With the accounting scandal around the Munich-based media company EM.TV in the years 1998-2000, the auditors’ profession caught unprecedented attention in Germany. As the society had just “discovered” stock markets for the broader masses, the burst of the dot-com bubble and especially EM.TV’s crash served as a painful warning signal that also in the equity markets, higher returns are not risk-free. Quickly after the full extent of EM.TV’s scandal became visible and clear, the investor community filed a lawsuit against the management, and also prepared to sue PricewaterhouseCoopers, which audited the financial statements.
This paper attempts to shine light on the EM.TV story, focusing on the role of the auditors. While definitely playing a central role, it will be shown that auditing in this particular case rather helped to dismantle the problematic issues and to reveal a more realistic assessment of the company’s financial health. I will first give a brief overview of the discussed company as well as the special stock market environment it operated in. Secondly, I will summarize the major accounting malpractices that, consequently, have made this issue so relevant for the topic of auditing. The main part will then analyze the auditing and accountability issues, in this case implemented by PriceWaterhouseCoopers (PwC), by outlining their approach and methodology, and the subsequent actions taken. This will then be drawn further to discuss and conclude with general effects on the auditing market, especially in Germany.
Table of Contents
I. Introduction
II. Background: EM.TV and the German “Neuer Markt” (New Market)
III. Brief Overview of Accounting Malpractices
IV. Analysis of the auditing and accountability issues
V. Conclusion: Consequences for EM.TV and for the German Auditing Profession
Research Objectives and Themes
This paper examines the role of auditors in the EM.TV accounting scandal between 1998 and 2000, analyzing how auditing processes interacted with the company's aggressive accounting practices and the subsequent regulatory impact on the German auditing profession.
- The role of PricewaterhouseCoopers (PwC) in the EM.TV audit process.
- Evaluation of accounting malpractices including revenue recognition and goodwill amortization.
- Application of the "fraud triangle" and audit risk models in a volatile market environment.
- The impact of the EM.TV scandal on German auditing regulations and quality control standards.
- The tension between auditor independence and management incentives.
Excerpt from the Book
IV. Analysis of the auditing and accountability issues
The annual reports 1998 and 1999, both signed by the same persons on behalf of the auditor PwC, indicate a standard unqualified statement as “Our audit [...] has not led to any reservations.” (annual report 1999, p.109).On the other hand, in retrospect we may well identify both error and fraudulent financial reporting practices by EM.TV, meaning unintentional as well as intentional misstatements as pointed out in the previous section. How and why did the auditor eventually object?
While it is not possible to give a fully exhaustive answer to this, a key report on the German “Neuer Markt”, issued by PwC itself, is likely to have played a crucial role in increased precautions. In July 2000, one internal study yielded that a significant number of the listed start-up firms, especially internet-related companies, will run into bankruptcy in the near future. As one PwC partner noted: “The air is getting thin.” (Spiegel, 2000). Generally, the auditing firm warned investors regarding overly aggressive sales and profit forecasts by some of the listed firms. This directly affected one of the auditor’s key considerations when evaluating the financial statements of EM.TV, namely their independent expectations of the estimates given by the client’s management. Management assertions appeared to be questionable especially regarding the presentation of assets, especially acquired media licenses, as well as regarding valuation issues, related to media rights and the value for goodwill.
Summary of Chapters
I. Introduction: Outlines the historical context of the EM.TV scandal and the subsequent legal actions taken against management and auditors.
II. Background: EM.TV and the German “Neuer Markt” (New Market): Describes the rapid rise of EM.TV as a star of the "Neuer Markt" and the eventual financial pressures that led to the exposure of accounting irregularities.
III. Brief Overview of Accounting Malpractices: Explains the specific accounting techniques used by EM.TV, such as questionable amortization periods and aggressive revenue recognition.
IV. Analysis of the auditing and accountability issues: Analyzes the auditor's risk assessment, the "fraud triangle" present at the firm, and the shift in auditing approach once potential misstatements were identified.
V. Conclusion: Consequences for EM.TV and for the German Auditing Profession: Reviews the legal outcomes for the company leadership and highlights how the scandal served as a catalyst for changes in German auditing regulations.
Keywords
EM.TV, Auditing, PricewaterhouseCoopers, Neuer Markt, Accounting Scandal, Goodwill, Revenue Recognition, Thomas Haffa, Financial Reporting, Audit Risk, Fraud Triangle, German Auditing Regulation, Asset Valuation, Investor Protection, Materiality
Frequently Asked Questions
What is the primary focus of this paper?
The paper focuses on the role of auditors during the EM.TV accounting scandal between 1998 and 2000, specifically investigating how the auditor interacted with the firm's financial practices.
What are the central themes discussed?
The central themes include corporate governance, auditor independence, aggressive accounting practices in media companies, and the impact of market bubbles on financial oversight.
What is the core research objective?
The objective is to analyze how and why the auditor, PricewaterhouseCoopers, eventually identified and acted upon problematic accounting issues at EM.TV after initially providing unqualified audit reports.
Which scientific methodology is applied?
The research uses a descriptive and analytical case study approach, evaluating the timeline of events, internal company reports, and the professional audit response in the context of the German regulatory environment.
What topics are covered in the main section?
The main section covers the background of EM.TV, the specific accounting malpractices (depreciation and revenue recognition), an analysis of audit risk models, and the legal consequences of the scandal.
Which keywords best characterize the work?
Key terms include EM.TV, Auditing, PriceWaterhouseCoopers, Neuer Markt, Financial Reporting, and Accounting Scandal.
How did EM.TV justify its long depreciation periods for licenses?
The company argued that its film and merchandising rights, specifically in children's entertainment, were particularly long-lived assets, comparing them to iconic characters like Mickey Mouse.
Why was the "fraud triangle" considered relevant in this case?
The fraud triangle was used to explain the auditor's re-adjustment of their risk model, citing massive management incentives, lack of internal controls, and questionable management attitudes.
What was the outcome for the auditing profession in Germany?
The scandal served as a major warning signal, leading to significant amendments in German legislation regarding external quality controls and transparency requirements for auditors.
Was PricewaterhouseCoopers found legally liable for the scandal?
No, despite efforts by stockholders to hold them liable, the legal investigations were dropped as it could not be proven that the auditors had acted wrongly.
- Citar trabajo
- Anonym (Autor), 2011, Accounting Scandal at EM.TV 1998 - 2000: The Role of the Auditors, Múnich, GRIN Verlag, https://www.grin.com/document/176312
