It seems rich to dismiss detection of a €1.9bn cash hole as something that “even the most robust audit procedures may not uncover”. Rich, but predictable, as accountancy firm EY finds itself in the line of fire over its audit of now insolvent payments processor Wirecard.
Unfortunately for investors, rhetoric is not the only defence at the auditor’s disposal. A string of wearily familiar financial scandals this century illustrates three built-in protections afforded to EY and its ilk.
The first is time. History shows financial frauds take years to come to light and even longer to come to justice. Investigation into KPMG’s role auditing Carillion stretches back to the UK outsourcing group’s accounts from 2014. Deloitte agreed to settle allegations that it helped to prolong fraud at Parmalat in early 2007, four years after the Italian dairy group collapsed with debts of €14bn.
Next comes organisational structure. Unlike multinationals, with their global HQs and regional hubs, audit firms operate as a network of geographic entities. Firms like to stress their international reach — until it all goes wrong. Hence Grant Thornton sought to distance itself from the Parmalat scandal by pointing the finger at Grant Thornton Italy.
Similarly, Arthur Andersen in the US was only partially taken down by Enron, a scandal so large and colourful it spawned a West End musical. Andersen’s UK business, including partners named in one of the many lawsuits, moved to Deloitte UK. For its part, EY boasts “several hundred” member firms, all of which are separate legal entities.
Country rules offer additional wriggle room. Take China, where EY’s local arm is under scrutiny for its role auditing coffee shop Luckin. The Public Company Accounting Oversight Board, which oversees the audits of US public companies, is barred from China. That, as Luckin and its overseas-listed Chinese peers repeatedly note, “makes it more difficult to evaluate the effectiveness of our auditors’ audit procedures or quality control”.
Finally, auditing firms are obliged to have indemnity insurance rather than capital buffers. That means they lack the financial heft required to bear the sort of fines meted out to perpetrators of fraud and their advisers.
All of this is a worry as more bankruptcies loom. Deregulation and new business models are fertile grounds for scams — see Enron, WorldCom and Wirecard. So too is the pandemic, which has shunted sheaves of documentation online, making fraud easier. Regulation typically lags progress, but seldom so glaringly as in the world of audit.
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