NAAT Audit & Accounting Challenge 2021
NAAT Audit & Accounting Challenge 2021
NAAT Audit & Accounting Challenge 2021
Behind the Wirecard scandal, EY failed to adequately check Wirecard’s cash balance and fulfil its duties as an
auditor…
For years, EY had been negligent with checking Wirecard’s cash balances in According to the ISCA Ethics Pronouncement (EP) 100 Part A, EY has
OCBC Bank… breached the following …
Section 120
Bank Singapore, where it had claimed to have up to €1bn in
Objectivity
There was a vested interest in having Wirecard as a client and
cash. hence, raises the question over the EY’s objectivity when
performing the audit,
Instead, the auditors relied on documents and screenshots
provided by a third-party trustee and Wirecard itself. EY earned nearly €10m in the audits of Wirecard over the
past decade. This huge sum of money could have impaired
EY’s objectivity when performing the audit.
The inability to find the missing cash (€1bn) claimed to have This is a routine audit procedure which should have been
Section 130
been sitting in the Singapore Books in OCBC… performed that could have uncovered the fraudulent figures in
Wirecard’s books.
There was uncessary reliance on documents and screenshot
… which ultimately led to the discovery of a fraud in Wirecard provided by third-party trustee and Wirecard to prove the
and filed for insolvency – revealing that €1.9bn in cash existence of the cash existence claimed by Wirecard’s books.
probably did “not exist”.
This shows EY did not exercise its professional competence to
act diligently in accordance with ISCA 100 Part A
Source(s): Financial Times
…thus this scandal have been prevented had EY complied with the ISCA Ethics Pronouncement (EP) 100.
In addition, according to the ISCA Ethics Pronouncement (EP) Had EY conducted its audit in accordance and strictly withholding
100 Part C, EY has also breached the following … the principles stated in the ISCA EP 100…
EY would have known that cash within the business is one of the
Information
most important aspect to verify through sending a confirmation of stakeholders of the company
Yet, it relied on confirmation of bank records prepared by by This would have maintained and strengthened the trust of the
third-parties financial system in Germany and EY’s reputation as a Professional
Accounting Firm
“Cash is easy to audit. If investors can’t trust the cash
number, what can they trust?” – Financial Times Article
…However, there are various actions which EY could explore
moving forward
Section 330.2 (b) and 330.4: “In performing duties with appropriate
Acting with Sufficient Expertise
EY should have known that bank confirmations and ... so that they would have the ability to flag out and investigate
statements provided by third parties is considered inadequate fraudulent behaviors and accounts early during the auditing process
information
Performing checks on audit engagements regularly
… and therefore, should not have continued to approve the
audit report … as this would ensure management and employees remains
Source(s): Financial Times
competent when conducting its audit
To obtain a license by Hong Kong authorities allowing Wirecard to dish out prepaid bank cards in the region, Wirecard
embarked on a ”round-tripping” scheme, inflating its revenue to compel authorities to consider their application…
Why did Wirecard need a license? How did they implement “round-tripping” What is the impact on the statements?
In a traditional “cash is king” society, Hong According to WallStreetMojo, “round-tripping” is an 2018 2017 2016 2015 2014
Kong has developed rapidly into digital and illegal way to inflate revenues by swapping assets or
mobile payments society with the Hong Kong shell transactions, that are done usually on a no-profit Revenue €2,016 €1,489 €1,028 €771 €601
Monetary Authority (HKMA) issuing stored basis through a mutual settlement or an agreement. million million million million million
valued facilities (SVF) licenses in 2016 and
virtual banking licenses in 2019.
Repatriation Growth 35% 45% 33% 28%
Funds Funds
EPS €2.81 €2.07 €2.16 €1.16 €0.89
…which Ernst & Young (EY) could and should have discovered if they had exercised their due diligence and tested for
various financial statement assertions.
However, diving deeper into Wirecard’s corporate governance structure, its board of directors should have been
responsible for failing to detect the fraud scandal…
Wirecard’s current corporate governance board structure is as such… However, Wirecard’s board of directors failed to …
Wirecard was run on a two-tier board system - run by executives on a For a long time, there was no Audit Committee in the CG structure of
management board and a supervisory board of non-executives, whose Wirecard prior to 2019, which explains why the Supervisory Board failed to
explicit duties are appointing, supervising and advising the managers. conduct their independent internal investigation of the several allegations
Refer to Appendix D for detailed board structure relating to Wirecard’s accounting practices much earlier.
Wirecard’s Supervisory Board always had the mentality of “monitoring” and
Wulf Matthais was both the Chairman of the Supervisory Board and the
“be informed”. It comprised of just three directors and the number eventually
Chairman of the Audit Committee. However, doing so may limit the
rose to five in 2016. The company had no supporting committee like audit
effectiveness of the Audit Committee to carry out its fiduciary duties and
committee and risk management committee until early 2019.
responsibilities to Wirecard. Refer to Appendix D for detailed board structure
… with a compensation structure to align the interests …which was a breach of duty.
For the board of directors, it is impossible to perfectly observe the actions of Wirecard did not comply with the 90-day publication deadline for financial
management. Thus, in order to ensure that management acts in the best statements provided for in the German Corporate Governance Code, instead
interest of the shareholders, their compensation is closely tied to the taking advantage of the longer statutory periods.
performance of the company, which was the stock performance.
The board performed the “tasks incumbent on it pursuant to the law,”
With its compensation structure, Wirecard’s management was under heavy implying a box-ticking mindset. It took yet more pressure from the FT before
market pressure to continue showing a business growth consistent with Wirecard engaged KPMG for an independent audit in October 2019.
historical trends which showed tremendous growth.
Refer to Appendix E for detailed compensation structures
of compensation of the Management Board in FY 2018 was performance- Hence, the board of directors had breached its duty of care as they failed to
35% based compensation, measured by EBITDA growth and stock performance
equally.
conduct their independent internal investigation of the allegations relating to
Wirecard’s accounting malpractices and also failed to prevent management
Refer to Appendix F for detailed compensation of executives from wrongdoing. Thus, they were responsible.
Source(s): Wirecard, Washington Post, IDW Paper, The Financial Times
Hence, introducing our proposed recommendations – (1) Restructuring corporate governance boards with specific
measures in place to protect the interests of stakeholders
Having a supporting committee within the supervisory board… … complemented with appropriate continuous measures
Such requests must be channeled via the chair of the audit committee to Consolidated financial statements and group management report should be
ensure oversight, who must then provide the requested information to all published within 90 days of the end of the financial year be required by law,
other audit committee members and must also inform the management Procedures governed and vetted by the audit committee of the board.
board of the information request without undue delay.
Thus, with a compulsory supporting committee within the supervisory board, complemented with continuous measures in place, this would enhance the competence and capacity
of supervisory boards to act in the monitoring of entities. Hence, this would improve corporate governance structure of the board of directors.
Source(s): Gibson Dunn, IDW Position Paper, Deloitte Report 2018, CFA Institute
(2) Coupled with a revamp its internal control measures, with enhanced transparency to all stakeholders…
Introducing a new transparent compliance management system… …enhanced by the help of auditors for risk management.
A compliance management system, which is designed to prevent white-collar To provide enhanced support to the Supervisory Board in performing its
crime in the form of balance sheet fraud or misappropriation of assets. In monitoring function, auditors should audit the appropriateness and
addition, the Management ought to report publicly on the basic features of effectiveness of the compliance management system set up by the
the system and issue a statement confirming that it has established. Management Board as part of the audit of financial statements.
As part of its supervisory responsibilities, the Supervisory Board has the To strengthen confidence in the accuracy and completeness of this
responsibility to monitor the Management Board’s compliance and then also statement, the (group) statement on corporate governance should be made
examine whether the Management Board has fulfilled its duty to establish a a mandatory part of the audit of financial statements
workable, appropriate and effective compliance management system.
THIS IS BECAUSE…
Thus, with a new compliance management system managed by the supervisory and management boards, coupled with audit procedures in check,
this would enhance the transparency and compliance procedures within public entities, hence restoring confidence among investors.
Furthermore, while Wirecard’s external auditor (EY) was indeed responsible for failing to uncover the vast fraud at
Wirecard…
As Wirecard’s external auditor, EY is expected to increase the financial … Yet, for the past decade, EY has failed to spot a series of fraud risk
statements transparency and makes disclosures more accountable… indicators and allowed Wirecard to continue its fraud for many years
Nonetheless, it is plausible to give EY the benefit of doubt that they were unable to discover the fraud after so many years
“Even the most robust audit procedures may not uncover this kind of fraud”.
• Given that Wirecard had planned such an elaborate and sophisticated fraud, which involved multiple parties around the world in different institutions, it is
plausible that EY was unable to discover the fraud
• In the aftermath of the discovery of the fraud, EY also fully co-operated and supported the parliamentary inquiry committee (PIC) throughout the course
investigations
Source(s): Financial Times, International Standard on Accounting, European Journal of Business and Management Research
… there were other stakeholders involved, who were responsible for failing to uncover the fraud as well.
The primary role of a company’s Audit Committee is to provide oversight The primary role of BaFin is to ensure the stability and integrity of the
of the financial reporting process, the audit process, the company’s German financial system including identifying and eliminating financial
system of internal controls, and compliance with laws and regulations. crime. This includes promoting anti-money laundering in Germany.
Yet, the formation of the Audit Committee was too late and the internal Yet, BaFin failed to adequately supervise Wirecard and even downplayed
auditors were ineffective in carrying out its fiduciary duties and allegations and opened probes into accusers, which eventually resulted in
responsibilities: a recurring pattern and the fraud remained undetected for many years:
Allegations of
accounting irregularities, Allegations of Formation of Audit Wirecard filed for
“Round Tripping” Committee insolvency Whistleblowers and journalists accuse Regulators side with Wirecard remains unscathed and
money laundering etc.
Wirecard of improprieties Wirecard continues expanding
No independent No independent
internal investigation
internal investigation
What BaFin Did:
• The Supervisory Board committees (e.g. the Audit Committee, the Risk and • Unprecedentedly banned short-selling in Wirecard stock for a period of time when
Compliance Committee) were not formed until the first quarter of 2019 the firm’s share price slid after allegations of false accounting surfaced, citing:
• The absence of the Supervisory Board committees, especially the Audit Committee, “Wirecard’s importance for the economy and the serious
in the CG structure of Wirecard prior to 2019 explains why the Supervisory Board threat to market confidence”
failed to conduct their independent internal investigation of the several
• Filed a criminal complaint against two FT journalists who reported the
allegations, which allowed the fraud to be undetected for many years
whistleblower allegations about Wirecard and its round tripping scheme
• Even after the formation of the Audit Committee, the effectiveness of the
Committee to carry out its fiduciary duties and responsibilities was limited as the • Assigned the Financial Reporting Enforcement Panel (FREP), a small private-sector
Chairman of the Supervisory Board and Audit Committee is the same individual body, to audit Wirecard’s accounts instead of investigating by themselves. As only
one auditor at FREP was assigned to the Wirecard case, little progress was made.
Source(s): Financial Times, Practical Ecommerce, European Journal of Business and Management Research
1. Wiggenraad, P. & Lung, T. (2019). Digital payment in Hong Kong. Tofugear. Retrieved from
https://www.wirecard.com/uploads/knowledge-hub/white-paper/digital-payment-in-hong-kong.pdf
2. Thakur, M. & Vaidya, D. (n.d.). Round tripping. WallStreetMojo. Retrieved from https://www.wallstreetmojo.com/round-
tripping/
3. Spotting red flags: Wirecard edition. (2020, July 22). The Financial Times. Retrieved from
https://www.ft.com/content/f70686c7-473c-4a5b-90b0-89094b534394
4. Storbeck, O. (2021, June 24). Wirecard: a record of deception, disarray and mismanagement. The Financial Times.
Retrieved from https://www.ft.com/content/15bb36e7-54dc-463a-a6d5-70fc38a11c81
5. Storbeck, O., Kinder, T., & Palma, S. (2020, June 26). EY failed to check Wirecard bank statement for 3 years. The
Financial Times. Retrieved from https://www.ft.com/content/a9deb987-df70-4a72-bd41-47ed8942e83b
6. McCrum, D. & Palma, S. (2019, February 7). Wirecard: inside an accounting scandal. The Financial Times. Retrieved from
https://www.ft.com/content/d51a012e-1d6f-11e9-b126-46fc3ad87c65
7. Jo, H. & et al. (2021, March 25). Corporate governance and financial fraud of Wirecard. European Journal of Business
and Management Research. Retrieved from https://www.ejbmr.org/index.php/ejbmr/article/view/708
8. Eckler, M. (2021, February 23). The Wirecard Fiasco: Digital Payments Gone Wrong. Practical Ecommerce. Retrieved
from https://www.practicalecommerce.com/the-wirecard-fiasco-digital-payments-gone-wrong.
APPENDIX
Audit and Accounting Challenge 2021
Appendix 14
1. Behind the Wirecard scandal, EY failed to check Wirecard’s cash balance and A. APPENDIX A: A Flowchart Diagram of how Round-tripping Works by
fufil its duties as an auditor… WallStreetMojo
2. This situation have been prevented earlier if EY had complied with the ISCA B. APPENDIX B: Wirecard’s Key Financial Metrix from Wirecard AG 2018 & 2019
Ethics Pronouncement (EP) 100… Half Year Annual Report
3. To obtain a license by Hong Kong authorities allowing Wirecard to dish out C. APPENDIX C: Key Liquidity Financial Metrix from Wirecard’s AG 2018 Annual
prepaid bank cards in the region, Wirecard embarked on a ”round-tripping” Report
scheme, inflating its revenue to compel authorities to consider their D. APPENDIX D: Overview of Wirecard’s Management Board and Supervisory
application… Board
4. …which Ernst & Young (EY) could and should have discovered if they had E. APPENDIX E: Summary of Wirecard’s Compensation Structure
exercised their due diligence and tested for various financial statement F. APPENDIX F: Summary of Wirecard’s Compensation of Management Board
assertions. G. APPENDIX G: Summary of Incentives for Management Board to Manipulate
5. However, diving deeper into Wirecard’s corporate governance structure, its Earnings
board of directors was responsible for failing to detect the fraud… H. APPENDIX H: Wirecard’s Board Expertise and Skills Matrix
6. Hence, introducing our proposed recommendations – (1) Restructuring its
supervisory board with specific measures in place to protect the interests of
stakeholders
7. (2) Coupled with a revamp its internal control measures, with enhanced
transparency to all stakeholders…
8. Furthermore, while Wirecard’s external auditor (EY) was indeed responsible
for failing to uncover the vast fraud at Wirecard…
9. … there were other stakeholders involved, who were responsible for failing
to report the fraud as well
Source(s): WallStreetMojo
APPENDIX B: Wirecard’s Key Financial Metrics from Wirecard AG 2018 & 2019 Half Year Annual Report
APPENDIX C: Key Liquidity Financial Metrics from Wirecard’s AG 2018 Annual Report
Source(s): European Journal of Business and Management Research, Wirecard AG 2018 Annual Report
Source(s): European Journal of Business and Management Research, Wirecard AG 2018 Annual Report
Source(s): European Journal of Business and Management Research, Wirecard AG 2018 Annual Report