Task Solutions Of Incorporated Accounting Malpractices:ACCY342

Task Solutions Of Incorporated Accounting Malpractices:ACCY342

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
Name of the Student
Name of the University
Authors Note
Course ID
1 AUDITING AND ASSU …

Preview text

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
Name of the Student
Name of the University
Authors Note
Course ID
1 AUDITING AND ASSURANCE
Introduction:
The latest accounting scandal involving Wirecard had again resulted in public
discussion as whether the independence of auditors is attained or not, since there is an
evidence that conflict of interest is present. On June 17 Wirecard company was valued
greater than $14 billion that belonged to the German bluechip market named as DAX index.
After eight days, Wirecard filed for bankruptcy (Kaidonis 2008 ). The company stated on 18 th
June that an amount of $2 billion that it had told to auditors was located in a pair of
Philippine bank was not existing.
The allegations concerning accounting malpractice have already made headlines ever
since the company got incorporated. Accounting malpractices reached peak in the year 2019
following the publications made by Financial Times that led to number of investigations
together with whistle-blower complains and inspection of internal documents. On 25 th June
2020, the company declared itself insolvent and also filed for the insolvency after it revealed
that €1.9 billion was missing and this led to termination as well as arrest of its CEO Markus
Braun. Questions were also raised regarding the regulatory failure on Federal Financial
Supervisory Authority (BaFin) which is Germany ’s highest fiscal regulator along with
possible auditing and accounting malpractice of its auditor Earnest & Young.
Discussion:
Presently, Wirecard is scandalous due to supposedly committing abeyond belief fraud
cases in the recent history of global business. The company had a very humble start.
Wirecard was established in the year 1999 in Germany as the payment processor. In 2006, the
company bought abank and changed it to full-service payment operator (APESB 2018 ). Its
services were accessible throughout the world. Wirecard role in payment processing services
2 AUDITING AND ASSURANCE
involved processing of digital credit card purchase for the global online retailers. Later the
success of company led to exponential rise in its share price.
Wirecard was considered as ahighly growth oriented fintech and also an important
part of Germany ’srising financial technology centre. Their e-payment processing system was
considered as the step forward to make cashless society and highly advanced e-commerce.
The company simply differentiated itself from the competitors by placing advertisement more
about advanced payment technologies instead of competitors.
Wirecard ’s headquarter was located in Germany but majority of its payment
processing operations were carried on in Dubai and Dublin. The significant growth of
Wirecard was because it acquired small payment companies in new markets where the
company did not had license to carry their operations (Trung 2016 ). The business models of
Wirecard comprised of making use of third-parties, particularly in Asian nations such as
Singapore, Dubai and Philippines for processing the transactions and to pay Wirecard ’s
commissions through an escrow account.
Wirecard achieved more success in its business when bought the Chinese payment
application named WeChat Pay for its European retailers in 2017 and also joined forces with
FedEx, that allowed providing FedEx customers with pickup and drop-off services in the year
2018 (Shailer 2020 ). Furthermore, main clients like Singapore Airlines, Ikea, Allianz, Aldi
and KLM provided credibility to Wirecard. Successively, Wirecard became famous market
leader in digitizing money within the Asian markets with some notable nations such as Hong,
Kong, India, Malaysia, Indonesia and Philippines.
Wirecard was considered as aunique company its fraud was not localized. Rather the
company committed fraudulent activity through multiple areas of business by making use of
elaborate and difficult tactics which explained about the delay in discovery of fraud.
3 AUDITING AND ASSURANCE
Wirecard was able to successfully mislead its investors and regulators by making use of
multiple tools for manipulating purpose. It used tools to inflate and favourably time the
revenues as the common practice followed by fraudsters, while others were very unique to
the present environment and for Wirecard itwas relatively new and under-regulated industry.
One important auditing and accounting issue that led to fraud in Wirecard was its
fictitious revenues in impervious environments. The major part of revenues derived by
Wirecard were from 300,000 small customers in nations where online e-payment process was
not regulated and not even licensed. Under this circumstances, there is no need for auditing
and transparency in reporting (Payne et al. 2019 ). It was projected that around one-third of
Wirecard ’srevenues and around 80% of its profits were falsified.
The main player in deceiving revenues was Wirecard ’sDubai intermediary Al Alam
Solutions. Al Alam was regarded as the third-party payment processor as it helped the
retailers in accepting credit through bogus licenses with Visa and Mastercard (Van Brenk et
al. 2020 ). Al Alam Solutions was funnelled with the help of Wirecard ’stwo subsidiaries
namely the CardSystem that involved aone-man operation in Burj Khalifa, Dubai and the
other was Wirecard UK/Ireland. Both the locations from where Wirecard carried its
operations were treated as tax havens. The operations in Dubai did not needed any legal
requirements for audit purpose and while its operations in Ireland was given exemption from
filing.
Al Alam Solutions employee strength was lower than 10 employees, yet Wirecard
was allegedly able to move €350 million of payments from its vital 34 clients with the help of
this processor each month in the year 2016 and 2017. A red flag could have been raised if
there was athird party but Wirecard had its own processing center near Dubai. Eventually,
4 AUDITING AND ASSURANCE
the special audit conducted by KPMG revealed that majority of transactions that Al Solutions
had processed for customers in US, Ireland and Philippines did not actually took place.
Secondly, Wirecard had much weaker internal controls and corporate governance
framework. Majority of the fraud at Wirecard was arranged by the higher management. The
fraudulent activity was largely attributable to CEO Markus Braun and COO Jan Marsalek.
Evidences shows that personal traits of certain CEO ’sinvolved narcissism, Machiavellianism
and psychopathy and this can create a splitting influence throughout the corporate suite.
Particularly, this may result in lower quality information exchange all through the command
chain (Repositorio 2022 ). This outcome in subordinates brings revengeful and
counterproductive in their behaviour, leading to downward quality of reporting in company
outputs.
For example, Braun and Marsalek ’scompany design read out that those involved in
assurance and risk are only allowed to verify the transactions for the allocated province.
There were only limited number of senior managers that were given access to worldwide
internal data of Wirecard. Furthermore, the executives of Wirecard were failure to report
about the known accounting misdeeds to regulators in Singapore, Germany and Hong Kong
as needed. Additional investigations conducted in Asia-Pacific irregularities under Marsalek
noted an alleged conflict of interest.
As eminent, Marsalek purportedly had part ownership of a Singapore-based third
party named Matrimonial Global. It was used by Marsalek to shift money and to fabricate
sales in that area. Wirecard also had issues regarding related party transactions (Sep.luiss
2022 ). For instance, Wirecard made payment of €340 million for acquiring Indian processor
Harmes from EMIF, a company in which Marsalek had stake in spite of the fact that
Marsalek recently bought Hermes for just €40 million.
5 AUDITING AND ASSURANCE
Thirdly, Wirecard overstated its intangibles and falsified the evidence. Growth was
necessary for Wirecard and this helped the company to gain necessary attention for attracting
more number of investors. Wirecard was able to grow due to acquisition of small payment
processing companies and customer portfolios in new markets. Often its acquisition was
overly difficult, costly overseas acquisitions were very puzzling for analysts and investors to
examine.
On Wirecard balance sheet, from 2005 to 2019 their intangible balances of goodwill
and assets grew evidently. To keep their assets growing, the company got exposed in emails
for fabricating its gross profits in order to avoid the impairment testing from the auditors
(Tx.cpa 2022 ). As long as their acquisitions gross profit were much higher than their yearly
depreciation, there was no need for impairment testing.
Besides this, in order to raise capital and satisfy the performance targets, Wirecard
falsified its contracts and emails regarding deals in technology and customer contracts for
inflating the figures. However, probably the most egregious frauds committed by Wirecard
was falsely representing in-person evidence gathering that alluded Earnest & Young. The two
Philippine banks that were alleged to house the rising escrow accounts namely BDO Unibank
and Bank of Philippines Island, were simply unaware about their business activities with
Wirecard and visits conducted on its sites.
The visits made by Wirecard and EY were considered unauthorised except by juniors
without the permission of authority to get indulge. These juniors were later found to have
fake invoices (Van Brenk et al. 2020 ). For instance, R. Shanmugaratnam, an associate in
Singapore was eventually arrested in the month of December 2020 for having connection
with falsely giving letter assurance about the existence of around €1.2 billion in the escrow
accounts.
6 AUDITING AND ASSURANCE
Taking into account the audit firms namely E&Y, they face specific consequences for
their failure since they were the main auditors of Wirecard. The APAS body is responsible
for looking after the auditing companies in Germany and now have the power of imposing
heavy sanctions on the auditing companies. Furthermore, the German companies are now
required to change their auditors after every 10 years. In case of Wirecard it was announced
that Andreas Loetscher, who was the main auditor of EY responsible for auditing Wirecard
from the year 2015 to 2017 and Martin Dahmen, who had succeeded Loetcher in that role,
were under investigation by the German authorities.
The auditors in case of Wirecard, E&Y Global Limited had failed for greater than
three years to make request for escrow account information from Singapore bank where
Wirecard had made claimed of having €1billion in cash. It was aroutine audit procedure that
E&Y were not able to uncover the huge amount of fraud at German payments group. The
auditing firm that conducted auditing operations of Wirecard for adecade was facing the heat
for insolvency filed by the high flying tech company. In its place, E&Y were relied on
documents and screenshots that was provided by the third-party trustee and by Wirecard.
The falsification of information regarding profits and sales at Wirecard were in huge
amounts. As per the audited financial reports of Wirecard published by E&Y, between the
years 2016 and 2017 Wirecard reported operating margins of around 22 per cent and nearly
doubled its EBIT to €439 million (Shailer 2020 ). However, such profits were only visible on
paper and not in actual following the special audit conducted by KPMG.
The internal numbers of Wirecard revealed that its operating performance of payment
processing in Europe and issuance of credit cards in Europe and North America was in worse
condition than before. Those activities of Wirecard was producing losses, in spite of
accounting for half of company ’s reported revenue and around two-thirds of transaction
7 AUDITING AND ASSURANCE
volumes. For number of years, Wirecard was not producing profits but it claimed to be
operating as aprofitable company. In reality itwas loosing money. The E&Y original auditor
falsely stated that Wirecard ’searnings grew by almost double from the year 2016 to 2018.
The accounting firm E&Y were failure in discharging its accounting responsibility
and later it was discovered that KPMG had conducted an accurate audit. The examination
conducted by E&Y of Wirecard represented apoor auditing performance not just once but
over a number of years. The E&Y audits conducted on the defunct German payments
processing group Wirecard suffered due to serious short-comings over the number of years.
The auditors here E&Y have simply failed to identify the fraud risk indicators and failed to
completely implement professional auditing guidelines.
Conclusion:
The decline of Wirecard had raised several questions as how accounting fraud of this
scale was arranged and collaborated. The case of Wirecard explains that how a highly
overvalued company can get indulge in fraudulent behaviour and contribute to global
financial crisis. Wirecard fraudulent activities is considered as one of the expensive failures
in financial fraud till date. Wirecard was the part of developing Fintech industry and the
company made use of number of tools such as manipulating of intangible assets and
falsifying the revenues to perpetuate and prolong the effect of fraud. This type of tools
actually create challenge for the auditors and regulators.
8 AUDITING AND ASSURANCE
References:
Accounting Professional & Ethical Standards Board (APESB), 2018. APES 110 Code of
Ethics for Professional Accountants (including Independence Standards).
Kaidonis, M., 2008. The Accounting Profession: Serving the public interest or capital
interest?. Australasian Accounting, Business and Finance Journal ,2(4), pp.1-5.
Payne, D.M., Corey, C., Raiborn, C. and Zingoni, M., 2019. An applied code of ethics model
for decision-making in the accounting profession. Management Research Review .
Repositorio.iscte-iul.pt. 2022. Repositorio.iscte-iul.pt . [online] Available at:
[Accessed 7May 2022].
Scirp.org. 2022. Scirp.org . [online] Available at:
[Accessed 7May 2022].
Sep.luiss.it. 2022. Sep.luiss.it . [online] Available at:
[Accessed 7May 2022].
Shailer, G., 2020. Ethics in the Independent Audits of Financial Statements. Handbook on
Ethics in Finance ,pp.1-17.
Trung, N.K.Q., 2016. Professional ethics in accounting curriculum at a Vietnamese
university. International Journal of Management, Accounting and Economics ,3(4), pp.261-
271.
Tx.cpa. 2022. Tx.cpa . [online] Available at: [Accessed 7May 2022].
9 AUDITING AND ASSURANCE
Van Brenk, H., Renes, R. and Trompeter, G.M., 2020. Auditing in the public interest:
Reforming the profession by building on the strengths of the existing accounting
firms. Critical Perspectives on Accounting ,p.102184.

Order Now

QUALITY: 100% ORIGINAL PAPER – NO PLAGIARISM – CUSTOM PAPER