Travel firm Thomas Cook declared bankruptcy Monday after being unable to raise emergency funds. The downfall of the 178-year-old firm put 9,000 staff in the United Kingdom out of work and left 150,000 British holidaymakers stuck overseas.
The Financial Reporting Council (FRC), the United Kingdom’s corporate governance regulator, is investigating EY over the audit work it carried out at the firm, as concerns continue to escalate about why the company’s impending doom was not flagged up. EY took over as Thomas Cook’s auditor from PwC in 2017. While PwC is not under investigation, an FRC spokesperson declined to comment further about the possibility of the probe extending to earlier audit work.
The current investigation will focus specifically on EY’s audit of the company’s financial statements for the year ending Sept. 30, 2018, and will be conducted by the FRC’s Enforcement Division, which has the power to impose unlimited fines and suspend individual accountants.
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The FRC said in a statement that it “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.”
The company—which has had three chief financial officers over the past two years—has blamed a series of issues for its problems, including political unrest in holiday destinations such as Turkey, last summer’s prolonged heatwave, rising fuel costs, increased competition, and customer uncertainty over Brexit.
But the company’s collapse with a £1.7 billion (U.S. $2.1 billion) debt pile has also raised questions about its accounting methods, and—like the corporate failures of Carillion, BHS, and Patisserie Valerie—has shown how exposed suppliers can be when companies go bust without sufficient warning from auditors.
Rachel Reeves, chair of the Commons’ Business, Energy and Industrial Strategy (BEIS) Committee, sent a letter to the government’s Business Secretary Andrea Leadsom raising questions about the firm’s “aggressive” accounting practices, suggesting they improved the chances of executives being paid large bonuses—despite rising debts.
Reeves also flagged concerns about the auditor’s treatment of “goodwill” and use of “separately disclosed items” and “exceptional one-offs” that may have affected the true state of the company’s balance sheet.
In her letter, Reeves pressed for “urgent and meaningful reform of the audit industry,” as well as the FRC itself, and for the government to implement proposals made last December to hold company directors to account for their duties to prepare and approve true and fair accounts and compliant corporate reports and to deal openly and honestly with auditors.
She also wants the Insolvency Service to consider disqualifying the company’s former directors, as well as recover their bonus payments if their conduct is considered to have caused detriment to creditors or to the company’s pension programs—an issue the government is now looking at.
Earlier this year the United Kingdom’s competition regulator, the Competition and Markets Authority (CMA), recommended that auditing and consultancy services should be entirely separate to improve competition and prevent “cozy relationships” and conflicts of interest, but stopped short of calling for the Big Four accountancy firms to be broken up.
A spokesperson for EY said the firm will fully cooperate with the FRC during its enquiries.