TheChek News Flow

Big Four firm seeks to conclude years-long crisis triggered by work for defunct payments firm

EY has abandoned an appeal against unprecedented penalties imposed following its audits of fraudulent payments company Wirecard, as the Big Four firm seeks to draw a line under years of crisis in Germany.

Germany’s audit watchdog Apas last year banned EY from taking on new listed audit clients for two years and levied a €500,000 fine over alleged flaws in its audits of Wirecard, which collapsed in June 2020.

EY Germany said on Tuesday that, while it “does not agree with all findings” by Apas, it has decided to “fully comply with the sanctions” in a move that “will bring a conclusion to these proceedings”. The ban on new clients was on hold pending the appeal, which EY has withdrawn and so is likely to take effect immediately, a person familiar with the matter said.

EY and some of its partners still face an array of other legal cases, which are expected to take years to work their way through the Germany courts. The auditor faces law suits from former Wirecard shareholders and the group’s administrator seeking damages over its work for the defunct company. Munich prosecutors are also pursuing an investigation against several EY partners who were in charge of Wirecard audits, after Apas in 2020 identified potential misconduct in a criminal complaint.

Even without the ban on new clients, in the four years since Wirecard crashed into insolvency EY Germany has not won any blue-chip mandates and has lost several. The two-year ban taking effect now means that EY would be free to take on clients from late March 2026, which is just before when many annual shareholder meetings take place, in which auditors are formally appointed.

The number of EY’s audit clients in the Dax 40 index of big companies almost halved last year, from 11 to 6, said Jörg Hossenfelder, partner at the consultancy Lünendonk & Hossenfelder. The remaining clients include Volkswagen and Deutsche Bank, he said. But EY’s overall audit revenue in Germany still rose 8.4 per cent to €714mn in 2023, compared with a year earlier, he added.

Apas, the watchdog, last year concluded that EY violated its professional duties “during the audits of Wirecard and Wirecard Bank from 2016 to 2018”. EY had issued a series of unqualified audits for the disgraced payments group, missing that half of the revenue and the bulk of the profits did not exist.

Apas did not publicly disclose the details of EY’s alleged misconduct. People with direct knowledge of the ruling told the Financial Times that the regulator did not address the question if EY acted with intent or just with negligence, which will be an important factor in deciding the firm’s criminal and civil liabilities.

EY said on Tuesday that it “has learned important lessons from this particular case” as it improved its quality control and puts more focus on preventing fraud. Previously, EY had stated that it regrets that “the collusive fraud at Wirecard was not discovered sooner”.

Last year, Apas also announced that it would impose individual fines of between €23,000 and €300,000 on five current and former EY employees over alleged failures in their work on Wirecard.

Apas did not immediately respond to an FT request for comment.

A cybersecurity startup called Cyera is betting that the next big challenge in enterprise data protection will be AI, and it’s raising a big round of funding as demand picks up for it.

The company — which builds AI-enhanced tools to create accurate pictures of where and how data is being used in organizations’ networks — is close to finalizing a round of nearly $300 million, tripling its valuation to $1.5 billion in the process, according to sources very close to the deal. Storied venture firm Coatue is leading the round of funding, say the sources.

The deal is expected to be complete in early April. It’s not clear which other investors are participating in this round. Previous to this, Cyera — pronounced “Sierra” and headquartered in San Mateo and with roots in Israel — had raised a total of $160 million with its current $500 million valuation dating from last year.

Previous Cyera backers include Sequoia (which led both of its previous two rounds, including a $100 million round less than a year ago, in June 2023), Accel, Redpoint and the Israeli firms CyberStarts and Cerca Partners, among others.

Cyera, Coatue and Sequoia declined comment.

There were rumors of this round circulating earlier this month. Since then, we can confirm that the amount being raised has increased by some $150 million, and before now, no investor names had been known.

This latest Cyera investment is notable on a couple of counts.

First, it underscores how cybersecurity — despite wider pressures in the technology economy and the venture market — continues to attract business, investors and big checks — even from firms like Coatue that have pulled back from some of their more exuberant bets. (Notably, Coatue shut a relatively new venture office in London earlier this year, a signal that it would be significantly less active in Europe going forward.)

Second, this round sheds new light on the huge role AI is playing in the technology market today.

Startups like OpenAI and Mistral continue to attract mega investments to build out large language models, and it’s rare to find an organization today that’s not evaluating how to use more AI in its business. But increasingly, information security teams are also recognising the problems that AI can pose.

Yes, AI is being weaponized by malicious hackers to crack into networks, and it’s helping cybersecurity companies (like Cyera itself) to fight bad actors and get a better grip on enterprise data.

But more unwittingly, it’s playing a different part, too: companies themselves, interacting with AI services like chatbots or generative AI applications, run the risk of breaching their own internal intellectual property and data protection policies. Cyera is setting out to address the latter of these scenarios, too.

A source said that AI right now is a “huge driver” for business at Cyera. But interestingly, the startup did not set out to build tools to identify how and where data would be exposed and potentially misused in AI applications per se.

Its focus initially was more general — working with companies in verticals like healthcare, technology, financial services, manufacturing, retail and travel, to provide tools for data classification, posture management (snapshots that help track how and where data is moving), detection and response, and access governance.

That business has driven, from what we understand, tens of millions of dollars in current ARR for the startup.

More recently, however, Cyera has been noticing a shift in what its customers are asking to track, a source tells us.

Many organizations are bringing more automation into their networks, and the concern is that this too will make it much harder to categorize and screen for the usage of sensitive data. “It’s all about everything that enterprises need to do to get ready for AI,” he said. “AI is a data problem.”

Telegram has introduced a controversial new feature that grants users a free premium membership in exchange for allowing the instant messaging app to utilize their phone number as a relay for sending one-time SMS passwords to other users attempting to log into the platform, raising concerns about potential privacy risks and the exposure of personal information.

The feature, spotted first by the TGInfoEn Telegram channel (via reverse engineer AssembleDebug), is rolling out in select countries for Telegram for Android users. If you agree to let Telegram use your number as an OTP relay, the company will send you a transferable code for Telegram Premium.

The terms of service for this peer-to-peer login program notes that the company will send a maximum of 150 OTP messages per month. Participating users, who may also be charged for local and international SMS usage, will have to hit a certain quota to be able to avail the complimentary subscription. From a monetary perspective, you might end up paying more through your phone bill than the value of Telegram’s premium membership.

Then there is a massive issue of privacy, which allows strangers to look up your number and use it for spam and fraud. Telegram allows users to hide their phone numbers from strangers, but using your number as a relay could allow them to look up your Telegram account.

The terms indicate that people participating in the program won’t hold Telegram liable for any damages and give the company absolute indemnity from all claims related to peer-to-peer login.

“You acknowledge and agree that Telegram shall bear no liability for any costs, expenses, damages, or any other adverse or otherwise unforeseen consequences that you may incur as a direct or indirect consequence of your present or past participation in the P2PL Program,” they read.

Telegram tells users not to engage with people who receive an OTP code from their number, but there is no way to enforce that.

The company launched a subscription service two years ago with features like transcription, exclusive stickers, reactions, and other customizations. Telegram has introduced features like Stories for paid users. However, users opting into the peer-to-peer login system have to think if giving out their phone number to strangers to save a few bucks is worth the hassle.

Fierce competition has hammered the market’s economics

In most markets, consumers are best served when regulators foster fierce competition. Telecoms bosses have long argued that their sector should be an exception. They increasingly appear to be right.

European competition authorities have largely dismissed the sector’s pleading as self-serving twaddle. The industry and its beleaguered investors are looking to the UK’s Competition and Markets Authority — currently investigating a proposed tie-up between Vodafone’s UK operations and Three UK — for inklings of change.

It is not difficult to see why the CMA plans a full inquiry into the proposed tie-up. Together, Vodafone and Three would create a mobile operator with 30 per cent of the UK market, just behind leader BT. The larger entity, the CMA fears, might be less motivated to compete aggressively than two relative minnows fighting for survival. A less fragmented market may also result in resellers such as Sky and Tesco Mobile paying more to piggyback on their networks, leading to higher prices for consumers.

This misses one important point. Fierce competition has hammered the market’s economics. UK mobile revenues have fallen by 20 per cent in real terms in less than a decade, says Karen Egan at Enders, while data traffic is 30 times higher. Europe as a whole tells a similar tale. In Italy, the average price of one gigabyte of data fell by 85 per cent between 2019 and 2021, according to data compiled by Statista.

In that kind of market, economies of scale are the only way to eke out a decent return on investment. Subscale network operators like Vodafone and Three cannot justify pouring any more money in. 

That’s a problem — for consumers and policymakers alike. Building evermore advanced telecoms networks is capital-intensive. Despite sucking in €59bn of investment last year, according to industry group ETNO, Europe’s 5G rollout is barely out of the starting gate. Completing it will require €400bn, according to the European Court of Auditors. The US and China are moving faster than Europe. The UK, in particular, is falling behind, with the worst download speeds in the group of G7 nations.

Consolidation would help. In the UK a merger between Vodafone and Three would cut operating costs, helping to nudge returns above the company’s cost of capital even absent a recovery in pricing. That would give the company an incentive to build a network that would otherwise not be available to consumers. The challenge for regulators is to ensure consolidation spurs better outcomes, rather than being a free pass.

It could even give shareholders in the sector hope that its endless cycle of capital destruction might, eventually, come to an end.

An interesting disconnect in US rate-cut expectations

Economists and the Fed think similar things on what will happen to the US economy. So why is there a big gap in their expectations for interest rates?

When Jay Powell said in December that the Federal Reserve would lower interest rates by 25 basis points three times in 2024, markets read that as many as six.

Three months later, investors are wholly in sync with the US central bank’s three-cut view. Many economists, however, are not.

A week ahead of the Federal Open Market Committee’s March meeting, FT-Chicago Booth polled a group of 38 academics to ask them what they thought would happen to the US economy this year. They were decidedly more hawkish than either rate-setters or investors, with the bulk expecting two or fewer cuts.

The Financial Times had the scoop and the story, published ahead of the Fed meeting, which is here.

But now that we have the FOMC’s projections, we want to delve into a little more detail on how the poll and the dot-plots stack up.

We want to see what the results might reveal about how the economists and the rate-setters differ in their response to the latest — largely favourable — batch of data on the US economy. And whether or not they have different risk appetites when it comes to deciding it’s time to declare victory on the worst wave of inflation in a generation and finally cut rates from their current 23-year high of 5.25 to 5.5 per cent.

First, here’s what the economists said when asked how many times they thought the Fed would cut this year:

So what explains the disconnect?

It’s certainly not differences in how they view the economy’s prospects. Indeed, comparing the economists’ estimates for growth, inflation and unemployment this year with those of the FOMC would lead one to suspect that the academics would be keener on cuts than the rate-setters.

Those polled are even somewhat gloomier on the jobs market beyond 2024 — when asked what the highest rate of unemployment would be over the next three years, the most common response was between 4.5 and 5 per cent. The FOMC, meanwhile, expects the jobless rate to hit just 4.1 per cent over its 2024-2026 forecast horizon.

The academic economists also view the risk of a recession this year as marginal, and believe that the chances of core personal consumption expenditures, which measure how much consumers are paying for goods and services excluding food and energy products, rising above 3 per cent are relatively small.

This echoes the pronouncements of Fed officials, who believe both that inflation will not substantially bounce back and that the US’s economic strength affords them the patience to act only when they see further signs of price pressures dissipating.

The biggest difference between the two camps, then, is that the Fed is more willing to risk cutting at a time when core inflation is still too high for comfort.

As monetary policy operates with a lag, taking broadly about 18 months for the impact of a change to fully work through the economy, waiting until inflation is bang on 2 per cent isn’t necessarily a good idea.

But what surprises us is that there can be similar takes on the near-term economic outlook yet divergent views on how confident one can be that the FOMC can afford to cut as many as 75 basis points this year. Fed officials, it appears, do have quite a big easing bias — at least when their preferences on rates are set against those of the professors.

By the time we get the next set of poll results and dot plots, we’ll have seen the Consumer Price Index releases up until May, and another three months’ worth of PCE data. That should offer a better idea of whether three cuts — or two or fewer — look about right.

Europe’s largest media group open to ‘joining forces’ after previous expansion attempts were scuppered by regulators

German media giant Bertelsmann is interested in doing a deal to dramatically scale up its music business BMG, whose artists include Kylie Minogue and Rita Ora, following a series of setbacks that curbed the group’s previous expansion efforts.

“BMG could potentially be an opportunity for a breakout investment and joining forces with a competitor,” Bertelsmann chief executive Thomas Rabe told the Financial Times. “If the opportunity arose to significantly grow BMG by joining forces with another music company, we would consider it.” 

Rabe’s remarks come as Bertelsmann, Europe’s largest media group, assesses its future after several upsets scuppered its attempts to expand its core broadcasting and publishing businesses, which include the publisher Penguin Random House and broadcaster RTL. 

Competition regulators in Europe and the US stopped four big deals planned by the company in the past 18 months and Bertelsmann has subsequently moved to sell some of the businesses involved, including RTL’s Dutch arm and the services company Majorel.

The disposals flattered 2023’s results but have raised questions over future sources of growth. Annual revenues were stable at €20.2bn while adjusted operating earnings before interest, taxes, depreciation and amortisation fell slightly to €3.1bn. The company said it expected a “sharp decline” in revenue and earnings this year.

Rabe said that although Bertelsmann would continue to incrementally invest in its European and US media businesses, the “big themes” he was interested in over the next few years included large capital allocations in healthcare, education, music and in developing economies, particularly Brazil, India and Mexico.

The marathon-running 58-year-old, who has headed the privately owned company since 2012, is due to step down at the end of 2026. While credited with transforming Bertelsmann during his tenure from a sleepy European publishing business into a transatlantic conglomerate, critics say Rabe is at risk of mis-steps as he seeks to quickly craft a strategic plan B.

BMG is the world’s fourth-largest music label — but lags far behind the top three “majors”, Universal, Sony and Warner. The company earned revenues of €905mn in 2023, up 4.5 per cent year on year. Management of the division was taken over by Thomas Coesfeld, the 33-year-old scion of Bertelsmann’s owners, the Mohn family, last year.

Rabe said it might be an opportune moment for a “bigger step” to scale up BMG, which has already sought to expand its catalogue through a partnership with KKR, the private equity firm.  

“Music investments go through cycles,” Rabe said, pointing to investors’ cooling interest in music rights because of rising interest rates. “We’ve seen a number of financial institutional investors who put a lot of money into music rights and didn’t make returns because a) they didn’t know the business particularly well and b) they overpaid. But we are a long-term investor.”

He added: “We make a decent three times our cost of capital in music.”

For BMG, Rabe said, there could be significant economies of scale from a merger or acquisition of a rival.

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