EY warned Wirecard that special audit risked misinterpretation

EY told Wirecard that the draft of an independent audit report by KPMG lacked “context” and could lead to wrong conclusions about the business at the heart of an accounting scandal that has shaken corporate Germany.

The German payments group’s longstanding auditor intervened just a day before the April publication of the KPMG report which raised doubts about a company now exposed in one of the country’s biggest postwar accounting frauds.

KPMG had been unable to verify the existence of activities which, on paper, accounted for half of Wirecard’s revenue and all its operating profit. Two months later Wirecard collapsed after this third-party acquiring business (TPA), which was said to carry out payments processing for the company in countries where it lacked licences to operate, was shown to be a sham.

Documents reviewed by the Financial Times show that EY and Wirecard saw two drafts of the KPMG audit prior to its publication. The investigation had been commissioned by Wirecard in October in an effort to allay concerns over the group’s accounting and was overseen by the supervisory board.

On April 27, a day before the long-delayed report was eventually published, Andreas Budde and Martin Dahmen, auditors at EY, informed Wirecard of their concerns with how the third-party business was presented in a second draft of the audit they had seen that morning.

“According to our view, the topic of third-party acquiring needs to be put in an overall context,” they wrote to then-chief executive Markus Braun, other members of Wirecard’s management board and supervisory board chairman Thomas Eichelmann, according to a document seen by the FT. “Reporting solely on KPMG’s forensic investigation carries the danger of misinterpretation,” they noted.

They added that the second draft of the audit contained information that was inconsistent with that “provided by the company [Wirecard] or with the findings of our audit”. In the documents seen by the FT, Mr Budde and Mr Dahmen did not go into further detail or recommend specific changes to the draft. 

During the audit of Wirecard’s 2018 results, the TPA business was a particular focus of Mr Budde and Mr Dahmen. They gave it a clean bill of health.

Last month, the Financial Times reported that EY failed for more than three years to request crucial account information from a Singapore bank where Wirecard claimed it had up to €1bn in cash purportedly linked to the TPA business — a routine audit procedure that could have uncovered the vast fraud. Wirecard in June disclosed that the cash does “not exist” and that the TPA has been misrepresented to investors for years.

EY’s intervention came as Wirecard faced mounting pressure to get its 2019 financial results signed off by its long-term auditor. The once high-flying company was legally obliged to publish audited results by April 30, or risk fines and reputational damage.

When the findings of KPMG’s special audit were published on April 28, they stunned shareholders who had been repeatedly assured by Wirecard that nothing untoward had been found. Wirecard’s shares closed the day down 26 per cent.

Germany’s worst accounting scandal in decades has turned the spotlight on EY, which gave Wirecard unqualified audits for more than a decade. Apas, the country’s auditor oversight body, has started looking into EY’s work. Last month EY said that third parties had provided the firm with false documentation in connection with Wirecard’s 2019 audit.

Four days before the KPMG audit was published, one of the documents seen by the FT shows that Mr Budde and Mr Dahmen told Wirecard’s management board and Mr Eichelmann that a first draft revealed “differences in opinion” both between itself and KPMG, as well as between Wirecard and KPMG, over “several topics that were raised”.

EY also told the German group that additional steps suggested by its supervisory board and KPMG to clarify issues risked adding further delays in the auditing of the 2019 results.

In an email sent on April 24, EY informed Wirecard that it was still missing “essential documents” that it had been demanding for months, including evidence that money had been paid into escrow accounts as well as evidence that a number of clients existed. 

People familiar with the different versions of the report told the Financial Times that the parts about the TPA section in the published report do not differ from the draft. In the published report, KPMG stated that it could “neither make a statement that the [third party acquiring] revenues exist and are correct [ . . .] nor make a statement that the revenues do not exist and are incorrect”.

In a statement to the FT, EY said: “It has been widely reported that the independent forensic investigation undertaken by KPMG was mandated by the Wirecard management and supervisory boards. EY Germany was not a party to the forensic investigation, and KPMG is solely responsible for the content.”

Mr Budde and Mr Dahmen, via EY, declined to comment.

KPMG and Wirecard declined to comment.