Former Wirecard CEO Markus Braun was arrested in connection with the accounting scandal that has now sunk the once high-flying German fintech firm. Wirecard’s collapse is just the latest in a long string of audit failures at public companies.
If there is one clear takeaway from the collapse of the once high-flying German fintech company Wirecard, which filed for the equivalent of bankruptcy protection Thursday following revelations that nearly €2 billion listed on its accounts is likely fictitious, it is this: Auditing is broken.
Wirecard’s auditors, Ernst & Young, are already being sued by some of Wirecard’s investors. EY will no doubt protest that financial reporting audits are not forensic audits; they are not designed to uncover a concerted deception involving forged account documents, as was allegedly the case with the German payments firm. And the company will likely say that once issues with Wirecard’s accounting came to light, thanks largely to dogged investigation by Dan McCrum of The Financial Times, EY refused to sign off on Wirecard’s accounts.
But McCrum and his FT colleagues started raising troubling questions about Wirecard’s accounting as early as July 2015 and published story after story that should have compelled its auditor to ask the same tough questions the journalists were posing—well before EY finally balked at signing off on Wirecard’s books in November 2019.
Of course, audit breakdowns are not unique to EY. All of the Big Four firms (as well as the firms in the next tier down) have been rocked by scandal upon scandal. In the U.K. alone, serious deficiencies have been either alleged or found in the audit of government contractor Carillion (KPMG), retailer BHS (PwC), Ted Baker (KPMG), Mitie (Deloitte), Rolls-Royce (KPMG), BT (PwC), as well as Patisserie Valerie and Sports Direct (both Grant Thornton). And that’s not even a comprehensive list. The UK Financial Reporting Council, which is responsible for supervising public company accountants, levied three times as much in fines for audit failures in the year from April 6, 2018, through April 5, 2019, the latest figures available, than the year before.
Meanwhile, in South Africa, legislators are considering trying to break up the Big Four after a series of audit failures involving both Deloitte and KPMG. In India, the failure of Deloitte’s local affiliate to catch significant financial problems at the Infrastructure Leasing & Financial Services company has led to significant scrutiny on the Big Four as whole.
The situation in the U.S. is no better, despite the existence of Sarbanes-Oxley, which passed after the 2002 Enron scandal sank Arthur Andersen and was supposed to strengthen accounting controls at public companies. That law helped establish the Public Company Accounting Oversight Board (PCAOB), a nonprofit corporation that is supposed to ensure audit quality. A September 2019 investigation by the Project on Government Oversight, a Washington, D.C., watchdog group, revealed that when the PCAOB has inspected Big Four audits, it found frighteningly high failure rates. In the most recent figures available, inspectors found Deloitte got one in five audits wrong, PwC botched 23.6%, EY screwed up 27.3%, and KPMG flopped fully 50% of the time.
What’s more, none of the firms were showing any sign of getting better; their audit failure rates bounced around considerably from year to year, but there was no clear improvement. In fact, all four firms had worse records in their latest spot checks than when the PCAOB first began inspecting audits in 2004.