The Financial Report Council (FRC), the UK’s audit and accountancy watchdog, will extend its Thomas Cook investigation to include EY’s audit of the failed travel agency’s financial statements for the year ended 30 September 2017.
Initially, the scope of investigation covered financial statements for the year ended 30 September 2018. However, the regulator has opened a second investigation, approved by the Conduct Committee, to include the earlier financial statements audited by EY.
The travel firm entered into compulsory liquidation on 23 September 2019, with the FRC quickly launching an investigation into its audits on the 1 October 2019. Both PwC and EY have since been subject to investigations and government scrutiny for their roles as Thomas Cook’s auditors.
PwC, who audited the firm from 2008 until 2016, were criticised by MPs for a conflict of interest for auditing Thomas Cook’s books while also providing consultancy and non-audit work for the company.
EY took over the role as auditor in 2017, and were questioned by MPs for signing off Thomas Cook as a going concern in March, despite the company having amassed £1.6bn worth of debts.
Concerns were raised by EY over the practice of signing off ‘exceptional items’ when it assumed the role of Thomas Cook’s auditor. Such items totalled £1.8bn across eight years, but in the year EY begun auditing the firm, around £28m of these costs were reclassified, triggering a profit warning.
This practice meant that the company’s top-line earnings, which were used to calculate bonuses for Thomas Cook executives, were flattered and did not reflect the true nature of its finances.
Since taking over, EY has earned £3m in audit fees, and a further £1m in non-audit services.
Revised FRC standards
This announcement comes days after the FRC issued revised ethical and auditing standards, banning firms from undertaking any non-audit work while auditing a company’s books.
While not explicitly cited by the FRC, the collapse of Thomas Cook, and other high-profile audit failures at companies such as Carillion and BHS, is likely to have prompted these revisions.
In a statement, the FRC’s Chief Executive Sir Jon Thompson said: “High quality audit supports the effective functioning of capital markets and gives investors confidence.
“Where audit fails, that confidence is undermined. The steps we have taken in revising our standards include measures which our stakeholders have identified as important to strengthen their confidence in audit, by ensuring greater independence and a focus on delivering high quality and consistent work.”
The FRC has the power to investigate Thomas Cook’s auditors and any accountants that work for the company who are registered with a professional body that it oversees, such as the ICAEW.
Its powers include being able to levy fines of up to £10m against accounting firms, bring disciplinary proceedings against individuals, and even ban them from the profession.
However, the FRC is due to be replaced by the Audit, Reporting and Governance Authority (ARGA), and in Sir Donald Brydon’s report, he makes clear recommendations about what the new audit governing body should aspire to.
He has recommended that audit becomes a profession separate from accountancy, with ARGA being the “statutory regulator” of this profession.
On page eight of his report, Brydon wrote: “ARGA should facilitate the establishment of a corporate auditing profession based on a core set of principles. ARGA should be the statutory regulator of that profession. In doing so, I recommend that ARGA develops a coherent framework for corporate audit that includes but is not limited to the statutory audit of financial statements.”
The investigations are being conducted by the FRC’s Enforcement Division under the Audit Enforcement Procedure.