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.<p>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.<p>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.
Auditing big firms is hard and to be honest, there's little general audits can do to detect fraud (nor is it even the main goal, forensic auditing is a different beast) and if management is intent to commit fraud, it will happen. But in this case the fraud didn't involve very complex and very opaque structures à la Enron where normal checks wouldn't have been sufficient. The crazy part here is that EY did not verify directly with the banks if the account statements were real, which is very basic and very easy to audit. They just took what Wirecard gave them to confirm what Wirecard told them for something as important as accounts that were supposed to hold almost <i>all the cash the company had</i>. Absolutely insane.<p>But the thing is EY , like all the big 4, have totally seperate entities for every country they operate in. Now that could mean EY Germany is an isolated case of incompetence and (criminal?) neglect, which would be very surprising considering that EY seems to be involved in a <i>lot</i> of the recent big financial scandals. But it also means that they can't really be "taken down" and are basically immune from existential threats that could actually hurt them.<p>Yes, there's a partnership structure meaning people at the top of let's say EY Germany have the incentive to keep their credibility and avoid liabilities since they have a direct stake in the business. But considering how many perverse incentives there are ( one of these are low margins and high competition that can encourage having a cozy relationship with who you are auditing to keep the contract) in the auditing world, this opaque structure where EY itself can't lose much more than what it gained... You start understanding why this happen.<p>But even then EY still really stand out since the rest of the big firms have similar structures yet manage to be a lot more competent.
Companies hire their own auditors. No audit partner wants to have to go find new clients, so they bend over backwards to appease the existing one. The partners do the math of “I’d rather have a 1% chance of my client blowing up than a 50% chance of having to find replacement revenue is a zero sum game”<p>Unfortunately, what’s rational for individual audit partners isn’t rational for the firm as a whole. And this is why Enron/Anderson happened. And Wirecard.
All the auditors are a joke and the entire culture around the Big 4 auditors and the way its seen as a path to groom finance leaders is gross and shockingly wasteful. I've never worked with an auditor or consultant at a Big 4 that didn't seem like they were either being massively overpaid, didn't know what they were talking about, taking shortcuts, or just going through the motions of whatever was done in a previous audit. I don't think they are worth their salt. They have no investment to what they are doing because worst case scenario they screw things up and they get shuffled to another another client. I would rather do the work by myself or with a contractor. I've also seen execs at tech companies hiring consultants/auditors from companies where their spouse works or even oversees the practice, it just seems like a lot of companies don't question spending on consultants, but I've seen multiple times where we were billed for work we did ourselves and they tried to take credit or were just running down the clock on a contract and expecting their hours to be extended at the end of the contract period.
The rest of the stack so far:<p><a href="https://news.ycombinator.com/item?id=23638624" rel="nofollow">https://news.ycombinator.com/item?id=23638624</a><p><a href="https://news.ycombinator.com/item?id=23611347" rel="nofollow">https://news.ycombinator.com/item?id=23611347</a><p><a href="https://news.ycombinator.com/item?id=23573386" rel="nofollow">https://news.ycombinator.com/item?id=23573386</a><p><a href="https://news.ycombinator.com/item?id=23598824" rel="nofollow">https://news.ycombinator.com/item?id=23598824</a><p><a href="https://news.ycombinator.com/item?id=23438323" rel="nofollow">https://news.ycombinator.com/item?id=23438323</a><p>This, from a year ago, reads interestingly now: <a href="https://news.ycombinator.com/item?id=19737344" rel="nofollow">https://news.ycombinator.com/item?id=19737344</a>
After watching a documentary on Enron, and the collapse of Arthur Anderson, I thought we were past this. But I am now wondering what the future looks like for auditors, and particularly the auditors involved at Wirecard. I’m looking forward to watching a documentary on this too, in 5-10 years but I feel bad for the honest employees there
><i>The crazy part here is that EY did not verify directly with the banks if the account statements were real, which is very basic and very easy to audit. They just took what Wirecard gave them to confirm what Wirecard told them for something as important as accounts that were supposed to hold almost all the cash the company had. Absolutely insane.</i><p>Not insane at all, and you went on to explain why it's not insane:<p>><i>But the thing is EY , like all the big 4, have totally seperate entities for every country they operate in. Now that could mean EY Germany is an isolated case of incompetence and (criminal?) neglect</i><p>People <i>believe</i> that these firms are strict in auditing, which can be useful to some companies to have as a seal of approval. Case in point, Deloitte and the reverse mergers of Chinese companies with an estimated loss of $500 billions.<p><a href="https://en.wikipedia.org/wiki/Early_21st-century_Chinese_reverse_mergers" rel="nofollow">https://en.wikipedia.org/wiki/Early_21st-century_Chinese_rev...</a>
How can financial auditors be so poor quality? So many of us implicitly trust them through our trust in public equity markets. If I can't trust company financial statements, how can I deploy my savings in a low friction way.<p>Ugh. This year it seems so many institutions we trusted are failing us.