BUSI 3163 Advanced Corporate Reporting and Analysis
AGS CASE STUDY NOTES - wirecard
Contents
a. Auditor .......................................................................................................... 3
b. Independence of auditors ............................................................................. 4
c. Negligence ..................................................................................................... 7
d. The limitations of audit procedures ............................................................ 10
e. Corporate Governance ................................................................................. 11
f. Role of leaders (CEO, CFO) .........................................................................14
g. Tone at top, Ethical dimensions (CULTURE) ............................................. 15
h. Two tier system ............................................................................................19
i. Lack of integrity and transparency. RISK OF FRAUD ................................ 21
j. Internal control systems and risk management ......................................... 24
k. Role of financial regulators ......................................................................... 29
l. Encouraging whistle blowers ...................................................................... 32
m. Carillion...................................................................................................... 33
n. Wells Fargo ................................................................................................. 34
o. Steinhoff ...................................................................................................... 34
p. Barrings....................................................................................................... 34
q. Enron .......................................................................................................... 35
r. Olympus ...................................................................................................... 36
1
, Questions that will be related to the
particular topic.
• Conflict of Interest The problem/situation of Wirecard,
• On Inorganic Growth related to the topic.
• Why auditors fail
Concepts that can be used on the topic.
• COSO’s Control Environment
• Recommendation
Recommendations provided for the
• Audit rotation
problems on the topic.
• Strengthen Accountability
2
, • Role of Auditor
EY held a moral duty to oversee and ensure Wirecard was meeting its duty of fair
play and transparency. Particularly significant is the presence of a conflict of interest in
EY’s audit function. The failure of EY in its negligence in spotting Wirecard’s malpractice
sheds light on the conflict of interests present in most audit firms’ work with their clients,
an area which clearly requires more regulation in order to ensure ethical standards are
met. EY has shown similar negligence with companies NMC Heath and Luckin Coffee in
2020, demonstrating conflicts of interest are endemic within this firm and across this
field.
Although ethical issues may be inherent in the field of audit services as it stands,
there are nonetheless individual agents involved within EY. Martin Dahmen, Andreas
Budde, Andreas Loetscher and Ralf Broschulat were the EY auditors responsible for
approving Wirecard’s accounts since 2013. They negligently signed off accounts without
fulfilling their audit duties raising questions as to why, as individuals, they chose to look
the other way, fail to meet audit standards, and ignore Wirecard’s increasingly evident
fraud.
Fundamentally, external audits are a response to the agency problem between
outside investors and corporate insiders, in particular, management. Outside investors
rely heavily on audited financials to get information on what insiders do with their
money. For this reason, credible financial reporting is viewed as a cornerstone of well-
functioning capital markets (Summers 1999) and audits play an important role in
facilitating the trust needed for broad investor participation. The credibility of audit
opinions depends crucially on auditor independence.
3
, • Familiarity/trust threat
A familiarity (or trust) threat arises when the firm or a covered person predisposed to
accept, or is insufficiently questioning of, the point of view of an entity relevant to the
engagement. Such threats may arise, for example, where close personal relationships are
developed with such an entity's personnel through long association with the entity.
• Conflict of interest ᐁ
Auditors collected large amounts in audit and non-audit fees.
raise questions about the value of company audits, auditor independence and
quality of audit work, economic incentives for good audits and the knowledge base of
auditors
the client-based relationship between the audit firm and its client, in this case EY
and Wirecard respectively, creates a conflict of interest. These conflicts of interests take
place because the firm is supposed to serve interests other than their own. It is in EY’s
interest to sign off Wirecard’s accounts so that it continues to be hired and have a
recurring, stable client. However, it is EY’s duty to serve the universal, non-personal, duty
of transparency over both their clients’ and their own interests.
Shutting down investigations by wirecard
EY had an internal whistleblower in May 2016 who raised fraud allegations against
Wirecard and reported an attempt to bribe an auditor in India. This incident triggered an
investigation by EY, which supposedly shared information with its group audit team, but
was eventually shut down at the behest of Wirecard management, which oversaw this
investigation, rather than the supervisory board
4
AGS CASE STUDY NOTES - wirecard
Contents
a. Auditor .......................................................................................................... 3
b. Independence of auditors ............................................................................. 4
c. Negligence ..................................................................................................... 7
d. The limitations of audit procedures ............................................................ 10
e. Corporate Governance ................................................................................. 11
f. Role of leaders (CEO, CFO) .........................................................................14
g. Tone at top, Ethical dimensions (CULTURE) ............................................. 15
h. Two tier system ............................................................................................19
i. Lack of integrity and transparency. RISK OF FRAUD ................................ 21
j. Internal control systems and risk management ......................................... 24
k. Role of financial regulators ......................................................................... 29
l. Encouraging whistle blowers ...................................................................... 32
m. Carillion...................................................................................................... 33
n. Wells Fargo ................................................................................................. 34
o. Steinhoff ...................................................................................................... 34
p. Barrings....................................................................................................... 34
q. Enron .......................................................................................................... 35
r. Olympus ...................................................................................................... 36
1
, Questions that will be related to the
particular topic.
• Conflict of Interest The problem/situation of Wirecard,
• On Inorganic Growth related to the topic.
• Why auditors fail
Concepts that can be used on the topic.
• COSO’s Control Environment
• Recommendation
Recommendations provided for the
• Audit rotation
problems on the topic.
• Strengthen Accountability
2
, • Role of Auditor
EY held a moral duty to oversee and ensure Wirecard was meeting its duty of fair
play and transparency. Particularly significant is the presence of a conflict of interest in
EY’s audit function. The failure of EY in its negligence in spotting Wirecard’s malpractice
sheds light on the conflict of interests present in most audit firms’ work with their clients,
an area which clearly requires more regulation in order to ensure ethical standards are
met. EY has shown similar negligence with companies NMC Heath and Luckin Coffee in
2020, demonstrating conflicts of interest are endemic within this firm and across this
field.
Although ethical issues may be inherent in the field of audit services as it stands,
there are nonetheless individual agents involved within EY. Martin Dahmen, Andreas
Budde, Andreas Loetscher and Ralf Broschulat were the EY auditors responsible for
approving Wirecard’s accounts since 2013. They negligently signed off accounts without
fulfilling their audit duties raising questions as to why, as individuals, they chose to look
the other way, fail to meet audit standards, and ignore Wirecard’s increasingly evident
fraud.
Fundamentally, external audits are a response to the agency problem between
outside investors and corporate insiders, in particular, management. Outside investors
rely heavily on audited financials to get information on what insiders do with their
money. For this reason, credible financial reporting is viewed as a cornerstone of well-
functioning capital markets (Summers 1999) and audits play an important role in
facilitating the trust needed for broad investor participation. The credibility of audit
opinions depends crucially on auditor independence.
3
, • Familiarity/trust threat
A familiarity (or trust) threat arises when the firm or a covered person predisposed to
accept, or is insufficiently questioning of, the point of view of an entity relevant to the
engagement. Such threats may arise, for example, where close personal relationships are
developed with such an entity's personnel through long association with the entity.
• Conflict of interest ᐁ
Auditors collected large amounts in audit and non-audit fees.
raise questions about the value of company audits, auditor independence and
quality of audit work, economic incentives for good audits and the knowledge base of
auditors
the client-based relationship between the audit firm and its client, in this case EY
and Wirecard respectively, creates a conflict of interest. These conflicts of interests take
place because the firm is supposed to serve interests other than their own. It is in EY’s
interest to sign off Wirecard’s accounts so that it continues to be hired and have a
recurring, stable client. However, it is EY’s duty to serve the universal, non-personal, duty
of transparency over both their clients’ and their own interests.
Shutting down investigations by wirecard
EY had an internal whistleblower in May 2016 who raised fraud allegations against
Wirecard and reported an attempt to bribe an auditor in India. This incident triggered an
investigation by EY, which supposedly shared information with its group audit team, but
was eventually shut down at the behest of Wirecard management, which oversaw this
investigation, rather than the supervisory board
4
