EY sued over Wirecard audit after management board comes under investigation

Written by Ruby Hinchliffe
9th June 2020

Longstanding auditor for Wirecard, Ernst and Young (EY), is being sued by law firm Wolfgang Schirp on behalf of investors for allegedly failing to flag a €1 billion accounting error for the payments company from 2018. The lawsuit follows a raid of Wirecard’s headquarters on 5 June by Germany’s financial regulator, BaFin.

Wirecard faces allegations of accounting fraud which are currently being investigated by KPMG

BaFin has initiated proceedings against “the entire board of directors”, and started searching the company’s headquarters in Aschheim on 5 June. The responsible public prosecutor’s office in Munich told the Handelsblatt on 5 June: “We can confirm that a few days ago BaFin filed a criminal complaint against those responsible at Wirecard for suspected market manipulation.”

The investigation had its entire management board face a criminal complaint “for suspected market manipulation based on the fact that those responsible at Wirecard could have given misleading signals for the stock market price of Wirecard AG shares through the ad hoc announcements of 12 March and 22 April 2020”.

These ad hoc announcements were in relation to the ongoing KPMG investigation, and though not publicly available, may have given investors the impression that the upcoming report could alleviate all allegations against Wirecard.

But at the end of April, KPMG stated that its investigators had been “unable to conclusively assess” the reliability of confirmations sent by Wirecard to its auditor EY. It also wrote that it had encountered an absence of original documents and “significant delays” in accessing material.

The latest criticism of EY’s work follows a court battle in April which saw the auditor lose a seven-year $11 million case to whistle-blower Amjad Rihan. It is also currently being investigated for its auditing of NMC Health, the hospital administrator which collapsed in April.

Wirecard, which is complying with BaFin, has confirmed the searches and told the Handelsblatt: “The board is confident that the matter will clear up and the allegations will prove to be unfounded.”

The German regulator said it is still waiting for information from the KPMG audit

Upon reports surfacing, Wirecard shares lost more than 10% of their value in late trading on Friday in Frankfurt.

A BaFin spokeswoman says it “regularly check[s] whether listed companies provide the capital market with timely, complete and not misleading information about inside information”.

“If we find any evidence that this was not the case, we file a complaint with the public prosecutor. Because incorrect, incomplete or otherwise misleading information such as ad hoc releases, can be prohibited market manipulation,” she added.

The German regulator said it is still waiting for information from the KPMG audit which will inform and complete its finding on the alleged market manipulation.

“The investigation as to whether Wirecard may also have misleadingly communicated and thus committed market manipulation has not yet been completed. Here we were and still are dependent on the findings of other bodies – especially the auditor (KPMG, EY). We absolutely need their findings on any accounting violations.”

The presentation of Wirecard’s 2019 annual balance sheet is due for 18 June, after being postponed three times since 8 April. The company has blamed the delay on “coronavirus-related travel restrictions, especially in Asian countries”.

Wirecard CEO Markus Braun

Last month, Wirtschafts Woche reported that German public sector bank Deka – a 1.6% stake holder in Wirecard – called for the removal of its chief executive Markus Braun.

Ingo Speich, the bank’s head of sustainability and corporate governance, told Handelsblatt: “The situation at Wirecard has worsened rather than improved in recent weeks. The negative news prevails […] The governance problems are now weighing so heavily on the share price – even operationally good results have a hard time having an impact.”

Braun told major investors in spring: “Don’t worry, everything will be fine.” And after the KPMG special audit report surfaced, which prompted Deutsche Bank to suspend its investment recommendation on Wirecard stock. Braun said in an analyst call that the auditor EY had “no problems at all” to release the 2019 annual balance sheet.

And earlier in March, the firm had said: “From today’s perspective, there are no substantive findings that would require correction for the annual financial statements in the 2016, 2017 and 2018 investigation period.”

This was followed by another note at the end of April: “No evidence was found for the publicly charged allegations of balance sheet manipulation.”

Braun has previously blamed his company’s rapid growth and international expansion for problems with regulatory compliance. In 2019, a group of white-collar crime investigators raided Wirecard’s offices in Singapore multiple times in connection with allegations that sales and profits were invented at numerous subsidiaries across Asia.

The payments company also suffered a fresh blow last month, when Al Alam Solution Provider, Wirecard’s most significant business partner of recent years, announced its liquidation, as reported by the Financial Times.

The arrangement with Al Alam and the two other partners contributed the “lion’s share” of the €985 million operating profit reported by the German group between 2016 and 2018.