Status: 04/12/2023 08:15 a.m
If a company stumbles, the question quickly arises as to whether there weren’t any warning signs. The focus is then also on the auditors. But what can and should they actually do?
“It’s bitter,” says Edgar Löw, “even professionals only read when the child has fallen into the well.” Löw trains auditors at the Frankfurt School of Finance. If financial professionals don’t read companies’ annual financial statements and auditors’ reports – i.e. attestations – what can we expect from private investors?
After almost every bankruptcy of a larger company, the auditors are scrutinized. Sometimes rightly, often wrongly. Auditors only certify that the financial statements have been properly prepared and that they accurately represent the company’s position. “We create trust in the quality of the accounting,” says the spokesman for the board of the Institute of Public Accountants IDW, Klaus-Peter Naumann. “People just have to read it.”
Even ailing companies get through
“The public assumes that the company is healthy with an unqualified certificate,” says Loew. “That’s not necessarily the case.” Example of the major bank Credit Suisse: It was already in trouble in mid-March when the auditors stamped their unqualified certificate.
Unlike the previous year, there are tortuous references to management’s responsibility. In the accompanying letter, the Credit Suisse bosses wrote twice about the need to improve risk management. Anyone who then read the risk report realized that the house was on fire.
Days later, Credit Suisse was dead. The case makes it clear that auditors are cautious people who are paid by the audited company and who can also be held liable.
Examiners and those being examined are too close
The Wirecard fraud case, whose management is currently on trial in Munich, shows that the proximity between auditors and companies can be too close, insofar as it is not volatile. Wirecard was audited for years by Ernst & Young, which is now called “EY”.
The German supervisory authority APAS passed a devastating verdict on the work of EY last week. The decision is not yet final. Five EY examiners should pay a fine of between 23,000 and 300,000 euros. According to information from the Handelsblatt, the former head of Germany at EY is said to bleed the most. Originally, twelve EY examiners were determined. Seven evaded the regulator’s access by returning their chartered accountant licenses.
“Flaws in the organization of EY”
“Obviously, the sanctions point to deficiencies in the organization of EY,” says IDW board spokesman Naumann. Because the company should also be punished. It was sentenced to the highest legal fine of 500,000 euros. Above all, EY is not allowed to accept new audit assignments from listed companies for two years. EY may continue old mandates.
Naumann from the IDW calls the penalties “exorbitantly high”. As a general warning, the verdict was published before EY received the official notification. For the first time the APAS struck like this. The demands have increased. “In the past, people might have turned a blind eye, the unqualified audit opinion requested by clients was issued more quickly,” says Dirk Driesch from the French auditing firm Mazars. “Today, many auditors seem to weigh up more carefully whether an unqualified audit opinion can actually be issued .”
The Accounting Market
Mazars wants to expand in Germany; it is currently posting annual sales of 200 million euros. The management consultancy Lünendonk has been preparing a ranking list for years. Above are only four companies that include EY. They take in more than a billion and a half a year. The next largest auditing companies only achieve up to 300 million euros. In order to be able to audit international corporations, they often lack the staff, specialist knowledge and offices abroad. Many companies have no choice but to have themselves checked by one of the big names in the industry.
EY likes to publish advertising and industry studies, most recently on the error culture of German companies. When asked about the judgment of the supervisory authority, it says: “We have learned important lessons from the case”. In addition: “It is important: EY Germany is a different company today”. In fact, it is still “Ernst & Young GmbH”.
Hardly any lessons from the Wirecard scandal?
The Wirecard risks were presented broadly in the last available annual financial statements for 2020/21. The current sanction by the supervisory authority was classified as “probable”. Overall, the Wirecard discussion has not resulted in a significantly reduced success rate for awarding contracts. “The extent of the loss of mandates that has occurred so far has no significant impact on our economic situation,” it says.
Auditor trainer Löw finds it incomprehensible that the supervisory authority allows EY to continue all orders from listed companies and only wants to ban new audit orders: “If APAS has doubts about EY, then there can be no distinction between old and new mandates.”