Au­di­tor EY could face its ‘En­ron mo­ment’ amid Wire­card back­lash

Big Four ac­coun­tant has ques­tions to an­swer over its role in fin­tech’s col­lapse, re­ports Michael O’Dwyer

The Daily Telegraph - Business - - Business -

The dom­i­nance of the Big Four ac­count­ing firms seems unas­sail­able. They au­dit ev­ery FTSE 100 com­pany, en­joy sim­i­lar strength across the globe and their supremacy has left many peo­ple won­der­ing if they should be bro­ken up to boost com­pe­ti­tion.

Two decades be­fore Wire­card’s col­lapse, the same seemed true of ac­count­ing’s Big Five. The scan­dal that brought down Texan en­ergy ti­tan En­ron in 2001 forced its au­di­tor, Arthur An­der­sen, to hand in its li­cences. It left one less ri­val for Deloitte, Ernst & Young (EY), KPMG and Price­wa­ter­house­Coop­ers to com­pete against for lu­cra­tive work.

In 1999, En­ron launched En­ronOn­line, an elec­tronic trad­ing plat­form it hoped would rev­o­lu­tionise the en­ergy sec­tor and tur­bocharge prof­its by let­ting it in­sert it­self in trans­ac­tions for com­modi­ties and deriva­tives. Sold off af­ter en­demic fraud was un­cov­ered at En­ron, the plat­form was shut by 2002.

In the same year that En­ronOn­line launched, a fi­nan­cial ser­vices start-up was founded in Ger­many. Wire­card’s web­site claims it has spent the past 21 years “rein­vent­ing pay­ment”.

Sim­i­lar to En­ron’s ill-fated plat­form, Wire­card’s strat­egy was to in­sert it­self into the in­fra­struc­ture be­tween buyer and seller by pro­vid­ing the tech­no­log­i­cal plumb­ing needed to sup­port card pay­ments.

The spec­tac­u­lar demise of Wire­card af­ter au­di­tors at EY re­fused to sign off on its ac­counts be­cause €1.9bn (£1.7bn) of cash was miss­ing has al­ready been widely com­pared to the En­ron scan­dal.

While it was EY’s re­fusal to ap­prove the ac­counts that ul­ti­mately sparked Wire­card’s nose­dive into in­sol­vency last week, the fi­asco raises un­com­fort­able ques­tions for the firm.

EY au­di­tors failed to con­firm Wire­card’s cash bal­ances with its banks for three years prior to the com­pany’s col­lapse and in­stead re­lied on other doc­u­ments and screen­shots, the

Fi­nan­cial Times re­ported.

“On ev­ery au­dit you should get bank con­fir­ma­tions,” says a se­nior au­di­tor at an­other firm. “Th­ese need to come di­rectly from the bank. Cash is so crit­i­cal that this isn’t a ‘nice to have’, but a cor­ner­stone of the au­dit.” Muddy Waters, the Cal­i­for­nian hedge fund run by Car­son Block, tweeted last week that EY’s “shoddy” cash con­fir­ma­tion pro­ce­dures were all the more amaz­ing given the size of the bal­ances be­ing claimed.

“The size and odd­ity of th­ese claimed de­posits should’ve been huge red flags,” Muddy Waters said.

The saga has sparked a bliz­zard of prob­lems for EY. It is al­ready fac­ing a €1bn share­holder class ac­tion law­suit in Ger­many. The coun­try is look­ing at how it reg­u­lates ac­coun­tants and will no doubt scru­ti­nise EY’s work closely.

An EY spokesman says: “We’ve estab­lished that third par­ties, with a de­lib­er­ate aim to de­ceive, pro­vided EY with false doc­u­men­ta­tion in con­nec­tion with its 2019 Wire­card au­dit. The ex­tent and so­phis­ti­ca­tion of th­ese sug­gest a large-scale in­ter­na­tional fraud at Wire­card.

“Col­lu­sive frauds de­signed to de­ceive in­vestors and the pub­lic of­ten in­volve ex­ten­sive ef­forts to cre­ate a false doc­u­men­tary trail. Pro­fes­sional stan­dards recog­nise that even the most robust and ex­tended au­dit pro­ce­dures may not un­cover a col­lu­sive fraud.” The de­fence is un­likely to stop more hard ques­tions be­ing asked of the au­di­tors. “Of course they’re to blame. That’s what they get paid for,” says Mark Tluszcz, chief of ven­ture cap­i­tal firm Man­grove Cap­i­tal Part­ners.

EY had man­aged largely to steer clear of trou­ble in re­cent years while its ri­vals were hit with a se­ries of in­ves­ti­ga­tions and sanc­tions by watch­dogs. That has changed in the past eight months.

In the UK, in­ves­ti­ga­tions are un­der way into EY’s work check­ing the books of Thomas Cook be­fore it fell into liq­ui­da­tion and at Lon­don Cap­i­tal & Fi­nance, the mini-bond com­pany whose fail­ure left 11,600 or­di­nary in­vestors at risk of los­ing £237m.

EY earned al­most £14m as au­di­tor of NMC Health, the FTSE 100 hos­pi­tal op­er­a­tor that went into ad­min­is­tra­tion in April af­ter bil­lions of dol­lars of off bal­ance sheet li­a­bil­i­ties were found, spark­ing al­le­ga­tions of fraud.

Over­seas, Luckin Cof­fee – a Chi­nese chal­lenger to Star­bucks – also man­aged to in­flate rev­enues on EY’s watch.

A for­mer part­ner in the Dubai branch won $11m (£9m) in March af­ter he re­fused to cover up a client’s gold-smug­gling op­er­a­tion.

The mount­ing prob­lems both in Bri­tain and abroad over­shadow the swan­song this week of EY’s UK boss Steve Var­ley – who, as it hap­pens, joined the firm in 2005 from An­der­sen Con­sult­ing, an off­shoot of En­ron au­di­tor Arthur An­der­sen.

EY re­mains firmly one of the Big Four but, as one au­di­tor points out, Var­ley’s suc­ces­sor Hy­wel Ball has been handed a “steam­ing in-tray”.

The spec­tac­u­lar demise of Wire­card has been com­pared to the En­ron scan­dal in 2001

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