Analysis: What happened to Tui Travel’s £117m?

Tui Travel believes it has drawn a line under the problems that led to a £117 million hole in its accounts. But speculation about the extent of its difficulties may not be at an end just yet.

The fallout led to the resignation of finance director Paul Bowtell and auditor KPMG. And two directors resigned last week, although Tui Travel insisted their departure was unconnected to the accounting error.

FTSE 100 companies that misstate their accounts are frowned upon. However, the group’s share price has recovered after falling 11% in October when the extent of the error was first revealed, and the group insists there have been no redundancies as a result of the shortfall.

Media speculation

The Guardian and sister newspaper The Observer have led speculation in the national press, suggesting the directors resigned “in protest at some of the company’s recent actions”.

They reported “divisions” within the tour operator, quoted an unnamed “major shareholder” describing the board as “in disarray” and suggested parent company Tui AG had been “throwing its weight around”.

Other newspapers reported an “£8 million payout” to five directors as though it was for their recent performance. The group points out this was a payment for shares awarded in 2007.

Tui Travel dismissed the reports in The Guardian. A spokeswoman said: “We have not been contacted by any shareholders with concerns regarding recent stock exchange announcements.

“We can confirm that the non-executive directors’ decision to step down was not a result of the need to restate our 2009 results.”

She also insisted the group was not subject to investigation by the UK regulator for corporate governance, the Financial Reporting Council (FRC), as has been rumoured in the industry.

The spokeswoman said: “Tui Travel plc and its UK subsidiary Tui UK have not heard from or been contacted by the FRC.”

However, these stories follow a steady drip of potentially damaging announcements:

  • August: Tui Travel UK reveals a £29 million hole in its accounts, leading to the departure of finance officer David Taylor.
  • October 21: the group reports the hole has widened to £117 million, wiping 10% off the operating profit for 2008-09 and £5 million off 2009-10. Group finance director Paul Bowtell resigns, to the obvious regret of chief executive Peter Long.
  • December 29: auditor KPMG resigns. Tui announces PricewaterhouseCoopers will take over.
  • January 5: non-executive director Jeremy Hicks, who chairs the group’s audit committee, writes to The Financial Times to correct the newspaper’s report that Tui had “sacked” KPMG. Hicks said: “It was KPMG that drew the board’s attention to the control weakness.”
  • January 7: Hicks and fellow non-executive director Giles Thorley resign.

Revealing resignation

KMPG’s resignation letter was revealing. It refers to “inappropriate analysis, judgments and accounting processes undertaken by the directors of… the UK tour operator business over an extended period of time”.

The letter stated KPMG’s “relationship with certain directors” had become “increasingly strained” since the issue came to light and as a result: “We are not confident we could carry out an audit of the company to the appropriate standard.”

That would not please institutional investors. A company source conceded: “The discussions with KPMG were difficult.”

However, Tui’s trading outlook appears strong and the share value will be bolstered by persistent reports that German-based parent Tui AG is poised to increase its 55% holding.

The company’s annual report explains the £117 million shortfall over seven years by suggesting cost cuts, consolidation of roles and outsourcing contributed to a failure to reconcile discounts on the group’s retail booking system to prices on the Thomson system.

Revenue was thus overstated, and the problem was multiplied across the group when Tui merged with First Choice in 2007 and made the Thomson booking system universal. The sums are significant in relations to profits, but represent a fraction – about 0.65% – of the £18 billion in transactions processed during the period.

Tui Travel will hope its AGM with shareholders on February 3 will signal the end of the affair. Investors in the City will decide whether that is the case.

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