Influence of the Losses of the German EY

Are the French afraid of assuming losses from the German EY?

After more than two decades at KPMG and half a decade at EY, Yannick de Kerhor left EY to set up a new company, Paris-based EKEM Partners. The new consultancy will team up with EOS Deal Advisory, the London firm run by two former senior partners at KPMG UK. De Kerhor co-founded EKEM alongside veteran consultant Eric Tirlemont.

“The resignations create further upheaval as EY prepares to centralise control of its operations in 25 countries in a new Europe West region”, writes Financial Times’ Michael O’Dwyer “The overhaul has caused concern among French partners that they could be left financially exposed after the firm’s audit of Wirecard, the German fintech company that collapsed in a fraud scandal last year.” This quote confirms our assessment that EY’s auditors are experiencing an equity bottleneck.

Equity and equity ratio have been falling for years. The decline draws an almost straight line. Year after year, losses continue to consume the auditing firm’s equity. The consolidated financial statements of the German “Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft” for the financial year from July 1st, 2018 to June 30th, 2019 are still the “most recent” financial statements published in the Federal Gazette.Until June 25th, 2020 there were still several additions to the publication in the Federal Gazette.While other leading accounting firms have already published their annual accounts, that of EY is still a long time coming.

“Some partners fear closer integration would force partners outside Germany to share the bill for possible fines, lawsuits or client losses”, says the article of Financial Times. The development of this company, one of the leading auditing firms, is relevant for credit rating agencies, as the continuing losses and the depletion of equity could increase the moral hazard.

Credit ratings can only be as good as the data on which they are based. If auditor’s reports were issued that would not have been issued under normal circumstances with a good equity base and satisfactory profit situation at the auditing company, this would also lead to wrong conclusions at the rating agencies.