EY’s audits of collapsed payments group Wirecard were “at the very least” negligent and in some cases grossly negligent, according to people with direct knowledge of the details of an investigation by the German audit watchdog.
Apas, however, did not establish criminal intent in the Big Four firm’s conduct and while its assessment is unflattering, it has been greeted with relief inside EY for this reason, said people familiar with the firm’s internal discussions.
Criminal misconduct, such as an auditor knowingly and deliberately issuing factually wrong audits, can be punished with up to three years in jail under German law. EY could also have faced unlimited liability for claims of damages from Wirecard’s administrator and former shareholders.
Without a finding of criminal intent, in any civil case EY’s liability would be capped at €4 million. According to one of the people familiar with discussions at the firm, EY was “rather pleased” with the ruling.
The people said this relatively favourable conclusion was a key reason why EY last month dropped its appeal against a €500,000 penalty and a two-year ban on taking on listed audit clients in Germany, which had been imposed by Apas last year.
When it dropped the appeal, EY said it did not agree with all of the regulator’s findings but was accepting the sanctions to “bring a conclusion to these proceedings”. Over the past four years, it has lost significant market share among German blue-chips, which it hopes to regain from 2026 when the ban expires.
Wirecard was one of Germany’s most successful tech start-ups and at its peak in 2018 was worth €24 billion, but it crashed into insolvency in June 2020 after disclosing that half of its revenue as well as most of its profits did not exist. In the years before the insolvency, it had received unqualified audit opinions from EY for close to a decade.
A review on behalf of the German parliament concluded in 2021 that EY had failed to spot signs of fraud risk, did not follow professional guidelines and relied on verbal assurances from executives on several key questions.
Over several years, the firm also failed to request crucial account information from a Singapore bank where Wirecard claimed it had large amounts of corporate cash.
Markus Födisch, the presiding judge in the criminal trial of former Wirecard boss Markus Braun and two other former managers has criticised the firm’s actions in court, saying: “[EY] could have handled it differently, and then the whole issue would have been uncovered more than a year earlier.”
Wirecard’s administrator and former shareholders have accused EY of failing in its professional duties, and have filed lawsuits claiming billions of euros in compensation.
EY has previously said that it “deeply regrets that we didn’t find the fraud sooner”.
At an early stage of its investigation of EY’s Wirecard audits in late 2020, Apas informed prosecutors in Munich that it had found evidence pointing to potentially criminal conduct by EY.
The prosecutors subsequently opened investigations of current and former EY partners who were in charge of the audits. At the time, Apas stressed its view was a “preliminary assessment” and “does not signify a conclusion or confirmation of any offences”.
Munich prosecutors told the Financial Times last week that their investigation was ongoing, and declined to comment further.
While criminal prosecutors and the civil courts are not formally bound by the Apas ruling and are required to take an independent view, people familiar with the case argued it was an important benchmark, noting that the threshold for establishing criminal intent is very high under German law.
EY and Apas declined to comment.
Copyright The Financial Times Limited 2024
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