BEIS committee to investigate Thomas Cook auditors

MPs are calling for faster progress on audit reform, as the Business, Energy and Industrial Strategy (BEIS) committee launched an inquiry into Thomas Cook’s leadership and auditors EY and PwC

The committee said the company’s collapse highlighted many of the governance issues already seen in earlier failures such as Carillion, BHS and Patisserie Valerie, and lambasted the Thomas Cook liquidation as another example of corporate failure.

The inquiry will focus on issues around the stewardship and leadership of the company, executive remuneration, accounting practices and the role of auditors EY and PwC. It is also likely to examine the impact on small businesses and suppliers of the collapse of Thomas Cook.

MPs will question Thomas Cook executives including the CEO, finance director and chairman, as well as Thomas Cook’s external auditor EY and PwC, which audited the company until 2017, the Financial Reporting Council (FRC), and the Insolvency Service.

It will also be approaching the chairs of the company’s remuneration and audit committees to give evidence and will question business secretary Andrea Leadsom on the government’s approach to the collapse of Thomas Cook, and to corporate governance and audit reforms.

Rachel Reeves, chair of the BEIS committee said: ‘This latest corporate failure has shone a light once again on the use of aggressive accounting methods to aid bumper payouts to company executives and the apparent inability of auditors and regulators to curb these practices in the wider interests of shareholders, investors, and the public.

‘The BEIS committee has a long-standing interest in corporate governance, executive pay and audit reform which we are keen to follow up in this inquiry.

‘The main players in the sad demise of Britain’s oldest travel firm should face public scrutiny and be held to account for their actions before the company collapsed.’

Letter to secretary of state

Reeves has also written to Leadsom, stating: ‘The committee is dismayed that similar issues that we identified in the collapse of Carillion and BHS may have occurred at Thomas Cook, including the role of auditors in identifying and addressing problems.

‘This latest collapse reinforces the need for urgent and meaningful reform of the audit industry, as we argued for in our report on the Future of Audit.’

The letter cited reports of ‘aggressive accounting’ methods at Thomas Cook, used to ‘flatter financial performance’, as well as claims the former CEO said the group had a balance sheet deficit in excess of £3.1bn, including £1.9bn of debt and guarantees, yet executives had been given more than £20m in bonuses over the past five years.

Reeves asked for responses to a series of questions from the committee by 7 October. These include information about when the government will publish its response to the initial consultation on the Competition and Markets Authority (CMA) recommendations, which closed on 13 September, and when it plans to bring forward legislation to implement reforms related to those recommendations.

The letter asks when the remaining recommendations for reforming the FRC, as recommended by the Kingman review, will be implemented. Plans to restructure the FRC as the Audit, Reporting and Governance Authority (ARGA) were announced in March but so far there has been no progress on the transition to the new oversight body.

Reeves added: ‘More specifically, when will the government implement Sir John’s proposals to hold company directors to account for their duties to prepare and approve true and fair accounts and compliant corporate reports, and to deal openly and honestly with auditors?’

Reeves also wanted to know whether Leadsom will ask the Insolvency Service to consider disqualifying Thomas Cook’s former directors and whether their bonus payments can be recovered if their conduct is considered to have caused detriment to creditors or to the company’s pension schemes.

Additionally, the BEIS chair asked to be informed of what preparations the government has made for responding swiftly to Sir Donald Brydon’s review of audit, which is due to report at the end of the year.

The letter highlighted concerns about long payment terms at the travel operator citing concerns that suppliers, especially SMEs, may lose out or go bust because of unpaid monies, as was the case for many suppliers when Carillion collapsed.

The committee also asked for confirmation that Thomas Cook suppliers will be offered support, as well as information about whether the government will reconsider introducing a statutory limit for payments, and whether auditors should widen the scope of audits, including the examination of the payment practices of the companies they audit.

Evidence hearings are scheduled to begin in mid to late October. Evidence submissions can be made on the committee’s website, and the deadline is 10 October.

BEIS committee, Thomas Cook inquiry - terms of reference

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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