When he was still a swindler in his main job, Oliver Bellenhaus always guided himself by one key question: “Is the auditor happy?” That was always crucial, said the accused and key witness a few weeks ago in the first Wirecard criminal case at the Munich Regional Court. The books of the insolvent payment service provider were always tailored to deceive the auditors, invented invoices, signed bogus contracts, forged e-mails. For years, the managers of the group got away with it until the alleged billion-dollar fraud was exposed in the summer of 2020.
The billion bankruptcy of Wirecard illustrated how easy it is to make accountants happy while at the same time not realizing that they are dealing with documents from suspected fraudsters. EY, one of the “Big Four” global accounting firms, continues to suffer from the failure to this day. For years she had certified Wirecard balance sheets – without restrictions. The German auditing authority APAS wants to complete its proceedings against EY and twelve former or current auditors in the spring. Both the company and the individual face severe penalties.
The Wirecard scandal also stirred up Brussels. The EU Commission wanted to regulate auditors more strictly. The last regulation followed the global financial crisis. At that time, a central conflict of interest between the “big four” was to be prevented once and for all, namely by a mandatory separation of the lucrative consulting business from the perhaps boring but important for the overall economy auditing business. In the end, nothing came of it, probably also because the auditors’ lobby had so vehemently opposed it.
The Commission is now in no hurry to introduce reforms
The lobbyists in Brussels could have had a similar amount to do for the new year. Because the EU Commission wanted to present new reform proposals, written as a draft law, by the end of 2022. This was announced by Financial Markets Commissioner Mairead McGuinness in May 2021. “If we can’t be sure that auditors work thoroughly and that an auditor’s signature has real value,” the Irishwoman said at the time, “we have a big problem.”
Now the Commission doesn’t seem to be in such a hurry – and it seems that no one within the authority could agree on specific reform proposals. It’s about complex issues, said McGuinness in her most recent speech in December: “We have to evaluate the problems with the audit framework more precisely. (…) And we need more time to find a consensus on political options.”
Last but not least, Russia’s war against Ukraine has shifted priorities, according to the EU’s top authority. In the area of financial market regulation, 15 ongoing legislative procedures are currently being discussed. The officials want to propose seven more this year. With regard to a reform of the final examination, the preparations, including a study, took longer than expected – it would be difficult to finish by the next EU elections in just over a year. “And finally, although the problems in the audit market are already relatively well recognized, we need more time to agree on the political measures,” said the hallways of the Berlaymont.
In fact, the problems in the market have not only been discussed a lot since the Wirecard case. EY, PwC, KPMG and Deloitte still form a kind of oligopoly when it comes to auditing balance sheets. Hardly anyone can get past them – they split 2 percent of the audit fees across the EU9 among themselves. Large, listed companies in the EU have had to change their auditors at least every ten years since 2016. This is intended to prevent sloppiness arising from habit and too close a relationship between the auditor and the audited company. “But more than half of the companies invite only the big four to submit a bid. Because the costs of participation are high, smaller audit firms often do not participate in tenders, even if they are invited,” says Sebastian Mack, an expert on European financial markets at the Jacques Delors Centre. Mack says he can’t understand why the EU is “further delaying” the reform of auditing. There is no reason to wait any longer: “After public consultation, an ESMA special report on Wirecard and relevant studies by Parliament and the Commission, there is definitely enough material for a legislative proposal.”
Auditors fail again and again, such as in 2001 at the US energy company Enron
Auditors fulfill a kind of sovereign task for the general public when they control company balance sheets. Banks and shareholders only give money if they can rely on the specialists’ attestations being reliable. In Germany, graduates take an oath to do their work carefully, objectively and conscientiously. A corresponding code of conduct also applies internationally for this profession.
Still, the list of failures is long. The bankruptcy of the American energy trading giant Enron in 2001 triggered alarms worldwide for the first time: the company’s success existed only on paper. For years, Enron had done business with itself through a network of more than 2,000 partner companies. Arthur Andersen’s auditors didn’t notice – or didn’t want to notice.
Based on the lessons learned from the Wirecard debacle, Germany has tightened the rules for the supervision of auditors in 2021. The Financial Market Integrity Act stipulates that stock corporations must now change their auditors every ten years, supplemented by a mandatory internal rotation of auditors at the auditing company. Counseling and testing are more separated from each other. Also the financial regulator Bafin has more rights: It can subpoena and question the managers of an audited company and its auditor.
But there are still no uniform rules for all EU member states. In particular, when sanctioning unsatisfactory audits, for example if the auditor does not drill deep enough, as in the Wirecard case, or found errors but did not object. “The maximum penalties for violations range from 14,300 euros in Latvia to five million euros in Portugal,” says Mack. Between 2017 and 2020, fines of more than one million euros were imposed only four times across the EU. “Big audit firms pay such penalties out of petty cash.” Sebastian Mack demands: “If the EU Commission wants to prevent scandals like Wirecard in the future, it must initiate fundamental reforms. This also means that the European Securities and Markets Authority (ESMA) should directly supervise the largest auditing companies.”