Ernst & Young Ignored Whistleblower's Warnings About $2.1BN Wirecard Fraud Back In 2016

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by Tyler Durden
Wednesday, Sep 30, 2020 - 05:30 AM

Despite Ernst & Young's global chairman insisting that the "Big Four" did nothing wrong in its overseeing of Wirecard during a time when the German fintech darling was running the biggest accounting frauds since WWII, the truth - as they say - will out.

In its latest bombshell report on Wirecard's historic unraveling, the FT has reported that EY was, in fact, warned by one of its own employees in 2016 that senior management at Wirecard may have committed fraud on a massive scale. One even reportedly attempted to bribe an auditor.

Surely, if any other executive had tried to bribe an EY employee, that person would have immediately reported the illegal solicitation to his superiors. That's apparently what happened here. Though apparently, somewhere along the line, the situation was knowingly quashed by management.

This is terrible news for EY, which is already facing an investigation by German regulators (who are now desperate to burnish their reputations after being denounced as "toothless" by practically every financial publication on the planet) as well as a flurry of lawsuits filed by Wirecard shareholders.

To recap: A special audit by EY rival KPMG uncovered a massive €1.9 billion ($2.1 billion) hole in Wirecard's balance sheet, representing fraudulent profits beginning in 2015 and continuing through Q1 of this year. More digging by an inspector appointed by German bankruptcy court has found that Wirecard's business was "almost entirely fictitious". The company hired 1,000s of employees who apparently sat around pushing paper all day.

Clearly, EY is employing the deny, deny, deny  approach perfected by the Trump Administration as it seeks to slow-roll harmful revelations that discredit the auditor's claims that it couldn't have possibly known about Wirecard's skulduggery. Because this doesn't sound good:

The revelation that an EY employee identified suspicious activity at Wirecard four years before the payments group imploded in Germany’s largest postwar corporate fraud will increase the pressure on the accounting firm, which audited Wirecard for more than a decade and provided unqualified audits until 2018. EY is already under investigation by Germany’s auditor oversight body Apas and is the target of lawsuits from Wirecard investors who lost billions of euros when the company collapsed in June.  Last month, EY’s global chairman Carmine Di Sibio wrote to clients to express “regret” that the fraud was “not uncovered sooner” but he claimed that EY was ultimately "successful in uncovering the fraud".

The latest revelations are part of an addendum to KMPG's special auditor report. The FT has obtained a series of leaks from the report, including the initial finding of fraud, and this latest one is perhaps one of the most incriminating as far as EY is concerned. At one point, the FT reports that the addendum serves as a "damning indictment" of EY.

The new revelations are contained within an unpublished “info addendum” to a special audit by KPMG. Its main report was published in April, revealing the giant cash hole at the heart of Wirecard and precipitating the demise of the company. The 61-page addendum describes findings by KPMG that were not directly within its remit but that the firm deemed so significant it decided to report them anyway. The addendum, seen by the Financial Times, amounts to a damning indictment of EY. According to KPMG, EY’s unnamed whistleblower in May 2016 filed a letter to EY Germany’s headquarters in Stuttgart. The letter did not address the whole extent of Wirecard’s global fraud scheme that unravelled this year, but focused on one of four contentious areas that were the focus of KPMG’s special audit in late 2019: a series of acquisitions in India that Wirecard had closed in early 2016. Wirecard had paid €340m for Hermes i Tickets, GI Technology and Star Global, three payments companies that it bought from an opaque Mauritius entity named Emerging Market Investment Fund 1A.  The EY whistleblower asserted that “Wirecard Germany senior management” directly or indirectly held stakes in EMIF 1A and were therefore embroiled in a conflict of interest.

The warning stemmed from a deal in India where Wirecard "senior management" responsible for the deal appeared to have stakes in the company being acquired, and therefore sought to push up the bidding price to skim as much money out of the deal as possible.

The EY whistleblower asserted that “Wirecard Germany senior management” directly or indirectly held stakes in EMIF 1A and were therefore embroiled in a conflict of interest. The whistleblower also accused senior Wirecard managers of artificially inflating the operating profit of the Indian businesses in an attempt to push up the acquisition price, which was partly linked to future profits. These performance-dependent “earn-outs” represented a third of the total price tag.

When one of the managers learned that an EY employee was preparing to report them, he tried to bribe the employee. But that didn't work.

According to the whistleblower, the Wirecard manager who held a senior position at Hermes offered a local EY employee a “personal compensation” provided the auditor agreed to sign off on manipulated sales numbers.

Still, the complaint went nowhere, which brings us to our next order of business concerning Wirecard. In a piece of "news analysis" published in Tuesday's paper, the FT reports that the scandal is drawing ever closer to Chancellor Angela Merkel, who once did a personal favor for a senior Wirecard executive on behalf of the company.

The article also recounted the profound failures of BaFin, Germany's financial regulator.

At any rate, with the election for Merkel's successor coming next year, the blowback against the ruling coalition, including Merkel's Christian Democrat Union, and the Social Democrats - Olaf Scholz, the finance minister who has shouldered significant criticism for the government's failings, is a Social Democrat - could be seriously bruising. The opposition Greens are doing everything they can to push the issue.

Fortunately, with former Wirecard COO Jens Marsalek still on the run, a series of well-placed media leaks recounting Marsalek's actions are helping the German political establishment craft a convenient political narrative: Blame it all on Russia.