The Big Four - Accounting firms under scrutiny | DW Documentary

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

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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

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auditors are required by law to

carefully verify annual financial

statements

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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

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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

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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

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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]

you