EY and PwC also sold consulting work to Thomas Cook
Big Four accounting and advisory firms PwC and EY have come under scrutiny for selling consulting services alongside accounting services to Thomas Cook in the lead up to the company’s collapse. Both companies received millions of pounds for consulting work they performed while fulfilling the role of external auditor to the doomed travel firm.
At the end of September, the long-expected bankruptcy of British travel company Thomas Cook finally came into force. 178 years after being founded, one of Europe’s largest tour operators and holiday airlines has succumbed to the threats of digital disruption, changing consumer behaviour and the all-mighty internet. Consultants from Big Four firm KPMG were brought on board to extract as much value as possible from the company.
Since then, two other members of the Big Four have been consistently tied to the story for very different reasons, however. Days after the collapse of Thomas Cook, the Financial Reporting Council (FRC) launched an investigation into the company’s downfall – with the UK’s auditing watchdog announcing it would explore whether EY acted appropriately as the collapsed travel firm’s accountant.
Since then, audit and advisory competitor PwC has also been roped into the growing controversy, after it emerged that the firm was Thomas Cook’s bookkeeper for the nine years prior to EY’s time in the role.
Rachel Reeves MP, Chair of the Commons Committee for Business, Energy and Industrial Strategy (BEIS), subsequently announced intentions to grill both EY and PwC as part of the committee's own investigation into Thomas Cook's demise – as Parliament seeks to take matters into its own hands, having previously labelled the FRC “chronically passive”, and slamming the soon-to-be-replaced watchdog for its “feebleness and timidity.”
As a result, in late October, both EY and PwC faced questions from the BEIS committee about their auditing of the travel firm. During a number of fiery exchanges at the meeting, one MP suggested the presentation of Thomas Cook’s financial position by its former auditors “defied common sense” given the risks its business faced.
Defending PwC’s record with Thomas Cook, Hemione Hudson, PwC’s Head of Audit, told the committee that PwC had highlighted its challenges to the board in every one of the years the audit firm audited the firm, from 2007 to 2016. In particular, she noted the accounts and annual report signing were delayed in 2011 because the firm required additional evidence about its financial position. EY Audit Partner Richard Wilson meanwhile explained the writing down of £1.1 billion of goodwill during his time as Thomas Cook auditor.
Wilson explained that the going concern considerations involved assessing whether or not Thomas Cook still had the support of its lenders. While there was evidence of this in December 2017 and in 2018 when a new bond was agreed and new credit facilities, the tests of the bank covenant were “very tight” by March 2019. The decision to agree a going concern statement in the half-year review in March 2019 hinged on EY seeing the banks’ commitment in writing to an additional £300 million funding. However, Wilson told MPs that subsequently the banks added conditions to this loan which included Thomas Cook receiving a binding commitment for the sale of its airline by the end of September.
This prompted further anger from BEIS members. One, Antoinette Sandbach, suggested the company had “nothing to sell to reduce its debt levels without going into insolvency”, before asking how that company could therefore still be a “going concern”, while another added, “If you strip out the airline Thomas Cook has no business and no income, so how can it be a going concern?”
EY and PwC carried out millions worth of consulting work for Thomas Cook between 2007 and 2017
Non-audit services
Beyond auditing, the furore surrounding PwC and EY has also linked the collapse of Thomas Cook to an ongoing debate about whether the Big Four needs to be forcibly broken up. A growing number of voices have claimed that the likes of EY, PwC, Deloitte and KPMG cannot be impartial auditors if they continue to supply consulting work to companies they perform accounting services for. One argument against this behaviour is that this represents a conflict of interest, as firms may wish to demonstrate a greater return from their advisory in a client’s accounts.
One of the key revelations from the BEIS committee’s pressing of EY and PwC is that the firms did provide a large amount of non-audit work when they were external auditors for Thomas Cook. EY were paid £7 million for two years as auditors and consultants for Thomas Cook. Meanwhile PwC carried out £21 million worth of non-audit work for the client from 2007 to 2016, though Hemoine Hudson also stressed that in the earlier years of this relationship, the rules regarding the provision of non-audit services were different from those currently in force.
Hudson said, “There have been changes to the rules, following societal expectations. In the past we did rely on processes – strong process – to counter threats to independence. It’s a question of transparency. In the firm we relied on processes and controls that were not obvious to the outside world, and it is now better to have the environment we have. The rules mean we have got better at giving confidence to people that this is the case; I don’t think our non-audit did impair our independence, but the perception undermines this.”
