If there’s one tie that binds some of the more recent and obvious implosions in capital markets – Luckin Coffee, Wirecard and NMC Health to name a few – is that Ernst & Young has been the auditor.
The big four accounting firm has “missed red flags or failed to aggressively pursue them” at many of these companies ahead of their scandals, according to a new write up by The Wall Street Journal.
Regulators are now taking a look at E&Y’s work, the report claims, as a result.
E&Y has stood by its work and has attested that it has high standards. But it’s tough to not want to try and notice that a trend is emerging with companies that are blowing up spectacularly.
Andy Baldwin, EY’s global client service managing partner, told WSJ: “We take all issues extremely seriously.”
E&Y also said it had roles in uncovering the fraud at two companies. The company has advocated for auditors to play a larger role in detecting fraud at companies, which would shift the onus on an industry that has been quick to back away at that responsibility for years.
E&Y has had “ties with executive and board members” at some of the troubled companies – including former E&Y partners sitting on companies’ boards and audit committees.
The firm charges lower fees for audits than other big four firms, allowing them to take on more work. They also focus on younger, quick moving companies. For example, they prepared the audits for Google and Facebook, among others. It has a history of trying to attract companies that are looking to go public.
A former U.S. Securities and Exchange Commission chief accountant said that “EY prices its audits exceedingly competitively low to attract these companies with the hope that when they go public, they will make up for the initial discounts of audit fees.”
The fees paid from companies can put pressure on auditing firms; both to offer low prices and to make sure that adequate resources are devoted to an audit. Many audit firms have started to take on consulting and tax work, in addition to audits,