Attn: Wirecard & its auditors- a lesson on the basics.
You may have read about the scandal at Wirecard AG (see here for example), where about €1.9 billion in cash probably did not exist. As a result, the German regulators are calling for more oversight. While I agree that more oversight may be useful, I also think it is worthwhile reflecting on the absolute basics of bookkeeping, accounting and auditing that seem to not get much mention in the media. As is often my style here, I’ll relate to my own experience.
Close to 30 years ago now, I started to study accounting (September 1990). The first few weeks of the class covered bookkeeping. This was a bit repetitive for me, having done accounting as a subject at secondary school. One of the things I learned was how to prepare a bank reconciliation. In Summer of 1990, I got a summer job at a small audit firm. For my very first task, I was presented with two books (pre computer days 🙂 ) from a company – their cash receipts and cash payments. From these, I had to manually check every payment or receipt to the bank statements to make sure they matched. Some transactions had errors, some were missing, but at the end I could explain – or reconcile – the balance of cash per the company’s books and per the banks records.
Just pause for a moment. The act of doing this bank reconciliation means that the accounting records of a business agree with an external information source – the banks records. Thus, as either an auditor or an internal accountant at a business, I can be somewhat confident that the financial statements to be prepared from the accounting records are reasonably accurate. This assumes of course all transactions ultimately go through the company bank accounts. A bank reconciliation was one of the first things I learned to do as an accountant, but also one of the first things I looked for when doing an audit.
Following from the above, how can I be sure as an auditor that a company is disclosing all their bank accounts? I cannot speak for every jurisdiction, but usually the client signs a letter addressed to the bank(s). The letter is sent by the auditor and requests the cash balance at year end plus a list of all accounts held in the name of the entity/entities being audited.
Thus, if 1) a company accountant does a bank reconciliation, 2) the auditor checks it is done and 3) the auditor sends a letter to the company’s bank, then all should be fine and cash balances easily verified. I can only presume something very untoward was happening at Wirecard, but how it was allowed to continue beggars believe. Any auditor should be able to do the simple tasks I have described and surely a bank letter should have revealed the €1.9 billion did not exist.
However, as an educator, I rarely teach bank reconciliations. This is somewhat disappointing perhaps, and I often think should we (or I) be at least reminding students of the absolute basics. They will of course learn it quickly in practice. It is also worth pointing out that accountants (when part of a profession) are also bound by codes of ethics. Not every jurisdiction has a legally recognised accounting profession which educates and guides members.