Running a business is complicated, particularly in today’s challenging macroclimate.
But economic downturns are cyclical — and there exists a bevy of professional service firms out there to help organizations chart a path forward through uncertain times.
Only now, those firms are increasingly coming under fire.
Leading big-four accountant Ernst & Young (EY) received a temporary ban in Germany over its role in Wirecard’s $2 billion accounting scandal. Blue-chip law firm Fenwick & West has found itself facing both federal law enforcement subpoenas and lawsuits tied to work it performed for the fraudulent cryptocurrency exchange FTX. Data compiled by the American Accounting Association (AAA) has found that the collective probability of fraud across major companies in corporate America is the highest it has been in over 40 years.
With interest rates and inflation alike at historic highs, coupled with supply chain snarls and broader economic contraction, some businesses may be tempted to hide losses or overstate their assets and revenues to make the company appear more financially healthy, but a rise in the manipulation of earnings is an ominous omen for the economy.
The report from the AAA uses what is called the M-Score to determine the likelihood of whether a company is manipulating its financial statements.
The “M” in M-Score stands for “manipulation,” and the metric raises flags around a company’s reporting of receivables, illiquid asset values, and changes in accruals as well as depreciation deductions — all ways for businesses to appear more profitable when their operational reality may tell a different story.
The M-Score gained notoriety when it was used to identify problems with infamous energy-trading and utility company Enron’s earnings reports, three years before the company’s disastrous collapse. The model also flagged several concerns around Wirecard’s books in advance of its similarly fraud-fueled implosion.
The score’s historic success rate highlights how disturbing the new pattern it has uncovered may be for the U.S. business landscape. A rise in manipulation of earnings, the AAA said, generally precedes the economy tipping into a recession.
Read also: Automation Does the Work Accountants No Longer Want To
Wirecard went bankrupt after acknowledging that $2.3 billion it had listed as cash probably didn’t exist, and executives admitted to allegedly faked data and documents.
EY served as Wirecard’s accountant, and the auditor’s repeated approvals of the firm’s annual reports has raised several questions about its audit processes.
German regulators slapped EY’s German business with a two-year ban on accepting new audit mandates from companies of “public interest” Monday (April 3), alleging the auditor breached its professional duty after it failed to uncover the years-long fraud at Wirecard.
FTX, for its part, has been accused of using customer funds to cover shortfalls to the tune of $8.6 billion, actions which several former top executives have already admitted guilt to.
The failed exchange’s law firm, Fenwick, is now being accused of aiding the crypto company in its fraudulent endeavors by setting up U.S.-based affiliates to funnel money between sister firm Alameda Research and FTX.
Fenwick served as FTX’s principal advisor on corporate, operational and corporate governance matters — all areas where the digital asset business was found severely wanting en route to its rapid implosion.
Several Fenwick lawyers jumped ship from the firm to work for FTX, including Fenwick’s payment practice chair Daniel Friedberg, who became FTX’s chief regulatory officer, and former Fenwick lawyer Can Sun whom FTX tapped to serve as its general counsel.
The demand for professional services firms has increased over time, as businesses and individuals have become more specialized and the regulatory environment within which they operate has become steadily more complex.
Helping meet and supplement that demand is an emergent suite of future-fit digital tools that leverage machine learning and artificial intelligence (AI) technology to help businesses.
These modern solutions can help businesses prevent accounting fraud by providing greater visibility and control over financial transactions, automating key accounting processes, and detecting irregularities or anomalies in financial data.
While the prospect of integrating and implementing a new digital solution may seem daunting, PYMNTS research shows that nine in 10 firms are just a month away from onboarding new software into their existing accounts payable (AP) systems, with a further majority of surveyed executives saying the process would take just two weeks.
We’re always on the lookout for opportunities to partner with innovators and disruptors.
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