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The UK accounting regulator has fined Big Four firm EY nearly £4.9mn for “serious breaches of standards” in its audits of failed travel company Thomas Cook, wrapping up a nearly six-year investigation.
The Financial Reporting Council has reprimanded EY for its audits of Thomas Cook in financial years 2017 and 2018, including failing to properly consider the independence of a key partner involved in signing off the going concern in 2018, who had previously managed EY’s relationship with Thomas Cook.
Thomas Cook collapsed in 2019, leaving hundreds of thousands of travellers stranded abroad and most of its 21,000 employees jobless.
EY failed to collect enough evidence to support its goodwill impairment model, a crucial part of its assessment of the company’s accounts, the FRC said, and relied on Thomas Cook’s own forecasts for its UK tour division that put growth at more than six times of that predicted by an independent forecast for the financial year 2018.
The accounting firm also breached independence standards by failing to properly evaluate the impact of allowing a restructuring partner with a “long association” with Thomas Cook and “close business relationship” with the company’s chief financial officer to join the audit team working on the company’s accounts in 2018.
That partner and their team, who are not named by the FRC, performed a “substantial” amount of work on signing off the travel group’s 2018 accounts as a going concern, meaning it had judged that the business could survive another 12 months.
EY’s models had initially shown severe impacts of a possible travel shock, but after discussions with the restructuring team and with Thomas Cook, the models were revised to reduce the negative impact on the company’s forecasted budget, the FRC said.
The restructuring partner had acted as EY’s relationship manager with Thomas Cook until 2016, and met the company’s chief financial officer — who was at the time Bill Scott — for lunches and drinks unrelated to work throughout 2018, the FRC said. That partner also introduced Scott to an EY colleague seeking a new job, who was subsequently appointed as Thomas Cook’s head of analysis.
When asked to tick the box confirming EY’s independence, that restructuring partner ticked the box stating “no exceptions noted”, the FRC said. EY admitted that there was “no evidence” that it had considered the potential risk to EY’s independence, and that the audit file incorrectly recorded: “our engagement team is comprised of individuals with no prior history of performing services for the client”.
The FRC did not find an “actual loss of objectivity” as a result of the relationship, however.
The House of Commons business select committee in 2019, then chaired by Rachel Reeves, accused EY and previous auditor PwC of being “complicit” in Thomas Cook’s failure.
The FRC, which had also considered an investigation into PwC in 2019, also fined the audit partner responsible for the audits, Richard Wilson, £105,000. The fines were both discounted 25 per cent for co-operation.
EY said: “We deeply regret that the 2017 and 2018 audits of Thomas Cook fell below the standards that we expect. We are committed to learning from these mistakes and have strengthened our procedures, training and guidance, as well as our global audit methodology, to address the issues identified . . . whilst reinforcing a culture of professional scepticism.”
