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

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The Wirecard AG business model

The fact that Wir­e­card AG fals­i­fied bal­ance sheets and de­frauded in­vestors and in­vestors is now well known. The bubble burst ab­ruptly on June 25, 2020, when news of the “dis­ap­peared” 1.9 bil­lion euros that were sup­posed to be in es­crow ac­counts be­came pub­lic. Why did no one no­tice for so long? And most im­port­antly – how did Wir­e­card do it?

How did Wirecard’s fraud model work is a ques­tion that not only ag­grieved in­vestors are ask­ing. It was a com­plex sys­tem that, ac­cord­ing to some ex­perts, only ex­is­ted to laun­der money. When deal­ing with the Wir­e­card scan­dal, one must look at the sys­tem as a whole.

Basic information on the “Acquirer” business model

As an in­ter­me­di­ary pay­ment ser­vice pro­vider, known in the trade as an “ac­quirer,” you for­ward money from the buyer to a mer­chant. The ac­quirer re­ceives a claim against the buyer’s credit card com­pany and is li­able in the event of non-​payment. So if the buyer or his credit card com­pany doesn’t (can’t) pay, an ac­quirer still has to pay the mer­chant. To min­im­ize the risk for it­self, the ac­quirer re­tains col­lat­eral in such a trans­ac­tion, which it does not pay out to the mer­chant un­til pay­ment is made in full. This is usu­ally only a small part of the pur­chase price. A small ex­ample: For a pur­chase of 100€, the mer­chant ini­tially re­ceives only 95€ from the ac­quirer, since 4€ serve as se­cur­ity and 1€ is the busi­ness fee. As soon as the ac­quirer re­ceives the money from the credit card com­pany, he pays out the re­main­ing 4€ to the merchant.

The special Feature of the Wirecard Business Idea

Since the mar­gins on pro­cessing such trans­ac­tions are re­l­at­ively low, a pay­ment pro­cessor needs many trans­ac­tions to have a prof­it­able busi­ness model. Pre­sum­ably for this reason, Wir­e­card has used busi­ness part­ners to ex­pand pro­cessing in non-​EU coun­tries. Ac­cord­ing to the cur­rent state of the in­vest­ig­a­tion, it can be as­sumed that the trans­ac­tions were largely fic­ti­tious. Wir­e­card provided the busi­ness part­ners with the al­leged cus­tom­ers and the tech­no­logy for pay­ment pro­cessing in or­der to ap­par­ently re­ceive the fee for the al­leged trans­ac­tions. This (fic­ti­tious) fee, the third-​party part­ners trans­ferred via de­tours to the al­leged es­crow accounts.

The idea of the said es­crow ac­counts was in­tro­duced from 2015, prob­ably be­cause at that time the crit­ical in­quir­ies re­gard­ing the busi­ness model ac­cu­mu­lated. Pre­vi­ously, Wir­e­card had re­por­ted the (al­leged) fees as re­ceiv­ables on its bal­ance sheets.

Us­ing the pro­ceeds of the in­ven­ted re­ceiv­ables, it was pos­sible to make com­pany ac­quis­i­tions. Con­spicu­ous thereby the in­creased prices. This was pre­sum­ably done in or­der to chan­nel money out of the com­pany and back into the Group. The in­vest­ig­a­tions there­fore as­sume that this method was prob­ably also used by Wirecard’s “senior man­age­ment” to en­rich them­selves and to em­bel­lish the Group’s bal­ance sheets.

The role of the auditors Ernst & Young

The on­go­ing law­suits by ag­grieved in­vestors of Wir­e­card AG are dir­ec­ted against the aud­itor Ernst & Young GmbH Wirtschaft­s­prü­fungs­gesell­schaft. Based on the state of the in­vest­ig­a­tion to date, we as­sume that a prop­erly work­ing aud­itor should have dis­covered the fraud and thus the dam­age to in­vestors years ago. In ad­di­tion, EY faces ac­cus­a­tions of hav­ing act­ively helped to shape the busi­ness model, or at least of hav­ing covered it with full knowledge.

Join the com­munity of plaintiffs against the aud­it­ors Ernst & Young here and claim your lost in­vest­ment in Wir­e­card AG as damages.

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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