Thomas Cook: Case for investigation to be assessed by FRC
The FRC has the power to investigate Thomas Cook’s auditors and any accountants that work for the company who are registered with a professional body that it regulates, such as the ICAEW.
The UK’s accountancy regulator is urgently considering opening an investigation into the collapse of Thomas Cook, and would likely focus on two of the Big Four accountancy firms – PwC and EY.
The Financial Reporting Council (FRC) has said that it is working with the Insolvency Service, which put Thomas Cook into mandatory liquidation, and has the power to impose penalties if it finds irregularities. The travel firm is audited by EY, which took over from PwC in 2017.
In a statement, the FRC said: “In light of recent developments at Thomas Cook we are considering whether there is any case for investigation and enforcement action as a matter of urgency and in cooperation with the Insolvency Service.”
The collapse of Thomas Cook has drawn attention to the company’s profits, which were flattered by historic exceptional charges. Its treatment of goodwill write-downs and heavy debts have also come under the spotlight.
The audit work of EY and PwC, who had audited Thomas Cook since 2008, before handing the reins over to EY in 2017, will come under intense scrutiny from the FRC should an investigation take place, and will be another case of the UK’s largest accountancy firms being investigated following the collapse of a large company.
FRC’s powers to investigate
The FRC has the power to investigate Thomas Cook’s auditors and any accountants that work for the company who are registered with a professional body that it oversees, such as the ICAEW.
Its powers include being able to levy fines of up to £10m against accounting firms, ana bring disciplinary proceedings against individuals, and even ban them from the profession.
Two members of Thomas Cook’s board, non-executive directors Paul Edgecliffe-Johnson and Jamie Wilson, are registered chartered accountants which means they would fall under the FRC’s scope, as would its former CFO Bill Scott. There has been no suggestion of wrongdoing.
Signs of decline
In October 2018, EY signed of Thomas Cook’s annual report for the year as a going concern, meaning it had judged that the firm could survive for another 12 months.
However, in May when the travel company’s interim results were released, EY said that there was “material uncertainty related to going concern” related to a new financial agreement. The company also reported that it had agreed a new £300m lending facility.
The May report saw the company post a £1.5bn first-half loss, and published its first profit warning in less than a year. In addition, it had £1.2m worth of debt and was forced to write-down the value of its MyTravel UK package holiday business by £1.1bn.
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Thomas Cook had recently seen several changes in its CFO position, with the latest, Sten Daugaard, taking over as chief financial officer in December 2018 from Scott, who quit after less than a year on the job.
Daugaard changed the way the firm reported its accounts to include items that had been treated as exceptional costs for several years. This included paying directors and meeting banking covenants.
EY did not agree with Thomas Cook’s treatment of these items, and in first-half results that were published last November, the company recognised £28m worth of charges made up of £14m write-off payments and another £14m of flight disruption and business transformation costs.
When these results were published, Dougaard told analysts that when he had looked at Thomas Cook’s accounts “one thing that I could immediately observe was the size of the exceptionals”.
