Britain’s accounting watchdog has begun an investigation into EY’s audit of Thomas Cook’s accounts, just over a week after the world’s oldest travel firm collapsed.
The Financial Reporting Council said its enforcement division was investigating EY’s audit of the financial statements of Thomas Cook for the year to 30 September 2018.
“The FRC 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,” it said.
EY took over from PwC as Thomas Cook’s auditors in 2017. Both are among the UK’s big four accountancy firms.
Five months before its collapse, Thomas Cook reported a £1.5bn first-half loss in May and issued its third profit warning in less than a year. In that set of accounts, EY warned there was “significant doubt” whether Thomas Cook could continue as a going concern.
On Monday, the FRC said it had issued a revised going concern standard following a spate of corporate failures in which auditors failed to flag up concerns about the company’s viability.
The collapsed tour operator had three different finance chiefs in two years as its financial problems deepened, and has faced questions about its accounting methods.
Sten Daugaard became Thomas Cook’s chief financial officer in December 2018 after Bill Scott quit after less than a year in the job following a profit warning. Scott had replaced Michael Healy in January 2018 when Healy stepped down after five years in the job.
Brexit
“There is now little doubt that the Brexit process has led many UK customers to delay their holiday plans for this summer,” said the chief executive, Peter Fankhauser, in May. But it cannot be the whole story - arch-rival Tui has coped because its finances are healthier.
Weather
The summer heatwave of 2018 encouraged would-be holidaymakers to stay at home, undermining prices in the “lates” market where operators try to clear unsold holidays. There seems to have been a hangover into 2019, with customers calculating that waiting to book is a productive strategy.
Competition
A pincer movement of Airbnb and budget holidays has changed consumer behaviour, though Thomas Cook still managed to sell 11m package holidays last year.
Banks and debt
The tour operator has been attempting to shoulder a huge pile of debt for the past decade – £1.7bn worth at the last count. Successive managements failed to remove meaningful chunks. The banks argue they have supported an overstretched company for years and the details of why it could not be saved may have to await the report from the Insolvency Service.
Bad management
Thomas Cook’s borrowings were too high. The moral of the tale is that tour operators should fund themselves conservatively. If your balance sheet is fragile, you are at the mercy of events in an industry where most of the cash arrives in the summer and then flows out in the winter.
Nils Pratley, financial editor
Daugaard changed the way Thomas Cook reported its accounts to include items that had been treated as exceptional costs for several years, including when paying directors and meeting banking covenants. He told analysts in November that when he looked at the books “one thing that I could immediately observe was the size of the exceptionals”.
The FRC aims to complete investigations within two years. If it finds evidence of wrongdoing, it could take EY to a tribunal, assuming there is no settlement. The tribunal would decide on the guilt of the firm and any individuals, and impose penalties if appropriate. They can include fines, as well as non-financial penalties such as a greater oversight of the firm and banning individuals from working.
