FRC fines EY £4.9m over ‘failures’ on Thomas Cook audits

April 17, 2024

Six years after the collapse of Thomas Cook with £1.7 billion of debt, the Financial Reporting Council (FRC) has hit EY with a £4.9 million fine over significant breaches of standards relating to the travel company’s audits.

The FRC’s Executive Counsel has imposed sanctions on EY and Richard Wilson, audit engagement partner, in relation to the audits of Thomas Cook Group plc for the financial years ended 30/9/2017 and 30/9/2018. This follows the issuance of a Final Settlement Decision Notice, under the Audit Enforcement Procedure.

The breaches related to work undertaken on Thomas Cook’s “goodwill balance” and “going concern” status, which were “fundamental to its financial position and performance” according to the FRC.

The FRC noted that the failings for the audit of goodwill in 2018 – which highlights the company’s value in terms of reputation or customer base, rather than physical assets –were especially serious in the light of Thomas Cook’s deteriorating trading performance, which heightened the risk that the goodwill balance could be impaired.

It concluded that the auditors were subject to a 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,” said Claudia Mortimore, Deputy Executive Counsel for the FRC.

The FRC deemed that “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,” Ms Mortimore added.

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