String of Firms That Imploded Have Something in Common: Ernst & Young Audited Them

By Patricia Kowsmann , Mark Maurer and Jing Yang of the Wall Street Journal

Big Four accounting concern reviewed the books of several companies where investors lost billions when scandals emerged. The firm says it uncovered some of the problems at its clients.

This year, $2 billion is missing at a German fintech company, $300 million of sales has been found to be fabricated at a Chinese coffee chain and $5 billion in undisclosed debt has been uncovered at two related companies listed in the U.K. Together, the incidents cost shareholders of the companies roughly $30 billion.

All had been audited by Ernst & Young. Last year, EY also audited office-space company WeWork, which nearly collapsed after fumbling a planned initial public offering.

EY is one of the Big Four accounting firms, whose audits are meant to give investors confidence in companies’ figures. EY missed red flags or failed to aggressively pursue them at some of the companies ahead of their scandals, and for the most part it was outsiders who raised questions first, a review based on publicly available documents and interviews with people close to the events shows. Now, regulators are scrutinizing EY’s work.

The EY audit clients that faced financial issues were German payments processor Wirecard AG ; China’s Luckin Coffee Inc. ; hospital operator NMC Health PLC; and NMC sister company Finablr PLC, which owned the Travelex currency service.

While it wasn’t possible to pinpoint why EY has had so many recent audit clients with financial scandals, certain elements of EY’s business strategy might help explain the cluster of blowups.

Lower fees

EY charges lower fees for audits, which are labor intensive and time consuming, than other Big Four firms in the U.S. and Europe on average, an analysis of data from research firm Audit Analytics shows.

Focus on tech and young companies

EY also focuses more than other firms on auditing young, fast-growing technology companies. All of the recent troubled clients portrayed themselves as tech-driven industry disrupters. 

Ernst & Young had the most tech clients than any other major auditing firm.

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