In 2020, Wirecard AG, one of Germany’s largest payment processors and financial service providers, filed for bankruptcy. The media revealed that the company lost 1.9 billion euros in cash due to false financial reporting and corrupt business practices. Its collapse has brought into the spotlight four of the world’s largest accounting firms – KPMG, Ernst & Young (EY), PwC and Deloitte. Also known as the Big Four, their credibility and the integrity of their work are now being called into question.
Almost all companies are subject to annual audits. It is carried out by a separate, independent private body that audits all of the company’s financial statements for the year.
Auditors examine the financial condition of a company. Auditors confirm or challenge the accuracy of what a company says about its financials. The annual audit also provides information about the company so that current and potential investors and shareholders can check: is it serious? Is it a good investment?
The companies want audits marked with an “unqualified opinion,” meaning the auditors found nothing wrong and have no concerns about the financial statements. However, if the audited company is underfunded or overfunded, it will receive a “modified audit opinion”. It’s a solid system, but what happens when auditors make mistakes and miss anomalies? Or worse, if they willfully turn a blind eye to fraud?
For example, Wirecard AG is a stable company in which many people put their pensions into buying shares. At least everyone thought so. It accepts an “unqualified opinion” audit by Ernst & Young, one of the “Big Four” auditors, every year. Unfortunately, when news of the scam broke, the stock price plummeted.
It raises several questions, including “how could EY have missed all the signs of fraud”? Did they miscalculate or did the audit process go wrong? Did they choose to see it differently? How many other Wirecard AGs have received high ratings and seals of approval from the Big Four, are using investors’ hard-earned money, but are ready to crumble?
Is there a problem with the system? Companies pay the Big Four to have them properly audited. Auditors want to make sure what they see is accurate so they can get paid, prompting them to overlook any discrepancies in financial records. Conflicts of interest also arise because the Big Four also act in an advisory capacity. In fact, they make more money from consulting than from testing. Do they also offer advice on how to cook the books?
It also doesn’t help that the Big Four are said to have helped draft finance-related regulatory laws and regulations, drawing criticism for setting their own rules. But believe it or not, they’re probably the only thing that can keep a big company in check. We hope so.
Directed by: Christina Dierschke, Stefan Ebling
