Dusseldorf EY has developed a five-point plan to realign its auditing. The company is also reacting to the Wirecard scandal, in which EY, as the long-standing auditor of the payment service provider, is accused of serious negligence. The plan will be presented to the workforce on Thursday morning and is not intended for the public, but is available in the Handelsblatt.
In essence, EY has stricter rules for accepting new orders for company audits. The client’s balance sheet certification should be supported by the use of new technology and training. The focus is on internal risk management, which is to be expanded with a new internal audit.
It is the result of the review that EY started in spring 2021. The scandalous Wirecard group collapsed a good two years ago. Since then, the auditors have been accused of not unmasking Wirecard’s model based on bogus transactions and of always having approved the balance sheets despite growing indications of irregularities.
EY has suffered major reputational damage as a result and is facing numerous lawsuits from Wirecard shareholders. The German audit supervisory authority Apas is investigating several EY employees and could still impose a fine on the company in the summer of 2022.
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Now the second largest German auditing company is pushing forward with its own plan for a reorientation. “We have worked intensively to identify possible weak points in order to learn from them, to draw conclusions – and to make our contribution so that such an event cannot happen again,” says the joint letter from the management and the supervisory board the employees.
The aim is to further increase the quality of the test and a cultural change in the company. “If you search ruthlessly, you will find what you are looking for,” says the internal analysis. Now the “most comprehensive change process in more than a hundred years of history” is imminent.
With such pithy words, EY wants to inculcate the importance of the plan to employees. The company is aware of the loss of confidence in the economy and fears that the Wirecard scandal will result in losing out to competitors such as PwC, KPMG, Deloitte or climbers such as BDO when it comes to awarding contracts.
So far, clients have not turned their backs on a large scale. EY examines ten of the Dax 40 companies, including Volkswagen, Deutsche Bank and Siemens. Only Telekom recently withdrew the order from the company and awarded it to Deloitte. In the next few years there will be numerous tenders in the Dax in which EY wants to get involved.
The reputational damage is one problem for EY. The damage compensation processes could develop financially more serious, because billions of euros are at stake there. So far, the company has won many lawsuits from plaintiffs in the first instance because they were unable to prove intent to the EY auditors.
Commission around Theo Waigel is to monitor the plan
However, there are possible further lawsuits pending from institutional investors and the insolvency administrator of Wirecard AG. At the end of 2021, the Munich Higher Regional Court had expressed serious doubts about the decisions of the first instance. In March, the Munich district court approved a class action lawsuit against EY under the investor test case.
The five-point plan that has now been submitted is irrelevant for the processing in court. But it shows what EY has lacked in the past from its own point of view. The external commission set up by EY last year influenced the report.
Its members include former finance minister Theo Waigel, former justice minister Brigitte Zypries, former Siemens supervisor Hans Michael Gaul and auditor Liesel Knorr. The Commission is to review in the first half of the year whether the plans have actually been implemented.
EY is asked why the company has not separated from the scandalous group.
(Photo: action press)
EY is repeatedly asked why the company accepted Wirecard’s mandate in the first place and, above all, why it kept it, even though the public allegations against the payment service provider were increasing. EY could not have terminated an ongoing order, but could have withdrawn from the new contract.
EY does not specifically address these questions in the five-point plan. In the future, however, a newly created “Risk & Audit Quality Board” will monitor the acceptance of orders in the final audit. “In addition, experts from EY forensics and new methods of evaluating data and media reporting will be systematically involved,” it says.
The new body should also check whether the clients have been classified in the correct risk class. At Wirecard, EY was accused of not consistently treating the group as a high-risk client with the correspondingly more intensive audit procedures. EY now wants to tighten the risk assessment.
Discover “anomalies” in balance sheets
All major auditors rely on the support of artificial intelligence and robotics in the final examination. This is intended to relieve employees of standard tasks such as document verification. In the time that has been freed up, EY auditors will in future concentrate on evaluating “patterns and anomalies in financial processes in order to more easily detect rule violations, fraud and corruption in companies”.
In training, the EY teams are to be taught the necessary “critical attitude” – another hidden reference to the criticism: EY is accused of often missing this critical attitude towards Wirecard management. The report literally states that all employees should be encouraged to “speak uncomfortable truths”.
EY wants to significantly increase the staff in risk management and expand internal auditing. The whistleblower hotline is opened to third parties from outside. The supervisory board is also to be replaced, where at least 50 percent of the capital representatives should be external personalities. In doing so, EY wants to strengthen the independence of the board.
More: Court paves way for Wirecard model lawsuit against EY