EY fined £5m for botched audits of Thomas Cook before the travel agent's collapse six years ago

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EY Fined Millions Over Botched Thomas Cook Audits

Accountancy giant EY has been penalised with a £4.9 million fine for flawed audits of Thomas Cook prior to the travel firm’s collapse six years ago. The Financial Reporting Council (FRC) uncovered deficiencies in EY’s assessments of the holiday company’s financial records for 2017 and 2018. This regulatory action highlights ongoing scrutiny of audit quality and corporate accountability.

Financial Reporting Council Findings

The FRC, the regulatory body overseeing accountants, stated that EY and its partner Richard Wilson admitted to ‘serious breaches of standards’ concerning their evaluations of key financial statement areas. Richard Wilson also received a fine of £105,000. These breaches relate to audits conducted before Thomas Cook, a long-established travel agent with roots in the 1840s, ceased trading in 2019. The company’s failure led to 9,000 job losses and left 150,000 tourists stranded internationally. Thomas Cook has since been revived as an online business under new ownership.

Audit Deficiencies: Goodwill and Going Concern

The FRC pinpointed specific shortcomings in the audit process. One major area of concern was the evaluation of ‘goodwill’, an accounting term representing a company’s non-physical assets like brand reputation and customer relationships. Another critical area of failure involved the assessment of Thomas Cook’s status as a ‘going concern’, a fundamental principle in accounting that determines if a company can continue operating in the foreseeable future.

During the audit periods, Thomas Cook’s goodwill was valued at £2.6 billion, a significant portion representing roughly two-fifths of its total assets. The FRC emphasized the gravity of the goodwill audit failings in 2018, particularly given Thomas Cook’s declining financial performance. This downturn increased the risk of the goodwill value being overstated or ‘impaired’.

The FRC clarified that their findings did not suggest any intentional or reckless misconduct by EY or Wilson, acknowledging their cooperation throughout the investigation.

EY’s Response and Remedial Actions

EY expressed ‘deep regret’ that their audit work fell short of the expected regulatory benchmarks.

A spokesperson for EY stated, ‘We deeply regret that the 2017 and 2018 audits of Thomas Cook did not meet the standards we uphold. We are dedicated to learning from these errors and have since enhanced our protocols, training programs, and guidance materials, alongside our global audit methodology, to address the identified issues.’ This statement underscores the firm’s commitment to improving audit quality and preventing similar situations in the future.

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