Ernst and Young LLP’s reputation as an auditor is straining beneath the weight of four high-profile scandals that threaten to generate big legal bills and dent the firm’s international standing.
The latest involves EY’s auditing of Wirecard AG, the German payment processing company that revealed a hole of 1.9 billion euros ($2.1 billion) in its finances. Markus Braun, Wirecard’s former chief executive officer, was arrested Monday in Munich, where prosecutors said he was suspected of inflating the company’s balance sheet and sales with fake transactions.
In addition, the London High Court in April awarded a former EY Dubai partner, Amjad Rihan, damages of $11 million after he claimed he was forced out of the firm for whistleblowing about alleged money laundering through a gold company audited by EY. The firm has said it will appeal the judgment.
“There’s never a good time for an audit firm to be embroiled in a scandal, but now seems especially awkward,” Karthik Ramanna, a business professor at Oxford University’s Blavatnik School of Government, said Monday in an email. “All businesses are being stretched by the coronavirus, so no business wants to deal now with a reckoning of this sort.”
“It’s a damaging cluster of cases against the firm,” said Jim Peterson, a lawyer and former partner at the now-defunct Arthur Andersen LLP accounting firm, although he pointed out that the four cases are in no way related. “It’s not a sign that the firm has systemic audit problems.”
“We understand our vital role in serving the public interest and fostering trust and confidence in capital markets,” EY said Friday in an e-mailed statement, after Wirecard’s CEO quit. “Audit quality is critical to this and we continuously seek to be globally consistent in delivering high quality audits.”
Audit quality tests carried out by U.S. and U.K. regulators showed improvements over the past year, although EY still failed to meet U.K. quality targets. The firm restructured its U.K. assurance operations earlier this year, separating out the management of its audit operations.
“EY can survive the hit to its reputation,” Peterson said. “None of the Big Four have a good reputation at the moment.”
The U.K., among other countries, has said it will enact audit reforms, including separating audit and consulting operations to reduce possible conflicts of interest, after a spate of Big Four auditing scandals, including KPMG-audited Carillion Plc, PwC-audited BHS Group Ltd, and Deloitte-audited Serco Group Plc.
Like other major accounting firms, EY has a low level of equity compared with revenue, because it distributes most profit to its partners.
“The partners have taken the money out of the firm so that it doesn’t have any assets for claimants to take,” Prem Sikka, a Sheffield University accounting professor who drafted audit reform proposals for the main opposition Labour Party in 2018, said Monday in a call.
That means, he said, that EY partners wouldn’t face big personal threats even if the four scandals escalated into unaffordable court cases. “When Andersen collapsed its partners found new jobs and its audits were simply given to the remaining big firms.”