The German audit regulator, Apas, has critically reviewed Ernst & Young’s (EY) audit processes of the now-defunct payments giant, Wirecard, revealing findings of negligence, according to a report by the Financial Times. The inquiry highlighted practices ranging from negligent to grossly negligent, though it stopped short of attributing criminal intent to EY’s actions during its tenure as Wirecard’s auditor.
This nuanced finding by Apas does not absolve EY of responsibility but provides a legal shield against more severe consequences. Under German law, intentional criminal misconduct by auditors can lead to up to three years in prison. Moreover, without evidence of criminal intent, EY‘s liability in civil lawsuits is limited to €4 million—a detail that has brought some relief within EY, as noted by internal sources cited by the Financial Times.
The case dates back to Wirecard‘s catastrophic collapse in June 2020, when it was revealed that significant portions of its reported revenue and profits were fabricated, leading the company into insolvency. Despite these discrepancies, EY had given the company clean audits for almost a decade prior to its downfall. This led to extensive financial and reputational damage among investors and stakeholders, with Wirecard‘s value peaking at €24 billion in 2018.
Following these revelations, a parliamentary review in 2021 criticized EY for missing clear fraud risks and for their reliance on verbal assurances from Wirecard executives without proper verification. Additionally, EY failed to obtain vital account information from a Singapore bank where Wirecard claimed to have substantial corporate funds.
The fallout saw EY facing multiple lawsuits from Wirecard’s administrator and former shareholders, seeking billions in damages for the audit failures. Markus Födisch, the judge presiding over the criminal trial of Wirecard’s former CEO Markus Braun and two other executives, commented that EY could have uncovered the discrepancies earlier had it conducted its audits differently.
In response to the severe criticism and the regulatory scrutiny, EY chose not to contest a €500,000 fine and a two-year prohibition from taking new listed audit clients in Germany, which Apas imposed last year. EY hopes to restore its market position among German blue-chips when the ban lifts in 2026.
Apas had hinted at potential criminal behavior in its early assessments and informed Munich prosecutors, who are still investigating the matter. However, the high threshold for establishing criminal intent under German law means the ongoing investigations might not necessarily lead to criminal charges against EY or its partners.
This episode underscores the crucial need for stringent audit oversight and may influence future regulatory frameworks to better detect and prevent such profound oversight failures in audit practices. As the legal and regulatory proceedings continue, the broader implications for audit standards and corporate governance remain a critical area of focus for stakeholders within Germany’s tech and finance sectors.
