https://www.economist.com/business/2023/04/05/ey-gets-banned-from-new-audit-business-in-germany

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Business | Why, EY?

EY gets banned from new audit business in Germany

The penalty comes atop the beleaguered accountancy's other problems

MUNICH, GERMANY - MAY 09: An Ernst & Young sign is seen on May 09,
2021 in Munich, Germany. (Photo by Jeremy Moeller/Getty Images)
Apr 5th 2023 | BERLIN
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EY just can't get a break. The accounting-and-consulting giant is
being sued for $2.7bn by the administrators of NMC, a London-listed
hospital operator it had audited and which went into administration
after understating debts by $4bn. EY is being investigated by the
Financial Reporting Council (FRC), a British regulator; the firm
denies the administrators' claims of negligence. Its plan to
unshackle an advisory business constrained by its inability to work
with audit clients, codenamed "Project Everest", is in doubt amid a
rebellion by a group of American partners. And on March 31st its
German arm received the harshest penalty ever meted out by APAS,
Germany's accounting watchdog, which includes a EUR500,000 ($548,000)
fine and, worse, two-year ban on auditing new publicly listed clients
in the country. This is a financial blow to the firm--and an even
bigger reputational one.

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APAS's decision comes after a three-year investigation into EY's role
in the demise of Wirecard, a fintech darling turned Germany's biggest
post-war corporate scandal. EY had given Wirecard a clean bill of
health for a decade until the company collapsed in 2020 amid
allegations of massive financial fraud. APAS now says that it
considers it "proven" that between 2016 and 2018 EY violated its duty
of care during the audit of Wirecard and Wirecard Bank. Five current
and former employees were also fined between EUR23,000 and EUR300,000.
Seven other employees who were also under investigation escaped
punishment by handing back their auditor's licences. In a statement,
the firm said, "EY Germany has fully co-operated with APAS throughout
its investigation. We regret that the collusive fraud at Wirecard was
not discovered sooner, and we have learned important lessons from
this matter."

After its cockups in recent years EY has indeed been trying to get
better at spotting mischief. In 2021 it said it would invest $2bn
over three years in improving its audits, including upgrading its
technology the better to detect fraud. But no auditor is likely to
get things right every time. Indeed, scandals such as Wirecard and 
NMC go to the heart of the so-called "expectations gap" in auditing.
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. And it is not the only auditor to be
embroiled in controversy. In 2020 Deloitte was fined PS15m ($19m) by
the FRC for "serious and serial failures" in its audit of Autonomy, a
business-software firm. HP, an American tech firm that bought
Autonomy in 2011, alleged that its target had misstated its accounts.

Regulators, for their part, think audits could be improved. They have
tried to increase competition. For instance, in Europe firms must
rotate their auditors, typically after ten years. Yet despite such
efforts, audit remains a cosy oligopoly. The so-called "big
four"--Deloitte, EY, KPMG and PwC--together audit nearly all large
listed companies in Europe and America, weakening incentives to
invest in audit quality. For example, EY is currently auditing 12 of
the 40 companies in the dAX, the stockmarket index of German blue
chips, according to Wirtschaftswoche, a business weekly. They include
giants such as Deutsche Bank and Volkswagen. Its main rivals, PwC, 
KPMG and Deloitte, work for 12, ten and five DAX firms, respectively.

Next year several DAX companies will decide whether to renew the
mandates of their respective auditors. Siemens, Siemens Energy and
Siemens Healthineers, three engineering firms, have already said they
will end their contract with EY, though that is also related to the
obligation to rotate auditors. Other clients in statutory need of a
new auditor will be unable to switch to EY because of the ban even if
they want to--which, given the damaging publicity, they may not.

EY's rivals will be watching the fallout closely. So will its
partners elsewhere in the world. The fact that, like other global
accountants, EY operates a franchise-like structure, with independent
partnerships in each country, will not spare the wider network from
reputational damage. As for EY Germany, it remains keen on Project
Everest. For the firm's German advisory business, the divorce from
the tarnished audit arm cannot happen fast enough. #

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This article appeared in the Business section of the print edition
under the headline "Why, EY?"

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