A corporate collapse in Germany that may be little known to most Australians is being compared to the 2001 bankruptcy of infamous US energy trading giant Enron. Dominant cashless payments processor Wirecard collapsed on 25 June owing US$4 billion, with billions missing from bank accounts pointing to fraud on a massive scale. At the centre of the scandal is auditor EY (Ernst and Young), one of the Big Four global auditing oligopoly, which didn’t do its most basic job of checking Wirecard’s money even existed.
The scandal is a timely reminder of the danger of bank bail-ins: while most of us assume the major banks are profitable and strong and our deposits are safe, that assumption depends on the reliability of bank audits. Unfortunately, the global Big Four auditing firms which monopolise bank auditing worldwide have proven again and again they cannot be trusted. To protect the public from the possibility of similar financial collapses occurring here, including of the banks, which may trigger bail-ins, Australians must demand politicians pass two bills drafted by the Citizens Party that are currently before Parliament:
the Australian Banks (Government Audit) Bill 2019 introduced in the House of Representatives by Bob Katter MP in December, directing the Commonwealth Auditor-General to conduct a deep audit of the Australian banks in place of the Big Four global firms; and the Banking Amendment (Deposits) Bill 2020 introduced by Senator Malcolm Roberts in February and currently the subject of a Senate inquiry, which clarifies the 2018 bail-in law rushed through Parliament so that its very broad language cannot be used to bail in bank deposits.
A 30 June London Telegraph article, “Why Wirecard could become EY’s Enron”, compares the role of the auditor in Wirecard’s downfall to that of Arthur Andersen, the then-Big Five accounting firm brought down by the 2001 Enron scandal. Arthur Andersen’s demise reduced the Big Five to the Big Four, but since then, despite countless scandals, the remaining Big Four have been considered too big to fail.
Wirecard started in 1999, and came to dominate cashless payments processing in Europe. Essentially the company is a middle man in the electronic payments system, processing money-flows between paying and receiving banks and taking its cut. Two years ago Wirecard became a member of Germany’s prestigious DAX 30 Index, valued at US$28 billion, but questions were already being asked about its accounting; now it’s the first DAX 30 company to go bust, losing 98 per cent of its value in just days.
Wirecard collapsed seven days after EY refused to sign off on its accounts over US$2.1 billion in missing cash. According to the 25 June Financial Post, a source reported the company had faked two-thirds of its sales. While EY eventually forced the issue, for three years it had signed off on Wirecard’s books without confirming the company’s claim that the missing billions were in bank accounts in the Philippines. Instead of confirming the existence of the cash with the banks directly, EY accepted screenshots and other documents. Fraud is possibly not the only crime EY facilitated: according to the 1 July London Times, “Senior Wirecard employees were linked to an opaque network of British companies associated with alleged money laundering.”
(This involvement of a cashless economy leader with fraud and money laundering destroys one of the central arguments of the Australian Treasury’s Black Economy Taskforce that recommended a ban on cash transactions above $10,000 to ostensibly combat crimes like money laundering and fraud. The truth is criminals will find a way to commit crime in any medium, and all cash bans will do is trap people in banks so they cannot escape bad policies like bail-in.)
Wirecard collapsed owing US$4 billion to creditors who are unlikely to see any of their money—US$3.25 billion to 15 banks and US$750 million in corporate bonds. The scandal has led to calls in Germany to break up the big auditors between their auditing and consulting businesses, which combined have led to massive conflicts of interests. Auditing firms are supposed to blow the whistle on bad practices in a company, but as they are often paid more by the same company in consulting fees, there are now many cases of audits ignoring bank scandals. In the UK in 2018, the Labour Party commissioned a report by accounting professor Prem Sikka, “Reforming the auditing industry”, which recommended breaking up the auditing firms and establishing a government auditor for the banks. These recommendations are included in the bill Bob Katter introduced in Australia’s Parliament.
The biggest immediate concern raised by the repeated scandals of the Big Four auditing firms is the true health of the world’s banks, 98 per cent of which are audited by the Big Four. In Australia EY has already been exposed for its corrupt collusion with NAB to hide that the bank was knowingly selling bad products to customers. Their audits simply cannot be trusted, not only due to their conflict of interests, but because they do not properly examine the assumptions underlying the banks’ trading in high-risk derivatives, which have the potential to spark unexpected bank failures that could force the regulator to order bail-ins of deposits in an attempt to sacrifice bank customers to save the system. Australian politicians assure concerned constituents that Australia’s banks are “unquestionably strong” and bank failures are highly unlikely, but they are relying on the word of the auditors, which is worthless. Even the regulator APRA outsources much of its detailed examination of the banks to the Big Four auditors, making it as blind as the politicians and public.
Instead of relying on the empty assurance of blind politicians and regulators, Australians must demand Parliament pass the Citizens Party’s suite of legislation to overhaul the financial system, beginning with the bail-in amendment bill to protect deposits from confiscation in a banking crisis, and the government audit bill to conduct a thorough examination of the banks’ books, especially their combined $53.2 trillion in derivatives.
Make a submission against bail-in now!
Australians have three days to make a submission to the Senate Economics Legislation Committee’s inquiry into Senator Roberts’ Banking Amendment (Deposits) Bill 2020. Every submission that urges the Committee to pass the bill counts—make yours straight away. Click here for instructions on making a submission.