FRC extends Thomas Cook audit probe

The Financial Reporting Council (FRC) has widened its investigation into EY’s auditing of collapsed travel firm Thomas Cook Group to bring in 2017 financial statements

The regulator initially said it was looking at EY’s audit of Thomas Cook’s financial for the year ended 30 September 2018. Now it has announced the probe include an investigation into EY’s audit of Thomas Cook’s financial statements for the year ended 30 September 2017.

For once, the audit regulator acted quickly to launch an investigation following pressure from the Department for Business, Energy and Industrial Strategy (BEIS) after the collapse of the travel company.

The FRC took action after a direct appeal from business secretary Andrea Leadsom in the immediate aftermath of the travel company’s collapse.

Leadsom wrote to the regulator asking it to  ‘consider the investigation as a matter of priority’ and saying this should ’examine not only the conduct of those directors, past and present, in the preparation of the accounts, but also the conduct and practice of the auditors of those accounts’.

Within a week, the FRC had opened its first investigation. The FRC investigation is being conducted by the FRC’s enforcement division under the audit enforcement procedure. 

EY was auditor of Thomas Cook for two years since 2017. It was appointed in 2017, taking over from fellow Big Four firm PwC, which had audited the business since 2008.

EY earned £3m in audit fees and a further £1m in non-audit services (NAS) for year end 2018, although there are no details in the annual report about the type of NAS provided.

The accounts show EY flagged a number of significant concerns about Thomas Cook over the last 18 months, most recently when Thomas Cook issued its half year results in May.

At the time EY highlighted material uncertainty related to going concern. The auditor warned that 'the outcome of the strategic review and the associated conditions in the new financing arrangement was uncertain. These events or conditions indicate that a material uncertainty exists.

This may cast significant doubt on the company’s ability to continue as a going concern. Our conclusion is not modified in respect of this matter’.

In the annual report for year end April 2018, the auditor also warned Thomas Cook about issues around journal reporting and debt repayment terms.

The 178-year-old firm went into compulsory liquidation in September, triggering the biggest ever peacetime repatriation, aimed at bringing more than 150,000 British holidaymakers home.

The events surrounding its collapse were the subject of a BEIS select committee inquiry, which was cut short when parliament dissolved for the election, but which published highly critical observations about the role of auditors, levels of senior executive pay and the government’s inaction.

Then BEIS chair Rachel Reeves said: ‘The failure at Thomas Cook has been notable for the extraordinary lack of interest shown by the business department and its secretary of state in the days and weeks leading up to the collapse.

‘It is also a matter of fact that many of the necessary measures on audit, on executive pay, and on corporate governance have been sitting in the government’s in-tray for months.

‘The CMA and BEIS Committee published proposals in April on reforming the audit market, on tackling conflicts of interest, and on improving audit quality but the government failed to bring forward the legislation necessary to drive this forward.

'A new government needs to put this right and ensure the Queen’s Speech in a new Parliament includes the laws needed to make this a reality.’

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