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If Ernst & Young auditors had done this one thing, they might have uncovered Wirecard’s $2 billion fraud years sooner

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Among the most startling revelations of the alleged accounting fraud that has led to the collapse of German fintech company Wirecard is that the company’s auditors, Ernst & Young, may have failed, for three years running, to confirm money Wirecard said was in a Singapore bank account actually existed.

That shocking nugget, first reported by The Financial Times citing anonymous sources with first hand knowledge of the interaction, led one senior auditor at a rival accounting firm to note that confirming bank balances was “equivalent to day-one training at audit school.”

But Brian Fox, a former CPA who is the founder and president of Confirmation, a network that allows auditors and banks to electronically certify account balances, says he’s not surprised that EY may have failed to correctly verify the bank balances.

While verifying bank balances is indeed Auditing 101, Fox says, the problem is that too often auditors simply rely on the contact information for the bank that the client supplies. “When I was an auditor, I never checked a mailing address or fax or an email, and no one ever told me to do that,” he says.

Confirmation fraud

Confirmation fraud has been at the heart of most of the largest corporate fraud cases of the past several decades, Fox says. It was at the center of the fictional $9 billion that led to the collapse of Italian beverage company Parmalat in 2003, which, even with Wirecard, remains Europe’s biggest financial fraud to date. In that case, Parmalat directed its auditors, accounting firm Grant Thornton, to send requests for confirmation for an account to an address that in reality belonged to one of its lawyers, Gian Paolo Zini. (Zini was eventually convicted, and sentenced to two years in jail for his role in the fraud.)

In the case of Wirecard, The FT reported that, between 2016 and 2018, Ernst & Young auditors relied on screenshots and documents provided by Wirecard itself, and by a third party trustee, to verify the existence of funds at Singapore’s OCBC Bank. That bank was, according to Wirecard, used to settle balances between the German payments company and several partners in Asia that conducted business for it in countries where Wirecard did not have payment processing licenses. In 2019, Wirecard said those balances had then been shifted to a bank in the Philippines. And EY said it was shown statements from these Philippine accounts.

OCBC Bank later said neither Wirecard nor its Singapore-based trustee ever had an escrow account with it. Meanwhile, accounting firm KPMG, which was brought in last year to conduct a special forensic audit of Wirecard, said it could not confirm that the $2.1 billion Wirecard claimed to have deposited in the Philippines ever existed. The Philippine banks told EY the account statements they had previously viewed were spurious.

EY has said that Wirecard employees engaged in “an elaborate and sophisticated fraud, involving multiple parties around the world in different institutions, with a deliberate aim of deception.” It said that “even the most robust audit procedures may not uncover this kind of fraud.”

“Inside man”

Fox says that in many confirmation fraud cases, paper confirmation documents are either completely forged, or an “inside man” at a bank or financial institution is bribed or coerced into providing a false confirmation statement on real bank letterhead, or from a bank e-mail address. But, he says, this conspirator is rarely the person at the bank who is authorized to provide legitimate confirmation, so the fraud typically involves misdirecting the auditors to send the confirmation request to the person at the bank who is involved in the conspiracy.

“The standards require the auditor to both validate the bank account balance and validate the authority of the person who is responding to the confirmation request,” Fox says. “But very rarely does the auditor actually do that.”

One problem, he says, is that, in the 21st Century, auditors still sometimes rely on 19th Century means of verifying that the cash the company says it has in the bank is really there: the postal system. This is particularly true when trying to confirm money held in foreign bank accounts, he says. Other times, they send faxes or emails.

It was the quest to find a better, less easily manipulated, system that led Fox to found Confirmation in 2000. The company has an electronic network that acts as the trusted intermediary between 5,000 banks around the world and most of the world’s auditing firms. Confirmation, which was purchased by Thomson Reuters last year for an undisclosed amount, uses this network to create a secure communication channel between the auditors and the authorized confirmation officer at each bank. It guarantees that a confirmation request is securely delivered to that individual and that the response is securely delivered back to the audit firm. The network also allows the auditor to ask the verified confirmation officer at the bank additional questions about transactions on the account or whether there are any liabilities registered against the funds.

The use of Confirmation led to the uncovering of the $215 million fraud at Peregrine Financial Group, the commodities broker in Cedar Falls, Iowa. The Group’s CEO, Russell Wasendorf, was eventually convicted and sentenced to 50 years in federal prison for his role in the scam.

Fox says he’s aware of several cases where corrupt executives, in an effort to hide a fraud from auditors, have purposefully selected obscure foreign banks that are not part of Confirmation’s network. The banks Wirecard said held its funds are not part of Confirmation’s network.

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Walgreens Reports $1.7B Quarterly Loss, Cuts 4,000 Jobs Due To Covid-19 Impact

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Walgreens Boots Alliance Inc. (WBA) reported a $1.71 billion quarterly loss and announced 4,000 jobs cuts due to the impact of the coronavirus pandemic sending shares down 8%.The stock dropped to $39.01 at the close on Thursday after the drugstore chain operator announced that it will also suspend its share repurchase program and will need to take a non-cash impairment charge of $2 billion mainly as result of the COVID-19 impact on its Boots UK business. As part of a restructuring plan to cut costs, Walgreens said it will close 48 of its Boots opticians stores and lay off 4,000 employees, or 7% of its workforce.Net loss was $1.71 billion, or $1.95 per share, in the three months ended May 31, versus a profit of $1.03 billion, or $1.13 per share, in the year-earlier period. Analysts on average had expected adjusted earnings of $1.19 per share. Revenue rose 0.1% to $34.6 billion.“Prior to the pandemic our financial performance for fiscal 2020 was on track with our expectations. However, this unprecedented global crisis led to a loss in the quarter as stay-at-home orders affected all of our markets,” Walgreens CEO Stefano Pessina said. “Shopping patterns are evolving more rapidly than ever as consumers further embrace digital options, spurring us to accelerate our ongoing investments in digital transformation and neighborhood health destinations.”Walgreens total digitally initiated sales rose 22.7% in the third quarter, compared with the same period last year. The drugstore chain recently formed a strategic partnership with Microsoft (MSFT) and Adobe to launch a marketing technology and customer data platform for personalized healthcare and shopping experiences.Earlier this week, Walgreens announced that it will be expanding the size of its care clinics by nearly 700 retail stores over the next few years as part of an overhaul of its business model from being primarily a drug pharmacy to a primary care clinic.With Walgreens’ stock down now 34% year-to-date, analysts are sidelined on the stock. The Hold analyst consensus shows an unanimous 4 Hold ratings. Looking ahead, the $47.75 average price target implies 22% upside potential from current levels. (See Walgreens stock analysis on TipRanks).Morgan Stanley analyst Ricky Goldwasser earlier this month cut the stock’s price target to $45 from $49 and reiterated a Hold rating, saying that investors are weighing whether, or not the challenges the company is exposed to are valued into the shares.Goldwasser remains cautious for now and lowered her full-year per share earnings forecast by 8 cents to $5.48. The analyst expects Walgreens to report EPS of $1.16 in the fourth quarter, which is slightly below consensus estimates.Related News: Costco June Sales Beat Estimates As Shoppers Go Online; Top Analyst Raises PT Lookout Walmart, Amazon Is Coming for Your Grocery Customers, Says Analyst Walmart To Launch Online Subscription Service For $98 Per Year- Report More recent articles from Smarter Analyst: * Moderna Inks Deal With Rovi To Supply Potential Covid-19 Vaccine Outside U.S. * Sony Invests $250M For Minority Stake In Fortnite Maker Epic Games * Amazon: Top Analyst Raises Estimates… Again * GenMark Diagnostics (GNMK) Stock Is a Winner, But How Much Higher Can It Go?



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Why Beijing is trying to tame China’s runaway stock markets

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China’s stock markets marked their first decline in eight days on Friday, ending a more than weeklong run that saw some stocks reach multiyear highs and featured record-breaking initial public offerings.

Bullish encouragement from Chinese state media kicked off the mainland’s stock market rally. State media outlets then tempered their tone late this week in an attempt to rein in speculation, telling investors to think about the long term, days after predicting a “healthy” bull market.

China’s securities regulator also issued a note of caution on Wednesday when it warned investors of risks in margin financing, a practice where brokers lend money to investors to buy stocks.

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The regulator listed 258 margin lending groups that it said were illegal and told investors not to use such financing. Margin financing is rising at the fastest rate since 2015, according to Bloomberg data, and illegal margin lending is seen as a primary reason for China’s 2015 stock market crash.

Some analysts said the initial bullishness from state news outlets was to help boost consumer spending and China’s economic recovery from the coronavirus slowdown, the Financial Times reported.

But the frenzy of trading this week raised fears of a repeat of the stock market bubble that formed in late 2014 and burst in June 2015.

State media had also encouraged bullish investors in the run that preceded the 2015 crash, when the Shanghai and Shenzhen stock exchanges fell more than 40% in the following months. Altogether, the collapse wiped $5 trillion in market cap off China’s exchanges. Beijing ousted the head of the securities regulatory commission, on whose watch the crash occurred, in February 2016.

Stock markets in China are dominated by millions of individual investors. They account for 70% of stock transactions across China’s exchanges and are known for sometimes contributing to market volatility by trading on rumor and a “get rich quick” mentality. Since June 30, China’s stock market has added more than $1 trillion in value.

The Shanghai Composite rose 16.5% for eight days straight on Thursday. Even with Friday’s dip, it’s still up 17.8% since its June low. (The Nasdaq is up 8.4% for the same time period). Friday’s trading was likely also dampened by the U.S. government’s decision to sanction Chinese officials over alleged human rights abuses against the Uyghur ethnic minority group, a move that will ratchet up U.S.-China tensions. China has already said it would retaliate.

The week’s market frenzy led to some remarkable listings. One Chinese tech firm, QuantumCTek, surged 924% on its trading debut in Shanghai on Thursday, setting a record for the largest first-day jump of any Chinese IPO. The Star board, which QuantumCTek debuted on, has no trading limits on the first five days of a company’s IPO.

Hopeful economic recovery data coming out of China also buoyed investor confidence this week. China’s manufacturing purchasing managers’ index (PMI) rose for a fourth straight month in June, according to official data from China’s National Bureau of Statistics.

Manufacturing PMI, which represents factory activity, is taken as an important indicator of economic performance. The figure plunged 14.3 percentage points in February during nationwide coronavirus shutdowns.

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Pag-IBIG Fund offers promo rates on home loans to boost economy 

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Top officials of Pag-IBIG Fund announced on Thursday (July 09) that they are offering promo rates on their home loans of as low as 4.985 percent per annum until the end of the year, in a move to help members acquire homes and help boost the national economy amid the pandemic.

The agency is offering special low rates of 4.985 percent per annum under a 1-year repricing period and 5.375 percent per annum under a 3-year repricing period. These are its lowest-ever rates under its Regular Housing Loan program, and are available to members getting new home loans until the end of 2020 only.

These further reduced the agency’s previous rates, already pegged at a low 5.375 percent per annum for the 1-year repricing and 6.375 percent per annum for the 3-year repricing period. Meanwhile, interest rates for its Affordable Housing Program, available for low and minimum-wage earners, remain at its lowest with a subsidized home loan interest rate of 3 percent per annum.

“By offering these special rates to our members, we are spurring economic activity in the housing industry, which has a ripple effect on the national economy. This is a win-win situation because our members get to take advantage of these home loan rates, while their purchase of their homes will help generate more jobs to help get our economy back on track.  This then, is our contribution to our nation’s journey to recovery, as led by President Duterte,” said Secretary Eduardo D. del Rosario of the Department of Human Settlements and Urban Development (DHSUD) and Chairman of the 11-member Pag-IBIG Fund Board of Trustees.

With the Pag-IBIG Board’s approval of the promo rates on July 9, Pag-IBIG Fund Chief Executive Officer Acmad Rizaldy P. Moti said that the special rates shall take effect immediately and shall be enjoyed by incoming home loan borrowers until December 29, 2020

“We review our rates regularly and have never repriced it upward under the Duterte administration. Our ever-improving quality of portfolio has allowed us to keep the rates low under our Risk-Based Pricing Model. But this time, we are offering something special. In consideration of the impact of the pandemic on the livelihood of our members, we reduced our home loan rates by as much 100 basis points for the next six months because we want to help members who are thinking of buying a home to take advantage of our lower-than-lowest rates.  Even amid the pandemic, now is the best time to buy a home with a Pag-IBIG Housing Loan” Moti said.



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