WIRECARD: The KPMG special audit has been completed - what does this mean for the previous annual audit activities of Ernst & Young?

Investor representatives make serious accusations and prepare legal action

On 28 April 2020, WIRECARD presented the 74-page special audit report by KPMG. While WIRECARD considers itself relieved of all accusations by the report, the markets have a different opinion: the share price has fallen considerably since publication.

Investor representatives around the attorneys Dr. Wolfgang Schirp and Dr. Marc Liebscher (both Berlin) examine the question of what follows from the special audit report for the activities of WIRECARD's long-standing auditors, namely the auditing company Ernst & Young (EY). After all, EY audited WIRECARD's annual financial statements up to the 2018 financial statements and raised no objections - neither as a qualification nor as a supplement. Dr. Liebscher and Dr. Schirp not only examined the issue themselves, but also discussed it with renowned auditors who specialise in the international accounting standards IFRS. The results are devastating. Attached are a few judgements on selected passages of the KPMG report:

- KPMG: "With regard to the amount and existence of sales revenues from the TPA business relationships between Cardsystems Middle East, Wirecard UK & Ireland as well as Wirecard Technologies and the respective relevant TPA partners, KPMG cannot make any statement as a result of the forensic investigation activities carried out with regard to the investigation period 2016 to 2018 that the sales revenues exist and are correct in terms of their amount, nor can it make any statement that the sales revenues do not exist and are incorrect in terms of their amount. In this respect there is an obstacle to the investigation."

Valuation Dr. Wolfgang Schirp, Berlin: "EY should have restricted or expanded the audit opinion in the consolidated financial statements. It is true that the specific amount of the incorrect accounting was not known, as this is within a range. But then the maximum amount by which the sales revenues were overstated should have been stated. If sales revenues cannot be proven, then this shortcoming cannot be eliminated by simply reporting such sales revenues. If EY did not wish to restrict the audit opinion in this respect, the minimum solution would have been to add/expand the audit opinion to refer to the facts of the case without explicitly stating that the annual financial statements/consolidated financial statements were incorrect. But the complete silence of the audit opinion on this point is not compatible with proper audit work."

- KPMG: "In summary, on the basis of the documents made available to KPMG and supplementary information provided by KPMG, KPMG comes to the conclusion that there are arguments against Wirecard's accounting of escrow accounts as cash or cash equivalents in the 2016-2018 period under review. (...) In our opinion, arguments speak against compliance with the requirements for classifying the funds in the escrow accounts as cash and cash equivalents, as there are doubts as to whether the requirements of IFRS of "availability at all times without penalty" were met.

Evaluation Dr. Wolfgang Schirp, Berlin: "EY should have restricted the audit opinion in this respect as well. At the very least, this aspect should have been explicitly mentioned in the auditor's report and made the subject of an extension of the auditor's report. Correctly, the escrow accounts should have been shown as "other assets". It is true that such a disclosure in the assets would not change the balance sheet, i.e. the bottom line would remain unchanged. But the escrow accounts would no longer be "means of payment", i.e. no cash. And it is precisely the key figure "means of payment", i.e. cash, that is an important criterion for investors when making investment decisions. The failure of EY has therefore led to a misrepresentation of a key figure that is important for the capital market. WIRECARD was thus able to inflate its cash ratio unhindered."

- KPMG: "Bank confirmations and account statements from the bank managing the trust accounts were not sent to us, as trustee 1, according to the information provided, has terminated the contractual relationship with the Wirecard companies and no longer responds to inquiries from Wirecard. For this reason, the individual payments made by the TPA partners to the trust accounts according to the information provided could not be tracked by KPMG on the basis of account statements. In this respect, it could also not be sufficiently proven that the payments were actually made by the TPA partners during the period under review. In addition to these insufficiently verified payments to trust accounts amounting to around EUR 1 billion, (...)

In the course of the investigation, we have requested bank statements or bank confirmations from Bank 1 in respect of the escrow accounts, which we consider to be essential for the investigation of the payment flows and as evidence of the existence of the funds and therefore of the turnover during the investigation period. However, no account statements and bank confirmations for the investigation period 2016 to 2018 were submitted to us. In accordance with the information provided, Trustee 1 did not respond to any such requests. It was therefore also not possible to reconcile the balances of the escrow accounts with the statements of accounts of Bank 1, which were behind them according to the information provided.

Evaluation Dr Liebscher: "The escrow balances are not only insufficiently or incorrectly shown in the annual financial statements. Worse still: there is even no proof of whether these credit balances exist at all and with whom they are held. And it must be assumed that this lack of proof already existed at the time of the audit by EY. But this should have led to a restriction of the EY certificates. At the very least, EY would have had to address the doubts about the existence of the escrow accounts and absolutely make them the subject of an extension of the audit certificate".

Dr. Liebscher (Berlin) "Of course, a distinction must be made between a special forensic audit, such as that of KPMG, and a normal annual audit, such as that of EY - especially with regard to the depth of the audit. However, the anomalies in the sense of unproven sales and incorrect accounting that became apparent in the KPMG report should have been identified in the course of a proper audit process of an audit of EY's annual financial statements. This applies in particular with regard to the material amount of the conspicuous items. These items are economically far too relevant for an auditor to have accepted this without a more in-depth audit. Therefore, the question of forensic or non-forensic audit makes no difference. "

Dr. Wolfgang Schirp: "Of course, we and the auditors cooperating with us cannot make a remote diagnosis without detailed knowledge. But based on the statements in the KPMG report and the press coverage to date on this subject - and above all without any refutation of the content by WIRECARD - it is the uniform opinion of experts that EY has issued attestations that do not comply with the legal requirements at least in the three points mentioned. We assume that this will result in liability claims by investors who have invested in the share in confidence in the attestations.

Dr Liebscher, Berlin: "We are also surprised at the low audit fees that EY has received for auditing and certifying the annual financial statements. According to the information in the provisions schedule of the published consolidated financial statements for 2018, provisions of € 1.0 million and € 2.2 million were made for the audit fees as of 31 December 2017 and 31 December 2018 respectively. If these figures are correct, then the fee appears to be very low in view of the complexity of the transaction(s) and for a DAX company. Of course, this does not justify a low standard of audit work, and it certainly does not justify misleading the capital market".

For further information please contact us:

Dr. Wolfgang Schirp, Schirp & Partner Rechtsanwälte mbB, Leipziger Platz 9, D - 10117 Berlin, Tel. 0049-30-3276170 and 0049-179-5320213, mail: schirp@schirp.com, URL: www.schirp.com

Dr. Marc Liebscher, Dr. Späth & Partner Rechtsanwälte mbB, Kurfürstendamm 102, D - 10711 Berlin, Tel.: 0049-30-88701617 and 0049-176-93150194, mail: liebscher@dr-spaeth.com, URL: www.dr-spaeth.com