April 23, 2024

How can firms protect their reputation?

In a captivating podcast episode, Stefan sits down with Andreas Loetscher, Managing Director of ABBL, a boutique consultancy specializing in reputation protection. Andreas shares intriguing insights from his extensive career in financial auditing and crisis management, including his time at major firms like Ernst & Young and Deutsche Bank. He recounts his firsthand experiences with significant crises such as the Siemens corruption scandal, the Kweku Adoboli case at UBS, and his involvement in the notorious Wirecard audit during one of Germany’s largest frauds.

Stefan Wagner: Good morning. I'm here with Andreas Loetscher, Managing Director of ABBL, an advisory boutique that offers services around reputation protection. Good morning Andy.

Andreas Loetscher: Stefan, many thanks for having me and it is a great pleasure and honour to be part of your podcast. And of course, a very warm welcome to the audience from me as well. Thank you for having me on your podcast.

Stefan Wagner: Thank you for your kind words. Let's start with my first question. What is the basis for your assessment of reputation risk? What is it in your mind?

Andreas Loetscher: Let me start with a short outline of my CV., I started my career at Swiss Bank Corporation and then moved to Ernst Young, where I was for 20 years until mid 2018 responsible for banking clients in particular around audit. But I also did a lot of advisory services during that time. I came across many instances of crises. For example, in 2004, I took over the leadership role in Lugano, for Ernst Young. As you know, Lugano is the third largest financial market in Switzerland. And reason for me going down there was that one of our clients, had lost a lot of money and I was deemed to help them out, from an audit perspective. And throughout my entire career, I was impacted by many of these instances. Let's say I was a part of the Siemens audit that had to deal with the reputational crisis after their corruption cases.

I was, auditor at UBS,, when the Kweku Adoboli case broke out. And then unfortunately, I was also part of the Wirecard audit team., that is one of the largest frauds in German corporate history. And thereafter, or after EY, I moved to Deutsche Bank and at Deutsche Bank I was the chief accounting officer. And one of, my activities was that I had to look into each and every crisis to understand if that would have an impact on internal controls. And hence, the integrity of the financials of the bank.

Stefan Wagner: There seem to be quite a few events that we could talk about for quite a long time. When it comes to assessing reputation risk, I mean, how do you distinguish between passing noise—you know, there's maybe some noise in the news—and things that could have a lasting impact?

Andreas Loetscher: Very difficult. And good question., I think, there are some factors, that need to be looked at. For example, what's the source or who is the author?, how frequent is this noise coming about and what are the allegations?, when looking at Wirecard, for example, many of the allegations related to activities that were from a couple years out. And for that reason, we deemed at the time that these allegations will probably not have any any relevance. Ultimately, what I can say with all of these items is that, they all have a negative, lasting impact.

Stefan Wagner: True or not true. And. Short and long. Correct. When something like such an event happens, I mean, I've seen often that such companies can dig their heels in, and somebody has to come in from the outside and potentially take a contrarian view and say no to the business or said, you have to do something very different. Is there something you can give as an example, or how did you make the argument?

Andreas Loetscher: Great topic. Look. I think that the most challenging aspect of this is, in my experience, bias and risk.

And let me make an example what I mean about that. When you sit in groups or in meetings to express, as you say, a contrarian view can be very difficult because everybody looks at you and tells you “What are you doing here? Why are you slowing down my thoughts? And why are you slowing down the progress? We're all waiting to go for lunch or for dinner or something like that.” And then you still have to back it out., I was, during a,, a couple of years member  of a board, and we had to make a significant investment. But it was very clear at the time that the money wasn't there to make that type of investment. Unfortunately, everybody wanted to go ahead with that investment. And the only way to convince the group that it was not a sound idea to go ahead with that type of investment was to use somewhat irrational arguments. That's the way I went about it.

Stefan Wagner: Okay. You mentioned several companies where you have been when certain exciting events happen.

Many were publicly listed companies. And often, when allegations are being made, or the reputation could become at risk, these are publicly listed companies, and short sellers come into the market, or they are the ones who have done the research. Right. And, some people have very, I would call it, strong views about short selling. I have one, but what is your opinion?

Andreas Loetscher: Look, I personally think,, short sellers perform a vital role in, in the financial markets. Unfortunately, many of them do not like to operate too much under transparency, which complicates things quite a lot. And to outline this, one of the first allegations at Wirecard I had to deal with came out of what they called the Zatarra reports. The Zatarra reports, as was later found out, were published by a short seller.

And we tried to identify the source of these reports. We tried to approach the publishers of these of these reports. And that was all not feasible, which added to one of the issues which was later then observed at Wirecard, that the credibility was significantly negatively impacted. The credibility of these reports is it is to say because they didn't want to come out and say, what have they done? Why have they done it? And they significantly benefited, at least from stock market statistics, from the share prices that tanked at that on the day of the publication of these reports. So that makes it to me difficult dealing with this type of of stakeholder. But at the end of the day, for me they provide a vital role.

Stefan Wagner: I mean, you just mentioned Wirecard, which is a case where the reputation changed very quickly for years and years, it was, you know, everybody loved it across the whole board regulators, politicians, investors, everything.

You saw how quickly something can go wrong. But how can anybody, or an auditor, spot fraud? These companies are so complex. How do you actually go about it?

Andreas Loetscher: Look, I think you have to really understand from the auditor's role,, what is the purpose of an audit? The purpose of an audit is to assert that the financial statements are prepared in accordance with a given accounting standard. You have some responsibility with regards to fraud, but that's fairly limited. So first and foremost, the role of an audit is not to identify fraud. If you come across fraud, you have to perform steps that are deemed to be in accordance with auditing standards. But ultimately identifying fraud, as you said, is very difficult. And I don't really think that I by no means have a greater level of intelligence about identifying fraud.

Stefan Wagner: In this case, the cash was apparently somewhere in the trustee and escrow account… but it was not the case or it disappeared. I think the Spiegel article that came out last week had some interesting points on that one., but what I struggled with and feel free to comment on it. There's an auditor, the regulator, and all these people are supposed to do a certain job, but nobody was responsible for finding the fraud. Or is there somebody?

Andreas Loetscher:  Look, I think overall if you have a perpetrator which has a certain level of a criminal mind, energy it is really difficult. If you look at, just as a small example, in this Wirecard case, you had over 100 police men, members of secret services, etc. for over two years investigating the case. At the end of the day, the only thing they know the cash is no longer there, but they haven't found really any evidence. And to crack these guys by, let's say, forensic interviews or something like that, none of them so far has, by no means answered yes, it was me. And that's the way I have done it. And there main witness they are having, no one is really certain if that's not just one more game that is being played in this in this whole story.

Stefan Wagner: With the benefit of hindsight, is there something that should have been done differently or that as a society and regulators can learn from it that could be changed? Or you're saying it's just so complex?

Andreas Loetscher: No, let let me answer the question from a couple of different angles. So what we have done as auditors was the following. Every time there was an allegation of something going wrong, we laid it out. Tried to understand what the allegation was all about and did procedures around it. Unfortunately, at the time, even with the help of forensics teams, we weren't able to find any evidence. But what would have happened? That' the second angle I would like to look at. What would have happened if we had delayed or qualified our audit report.

Given the hype that was around this company at the time, it is highly unlikely that besides, another tank of the stock price for a certain period of time would have happened and then it would have recovered. And so. Just delaying the audit opinion or qualifying the audit opinion will not uncover a fraud except if the whole system crumbles. Which means again, what? I have just tried to say that you have someone standing up and saying, yes, I confess it was me. But in these extreme schemes, how likely is that? I don't have an answer. And then it's really about the environment., the environment at the end of the day is such that, as you said, there was a big hype about this company. It was the darling of politicians, of regulators, of everybody, not just in Germany, but no, no, all across Europe. And everybody wanted to believe in that unicorn status of that company And then there are just things that are too good to be true.

But with hindsight, you're always much smarter to realize at a point in time it cannot be that you make that amount of money with that type of business. So there needs to be something else. It's very difficult.

Stefan Wagner: When I spoke to some of my friends who were doing financial analysis of companies, they always raised the issue that Wirecard never created any free cash flows. You know, how was this not seen as a red flag, or, you know, is it? But I know that. Is that part of the auditor's responsibility? No?

Andreas Loetscher: Red flag is a is a great topic. You know that that was one thing that challenged us greatly when we looked at all these allegations, because our forensics colleagues came up with several red flags. But when you have a red flag, you have to do something with it. You have to continue investigating or performing procedures.

Stefan Wagner: I think that's a very good point. You, as an auditor, don't really have the power to enforce certain things. You can only observe in a sense and asked for the information. I think this is interesting to hear. What were your personal learnings from? I mean, it probably still is and was very intense for you.

Andreas Loetscher: It was brutal. I mean, we worked night and day at the time and then ultimately it impacted my career severely, as you know. And luckily, I have now this new opportunity to work as the chairman of this company or the managing director. In my view, there are three things. First, collaboration needs to be facilitated, allowed and enabled. There were so many parties at the end of the day looking into that case, but no one spoke to the other. I had information that was protected by

Stefan Wagner: Client privilege.

Andreas Loetscher: Client confidentiality. Thank you. And I wasn't able to talk to anyone outside the firm and even inside the firm.

All the consultations I did make at the time, you had to be careful what you could actually say. The regulator, let's call it BaFin or the DPR or or. They never approached us and asked questions whenever we approached them, asking questions or saying, that's your job. And then the public prosecutor that was approached a couple of times, they never spoke to us either. And we were definitely not allowed to talk to the public prosecutor. So I think one thing that really needs to change is, it's collaboration. The second thing that needs to change and has already changed, is that the client has to prove its innocence. It cannot be that a third party needs to jump up and down to ultimately prove the innocence of another party. So as soon as you have some severe allegations, the client needs to stand up, needs to do all his work and come up with evidence.

Stefan Wagner: And you said that has changed.

Andreas Loetscher: I think that has changed. Yes., and the last, the last thing is the audit requirements.

For example, audit requirements in Germany are such that you cannot exit a client during an engagement. Except if you have evidence that there was a fraud.  The same is with the qualification of an audit opinion or withholding an audit opinion. Still to this day. The standards ask for a lot of evidence to do so. Otherwise you open up yourself as a firm to a liability claim. And that has also significantly changed., because if you look at a couple of instances,for Aurubis or Adler Group in Germany no audit opinion was given because the auditor just said I don't have enough evidence, and the public gave them the green light to do so, i.e. there was no ramification in terms of liability claims.

Stefan Wagner: I mean you clearly have fully experienced this one. So you I think, you know, with all that experience, you can truly, you know, help people in protecting their reputation.

But I think if I would be in your shoes. My worry would be a little bit, you know, there's a reputation risk for companies where allegations are being made, and the company wants to hire you, You might get on the wrong side of it because you actually trying to help a company that deserves a bad reputation. How do you go about making sure you don't get caught on the wrong side?

Andreas Loetscher: At the end of the day, I have not identified or presumed the matter at Wirecard and in any other instances I was involved in and I would never argue that I'm able to do going forward. What I'm offering as a service that I'm helping clients to prevent such issues from happening, although there is no guarantee that you can completely prevent if someone has malicious intentions. There is this famous example of the fence. You can build a fence as high as you want, but you will always find someone that climbs over or under it.

If he or she wants to do so. The second service we offer is during investigations. There are many options that can be taken during such an investigation. And in particular, you can spend a whole lot of money during such investigations. And I can help firms or individuals or lawyers or any other external party during those investigations. And then last but not least, the remediation phase is also very crucial, which means making sure that right, lessons learned, whatever type of crisis you are in or taken at the end of the day.

Stefan Wagner: And changes will happen inside the organization to reflect that. Exactly., is there I mean, there's a huge amount of energy often when that happens inside an organization sidelined from the main business, basically, are there technologies that could help you see something in there?, or, you know, I've seen very simple things. Let's see, on the fraud side, HR departments using software to analyze CVS, to spot people making misstatements.

But, it's not guaranteed but can highlight.

Andreas Loetscher: Now look, there are great tools out there. I just read an article lately about an anti-money laundering tool that is equipped with artificial intelligence. The challenge is always to deal with all the false positives, and even the best software cannot address false positives. You always need some kind of human intervention to look into this. The downside with technology, as we all know, is as soon as people know how it works, they will find a way to circumvent if they want. That's always the prerequisite. And let me make a short example from Australia. When I was working for Ernst and Young in Australia, they introduced the any anti-money laundering laws. And because I came from Switzerland and Switzerland, had a long established history to deal with anti-money laundering allegations, and it was one of the first countries to actually introduce laws against money laundering everybody deemed I would be perfectly suited to sell the EY services to financial services clients.

Whenever I met a client, they all told me. We don't have any money laundering issues at our place. But when you looked at the statistics, crime generated 7 billion AUD on an annual basis.

Stefan Wagner: That cash had to go somewhere.

Andreas Loetscher: Somewhere. But everybody we talked to said no to them. Not to us. Exactly.

Stefan Wagner: Yeah. So I can see this. I mean, thank you very much., it's been great. Something I always like to ask somebody at the end is sort of. What's your favourite song? Piece of music?

Andreas Loetscher: I like rock music quite a lot. My latest song that I heard almost an entire summer long was Renegades from X Ambassadors. That's kind of the style that that attracts me.

Stefan Wagner: Excellent. And now, for everybody who listen to this, how can they best reach you?

Either by phone or by mail? And I know you're publishing that type of information.

Andreas Loetscher: Yeah, I will do that. Thank you very much, Stefan. It has been a great pleasure.

Stefan Wagner: Great. Fantastic. Thank you. Andy.

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