FRC to investigate EY over Thomas Cook auditing

The Financial Reporting Council (FRC) has responded to pressure from the Department for Business, Energy and Industrial Strategy (BEIS) to launch an investigation into EY’s auditing of Thomas Cook

In the immediate aftermath of the travel company’s collapse, business secretary Andrea 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 has reacted with the launch of an investigation into EY’s audit of the financial statements of Thomas Cook Group for the year ended 30 September 2018. The investigation will be conducted by its enforcement division under the audit enforcement procedure.

In a statement, the regulator said: ‘The FRC will keep under close review both the scope of this investigation and the question of whether to open any other investigation in relation to Thomas Cook, liaising with other relevant regulators to the fullest extent permissible.’

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 flagged 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.

EY has been 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.

Last week, the BEIS select committee announced its own inquiry into the events surrounding Thomas Cook’s liquidation. 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.

In a statement, EY said: 'We can confirm that EY has been notified of the FRC’s intention to conduct an investigation into the audit of Thomas Cook Group plc for the year ended 30 September 2018. We will be fully cooperating with FRC during their enquiries. It would be inappropriate to comment further at this time.'

Report by Pat Sweet, Sara White

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