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Meanwhile, the rating agency Moody’s downgraded Wirecard by 6 notches (“B3”, i.e. “junk level”) and has since withdrawn it completely.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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