Railway operator Deutsche Bahn did not “comprehensively inform” its auditor PwC of fraud allegations at Germany’s largest infrastructure project, a decision that accounting experts said fell short of what is required under German and international audit standards.
Deutsche Bahn has been under increasing scrutiny since the Financial Times reported last month that whistleblowers had repeatedly warned that blatant mismanagement and suspected corruption were behind the spiralling cost of building Stuttgart’s new railway station.
The revelation of the allegations, made by two whistleblowers in 2016, has deepened the controversy over a project, where the initial price tag has more than tripled to €8.2bn. One whistleblower estimated that the alleged misconduct left Deutsche Bahn with €600m in unnecessary costs.
The state of Baden-Württemberg, of which Stuttgart is the capital, has pressed Deutsche Bahn for more information about the internal investigation, while local public prosecutors are assessing the whistleblower allegations. Germany’s transport ministry told the FT that the federal government was “actively working towards raising and critically challenging the reported events”.
The state-owned company said that an internal investigation into the whistleblowers’ complaint began in early 2016 and closed more than a year later without finding anything untoward.
Asked whether PwC had been informed about the complaints and subsequent investigation, Deutsche Bahn told the FT that it had not been “required to comprehensively inform” its auditor, or its own supervisory board, as they were only allegations and “proved to be wrong” in an internal investigation.
The company added that its independent compliance committee “was informed about interim findings of the probe by the internal investigations unit”.
Deutsche Bahn declined to comment further, pointing to confidentiality obligations regarding its auditor. PwC declined to comment.
However, four accounting experts told the FT that under German and international audit standards, companies are not only required to disclose actual violations of the law but fully inform auditors of any significant allegations of breaches.
In February 2017, PwC, which has been Deutsche Bahn’s auditor for more than three decades, gave the group an unqualified audit for 2016.
Germany’s audit standard 210, which is set by the Institute of Public Auditors and defines accepted professional procedures, says that an auditor should quiz a group’s management about “existing, suspected and alleged violations of law” as well the company’s response to the accusations. The International Standards on Auditing outline the same obligation.
Without full disclosure “it is impossible for the auditor to independently assess the quality of the internal investigation results and their potential impact on the financial results and the management report”, said Hansrudi Lenz, professor of accounting at the University of Würzburg.
This view was echoed by an audit partner at a rival Big Four accounting firm. “Every auditor worth its salt contacts the client’s compliance unit to review and assess last year’s whistleblower complaints,” the partner said, adding that one outlining a potential hit of €600m was “definitely” relevant for an auditor.
Wirecard’s auditor, EY, was for example dismayed when it learnt about an investigation that the payments company had commissioned into alleged misconduct in Singapore only through reporting by the FT.
In an extreme scenario, the lack of comprehensive disclosure of the allegations and the probe may mean that Deutsche Bahn’s financial reports for 2016 and 2017 were incomplete, one of the accounting experts said.