Financial watchdog imposes £6.5m fine over audits of Thomas Cook before collapse

A fine of £6.5 million has been imposed on professional services giant EY for audits of Thomas Cook Group before its collapse in 2019.

 

The Financial Reporting Council (FRC) watchdog said it had imposed sanctions on EY and audit engagement partner Richard Wilson.

 

The sanctions are in relation to the audits of Thomas Cook Group for the financial years ended September 30, 2017 and September 30, 2018.

 

The £6.5 million sanction was discounted by 25% to more than £4.8 million after EY applied for an ‘admission discount’. Wilson’s fine of £140,000 was also cut to £105,000.

 

The FRC said: “EY and Mr Wilson have each admitted serious breaches of standards relating to the work performed on two important areas of the financial statements: goodwill impairment and going concern, as well as failing to adequately consider a risk to EY’s independence during the 2018 audit.”

 

The watchdog added: “The sanctions imposed take account of a number of factors, including the seriousness of the breaches and the financial strength of the auditor, as indicated by the turnover of the firm.  

 

“It is not suggested that the breaches were intentional, dishonest, deliberate or reckless. Further, both EY and Mr Wilson co-operated with executive counsel’s investigation.”

 

The FRC said: “Thomas Cook’s goodwill balance was significant as it comprised £2.6 billion across the whole group (approximately 40% of total assets). 

 

“In both audit years, EY and Mr Wilson failed to approach this audit area with sufficient professional scepticism in order to properly corroborate management’s assumptions and estimates supporting the goodwill impairment model. 

 

“The failings for the audit of goodwill in 2018 were particularly serious given Thomas Cook’s deteriorating trading performance, which heightened the risk that the goodwill balance could be impaired.

 

“In relation to going concern, where there are breaches in the 2018 audit only, EY and Mr Wilson failed to adequately challenge management with regards to sensitivity testing, liquidity and financial covenant headroom, and as such were not in a position to properly conclude on whether a material uncertainty existed that might cast significant doubt upon Thomas Cook’s ability to continue as a going concern. 

 

"This was a key responsibility that EY and Mr Wilson did not fulfil adequately under the relevant auditing standards and was an important matter to users of the financial statements.”

 

The ruling added: “The breaches of auditing standards accepted by EY and Mr Wilson relating to the goodwill impairment and going concern work included areas such as risk assessment, the performance of procedures to obtain and evaluate audit evidence, communication with those charged with governance as well as disclosures in the accounts. 

 

“The breaches include auditing standards dealing with the exercise of professional scepticism, partner supervision and audit documentation which are central to the performance of an audit.

 

“Ultimately, as a result of the breaches by EY and Mr Wilson, both audits failed in their principal objective: that of obtaining reasonable assurance that the financial statements were free from material misstatement. 

 

“However, no assertions are made that any balances or amounts in either the 2017 or 2018 financial statements were in fact misstated, nor that the adoption of the Going Concern basis of accounting was not appropriate.

 

FRC deputy executive counsel Claudia Mortimore said: “Thomas Cook’s Goodwill Balance and Going Concern status were fundamental to its financial position and performance.  

 

“EY and Mr Wilson were subject to a public interest duty to comply with auditing standards and robustly challenge the forecasts and assumptions that underpinned Thomas Cook’s valuation of goodwill. 

 

“Similarly, in relation to going concern they should have exercised sufficient professional scepticism and obtained sufficient corroborative evidence to satisfy themselves that Thomas Cook’s low liquidity headroom and financial covenant risks had been reduced to an appropriate level.

 

“EY and Mr Wilson’s failure to challenge robustly and to apply sufficient professional scepticism in these crucial areas led to significant breaches of auditing standards in both audit years. 

 

“The failings in 2018 are particularly serious given Thomas Cook’s financial position and the heightened risks surrounding the audit work. EY’s remedial measures together with the programme of non-financial sanctions are designed to prevent such failures being repeated.”

 

An EY spokesperson told the Telegraph: “The delivery of high-quality audits remains our priority and we deeply regret that the 2017 and 2018 audits of Thomas Cook fell below the standards that we expect.

 

“We are committed to learning from these mistakes and have strengthened our procedures, training and guidance, as well as our global audio methodology, to address the issues identified.

 

They added that the company was ‘reinforcing a culture of professional scepticism” within its auditing teams.