“Quality before growth, quality before margin.” It could be the mantra of a fastidious Swiss chocolatier, a 750-year-old Japanese knife manufacturer or an English maker of hand-built wooden cars. But it is actually the new positioning from scandal-racked EY Germany.
Scarred by its role as auditor to fraudulent payments group Wirecard, the Big Four firm has searched its soul (more thoroughly than it searched Wirecard’s books) and this week announced “the most comprehensive process of change in its more than 100-year history”.
Sacrificing growth is a marked departure for a firm that doubled its market share among German blue-chips in the three years before Wirecard’s 2020 collapse, stealing clients from KPMG and PwC and taking its revenues in the country above €2bn.
But it is not clear from the internal memo sent this week that EY Germany really has come up with the prescription to avoid the next scandal.
For help, the accounting group looked to a team of “independent outsiders”, much as shareholders hope auditors are the independent outsiders monitoring a company’s financial statements.
Whether it is the right team you can decide. It included 83-year-old former German politician Theo Waigel and Hans-Michael Gaul, a Volkswagen director during the time the carmaker was cheating on its emissions tests.
Informed by this special committee, one of EY’s proposals is for its auditors to work less. Hiring more people and trying to limit overtime would help solve “permanent occupational stress and overburdening” among its audit staff.
Was this the problem in the case of Wirecard? An inquiry into EY’s audits found that staff tested the payments group’s systems by, among other things, subscribing to a porn site and buying digital goods for a Fifa video game.
That might suggest the job was quite relaxed but the real sin is less obvious. The auditors allowed Wirecard staff to pick the (fake) merchants selling the products. And so the test was tainted and the fraud continued.
Most egregiously, the EY auditors failed to verify the company’s stated cash. Instead of approaching banks directly to confirm Wirecard’s balances, the auditors relied on forged documents from a sham trustee in Singapore. Eventually, a €1.9bn hole was discovered.
Was this a lack of time or just laziness? And how much will it help for EY to “expand and refine our mentoring and buddy programmes”?
Another way EY is planning to relieve the pressure on hapless auditors is “to use the opportunities of artificial intelligence”. This sounds familiar. Another company once announced a whole “fraud prevention suite” which would use “machine learning and artificial intelligence”. That company was Wirecard.
What about not taking on dubious clients or dropping them? EY wants to strengthen its “monitoring of the acceptance and continuation of mandates”. Which makes it sound complicated.
In fact, accusations of wrongdoing by Wirecard were there at the very start of EY’s relationship with the company. The auditors were first hired in 2008 for a special audit in response to allegations of problems in Wirecard’s financial statements. After giving the company a clean bill of health, it became the group auditor and stayed there for 10 years even as the FT published increasingly damning evidence.
Missing from the internal memo is a thorough accounting for EY’s failures. Many of the people directly involved are still working at the firm. EY continues to admit no wrongdoing.
