EY to be investigated for Thomas Cook audit role

03 October 2019 Consultancy.uk 4 min. read
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The Financial Reporting Council has launched an investigation into the collapse of travel firm Thomas Cook. The UK’s auditing watchdog will explore whether EY acted appropriately as the collapsed travel firm’s accountant.

In September, the collapse of 178-year-old Thomas Cook put 22,000 global staff out of work, while leaving some 600,000 holiday makers stranded overseas. Consultants from AlixPartners and KPMG – one of the four largest professional services firms in the world – were installed to oversee the sale of Thomas Cook’s healthy assets, as well as the complete winding down of other aspects of the company. The involvement of the professional services sector, or indeed the Big Four, in the Thomas Cook saga does not end there, however.

The Financial Reporting Council (FRC) announced that its ombudsman will now probe EY's audit work at Thomas Cook for the year ending 30th September 2018. In May of that year, Thomas Cook reported a £1.5 billion loss for its first half results, with £1.1 billion of that figure apparently caused by the decision to write down the value of My Travel, the business it merged with in 2007. EY reportedly warned there was "significant doubt" whether Thomas Cook could continue as a going concern in those accounts.

These concerns seem to have been realised later in its downward trajectory. While Thomas Cook had secured a £900 million rescue deal led by its largest shareholder, Chinese firm Fosun, in August, a recent demand from its banks to raise a further £200 million in contingency funding put that deal in doubt, and ultimately doomed the firm to administration

EY to be investigated for Thomas Cook audit role

The FRC announced its investigation would initially inspect whether EY had a case to answer over this matter. If the FRC concludes that that is the case, then the firm and client will have to convene at a tribunal where EY – or individual accountants – will have a chance to defend any allegations against them. Announcing its inquiry, the FRC stated it would "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.”

Growing concerns

The news sees EY become the latest member of the Big Four to be subjected to a high-profile investigation, following the collapse of a major company. Since the liquidation of Carillion in 2018 – something which the FRC continues to probe KPMG over as the outsourcer’s auditor at the time – a number of major cases have led to heightened scrutiny being applied to the auditing sector.

This has not been limited to the firms themselves, either. While the FRC's enforcement division has the power to impose unlimited fines and suspend individual accountants when it finds against the likes of EY, it is not a statutory legislator, and this has led to a mounting number of voices claiming it is no longer fit for purpose. As a result, earlier in the year, the Kingman Review found that the FRC should be replaced with  a new statutory regulator with “the interests of consumers of financial information, not producers” at its heart.

Beyond the role of the watchdog, meanwhile, the debate continues over whether greater intervention from the Government is needed. Earlier this year the UK's competition regulator recommended a major shake-up of the UK's accountancy market, but stopped short of calling for the Big Four accountancy firms to be broken up. The Competition and Markets Authority (CMA) said auditing and consultancy services should be entirely separate.

This does not seem to have satisfied Members of Parliament, however. After a damning Parliamentary report further suggested that the Big Four’s sprawling advisory wings were leading to conflicts of interest and causing auditing discrepancies to be overlooked, a growing segment of the political mainstream have begun to admit a formal break-up of the firms may be on the cards.