EY fined £4.9m over Thomas Cook audit failures

The FRC has fined both EY and a partner at the Big Four firm over their audits of Thomas Cook for the years ended 30 September 2017 and 30 September 2018, prior to the group’s collapse in 2019.

EY was fined £6,500,000, discounted by 25% for admissions and early disposal to £4,875,000, while partner Richard Wilson was fined £140,000, again discounted by 25% for admissions and early disposal to £105,000.

Both were given a published statement in the form of a severe reprimand, and had to declare that the 2017 and 2018 audit reports did not satisfy the Relevant Requirements.

According to the FRC, EY and Wilson each admitted “serious breaches of standards” relating to Goodwill impairment and Going Concern, as well as “failing to adequately consider a risk to EY’s independence” during the 2018 audit.

Thomas Cook’s Goodwill balance was “significant”, according to the FRC, as it comprised £2.6bn across the whole group, around 40% of total assets. In both audit years, EY and 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, the authority noted.

In terms of Going Concern, there were only breaches in the 2018 audit, where EY and Wilson “failed to adequately challenge” management with regards to sensitivity testing, liquidity and financial covenant headroom.

Claudia Mortimore, deputy executive counsel at the FRC, 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.”

She added: “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 Accountancy Today: “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 audit methodology, to address the issues identified. We continue to make significant investments in new technology and processes to drive ongoing improvements, whilst reinforcing a culture of professional scepticism in our audit teams.”