WIRECARD-​Scandal: Lawsuit against Auditors – What did Ernst & Young testify?

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The Allegations against Wircard AG

It came as no real sur­prise: for years, Wir­e­card AG has been ac­cused of not re­port­ing trans­par­ently. At the latest since the ac­cus­a­tions of the Fin­an­cial Times, Wir­e­card AG has not been able to rest easy. The ac­cus­a­tions of cir­cu­lar pay­ments and ir­reg­u­lar­it­ies amount­ing to bil­lions of euros could not be dis­pelled even with the spe­cial audit by KPMG com­mis­sioned by Wir­e­card. The start­ing point of KPMG’s in­vest­ig­a­tion was the al­leged in­crease in sales rev­en­ues through fic­ti­tious cus­tomer re­la­tion­ships, par­tic­u­larly in third-​party ac­quir­ing with a third-​party ac­quir­ing part­ner, pub­lic­a­tions on the In­ter­net and ac­cus­a­tions con­cern­ing ac­count­ing is­sues in Singa­pore.

The Result of the KPMG Special Audit

The KPMG re­port was pub­lished at the end of April, and in­stead of the hoped-​for dis­charge, KPMG dis­closed ex­tens­ive omis­sions at Wir­e­card in its re­port. The Wir­e­card share price slumped by ap­prox. 40%. KPMG’s doc­u­ments were either sub­mit­ted late or not at all. In par­tic­u­lar, no bal­ance con­firm­a­tions were sub­mit­ted for bank bal­ances in so-​called es­crow ac­counts. It was ar­gued that the ac­count­ing for these bank bal­ances was in­cor­rect.

Now the Wirecard Bubble has burst:

In the ad hoc an­nounce­ment of June 18, 2020, Wir­e­card an­nounced that 1.9 bil­lion euro, which were to serve as se­cur­ity in es­crow ac­counts for Wir­e­card cus­tom­ers, could not be found by Ernst & Young GmbH Wirtschaft­s­prü­fungs­gesell­schaft (EY) as aud­it­ors. EY then no longer is­sued an audit cer­ti­fic­ate for the 2019 an­nual fin­an­cial state­ments. Wir­e­card has filed crim­inal charges against un­known per­sons and feels it­self to be a “vic­tim of gi­gantic di­men­sions”. Ac­cord­ing to Wir­e­card, it is threatened by the pos­sible ter­min­a­tion of loans amount­ing to 2 bil­lion euro. Even for a DAX com­pany, this is un­likely to be bear­able if no debt morator­ium can be agreed upon with the banks. CEO Markus Braun resigned and was re­placed by James Freis as in­terim CEO.

Mean­while, the rat­ing agency Moody’s down­graded Wir­e­card by 6 notches (“B3”, i.e. “junk level”) and has since with­drawn it com­pletely. Moreover, BaFin is already in­vest­ig­at­ing Wir­e­card due to in­cor­rect ad hoc an­nounce­ments with re­gard to the KPMG audit re­port. The in­vest­ig­a­tions are now to be ex­ten­ded.

Today, Thursday, Wir­e­card had to file for in­solv­ency at the Mu­nich Local Court due to the threat of in­solv­ency and over-​indebtedness. The day be­fore, it had been an­nounced that the company’s fin­an­cial strategy was to be re­aligned to­gether with Hou­li­han Lokey.

Wirecard AG is thus no longer a solvent defendant for claims for damages by investors!

How could EY not have been aware of this?

The ques­tion arises as to how EY was able to is­sue the last audit cer­ti­fic­ates without lim­it­a­tions. How could it be that the de­fi­cits iden­ti­fied by KPMG re­mained hid­den from EY’s aud­it­ors in the years be­fore?

After ex­amin­ing the legal situ­ation, Schirp & Part­ner comes to the con­clu­sion that the cer­ti­fic­ates could prob­ably not have been is­sued without a breach of an auditor’s audit­ing ob­lig­a­tions. EY has ap­par­ently cer­ti­fied credit bal­ances in trust ac­counts of up to 1.9 bil­lion euro in re­cent years without ob­jec­tion, al­though no suf­fi­cient evid­ence could have been provided, as the banks con­cerned deny the ex­ist­ence of the ac­counts. Ac­cord­ing to our ana­lysis, this does not cor­res­pond to the du­ti­ful pro­ced­ure of an aud­itor.

What can affected Investors do?

We be­lieve that EY is eco­nom­ic­ally the bet­ter claimant for ag­grieved in­vestors. The fu­ture of Wir­e­card is writ­ten in the stars; the in­solv­ency ap­plic­a­tion was filed on June 25, 2020. There­fore, any­one who wants to en­force dam­ages should con­sider whether he or she wants to take ac­tion against Wir­e­card at all.

We see a pro­ceed­ing against the aud­itor EY as the bet­ter al­tern­at­ive. The lat­ter has audited and cer­ti­fied the an­nual fin­an­cial state­ments of Wir­e­card AG for many years and claims to have en­countered in­cor­rect bal­ance con­firm­a­tions for the first time in June 2020? In our opin­ion, this is not com­pat­ible with the audit­ing du­ties of an aud­itor. Only in March of this year, in a sim­ilar case, the Ger­man Fed­eral Su­preme Court (Bundes­gericht­shof – BGH) had ruled against an aud­itor for in­cor­rectly is­sued audit cer­ti­fic­ates and awar­ded the in­vestor dam­ages.

We have already filed a first class ac­tion. If you are also in­ter­ested in a class ac­tion against the aud­itor EY, please con­tact us. As con­tact per­sons for your fur­ther pro­ceed­ings, you can con­tact at­tor­ney Dr. Wolfgang Schirp, spe­cial­ist at­tor­ney for bank­ing and cap­ital mar­ket law and at­tor­ney Dr. Susanne Schmidt-​Morsbach, spe­cial­ist at­tor­ney for bank­ing and cap­ital mar­ket law and spe­cial­ist at­tor­ney for com­mer­cial and cor­por­ate law.

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