Home Accounting and Auditing Thomas Cook auditor EY will face regulator probe

Thomas Cook auditor EY will face regulator probe

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The UK government has told the Financial Reporting Council (FRC) to start an investigation into the auditors of Thomas Cook as well as the conduct of its directors, according to Accountancy Daily.

Business secretary Andrea Leadsom has told the audit regulator to launch an immediate investigation into the reasons for the collapse of the business, and the role of the auditors and senior directors, particularly their financial conduct of the business.

Leadsom told the outgoing head of the FRC, Stephen Haddrill, to ‘consider the investigation as a matter of priority’ and asked the regulator to’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’.

The auditor and director conduct review was also confimed by secretary of state for transport Grant Shapps, who told MPs today in parliament that the investigation would go ahead.

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.

A spokesperson at EY told Accountancy Daily: ‘It is not our policy to comment on the companies we audit.’

However, EY has flagged a number of significant concerns over the last 18 months, most recently when Thomas Cook issued its half yearly 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.

In the 2018 annual report, senior Thomas Cook management also stated that cash and working capital was a significant risk, particularly in terms of ‘meeting scheduled payments under the terms of our debt facilities as they fall due’.

The FRC issued a statement yesterday saying that it was considering an investigation but had not taken any action as yet. However, the regulator is now coming under pressure to act. So far, it has refused to comment on the letter from Leadsom.

The regulator did not add any further comment about today’s announcement to MPs, but said it would be reviewing the circumstances of the collapse following its normal review process. It refused to put a timescale on possible enforcement action. 

An FRC spokesperson said Tuesday: ‘In light of recent developments at Thomas Cook we are considering whether there is any case for investigation and enforcement action as a matter of urgency and in cooperation with the Insolvency Service.’ 

Meantime, Shapps has told MPs that bailing out Thomas Cook was never under consideration.

‘Given the perilous state of the business and half year loss of £1.5bn reported in May, supporting the company. Even if the government put an injection in, there was no guarantee that the money would save the company – it would be throwing good money after bad. It is clear that in the last couple of years the company ran into serious problems.

‘We have never had a collapse of an airline or a holiday company of this size. We will be looking closing at whether any individuals failed in their duties of stewardship at the company.

‘This is a ridiculous situation – we need to look at the options in ATOL and whether it is possible to wind down airlines in a more orderly manner. We will need primary legislation to do this,’ Shapps added.