EY fraud expert: ‘incomprehensible’ that Wirecard ‘red flags’ were ignored
Christian Muth told German MPs his ‘professional honour’ had been hurt after his findings were dismissed
A senior EY anti-fraud specialist who investigated whistleblower allegations of fraud at Wirecard said it was “incomprehensible” that audit partners at the Big Four firm had dismissed “red flags” pointing to accounting manipulations at the disgraced payments group.
In a day of explosive testimony before German MPs in Berlin, Christian Muth, a 45-year-old former German army officer who led an EY probe into the allegations between 2016 and 2018, said that his “professional honour” had been hurt after its findings were discounted.
He pointed out that the investigation, which was first reported by the Financial Times last year and codenamed “Project Ring”, had made six distinct observations that supported the allegations from a whistleblower in India.
The probe had been commissioned by Wirecard’s management board and conducted by EY Forensic & Integrity Services, an arm of the Big Four firm that specialises in white-collar crime.
However, Wirecard ultimately blocked EY’s anti-fraud team from investigating the issues further and eventually aborted the probe in early 2018. Just over two years later, the payments group collapsed in one of Europe’s largest postwar accounting frauds.
According to Muth, the EY partners in charge of Wirecard’s audit were aware of the issues raised by the probe, but still issued unqualified audits having concluded the allegations were of “no substance”.
“I was irritated. From my point of view as a forensic investigator, this assessment was incomprehensible,” Muth told MPs in a hearing that lasted for more than five hours.
Danyal Bayaz, an MP for the Greens, said Muth’s “outspoken testimony heavily incriminated his audit colleagues”, adding that there was “strong evidence” that risks were not properly assessed.
The damning assessment from Muth was in sharp contrast to how the hearing began, with the EY partner initially refusing to answer even basic questions. He argued that many of the documents that he would need to reference were classified as secret.
That drew a stern rebuke from MPs of all parties on the parliamentary committee from the pro-business Free Democrats to the hard-left Die Linke party. “Stop playing hide and seek with a constitutional body,” said Hans Michelbach, an MP for Angela Merkel’s conservative CDU/CSU.
“You may be trying to protect company secrets but I wonder how long as a company in Germany [EY] will continue to exist”, thundered Jens Zimmermann, a Social Democrat MP.
After consulting with his lawyer and EY representatives, Muth relented and began his testimony.
“EY Germany welcomes the fact that a partner testified today at the parliamentary inquiry committee,” the Big Four firm told the FT, adding that “at no point did EY Germany object to its partner providing public testimony and this was confirmed to his lawyer”. It stressed that it has supported the committee “throughout and will continue to do so”.
However, Muth’s testimony is a further blow for EY, which has been under intense scrutiny after giving Wirecard unqualified audits for a decade. An investigation into its audit work for the company, which was commissioned by the German parliament, last month uncovered serious shortcomings.
Munich prosecutors have launched a criminal investigation against the EY partners who oversaw the Wirecard audits, while the firm has lost several high-profile clients in Germany.
In his testimony, Muth stressed that while “Project Ring” was separate from EY’s annual audit of Wirecard, the audit partner in charge of the once high-flying payments group was part of the probe’s team.
Muth told MPs how right from the start Wirecard had stonewalled the probe, blocking many of the investigative steps that were initially agreed. Muth said he had “continuously and clearly” told the payments group and his EY audit colleagues that further action was needed.
In March 2017, EY’s audit team had threatened to withhold an unqualified audit from Wirecard unless a series of key questions related to “Project Ring” were answered. However, just weeks later they changed their mind and signed off the group’s 2016 results without qualifications.
Muth said that while Wirecard provided additional information to EY after the threat, “this did not resolve all the issues” and many were still pending when Wirecard aborted “Project Ring” a year later.
Asked if he thought the unqualified audits were flawed, Muth declined to comment, saying that “I am a forensic expert, not an auditor. This is something other people have to determine.”
He also described how Wirecard’s then chief financial officer, Burkhard Ley, had tried to influence the wording in EY’s status memorandum, suggesting that EY should clearly state that the allegations could not be validated. “I flipped out when I learned about that,” he said.
EY has repeatedly said it was deceived by the fraud at Wirecard. “Based on our information, the EY Germany auditors performed their audit procedures at Wirecard professionally, to the best of their knowledge and in good faith,” the firm said.