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May 1, 2021
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The Gang of Four in the global audit market

They must not only be limited – they must be uprooted

In a previous article on the Big Four of audit giants – Deloitte, PricewaterhouseCoopers (PwC), Ernst & Young (EY), KPMG – I focused on the side of their activity that can be called espionage.

And now I would like to draw your attention to the violation of ethical and legal norms that has become customary for these companies. Sometimes these are crimes. Lawsuits, investigations and charges are being brought against the Big Four companies in different countries of the world. Here the “Big Four” appears as a “gang of four”.

Its violations can be reduced to the following main types:

1. Falsifications. Preparation of a “fake” audit report that does not reflect the real state of affairs of the client;

2. Covering. Failure to take urgent measures in case of detection of violations of a criminal nature during the inspection;

3. Theft. Transfer of information received from the client to competitors and other business structures;

4. Incitement. Along with audit services, the client is provided with consulting services. An advisory “help” can provide advice on how to maximize a client’s profit by exploiting loopholes in laws. This is especially true for tips on how to avoid paying taxes.

Violations committed by audit giants can cause great damage not only to their clients, but also to shareholders, contractors, business partners, creditors, clients of audited banks, etc.

Only in rare cases do financial regulators, law enforcement agencies, and the media touch on the delicate side of high-profile bankruptcies. But all the high-profile bankruptcies are the fall of the giants of industry, trade, and finance. In 99 out of 100 cases, the auditors of such giants are the Big Four companies. Perhaps the global financial crisis of 2007-2009. could be stopped at an early stage if the auditors of the Big Four provided objective opinions to the main participants in the US mortgage-backed securities market.

The loudest scandal in the history of the audit business was the story of the American Enron Corporation… From the mid-90s to the early 2000s, it was considered one of the most successful American companies. Fortune has named Enron “America’s Most Innovative Company” for six consecutive years. And at the end of 2001, there was a sensational bankruptcy. It turned out that Enron is a “stock market bubble”, in which many firms, media, government officials and politicians participated. An American auditing company was named the main participant in the criminal project. Arthur Andersen, which regularly gave positive opinions on Enron’s reporting. Then Arthur Andersen was included in the group of world leaders in audit along with Deloitte, PricewaterhouseCoopers (PwC), Ernst & Young (EY), KPMG… The scandal was so deafening that Arthur Andersen as a single structure did not survive it.

The second most resonant scandal occurred in Germany the year before last. In the 2010s, the rising star of German business was Wirecard AG, which offered electronic payment services, issuance and maintenance of physical and virtual cards, financial risk management. In 2017, it was listed on the Frankfurt Stock Exchange and entered the stock index DAX… Suddenly Financial Times published a series of company investigations with internal documents provided by a whistleblower. And the rapid sunset began Wirecard AG, which ended with the fact that on June 25, 2020, the company declared itself insolvent. An investigation that has begun has shown that 1.9 billion euros were “missing”. CEO Marcus Brown was fired and arrested, followed by the arrests of other company executives. They were accused of deliberate deception and fraud.

One of the main accomplices of this criminal group was an audit company Ernst & Young… Now an investigation into the case Wirecard AG continues. I will give excerpts from the article German investigation found Wirecard audits had serious flaws (German investigation found that audits EY Wirecard had serious shortcomings “) dated April 17, 2021.

“The investigator was authorized by the parliamentary committee of the Bundestag in Berlin to investigate the accounting scandal and had access to internal EY documents.”

“According to people familiar with the report, the special investigator, who carefully studied EY’s audits, issued a guilty verdict on the quality of the work.”

“The report submitted to the Bundestag … will greatly exacerbate the problems of the accounting firm. EY is already facing lawsuits from Wirecard shareholders and creditors and has lost a number of high-profile clients. Legal action from the Wirecard administrator is also likely to follow. ”

Experts are closely following the developments around Wirecard and EY… Representatives EY trying to convince German investigators that, they say, the client Wirecard deceived auditors by slipping falsified information on them. But auditors exist in order to reveal the facts of falsification of documents. Or company EY not capable of this?

As for the fate of the audit giant Arthur Andersen, it turned out that the reports of his death 19 years ago were greatly exaggerated. This company has evolved into a network structure from formally independent companies registered in different countries. Three years before its disappearance Arthur Andersen spun off most of its business into a separate company called Accenture and began to specialize in consulting. In 1999 Accenture was registered in Bermuda, and on September 1, 2001 received the status of a joint stock company in Ireland, but its head office is located in New York. With over half a million employees, the company serves customers in more than 120 countries around the world. She is said to work with 94 companies from Fortune Global 100 and more than ⅔ from Fortune Global 500… There are other firms from the empire Arthur Andersenwho live and thrive. The audit mafia is immortal.

Therefore, if in Germany EY after all, it will be banned, it will simply “change clothes” and continue to work under a different name. After all, and EYand the rest of the Gang of Four auditors are built like global networks. Each “bandit” from the “Big Four” has a network of offices numbering 700-800. Each office is an independent company or a branch of a company. The company has national status, because is registered in the local jurisdiction, there are no signs of the presence of foreigners in the capital, the staff is from local citizens. At the same time, the global network organization has a rigid vertical of management, closed to the headquarters in London (Deloitte, PricewaterhouseCoopers- – PwC, Ernst & Young – EY) or Holland (KPMG)

Of the large number of legal proceedings in which organizations from the “Gang of Four” appear, I will note one more, where the plaintiff is a former auditor and partner Ernst & Young Amjad Rihan… He filed a lawsuit in 2013 against EY, where he worked. The last thing he did for the company was listening to the Dubai Gold Mining Company. (Dubai Gold Company)… When he delved into the client’s affairs, he realized that the audited company was involved in many criminal cases (money laundering, smuggling, drugs). Amjad Rihan tried to bring this information to the higher authorities in the empire EYbut did not find understanding. There was a team not to advertise this side of the client’s activities and to prepare a positive audit opinion. Former auditor accused EY in forcing him to commit violations (in fact, in the fact that he was made an accomplice in crimes). Only in 2020, the court decided to put an end to this trial, admitting guilt EY and awarding compensation for non-pecuniary damage to the plaintiff in the amount of £ 11 million. The media preferred not to give this story too much publicity.

The Gang of Four is not enough to simply restrict, regulate, punish. It must be uprooted. And here you need painstaking work and an understanding of how the Big Four works.

A member of the board of one of the large audit firms told about how the survivability of the audit mafia is ensured: “We position ourselves as a global solution, and then when a problem comes up and a fire breaks out, we just cut the gap between the problem office and the rest of the firm.”

And here is the opinion of Amjad Rihan: “In terms of potential harm, the reality is that they will continue to do what they do – for large auditors, life just goes on. Financial penalties for companies of this size are only minor costs. Their egos may suffer from this, but only real regulatory changes can have a significant impact on them. “

Photo: ecostandardgroup.ru

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