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EY gets banned from new audit business in Germany

economist.com

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Re: EY gets banned from new audit business in Germany

#31

Post by crazygringo »

> Auditors insist that their services cannot be treated as a guarantee that accounts are truthful, and note that sophisticated frauds are by their nature difficult to spot.

As someone who knows nothing about this area, I don't understand why audits won't always detect fraud.

I would naively assume that auditors have access to all financial accounts and records of cash flows and they make sure they all add up and are categorized correctly. And that if fraud is happening, there will necessarily be numbers that don't add up.

So what am I missing? Do they not have access to all accounts and statements? Is it just a top-level glance at the numbers because there isn't enough time/money to scrutinize everything? Or can the numbers all add up but there's still fraud?

Is there anyone here who can give an example of something fraudulent that is hard to catch?

Re: EY gets banned from new audit business in Germany

#32

Post by charlieyu1 »

shortrounddev wrote: post #29
jll29 wrote: post #5

If a CEO mismanages and goes bankrupt, they cannot start another company for 5 years; a two-year ban seems mild, but better than nothing, as the reputational damage is substantial (why would any non-criminal pick EY afterwards in good faith if there are others?).

Really? 5 years? That seems really harsh. Is it all business failures or does it have to be due to mismanagement? I've heard the climate is very hostile to businesses in Germany; my sister in law was trying to sell art on etsy and apparently she had to get a business license to do so in Germany. She's now back in the USA where she can just sell stuff online and the only thing she needs to do is file her taxes correct…

You know, all regulations only hurt small sellers, people at the “top” always get away from all the crap they are directly responsible for, no matter they are hurting their own business or the society as a whole

Re: EY gets banned from new audit business in Germany

#33

Post by ejb999 »

crazygringo wrote: post #31

> Auditors insist that their services cannot be treated as a guarantee that accounts are truthful, and note that sophisticated frauds are by their nature difficult to spot. As someone who knows nothing about this area, I don't understand why audits won't always detect fraud. I would naively assume that auditors have access to all financial accounts and records of cash flows and they make sure they all add up and are…

>>Is there anyone here who can give an example of something fraudulent that is hard to catch?

Someone in control of the checkbook at a medical facility who starts a shell company with some innocuous sounding name (i.e. Smith's Medical Supply) and and regularly submits bills in low enough amounts that they don't raise concerns - which of course is relative to the size of the company - but say you run a practice that has $50M in annual revenues, it would be quite easy to send in bills for supplies that only amount to 1-2K per invoice over a long period of time.

This kind of thing happens a lot, and without actually contacting every single vendor, verifying they are real, and verifying every thing that was purchased, can be very difficult to root out - especially with supplies that get used up, as opposed to hard assets they are supposed to be around for a while.

When the numbers are small enough, nobody even bothers to verify them - even though over years they can add up to a significant amount of losses.

I hear about stories like this all the time - it is pretty common.

Re: EY gets banned from new audit business in Germany

#34

Post by FabHK »

fauigerzigerk wrote: post #24
wjnc wrote: post #7

Look, these sentences are probably more than just and even on the light sight. Handing in your auditing license is a pretty severe punishment, at least career changing. But will the risk and audit professionals at BaFin face the same penalties?

BaFin's role in this is indeed pretty astonishing: "The German financial watchdog has filed a criminal complaint against two Financial Times journalists and several short sellers, accusing them of potential market manipulation over reports about suspected accounting irregularities at payments processor Wirecard." https://www.ft.com/content/8e1948be-6060-11e9-b285-3acd5d435...

Indeed, they failed big time. Apparently some BaFin employees were also trading the shares of Wirecard (and presumably other companies they were supposed to oversee).

There's a pretty good book on the whole sad story: Money Men: A Hot Startup, A Billion Dollar Fraud, A Fight for the Truth by the FT journalist that did most of the digging.

If journalists and short sellers hadn't kept pushing (against Wirecard, auditors, and BaFin), Wirecard might have survived a bit longer, managed to acquire Deutsche Bank, and then (with the merged balance sheet) gotten away with it. Mind boggling.

However, I must say, after reading that book and several articles about the whole thing, I am still not quite sure how they could keep up the fraud for so long, what exactly happened there, and who benefited.

(I suspect that crypto firms have taken over a lot of Wirecard's "business"...)

Re: EY gets banned from new audit business in Germany

#35

Post by mantas »

shortrounddev wrote: post #29
jll29 wrote: post #5

If a CEO mismanages and goes bankrupt, they cannot start another company for 5 years; a two-year ban seems mild, but better than nothing, as the reputational damage is substantial (why would any non-criminal pick EY afterwards in good faith if there are others?).

Really? 5 years? That seems really harsh. Is it all business failures or does it have to be due to mismanagement? I've heard the climate is very hostile to businesses in Germany; my sister in law was trying to sell art on etsy and apparently she had to get a business license to do so in Germany. She's now back in the USA where she can just sell stuff online and the only thing she needs to do is file her taxes correct…

Can’t speak about Germany for sure, but usual euro way is you don’t need to do taxes at all if you do not run a business. Employer fills it for you. And getting a doing-business-as-individual is as simple as filling a form at revenue service website telling you’re starting a business. Then you get a tax ID to put on your invoices next day.

If you sell as an individual, it’s just you selling random stuff that you don’t need to pay taxes for. Once you do this as a business, you declare it as such and notify the state about it.

Re: EY gets banned from new audit business in Germany

#36

Post by belter »

shortrounddev wrote: post #29
jll29 wrote: post #5

If a CEO mismanages and goes bankrupt, they cannot start another company for 5 years; a two-year ban seems mild, but better than nothing, as the reputational damage is substantial (why would any non-criminal pick EY afterwards in good faith if there are others?).

Really? 5 years? That seems really harsh. Is it all business failures or does it have to be due to mismanagement? I've heard the climate is very hostile to businesses in Germany; my sister in law was trying to sell art on etsy and apparently she had to get a business license to do so in Germany. She's now back in the USA where she can just sell stuff online and the only thing she needs to do is file her taxes correct…

Many other countries have similar laws. Normally get's solved by buying an existing business...

Re: EY gets banned from new audit business in Germany

#37

Post by calderarrow »

crazygringo wrote: post #31

> Auditors insist that their services cannot be treated as a guarantee that accounts are truthful, and note that sophisticated frauds are by their nature difficult to spot. As someone who knows nothing about this area, I don't understand why audits won't always detect fraud. I would naively assume that auditors have access to all financial accounts and records of cash flows and they make sure they all add up and are…

Auditors have access to all the financials, but they only audit a statistically significant sample, because it would be incredibly expensive to audit every transaction.

Fraud can be easily detected if one employee is committing it. Fraud is substantially harder to find if two employees are involved, specifically 2 employees involved in internal controls.

For instance, if you have a policy that all checks paid over $10k require 2 signatures from corporate officers, it’s easy to catch a check with one officer forging the name of a second in order to siphon money to his 3rd party shell company.

But if both officers make a shell company, they can post the check as usual, and the check would pass auditor checks unless they looked into the specific corporation being paid, which may be out of scope if it’s a relatively small transaction.

Ultimately, you don’t need assurance that the financials don’t have fraud, you want assurance that they’re materially correct. Whether the company lost 10k to fraud or waste or incompetence is almost irrelevant for the investor, because the company has 10k less money. Obviously they’d prefer it not be due to fraud, but the impact on the financials is more or less the same.

Source: am a CPA

Re: EY gets banned from new audit business in Germany

#38

Post by niklasrde »

crazygringo wrote: post #31

> Auditors insist that their services cannot be treated as a guarantee that accounts are truthful, and note that sophisticated frauds are by their nature difficult to spot. As someone who knows nothing about this area, I don't understand why audits won't always detect fraud. I would naively assume that auditors have access to all financial accounts and records of cash flows and they make sure they all add up and are…

Plenty of things aren't necessarily evidences. Just because you have access to account statements telling you you got a bunch of money coming in from person X for provision of service Y and a matching contract doesn't mean that the contract has been fulfilled or that the service was worth the money.

Same with picking a supplier - there are processes in place that try to assess quality, speed, price, effort, etc, but in the end it's humans making decisions, humans with bias and the ability to lie and make untrue statements as to how they made their decision.

Then there are the usual money laundering techniques, eg art dealing. You could easily spend a few million $$ on art for, say, a big office. And the VP's niece might be an artist that can demand that on the open market.

Re: EY gets banned from new audit business in Germany

#39

Post by Timon3 »

charlieyu1 wrote: post #32
shortrounddev wrote: post #29

Earlier quoted context omitted.

Really? 5 years? That seems really harsh. Is it all business failures or does it have to be due to mismanagement? I've heard the climate is very hostile to businesses in Germany; my sister in law was trying to sell art on etsy and apparently she had to get a business license to do so in Germany. She's now back in the USA where she can just sell stuff online and the only thing she needs to do is file her taxes correct…

You know, all regulations only hurt small sellers, people at the “top” always get away from all the crap they are directly responsible for, no matter they are hurting their own business or the society as a whole

It's the wrong take-away to say all regulations only hurt small sellers. Do you want to give up regulations on child labor, or worker safety, or foods and drugs? If not, how come, considering it all hurts only small sellers?

The problem isn't the concept of regulation, but the follow-through on loopholes. By doing away with regulations you'll decrease quality of life for most people. Instead we have to find ways to react to loopholes in a fair way. It's not impossible, we've done it before, see the previously-mentioned examples!

Re: EY gets banned from new audit business in Germany

#40

Post by avianlyric »

shortrounddev wrote: post #29
jll29 wrote: post #5

If a CEO mismanages and goes bankrupt, they cannot start another company for 5 years; a two-year ban seems mild, but better than nothing, as the reputational damage is substantial (why would any non-criminal pick EY afterwards in good faith if there are others?).

Really? 5 years? That seems really harsh. Is it all business failures or does it have to be due to mismanagement? I've heard the climate is very hostile to businesses in Germany; my sister in law was trying to sell art on etsy and apparently she had to get a business license to do so in Germany. She's now back in the USA where she can just sell stuff online and the only thing she needs to do is file her taxes correct…

> Really? 5 years? That seems really harsh. Is it all business failures or does it have to be due to mismanagement?

There’s a big difference between bankruptcy and business failure. Plenty of businesses fail without entering bankruptcy, they’re wound down responsibly and their creditors are repaid in full.

If a company fails due to bankruptcy, then it means that people who lent money to that business are out of pocket, and end up paying for the failure.

The whole point of “limited liability” companies is that the owners and management are shielded from creditors in the event of bankruptcy (hence the “limited liability”). So a five year ban (which is true in most countries) from directing another limited liability company is reasonable, it don’t prevent your from running a business, only from running a limited liability business, because there’s now evidence that in the event of failure you’ll leave your creditors high and dry.

Ultimately the privilege of running a limited liability company, where the state promises to protect you from your creditors if things go wrong, is just that, a privilege. If you prove yourself unable use that privilege responsibly, then that privilege is temporary taken away. To be clear, the privilege removed is protection from creditors by the state, if your business fails. You can absolutely start another business, it’s just that the state won’t protect you if you fail.

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