German audit watchdog bans EY due to Wirecard work

Due to shortcomings in its work for the defunct payments business Wirecard, EY has been prohibited from accepting any new listed audit clients in Germany for two years.

Apas, the nation's audit watchdog, also imposed a €500,000 fine for EY and fines ranging from €23,000 to €300,000 for each of its five current and former employees.

Without going into greater information about the violations, Apas stated in a statement on Monday morning that it "considered violations of professional duties during the audits of Wirecard and Wirecard Bank from 2016 to 2018 as proven."

There has not been a formal determination of whether EY acted with intent or only with negligence, which will be a crucial issue in determining the firm's criminal and civil obligations, according to persons familiar with the regulator's thinking.

Top executive Andy Baldwin described the fines as "severe" in a statement issued to EY partners.

He continued, "This has been a deeply challenging chapter for our organization, and for EY Germany in particular. It is not an audit EY Germany is proud of."

White-collar crime specialist Konrad Duffy of the German consumer advocacy group Finanzwende said, "This penalty sends a clear message." The regulator, he continued, has long been acting too softly with Wirecard and needed to act "more decisively."

Klaus-Peter Naumann, chair of Germany's Institute of Public Auditors IDW, described the two-year suspension as "quite a severe sanction which we have not seen before in Germany."

Following the incident, Germany increased the liability for all auditors and tightened the rules governing the sector.

The government has increased the authority of Apas and Germany's financial watchdog BaFin and boosted the maximum fine for professional misconduct to €1 million.

Apas filed a criminal case against numerous EY audit partners following the collapse of Wirecard in 2020, citing evidence that the company may have willfully provided factually false audit opinions. Despite conducting an investigation, the prosecution has not yet brought any charges.

EY has come under fire from the prosecuting attorney in the ongoing criminal case against former Wirecard CEO Markus Braun and two other top executives for allegedly neglecting to take action when there was clear evidence of fraud at the German payments company.

In one of Europe's worst postwar accounting scandals, Wirecard declared bankruptcy in June 2020 after admitting that €1.9 billion in corporate cash and 50% of its revenue were fakes. It had more than ten years of unqualified audits from EY.

In a statement, EY Germany stated that it will "carefully" review the Apas ruling but had not yet obtained the detailed legal conclusion.

The company stated that it had taken "significant action" to enhance the audit quality and risk management, adding that it regretted that the collusive fraud at Wirecard had not been identified earlier and that it had learned valuable lessons from the incident.

Also, it has installed a new management team and added more controls. The company stated that "EY Germany is a different organization today" and added that it worked closely with Apas on the investigation.

The Apas ban was praised by Hansrudi Lenz, a retired accounting professor at the University of Würzburg. That will further harm EY's reputation, he said, adding that he thought the fine and ban together will serve as a warning and boost audit quality more broadly.

Apas initially intended to target 12 current and former EY audit personnel, but seven of them resigned from the industry and surrendered their licenses. This implies that the regulator cannot penalize them.

Following the scandal, the company lost a number of significant audit clients, including Commerzbank, DWS, and KfW, and it has not lately secured any sizeable new mandates. As part of attempts to increase profitability, it announced in January that it planned to reduce employment in Germany.

By fLEXI tEAM