EY slapped with £6.5m fine over Thomas Cook audits
The watchdog has fined Big Four giant EY £6.5m for its audit of the collapsed airline Thomas Cook.
The Financial Reporting Council (FRC) imposed sanctions on EY and its audit engagement partner, Richard Wilson, over audits for the airline for the financial years ended 30 September 2017 and 30 September 2018.
Thomas Cook collapsed in 2019 after failing to secure a rescue deal.
The watchdog said the airline’s goodwill balance was significant, comprising £2.6bn across the whole group, approximately 40 per cent of total assets.
Following an investigation, it was found that for both audit years, EY and Wilson failed to “approach this audit area with sufficient professional scepticism to properly corroborate management’s assumptions and estimates supporting the goodwill impairment model.”
The regulator stated that “the failings” for this “were particularly serious” for 2018 “given Thomas Cook’s deteriorating trading performance, which heightened the risk that the goodwill balance could be impaired.”
For going concern, where breaches occurred only in the 2018 audit, EY and Wilson were found to have “failed to adequately challenge management with regard to sensitivity testing, liquidity, and financial covenant headroom.”
The regulator noted that the firm and the partner were not in a position to properly conclude whether a material uncertainty existed that might cast significant doubt upon Thomas Cook’s ability to continue as a going concern.
“This was a key responsibility that EY and Wilson did not fulfil adequately under the relevant auditing standards”.
Due to EY and Wilson’s breaches, both audits “failed in their principal objective.”
However, it was not suggested that the breaches were intentional, dishonest, deliberate or reckless.
EY and Wilson cooperated with the executive counsel’s investigation and admitted serious standards breaches.
The FRC hit EY with a £6.5m financial sanction but applied a 25 per cent admission discount, taking the fine to over £4.8m. Meanwhile, Wilson received a £140,000 fine, also discounted by 25 per cent to £105,000.
EY also paid the costs of the investigation.
Commenting on the results, Claudia Mortimore, deputy executive counsel, said: “Thomas Cook’s Goodwill balance and going concern status were fundamental to its financial position and performance.”
“EY and 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,” she added.
Last May, EY was one of the three firms fined by FRC for its role in the auditing of collapsed London Capital & Finance (LCF).