When the giant tour operator Thomas Cook collapsed and went into liquidation after 178 years in business, various factors were cited. The firm’s failure was attributed to its unsuccessful merger with My Travel in 2007, its soaring debts and the transformation of the travel industry due to the internet. Uncertainty over Brexit and the fact people stayed at home rather than booked a holiday abroad due to the 2018 heatwave no doubt also played their part.
Much has been made in the press of the directors’ exceptionally high bonuses. But question marks must also be raised against the performance of the auditors.The travel firm failed despite having being given a clean bill of health by its original auditors, PwC, and again by EY, who replaced them in 2017. These are both major audit firms known as being part of the Big Four. By the time the firm collapsed it had a debt of £1.7bn, so why had an alarm not been raised earlier?
EY said there was ‘significant doubt’ as to whether Thomas Cook could continue as a going concern when the firm posted a first-half loss of £1.5bn in May 2018 and issued a third profit warning. But by that point there was little that could be done.
So from an auditing point of view what lessons can be learnt?
The Financial Reporting Council (FRC), who is investigating EY’s audit, said it felt that auditors had lost their objectivity and had got too close to the firms they were auditing. Elizabeth Barett, executive counsel and director of enforcement at the FRC, said she felt audit firms were viewing the companies they are auditing as clients and focusing on delivering non-audit services rather than playing the role of independent reviewer. The regulator’s view is that the lines have become blurred which could lead to potential conflicts of interest.
In addition, the FRC criticised auditors for not being strong enough in challenging management and called on firms to adopt a more robust culture.
The very fact that there had been three finance chiefs at Thomas Cook in two years should have highlighted that all was not well. The firm’s accounting methods had been questioned and when Sten Daugaurd took over as Chief Financial Officer in December 2018, he expressed surprise at the number of items classed as exceptional costs. But again, no action was taken.
The FRC’s investigation can take up to two years to complete but in the session before MPs, the regulator gave the opinion that the auditors were complicit in the failings and not sufficient scrutiny had been given.
The FRC itself has also been criticised, however, and questions raised as to why it didn’t see problems a long time ago when Thomas Cook carried out a refinancing in 2013.
With high profile cases such as Carillon and now Thomas Cook, proactive steps are being called for in order to reform the audit sector.