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.
