the annual audit,” the lawyers wrote, adding that the audit team “was not dependent” on the forensic investigation.
Asked to explain why its two teams had diverging views on the relevance of the “red-flag indicators”, EY said it “cannot comment on Wirecard due to ongoing confidentiality obligations”, adding that “audit conclusions are always based on the totality of audit evidence gathered by the relevant audit teams”.