German authorities have defended domestic regulators and politicians - including BaFin, the Germany equivalent of the SEC, along with Chancellor Angela Merkel's finance minister Olaf Sccholz - past the point of public believability. It's clear, as former CEO Markus Braun's lawyers are arguing, that the German officials who were tasked with holding companies accountable instead protected Wirecard - until Ernst & Young refused to sign off on the company's financial statements earlier this year after failing to track down more than $2 billion that the company claimed was stashed in the Philippines.
Wirecard's sudden slide into insolvency, which made several short-seller's rich, led to the arrest of Braun (whose formerly sterling reputation as an evangelist for the transformative power of data and technology has likely been forever blemished) while former COO Jans Marsalek managed to successfully evade authorities (it's believed he is hiding out in Russia, possibly with the protection of Russian intelligence services). Public fury was directed initially at Braun, who was released on €5 million bail, a massive sum for somebody who had the vast bulk of their wealth tied up in shares of a now-worthless company, but has since migrated to German regulators who ignored numerous reports from shortsellers over the years, even going on the offensive and targeting an investigative reporter from the FT, alleging some fantastical scheme about the reporter cooperating with short sellers.
In recent weeks, the perception that EY's business in Germany would simply weather this storm without any lasting repercussions has faded as German lawmakers and regulators have called for a criminal investigation into EY.
They claimed that top managers at EY's German unit were likely aware of Wirecard's fraud (at least, on some level), and likely enabled the company for years.
And on Tuesday, the FT - the paper that masterminded the investigation that brought Wirecard down - reported that German regulators purportedly have evidence that EY signed off on some of the company's results, even though auditors new some of the statements were "factually inaccurate". Apas, Germany's regulator that oversees auditing firms, has obtained the evidence, and is turning it over to prosecutors to help further a criminal probe.
Some of the wrongdoing dates to 2017, when EY reportedly gave Wirecard a pass despite the fact that the "issues" highlighted in EY's complaints to the company couldn't be easily resolved. In reality, the stonewalling of the audit team by executives at Wirecard was clearly suspect.
However, in 2017 EY was just days away from denying Wirecard the crucial all-clear, according to documents reviewed by Apas. On March 29 of that year EY warned Wirecard that a qualified audit was imminent and shared a draft version of a qualified opinion with its client, people familiar with the documents told the FT. One of the sticking points raised by EY were protracted delays to a forensic audit by EY’s anti-fraud team into alleged accounting manipulations at a Wirecard subsidiary in India, which was being stonewalled by Wirecard executives. Just days later, the auditors changed their minds. On April 5, they signed an audit opinion that stated: “Our audit has not led to any reservations.” Apas found that it was unreasonable to believe that the issues could have been resolved within a few days, according to people familiar with the matter. The watchdog told prosecutors that therefore EY’s unqualified audit was “factually inaccurate”.
In terms of personnel, it looks like the two key players on the EY side are Andreas Loetscher and Martin Dahmen, who were the lead partners of the EY unit charged with auditing Wirecard. Dahmen eventually left EY in 2018 to become the head of accounting at Deutsche Bank.
Last week the EY auditing partners, Andreas Loetscher and Martin Dahmen told MPs that they were being probed by Apas over their work for Wirecard and declined to give testimony to the parliamentary inquiry commission into Wirecard. EY told the Financial Times on Monday that because of “the ongoing confidentiality obligation” the firm and Mr Dahmen were unable to discuss details of the audit procedures at Wirecard. Based on its current understanding of the facts, "our colleagues conducted their audit procedures professionally, to the best of their knowledge and in good faith”, the firm said. The auditing firm stressed that it was "actively working towards a legally effective release from the confidentiality obligation after which we will be able to provide details." Mr Loetscher, who in 2018 left EY to become Deutsche Bank’s head of accounting, declined to comment. Apas previously said that it categorically does not comment about its work, pointing to strict legal confidentiality requirements. Munich prosecutors are evaluating the evidence sent by Apas and have not decided whether to open a criminal investigation of EY partners. Under German law, auditors found guilty of such misconduct can be punished with up to three years in jail.
Around the time Dahmen left, Wirecard infamously tried to cover up the massive fraud by engineering a buyout of Deutsche Bank. Though that deal apparently died on the vine.
Of course, DB had access to all the short-seller reports warning about potential fraud at Wirecard. But Dahmen's previous "experience" working on Wirecard's books could have of course been very relevant. And now Deutsche Bank is buying up some of the remnants of Wirecard's loan book.