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The impression from the title is different than what the article actually says--EY missed red flags that resulted in passing the audit when it should have faile

The impression from the title is different than what the article actually says--EY missed red flags that resulted in passing the audit when it should have failed, and later scrutiny is what caused the companies to implode.

thaumasiotes 6y ago
> and later scrutiny is what caused the companies to implode Really? If scrutiny is what caused the companies to implode, it seems like there's a strong argument to be made that the problem was the scrutiny. You want to find problems that are problems whether you find them or not, not problems that are only problems because you called them "problems".
- qw3rty01 6y ago
  I'm not sure where you got the impression that problems such as $300 million in fabricated sales, or $5 billion in undisclosed debt which were missed in audits is an issue with external scrutiny. My post is specifically pointing out that the wording makes it sound like EY audited the companies and their findings are what caused the companies to implode, which is what the parent comment seemed to assume, but the article actually says that it was the fact that EY did not find problems during their audits, which were later found, causing companies to implode.
  - thaumasiotes 6y ago
    > I'm not sure where you got the impression that problems such as $300 million in fabricated sales, or $5 billion in undisclosed debt which were missed in audits is an issue with external scrutiny. You don't think these might have caused problems for the company in the absence of external scrutiny?
TheOtherHobbes 6y ago
The story is more interesting, especially in the case of Wirecard. The FT started questioning Wirecard's accounts years ago, and Wirecard and the German financial services regulator, BaFin responded by... launching legal attacks on the FT, accusing the paper of colluding with short sellers. The FT kept finding and printing more and more evidence, EY kept giving Wirecard audit cover, and BaFin kept up an aggressive defence... of Wirecard. Then finally €1.9bn was found to be missing. The various "evidence" provided to EY to "prove" the money was real shouldn't have fooled anyone who had even the most basic grasp of professional auditing. When the shares were in freefall, BaFin finally admitted that perhaps there was a problem. Then EY's CEO sent a letter to clients in which he said “Many people believe that the fraud at Wirecard should have been detected earlier and we fully understand that. Even though we were successful in uncovering the fraud, we regret that it was not uncovered sooner.” The part in italics is simply a lie. EY did not uncover the fraud. The FT did. And in fact what finally killed Wirecard was an independent audit by another Big 4 member - KPMG - which was supposed to vindicate Wirecard, but actually found "irregularities" which Wirecard couldn't explain. So - what to conclude? It's hard to avoid a cynical interpretation - that auditing at this level is basically PR with spreadsheets, intended to reassure investors that everything is fine, and not a serious effort to reveal financial irregularities. It's not just EY. KPMG, Deloitte, and PWC have all had issues of their own. The underlying problem is that these companies are hired by their clients to provide a clean bill of health, and if they're too thorough they're not hired again. So the incentives are - let's say - heavily aligned against too much stringency. The FT Wirecard story is well worth a read. The FT is (expensively) paywalled, but some of the reporting is free. https://www.ft.com/content/284fb1ad-ddc0-45df-a075-0709b36868db https://www.ft.com/content/284fb1ad-ddc0-45df-a075-0709b3686...
- baq 6y ago
  Sound like a movie script. I’ve even got a title in mind: Big Short.
  - glaucon 6y ago
    Surely "A Bit Short" would be a better fit ? (Not quite sure that idiom works in US English so maybe only for some markets ;-)
- FuckButtons 6y ago
  The other dimension is cost, auditing a business to the point that you could conceivably uncover any fraud is prohibitively expensive, auditors, for better or worse are highly trained and specialized professionals and the hours that they work cost their clients substantially. If you really want a system that prevents all fraud, rather than most, then you’re going to have to accept much higher costs, which given its relative rarity is possibly not worth paying for.
whoisburbansky 6y ago
Ah, that's funny, because the way I read the headline, I assumed it was saying that they imploded because of lax auditing by E&Y, which should have caught their problems before they snowballed into too-large-to ignore implosion drivers.
- qw3rty01 6y ago
  It might've just been me misinterpreting, but I thought the parent comment meant that EY would become the "Big One" after auditing the other companies and causing them to implode
  - whoisburbansky 6y ago
    Ah, hahaha I thought that was just a general comment about any of the others being potentially hole-ridden enough that an audit would destroy everyone but the one doing the auditing.

thaumasiotes 6y ago

> and later scrutiny is what caused the companies to implode Really? If scrutiny is what caused the companies to implode, it seems like there's a strong argument to be made that the problem was the scrutiny. You want to find problems that are problems whether you find them or not, not problems that are only problems because you called them "problems".

qw3rty01 6y ago
I'm not sure where you got the impression that problems such as $300 million in fabricated sales, or $5 billion in undisclosed debt which were missed in audits is an issue with external scrutiny. My post is specifically pointing out that the wording makes it sound like EY audited the companies and their findings are what caused the companies to implode, which is what the parent comment seemed to assume, but the article actually says that it was the fact that EY did not find problems during their audits, which were later found, causing companies to implode.
- thaumasiotes 6y ago
  > I'm not sure where you got the impression that problems such as $300 million in fabricated sales, or $5 billion in undisclosed debt which were missed in audits is an issue with external scrutiny. You don't think these might have caused problems for the company in the absence of external scrutiny?

TheOtherHobbes 6y ago

The story is more interesting, especially in the case of Wirecard. The FT started questioning Wirecard's accounts years ago, and Wirecard and the German financial services regulator, BaFin responded by... launching legal attacks on the FT, accusing the paper of colluding with short sellers. The FT kept finding and printing more and more evidence, EY kept giving Wirecard audit cover, and BaFin kept up an aggressive defence... of Wirecard. Then finally €1.9bn was found to be missing. The various "evidence" provided to EY to "prove" the money was real shouldn't have fooled anyone who had even the most basic grasp of professional auditing. When the shares were in freefall, BaFin finally admitted that perhaps there was a problem. Then EY's CEO sent a letter to clients in which he said “Many people believe that the fraud at Wirecard should have been detected earlier and we fully understand that. Even though we were successful in uncovering the fraud, we regret that it was not uncovered sooner.” The part in italics is simply a lie. EY did not uncover the fraud. The FT did. And in fact what finally killed Wirecard was an independent audit by another Big 4 member - KPMG - which was supposed to vindicate Wirecard, but actually found "irregularities" which Wirecard couldn't explain. So - what to conclude? It's hard to avoid a cynical interpretation - that auditing at this level is basically PR with spreadsheets, intended to reassure investors that everything is fine, and not a serious effort to reveal financial irregularities. It's not just EY. KPMG, Deloitte, and PWC have all had issues of their own. The underlying problem is that these companies are hired by their clients to provide a clean bill of health, and if they're too thorough they're not hired again. So the incentives are - let's say - heavily aligned against too much stringency. The FT Wirecard story is well worth a read. The FT is (expensively) paywalled, but some of the reporting is free. https://www.ft.com/content/284fb1ad-ddc0-45df-a075-0709b36868db https://www.ft.com/content/284fb1ad-ddc0-45df-a075-0709b3686...

baq 6y ago
Sound like a movie script. I’ve even got a title in mind: Big Short.
- glaucon 6y ago
  Surely "A Bit Short" would be a better fit ? (Not quite sure that idiom works in US English so maybe only for some markets ;-)
FuckButtons 6y ago
The other dimension is cost, auditing a business to the point that you could conceivably uncover any fraud is prohibitively expensive, auditors, for better or worse are highly trained and specialized professionals and the hours that they work cost their clients substantially. If you really want a system that prevents all fraud, rather than most, then you’re going to have to accept much higher costs, which given its relative rarity is possibly not worth paying for.

whoisburbansky 6y ago

Ah, that's funny, because the way I read the headline, I assumed it was saying that they imploded because of lax auditing by E&Y, which should have caught their problems before they snowballed into too-large-to ignore implosion drivers.

qw3rty01 6y ago
It might've just been me misinterpreting, but I thought the parent comment meant that EY would become the "Big One" after auditing the other companies and causing them to implode
- whoisburbansky 6y ago
  Ah, hahaha I thought that was just a general comment about any of the others being potentially hole-ridden enough that an audit would destroy everyone but the one doing the auditing.