The Big Four – Accounting firms under scrutiny | DW Documentary

The Big Four – Accounting firms under scrutiny | DW Documentary

The Wirecard scandal brought the role of big auditing firms into focus. Their work is supposed to create trust in companies. But are appearances deceptive?

EY, PwC, KPMG and Deloitte: these “Big Four” auditing firms are hardly household names. Yet they play a key role in the global economy.

They have also all been at the center of a number of major financial scandals. For ten years, auditors at EY (Ernst & Young) certified Wirecard’s annual financial statements. They failed to uncover that a network of fraudsters were using accounting tricks to write billions into Wirecard’s books over several years.

Hundreds of Wirecard employees lost their jobs, and thousands of investors lost a total of €4.5 billion. Why didn’t the auditors recognize the fraud? Were they negligent, overextended?

The Big Four dominate the global audit industry, and their vast knowledge of company- and tax-law making them indispensable. Because growth opportunities in auditing have largely been exhausted, the Big Four offer a raft of consulting services, not only to the companies they audit but also to governments. Have the Big Four become too powerful — even out of control?

This documentary explores the role auditors played in the Wirecard scandal, investigates potential conflict of interest within the Big Four, and sheds light on the companies’ role within a complex web of political and economic dependencies.

They’ve been called the watchdogs of capitalism the conscience of the free market and
the pinstripe mafia
the big four auditors ernst young kpmg pwc and Deloitte the big four are
incredibly influential in our market economy
they are indispensable experts with an in-depth knowledge of companies and tax law
they’re much too powerful they influence politics and legislation
it can’t work without the big four have an important role
auditing corporate financial statements it’s extremely important for us as
consumers and for people who are investors to trust the information we are given
but are they doing their job
in 2020 the wirecard scandal shook germany
never before has there been such a plummet in the dax ernst young audited wirecard’s financial
results for years without uncovering the fraud this candy
mistakes from 90 years ago which led to our profession should not have repeated you don’t have to be an angel
in order to make a good audit you just have to be independent
each new scandal put the big auditors in the spotlight are they taking shortcuts
are they overwhelmed or is the system at fault
thomas haggard is retired his passion is building guitars
with a pension of just under 2 000 euros the former high school teacher says he is enough to live comfortably
but he’s also managed to put a little aside [Music]
if you put money in a checking account inflation takes it
instead he invested most of his savings in a promising german company
i’m not a risk taker which is why i didn’t buy just any stock
i bought wirecard active
it had seemed a safe bet but then the company suddenly crashed along with its shares
[Music] a fraud so big that the stock would
become almost worthless i didn’t think it was possible
[Music] wirecart lost a total of 10 billion euros in market capitalization
raising many questions [Music] how could it go unnoticed for so long
that the payment processing company was fudging its balance sheets the finance
ministry blames the private auditors a small investor like me can’t check
whether wirecard’s statements are true thomas herget has joined a class action
lawsuit against wirecard’s auditor they carry some blame they should have
been more careful but who are thomas hagert and the other small investors up against
ernst young or ey became the sole auditor of wirecard in 2011.
together with pwc kpmg and deloitte ey is one of the big four the four largest
accounting firms together they employ 1.1 million in and around 150 countries
[Music] and they ordered the financial statements of almost all major companies
is doing her phd at copenhagen business school she’s been researching the big four and
the role they play in the economy and society for years auditing is something that is required
this is something that is extremely important for a well-functioning market economy
every medium or large company is required to have its annual financial results reviewed by an independent
auditor [Music] for a market economy it’s extremely important for
us as consumers and for people who are investors to trust
the information we are given and our only weapon really is the audit
in 1929 the start of the great depression companies and banks around the world rushed to hide their financial
problems and countless people lost their jobs and savings including hundreds of thousands
in germany this was the context in which legislators introduced statutory audits
for stock companies in 1931
globalization accelerated the economy companies grew quickly and formed international networks
auditors grew too
in the 1980s eight accounting firms dominated the international industry
they expanded and merged forming the big six
then it became the big five and just a short while later the big
four kpmg ey deloitte and pwc
[Music] in germany the institute of public auditors or idw helps influence auditing
rules the privately run organization represents the interests of more than a
thousand public auditing firms in germany including the big four
[Music] class peter naumann says the job of an
auditor is clearly defined [Music]
auditors are required by law to carefully verify annual financial statements
[Music] they are also supposed to maintain professional skepticism toward the
companies they audit and follow a specific procedure
[Music]
an audit is designed to detect errors in financial statements whether due to fraud or not is
irrelevant [Music]
when a company opens its books its business is laid bare in numbers
order to see where money flows in and where it then flows out bank accounts marketing costs
operating expenses and acquisitions the bigger the company the more
complicated this flow of money can be auditors generally cannot examine a company in its entirety
they instead choose an area to focus on the one where they suspect the highest risk
they compare the company’s statements with the actual financial transactions to gain an understanding of each of the
transactions if the auditor finds no fault in the company’s annual financial statement
they give what’s called an unmodified opinion a seal of approval for the company
[Music] the auditor’s verdict on wirecard was trusted for many years
and to this day ey maintains an audited wirecard to the best of its knowledge and according to protocol
if companies like that bluff and auditors don’t notice it’s over because then we can no longer
rely on the very foundation of business namely the numbers
[Music]
fabio dumasi co-chaired germany’s wirecard parliamentary inquiry committee
together with parliamentarians from all political parties dimasi began investigating the german company’s
collapse in october 2020. the committee questioned 110 witnesses
over nine months one of the key questions did ey make mistakes
the wirecard scandal was not the first time the big auditors had to face criticism
for five years horizontal boring machine company flotex inflated its results with fake sales
and kpmg didn’t notice then either leading to damages of more than 5
billion deutsche marks the biggest white collar crime ever in germany [Music]
in the u.s energy company enron inflated its profits for years its auditor arthur
anderson was one of the big five back then and once again the auditor failed to detect the fraud enron filed for
bankruptcy in 2001 and senior anderson employees destroyed company documents without permission
following the scandal the auditor surrendered its license to audit listed companies
but it never recovered and was eventually dissolved
in 2008 it was investment bank lehman brothers filing for bankruptcy
lehman had used accounting tricks to hide its financial situation for years
and ey kept approving their cooked books [Music]
markets are in shock stocks are plummeting
lehman brothers eventually collapsed under massive debt in 2008 triggering the largest financial and economic
crisis since the second world war
taxpayer money was used to save banks around the world 59 billion euros in
germany alone escaped
these are isolated cases of corporate fraud that auditors failed to detect
and each case has won too many but can we say that because of these 10 scandals in 90 years auditing which
checks thousands of financial statements every year doesn’t work
auditors rarely help uncover corporate scandals one possible explanation is that there
are conflicts of interest
[Music]
companies hire and pay their auditors themselves a practice based on a government assumption that companies
have an interest in being properly audited
then the workshops perform is different auditing boosts the
public’s trust in a company and its finances often from underneath
karolo rinka is an expert on financial statements and a consultant she says the fact that companies pay
their auditors is problematic [Music]
if we agree on a deadline and i don’t meet it increasing costs then the client
might say see that you stay within it or next year we’ll hire another auditor
antoine delta is all too familiar with this pressure he worked as a junior auditor at pwc in luxembourg for two
years if an auditor sees something it’s
against his interest to speak up especially if they don’t want to correct it it’s impossible to audit well
[Music] and there’s an additional factor complicating the order to company
relationship next to auditing the big four also offer
consulting they advise clients on digitalization sustainability
and taxes the big four are incredibly
influential in our market economy they have a lot of services that really impact how
business is done silas styles home says this creates yet
another conflict of interest
you cannot see someone as a your client and then also investigate
them critically as the regulator you have to be on one side or the other
the big four’s core business used to be auditing but now it only accounts for around a third of their revenue
around two-thirds comes from consultancy
when it’s not revised if i know the auditing market is limited and fees are essentially stagnant and consultancy is
the opposite then it makes sense to offer the latter night
virginia
doing well financially ensures quality at the auditing firm i’d like to add that doing well
financially also secures financial independence and anyone who isn’t financially
independent is probably most likely to look the other way for a client they’re auditing when they shouldn’t
profit made from consulting ensures auditors can remain independent at least according to class peter
nullman but is this theory true are auditors independent from their
clients
another former pwc employee shared his experience in the u.s
our robota worked as an auditor at pwc for 18 years
the problem is that many companies that i experienced didn’t have the competency in-house
to document the complexity of the transactions that they were doing but instead of hiring third-party
consultants to do that for them the auditors was doing it for them because
again once you do that management likes you the auditor is not supposed to do that because the auditor
should audit if the auditor ends up doing it then who audits the auditors
bottle repeatedly reported his findings to his superiors
since i started to report those things internally my performance rating started to
gradually decline and i was not allowed to work on jobs progressively
this is how maura water sees it records show that his superior said bottle was too critical of his clients
management tend to hire comp auditors that are more friendly or that are less
inclined to give negative control opinions which meant that if we alone were the one that
were giving adverse control opinion when the other three did not we would not have been hired in the
market marrow bottle was fired in 2017. his suit for reinstatement was dismissed
by a california court in august 2021
[Music]
michelle geschrei is a certified public accountant and chairman of the association for medium-sized company
auditing he says the big four of forcing smaller auditing firms out of the market just
one of the reasons why he’s been campaigning for years for a strictest separation between auditing and
consulting [Music]
you just can’t trace what effect consulting has on the independence of the auditors
following the financial crisis the topic was put on the eu agenda in 2010. eu commissioner michel barnier also felt
the independence of auditors was at risk
is it healthy for the same firms to be auditing and consulting
is complete independence even possible in that context
we hoped what he said would become reality
wanted to strictly separate auditing and consultancy he also said companies should be
required to change auditors every 10 years [Music]
what followed was a lobbying campaign which michelle barnier correctly described as the biggest campaign ever
in brussels [Music] sven gigold was the coordinator of the
eu committee on economic and monetary affairs until 2021
he saw lobbyists working for large auditors exert political influence in brussels
[Music] they’re talking to the decision makers
and they’re meeting them early on when it’s crucial at the commission or at the ministries of the member states
in the end hardly anything remained of michelle barnier’s ideas member states themselves got to decide
which eu auditing reforms they introduced
germany introduced several exceptions auditors could still act as consultants
to companies they audit and they could order the company for longer than 10 years
how this reform developed reveals another potential conflict of interest
[Music]
we know the big four regularly get lucrative consultancy contracts with german ministries
including ey even after wirecard these consultancy contracts still exist
these problems show that the best people no longer work in the ministries
[Music] this problem also applies to the order
to watchdog known as apas in germany apas checks whether auditors maintain
their independence over half of its employees used to work at one of the big four
[Music] so if you have a system where there are
four organizations that have penetrated the government institution that are supposed to oversee them
they are essentially untouchable
governments often have to rely on external experts and the big four are very happy to offer
their expertise when it comes to the big four there’s a
kind of conspiracy theory about how some shady power influences everything
but that’s just part of a desperate search to find a physical power behind global capitalism
in globalization
economic power gives them political sway [Music]
for antoine delta getting a job at the big four was a great opportunity he started working for pwc in luxembourg
in 2008 i’m interested in numbers and i’m analytical so this was a good fit
he believed auditors could positively impact society
it’s very important for auditors to be independent societies rely on financial data being
correct
pwc is a demanding employer with long working hours and high pressure
over time antoine del tour began to understand how luxembourg worked as a financial center
in utah some audits really shocked me because i
was investigating empty shell companies with no employees no revenue no real
economic activity in luxembourg were supposed to create transparency
about the societal benefits of working as an auditor at pwc
he lost his motivation after two years he resigned but before leaving he came across
confidential tax returns they showed that luxembourg lured international companies with deals
tailor-made by pwc that slashed corporate taxes to less than one percent
every tax trick just short of illegal is being used to move profit made in one
country into another country to be taxed at a lower rate
pwc even prepared tax rulings with the letterhead of luxembourg’s tax authorities
government officials just had to sign
pwc was practically a division of luxembourg’s financial administration
it’s unreal
anton del toro shared the documents with a french journalist and he was then charged by luxembourg
authorities in 2014 for leaking documents but in 2018 he was recognized as a
whistleblower [Applause]
pwc isn’t the only firm selling such tax strategies they bring in a lot of money
for kpmg ey deloitte and other tax consultants all over the world
yeah of course that’s is some extra spice to the discussion on the big four
particularly when you think about how important they are for a functioning market economy it’s a little bit
worrying that they are also the ones who undermine the society in some ways by
showing businesses how they can practice a tax aggressiveness
according to the european commission the eu loses up to 70 billion euros a year due to corporate tax tricks
around half of the eu’s annual budget
the biggest damage is that people feel like some people are above the law those who get expert advice have an
international network and don’t pay their taxes this lowers the entire system’s legitimacy
that’s a difficult area when is it morally objectionable to use tax laws put in place by the legislator
who’s the sovereign schemer
tax competition also causes tax avoidance because i mean what is an incentive for some is
a strategy for someone else consultants are supposed to tell their
clients about the various opportunities
i don’t do that then my clients can later say i caused them financial damage
because i didn’t tell them all the options
but the big four aren’t just advising their clients [Music]
what’s very problematic is that many are also involved in legislation and other things in ministries
every country has its own tax laws and the resulting complexity leads to a need
for expertise exactly what the big four and their international networks offer
viazeen by their bratung de untonimen our consulting allows us to see where
the problems in the tax systems are and we tell politicians the government
the finance ministry and the parliament of mexico
it’s okay to speak with experts even business experts but when they’re practically co-writing laws without the
public or even parliamentarians knowing that’s a problem
spring 2021 ey auditors come under scrutiny by the wirecard parliamentary committee
a team of auditors was appointed as special investigators the committee asked them to review ey’s
wirecard audit their findings were summarized in the
wambach report although confidential it was leaked to some journalists
[Music]
felix holtermann works for handelsblatt a german financial paper and had been
following the wirecard case for a long time his desk also got a copy of the
wambach the report report is the first public
audit of one of the big four’s work its findings are crucial
the investigators looked at records from 2016 until 2021 and tried to ascertain
whether ey should have uncovered the fraud earlier
in 2016. wirecard bought a dubious indian payments firm for a great deal of money
a suspicion arose that wirecard managers made money off the deal
in response emy started project ring a forensic audit according to the wambach
report but there were problems
wirecard management didn’t sufficiently explain why they had overpaid for the takeover
the one back report included a letter from march 29 2017 written by the ey
auditor and addressed to the chairperson of wirecard’s supervisory board
if these points are not conclusively clarified there may be a modified opinion for the financial statements we
would also like to inform you that we will decide whether we can continue to work together based on your reaction to
this letter e y is threatening to not give an unmodified opinion
and to withdraw from the auditing mandate
this would have been a disaster for wirecard a modified opinion alone is enough for
investors and banks to lose trust but it would have also been a big
liability for the auditors
not even a week after this letter and we don’t know what happened during that time ey delivered its opinion
unmodified did ey receive the information they
needed the special investigators said the following in their report
the information includes verbal and written explanations by the management board
a proper clarification of the open points cannot be found in the documents
if i’m just having the board confirm things then there’s no point then i may as well skip it i need to maintain a
skeptical attitude and assume something is incorrect [Music]
this isn’t the only time ey spotted problems at wirecard
in the supervisory board’s notes which handles blood obtained the auditors said the following in 2019
doubts about the management’s integrity ey doubts the board’s integrity pretty much the strongest statement an
auditor can make
but in 2019 ey again gave wirecard an unmodified opinion
but they did refer to fraud investigations against wirecard employees in singapore in their final
report ey said the following in a written statement
very few annual financial statements of dax companies have contained such statements
this alone shows that this was an unusual measure
but the auditor’s comments received little attention and wirecard skillfully concealed its
true value in the final report as a woman if you look at the balance sheet
you see 2.7 billion euros in cash and cash equivalents nothing about how this also includes
money in escrow
on the financial statement it looked as if wirecard was swimming in money
and young had an idea throughout the years it was auditing ernst young failed to obtain independent
confirmation that these funds existed instead ey relied on trustees
in a written statement ey said the complex criminal web was designed to
deceive numerous stakeholders including investors bank regulators supervisory
boards auditors despite their diligent and extensive efforts
[Music] ey had become suspicious but it seems they nonetheless continue
to trust wirecard’s management board in key moments [Music]
ey relied on board statements while simultaneously doubting its integrity
even as an external observer that makes you wonder how ey could have issued audit certificates all those
years [Music] to this day it’s unclear why ey auditors
did not heed the many warning signals the damage to their reputation is
considerable clients such as commerce bank deutsche telekom and kfw a government bank ended
their auditing agreements with ey in 2020 munich state prosecutors opened
investigation into the partners at ey who audited wirecard
june 2021 the parliamentary inquiry committee presented its final report on
wirecard [Music]
this fraud should have been stopped early on ladies and gentlemen [Applause]
the auditors should have verified whether the 1.9 billion euros one-third of the balance sheet was actually in a
philippines escrow account
according to the committee it was not only the auditors who failed the case has exposed a radical failing
by authorities especially by bar finn
barfin is germany’s financial supervisory authority responsible for monitoring small banks
insurance companies and securities trading
when in 2019 fresh fraud allegations against wirecard caused a steep drop in its share price
finn banned investors from betting against the company without verifying whether there were problems with
wirecard’s balance sheet the financial regulator claimed that was
outside its responsibilities if i’m not responsible for something
it’s not my fault olaf schultz was finance minister at the
time and the head of barfin he held that position from 2018 to 2021
schultz told the parliamentary committee he didn’t feel barfin had protected wirecart
but he conceded that state controls to prevent and detect financial fraud were
insufficient that’s why it’s so important for us to
do everything by ensuring our powers and rules are strong to prevent a repeating
the german act to strengthen financial market integrity or fisk was passed in june 2021
the law was supposed to help strengthen confidence in the german financial market
and place more comprehensive rules on auditors with fisk germany implemented the eu
auditing reform proposed by michelle barnier in 2011
the obligation to separate the auditing and consulting for major companies was taken seriously
[Music] auditors are now no longer allowed to audit a publicly traded company for more
than 10 years and auditors also have more liability related to audits under civil law
listed stock companies must have effective internal controls
and barfin has more power and is directly responsible for monitoring balance sheets
some parts of this law are useful but when it comes to auditing it doesn’t go far enough
i would have liked a stronger separation of auditing and consulting
[Music] but it won’t improve the quality of
audits in the end the fisk may lead to an even more
concentrated audit market more rules means more bureaucracy which
often goes beyond the capacities of smaller firms
sven gigold says the fisk doesn’t address the actual problem
stricter public supervision but if the thousands of auditors have
conflicts of interest then just adding supervision on top is attacking from the wrong end
let’s be honest
[Music] was an opportunity missed thomas haggett is disappointed
the law hasn’t restored his trust venezuela
since they say pensions aren’t safe and that everyone should fend for themselves
the government and politicians have to make sure that auditors keep an eye on things
and catch fraud before it happens
[Music] what would need to happen for that to be
guaranteed by auditing [Music]
i believe that in every country the auditing job should be done by the
governments not by private companies private corporations have always the
for-profit as a goal and the conflict that exists as far as
independence it will never be solved fabio de marzi would like to see radical
changes to the market system auditing and consultancy need to be
strictly separated we need to break up the big players and
we need to require the inclusion of mid-sized auditors
when it comes to incorrect balance sheets class peter naumann says the companies are primarily responsible
the supervisory board has to ensure compliance if the board isn’t doing its job authorities must intervene and
baffin needs more rights how much public involvement you would
want in any solution and how much market-based involvement you would want in any solution
that is a political question wirecard shows once again that
audits cannot offer sufficient protection against financial fraud markets need reliable monitoring free of
conflicts of interest [Music]

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