Friday, May 14, 2021

EY’s fraud unit found ‘red flags’ at Wirecard in 2018

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An EY anti-fraud team warned in 2018 that “red flags” at Wirecard pointed to potential accounting manipulation and needed further investigation, according to documents seen by the Financial Times.

A few weeks later, the separate EY team in charge of Wirecard’s annual audit decided not to delve into the matter further and then issued an unqualified audit.

Wirecard, a once high-flying German payment group, this summer collapsed into insolvency in one of the biggest post-war accounting frauds in Europe.

The divergent views within EY raise new questions about the firm’s ten-year work as an auditor of Wirecard.

Munich prosecutors are already investigate three current and former EY partners after the German 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’s 2018 audit partners did not properly consider the findings of a forensic audit on an alleged accounting manipulation. In this investigation, which began in 2016 and was codenamed “Project Ring,” an EY anti-fraud team investigated allegations of fraud raised by a whistleblower in India.

The Ring Project was commissioned by the Wirecard Board of Directors and led by EY Forensic & Integrity Services, a branch of the Big Four company specializing in white collar crime.

New documents seen by the FT show that in the months leading up to March 2018, EY’s anti-fraud team repeatedly highlighted problematic “observations” it made during the investigation.

For example, EY had discovered that one-time items such as proceeds from the sale of Internet domains and IT infrastructure were added to operating profits without clear justification. He also found that interest income has been added to an operating profit gauge that explicitly excludes interest.

The investigation uncovered two copies of an invoice from an Indian subsidiary of Wirecard that were issued the same day for the same transaction, but that were on letterhead showing two different company logos for the company and different amounts.

EY’s anti-fraud team said these “red flags”. . . could potentially support ”the claim that profits have been inflated and should be investigated further. In a “situation memorandum” published at the end of March 2018, he recommended “full additional investigative steps” on the matter.

The fraud team pointed out that much of the forensic audit is still at an early stage and has so far relied only on “background open-source research Without using yet “other forensic investigation procedures, for example interviews and e-mail review.”

Less than three weeks after EY’s fraud control team summed up these issues in a 63-page state-of-the-art slide show that was shared with the Wirecard board of directors, the audit team EY took a different view on “Project Ring,” documents consulted by the FT.

In an internal memo, the auditors asserted that “nothing has been brought to our attention which leads us to believe that any of the points raised in the alert letter are of such substance as to further extended proceedings. are necessary ”, according to a document seen by the FT.

The EY audit team subsequently issued an unqualified audit for Wirecard’s 2017 financial report, stating that the ‘Ring Project’ had been ‘concluded’ without providing ‘any evidence indicating faulty accounting or other violations of the law ”.

In fact, “Project Ring” had been terminated by Wirecard’s second in command, Jan Marsalek, days after receiving the “status memorandum” from the EY anti-fraud team – a fact that was not mentioned in the report. audit opinion of EY.

The documents consulted by the FT show that the EY audit team was regularly informed of the “Project Ring” and that they were aware of the “red flags”.

KPMG, which revisited “Project Ring” in its own special audit on Wirecard, this year concluded that “key questions were left unanswered” by EY and that problematic “observations” had not been “dealt with in a way. conclusive ”during EY’s annual audit.

In a letter to the German audit watchdog, which was seen by the FT, EY’s lawyers argued that the forensic investigation into the whistleblowers’ allegations was independent of the audit. annual.

“The audit team planned and performed independent audit procedures that answered all questions relevant to the annual audit,” the lawyers wrote, adding that the audit team “was not dependent Of the forensic investigation.

When asked to explain why her two teams had differing views on the relevance of ‘warning indicators’, EY said she’ could not comment on Wirecard due to ongoing confidentiality obligations. “, Adding that” audit conclusions are always based on the whole audit. evidence gathered by the relevant audit teams ”.

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