In 2020, Wirecard AG, one of the largest German payment processor and financial services providers, filed for bankruptcy. The media exposed that the company lost €1.9 billion in cash due to fraudulent financial reports and corrupt business practices. Its downfall shone a spotlight on four of the biggest auditing companies in the world, namely KPMG, Ernst and Young (EY), PriceWaterhouseCoopers, and Deloitte. Also known as the Big Four, their credibility and the integrity of their work are now being called into question.
Almost all corporations go through an annual audit. It is conducted by a separate, third-party, private institution that will examine all of the business's financial statements for that year.
Audits double-check the state of a company's financial health. Auditors confirm or question whether what the company has said about its finances is correct or not. An annual audit also provides information about the company so that current and potential investors and stockholders can check: Is it legitimate? Is it a good investment?
Companies hope to achieve an audit marked with an "unmodified opinion", meaning that the auditors saw no issues and have no concerns over the financial statements. However, if the business being audited is missing money or has too much, it's given a "modified opinion". It's a sound system, but what happens when the auditors make mistakes and miss anomalies? Or worse, when they intentionally turn a blind eye to fraud?
Wirecard AG, for example, was a stable company, with many investing their pensions to buy shares. Or so everyone thought. It received "unmodified opinion" audits annually from one of the Big Four, auditors Ernst & Young. Sadly, its stock prices plummeted when news of the fraud emerged.
It raised several questions, including "How did Ernst & Young miss all the signs of fraud"? Did they make miscalculations, or was the auditing process wrong? Did they choose to look the other way? And how many other Wirecard AG's are out there, being given high ratings and stamps of approval by members of the Big Four, using their investor's hard-earned money, but ready to implode at any time?
Is the system flawed? Corporations pay the Big Four to audit them properly. Auditors want to ensure that what they're looking at is correct so they can get paid, which motivates them to overlook any discrepancies in financial records. Conflicts of interest also arise because the Big Four also give consultation advice. In fact, they receive higher revenues from consultations than from auditing. Are they also advising on how to cook the books?
It also does not help that the Big Four are supposedly helping draft financial-related regulatory bills and laws, prompting criticism that they are writing their own rules. But trust them or not, they are possibly the only thing that can provide checks and balances against big corporations. or so we hope.
Directed by: Christina Dierschke, Stefan Ebling