Big four firms PwC and EY, and the accountancy profession as a whole, has come under heavy fire from MPs during the inquiry into the collapse of Thomas Cook, with both firms being accused of having been “complicit” in the travel firm’s collapse.
PwC audited the company from 2008 until 2016, with EY taking the reins in 2017, and both defended their audits in the business select committee hearing on Tuesday, 22 October.
Chair of the business energy and industrial strategy committee, Rachel Reeves, said: “I wonder how many more company failures, how many more egregious cases of accounting do we need? We’ve had BHS, we’ve had Carillion, we’ve had Patisserie Valerie and now we’ve had Thomas Cook. How many more do we need before your industry opens its ideas and recognises that you are complicit in all of this and that you need to reform?
“We can’t rely on you to do the right thing and legislation is needed,” she added. “We need tougher regulation because your industry is not willing to make the changes needed. Reform is long overdue, and the evidence today makes it clear that that moment has got to come and got to come soon otherwise we’ll have more business failures and you will be complicit in those.”
Conflict of interest
MPs criticised PwC’s actions and for repeatedly signing off Thomas Cook’s accounts with a clean bill of health, despite the accounting firm admitting that it had made the travel firm’s board aware of the significant risks to its financial stability, and raised concerns about its accounting practices.
PwC was also challenged for a conflict of interest, that was revealed ahead of the hearing. When working as Thomas Cook’s auditor, it was also advising the firm on their executive pay and bonuses.
Thomas Cook used a controversial accounting policy that saw it cut out “exceptional items” totalling £1.8bn across eight years. This flattered the company’s top-line financial results which were then used to calculate bonuses for the company’s executives which did not reflect the true nature of its finances.
This policy was signed off by PwC during its time as Thomas Cook’s auditor, but concerns were raised by EY when the took over in 2017. Around £28m of these costs were reclassified that year which led to a reduction in underlying earnings and triggered a profit warning.
MPs were told that PwC was paid £21m between 2007 and 2016 for providing consultancy and non-audit work for Thomas Cook. This included £4m for advising the company on its executive pay. EY also provided non-audit services totalling £2.4m.
Hermione Hudson, PwC’s head of audit, said that she did not believe that the non-audit work would have impacted the quality of the audit work undertaken by PwC at the time, but said: “I do think it’s very important that we do have a trusted audit profession.”
She also admitted that she did not believe her firm would take the same actions today: “At the time it was appropriate [but] we wouldn’t do it today even if it were permitted by the rules.”
As MPs questioned the auditors about Thomas Cook’s exceptional items policy, to which Ms Hudson acknowledged that the £1.8bn of exceptional items over eight year was a “large number”, but both PwC and EY said that they have repeatedly challenged Thomas Cook’s management over the use of this policy.
Richard Wilson, an audit partner at EY, was also questioned by the committee, with MPs asking why the firm has signed off Thomas Cook as a going concern in March, despite having amassed £1.6bn worth of debts. A company signed off as a “going concern” is an accounting concept that means the company has the capability to continue operating, usually for the next 12 months. He said that EY did so with the assumption that it secured £300m from its lenders. Six months after this, Thomas Cook collapsed into liquidation.