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I used to work at EY in banking & capital markets audit - before I went into engineering - and everyone learns that if there is one thing, ONE THING!!! that the
by rojeee 6y ago
I used to work at EY in banking & capital markets audit - before I went into engineering - and everyone learns that if there is one thing, ONE THING!!! that the auditor should always do, it is to send bank confirmation letters. You get a list of all the banks where accounts are held and send them a letter asking for confirmation of the balance. This proves existence of the balances and helps with completeness as sometimes they send back balances you didn’t know about from the accounts!
If the letters don’t come back, you chase them because, in my experience, the partner would not sign off unless all cash was accounted for. There was always a significant risk associated with cash so providing a clear audit opinion in the absence of cash confirms is not a very smart move. Other procedures include checking reconciliations and “cut off” to make sure cash swept from one account to another is counted and / or not double counted. We would also get literally all the bank statements too and some poor graduate would have to “substantively audit” them. So yes... We used to do a lot of work in this area.
What happened with Wirecard? Who knows?! Seems like the team didn’t do their job properly because in my experience, it’s fairly easy to spot missing cash. And 1.9 billion of it...! The article states that EY didn’t “verify cash balances”... I’m not sure what that means - “verify” is a dirty word in audit because it’s not specific enough. I find it hard to believe they didn’t send bank confirms but if they didn’t then that’s an unforgivable mistake.
It’s also worth noting that auditors are not responsible for detecting fraud but clearly if something odd is going on and they find it, then it will be raised. In my experience most wrong things that we asked our clients to adjust were due to incompetence or over valuing illiquid securities.
- mikequinlan 6y agoTFA says >company’s cash was held in bank accounts it didn’t control I suspect that the accounts existed and had the cash, but the company wasn't the owner (or the sole owner) of the account.
- mardifoufs 6y agoTheir excuse was that it was an escrow account for them and their payment "partners" which were basically subsidiaries that turned out to be shell companies. So I can't believe they wouldn't have had access to the accounts to just check if the fake statements were real. Also, keep in mind that this whole thing exploded when they finally tried to verify them after the KPMG audit, so they had the option to do it they just didn't. IIRC it turned out the accounts weren't even real.
- diogenescynic 6y agoNot sure why you're being downvoted. This is common for payments companies where you have to fund another company's bank account or digital wallet or whatever they call it. Otherwise you have to open a bank account and that can be a painful process depending on the country. It's definitely more risky because the funds aren't in your name, but usually you protect yourself by only funding the minimal amount to fund operations for a few days at a time. Still not seeing how Wirecard could have lost the amount they did without some form of scam going on for a longer period of time or they were stealing customer funds to pay for corp expenses and they finally hit the point where they couldn't keep it going any longer.
- rojeee 6y agoThis is normal and doesn’t shed any light on the matter. Companies/individuals routinely hold cash in accounts they don’t control. For example; Client money accounts and collateral/margin accounts. Either way, the auditors would have known what the arrangements were and factored it into their opinion. Even the credit risk of the bank holding the nostro accounts is taken into consideration. Seems to me like Wirecard were running a large scale accounting fraud and EY were not “professionally sceptical” enough to see it. What’s not clear to me is whether any of the missing cash is client money or not. If it is then that’s a bit of a disaster.
- elliekelly 6y agoCould they perhaps have sent negative confirmations to the banks with the balances? IIRC that’s an acceptable process for verifying balances - though it’s typically used to confirm much smaller account balances. I’ve really only seen it used in bank audits where it’s sent to a sample of retail customers. But a negative confirm would be a way to “verify” for audit purposes without actually verifying. I’m not sure what would be worse though, using a negative confirmation for billions of dollars or sending no confirmations at all.
- ckastner 6y ago> The article states that EY didn’t “verify cash balances”... I’m not sure what that means - “verify” is a dirty word in audit because it’s not specific enough. In a German-speaking newspaper (I'm sorry, I don't recall which one), it was claimed that EY did not ask for confirmation letters for the past three years. If this is true given the immense amount of cash involved (representing a quarter of the balance sheet!), than I see this is a genuine Arthur Andersen moment.
- IMTDb 6y ago> What happened with Wirecard? Who knows?! Wirecard poured enough money in E&Y that the verification step was no longer deemed necessary.