EY has been fined almost £5m for “serious breaches of standards” over its audits of Thomas Cook in the years before the travel company’s devastating collapse in 2019.
The UK’s audit watchdog, the Financial Reporting Council (FRC), said EY and one of its partners, Richard Wilson, had admitted to failings related to their assessment of the travel agent’s financial statements from 2017 and 2018.
Thomas Cook, the world’s oldest travel company, collapsed in 2019 after it failed to finalise a restructuring plan that would help it cope with a £1.7bn debt burden.
The company’s failure put 9,000 jobs at risk and triggered a huge repatriation effort to bring home 150,000 UK holidaymakers stranded overseas. The Chinese company Fosun later acquired the company’s brand, before selling it to the Polish travel platform eSky Group last year.
“EY and Mr Wilson’s failure to challenge robustly and to apply sufficient professional scepticism in these crucial areas led to significant breaches of auditing standards in both audit years,” Claudia Mortimore, one of the FRC’s top lawyers, said. “The failings in 2018 are particularly serious given Thomas Cook’s financial position and the heightened risks surrounding the audit work.”
The breaches related, in part, to EY’s assessment of Thomas Cook’s going concern status, which indicates whether a company has the finances to continue operating for the foreseeable future. The FRC’s investigation found that EY and Wilson failed to adequately challenge Thomas Cook’s management on its finances, and therefore could not properly assess whether there were any material uncertainties that might cast doubt on the company’s financial standing.
The regulator said there was also a failure to approach Thomas Cook’s goodwill balance – which measures the value of a business beyond their physical assets, including things such as brand reputation and customer loyalty – with “sufficient professional scepticism”. The travel company’s goodwill balance at the time accounted for about 40% of its assets, and was valued at £2.6bn.
“The failings for the audit of Goodwill in 2018 were particularly serious given Thomas Cook’s deteriorating trading performance, which heightened the risk that the goodwill balance could be impaired,” the FRC said.
There was also a failure to properly consider how EY might be failing to remain independent in its audits, given the restructuring partner’s long association with the group and its close relationship with Thomas Cook’s chief financial officer, which related to past work conducted by EY. The FRC said this amounted to a “familiarity threat” that put EY’s ability to independently assess the financial position of Thomas Cook at risk.
However, the regulator said that none of the breaches were believed to be either “intentional, dishonest, deliberate or reckless”, and said that EY and Wilson cooperated with their investigation.
EY was officially fined £6.5m, discounted to £4.9m, given its willingness to admit wrongdoing. Wilson was fined £140,000, a sum that was reduced to £105,000 for the same reason. EY has also paid the costs of the FRC’s investigation.
EY said in a statement: “The delivery of high-quality audits remains our priority and 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.
“We continue to make significant investments in new technology and processes to drive ongoing improvements, whilst reinforcing a culture of professional scepticism in our audit teams.”
