Thomas Cook’s auditors in firing line as repatriation continues

With the horror stories of Thomas Cook’s holidaymakers all over the media amid a massive repatriation programme that has seen the tour operator’s staff turning up for free to assist, attention is now turning to who is to blame. The anger over this company’s spectacular collapse is raw, and entirely justifiable.

While bosses, chief executive Peter Fankhauser in particular, are at the front of the queue when it comes to apportioning blame, there’s plenty around to be shared. Considering the UK’s competition regulator recommended a major shake-up of accountancy earlier this year – and the scrutiny faced by the Big Four firms and their auditors – an investigation into EY’s performance with respect to Thomas Cook was inevitable. The Financial Reporting Council (FRC) has duly announced one.

In this year’s interim results, the firm warned there was “significant doubt” about whether the holiday outfit could continue as a going concern. But the investigation isn’t going to look at Thomas Cook’s final months. Rather it will focus on the work done for the year ending 30 September 2018. The annual report covering that period contains notes about challenges being raised by Thomas Cook’s auditors and adjustments being required to its reporting as a result of them.

But the auditors signed the business off as a “going concern” having “assessed that the severe but plausible scenarios identified by management are reasonable”. With the firm now having ceased trading, it seems those scenarios weren’t severe enough. EY issued only a bland statement in response to the FRC’s announcement, saying that it would be fully cooperating with the investigation while opining that any further comment would be inappropriate at this time.

There was none of the “we have confidence in our audit” as has sometimes happened when members of the Big Four have been challenged over their work. Perhaps that’s wise. It wouldn’t look good to be getting punchy amidst the carnage. EY’s bosses must know that the firm is in a tricky spot. The FRC has been repeatedly, and justifiably, criticised for being too soft. Its investigators have a duty to consider the evidence and nothing more. External factors aren’t supposed to matter.

But then there’s the realpolitik. They will be under huge pressure to pursue this particular investigation aggressively. It bears repeating at this stage that EY is not responsible for the collapse of Thomas Cook. At issue is its oversight and whether it provided sufficient challenge to the company’s bosses. This is an important point, but not one many people are going to want to pay much attention to.

Working against the firm and its peers in similar situations is a long history of corporate collapses in which auditors have sometimes looked as if they were barely paying attention to what was going on under their noses. This is going to be one of many investigations. They can be counted upon to leave a trail of devastation in their wake. Some big reputations are going to go down, if they haven’t already done so.

The thing is, is anyone going to suffer to the same extent as the low-waged staff turning up to help when they’d almost certainly be better off looking to their futures? Probably not. Their dedication and self sacrifice will only serve to highlight the failures of their bosses and perhaps their advisers. The FRC will have the final word on the latter.