The UK Financial Conduct Authority (FRC) has imposed significant sanctions on the auditing firm Ernst & Young (EY) and its lead auditor, Richard Wilson, for serious failures in its audit of the travel group Thomas Cook in 2017 and 2018. EY must pay a fine of nearly £4,9 million and implement internal measures to improve quality assurance.
The FRC accuses EY of inadequately auditing the accounting of Thomas Cook's goodwill, amounting to approximately £2,6 billion, which corresponded to approximately 40 percent of its total assets. The regulator criticized the auditors for failing to sufficiently critically examine the management assumptions and models underlying this valuation. Goodwill includes intangible assets such as brand recognition and customer loyalty, the valuation of which is complex.
According to the FRC, the failures in 2018, when Thomas Cook's financial situation had already deteriorated significantly, were particularly serious. EY failed to obtain sufficient evidence for its valuations and failed to conduct due diligence on management's forecasts regarding the company's continued existence. The financial regulator argues that the auditors thus failed in their core task of ensuring that material uncertainties regarding the company's ability to continue as a going concern were adequately addressed.
In addition to the fine imposed on EY, the lead auditor, Richard Wilson, was also personally sanctioned. He must pay a fine of £105.000 and also received a public reprimand. The FRC emphasized that no intentional or fraudulent conduct was proven on the part of those involved, but that the failures were serious and compromised the reliability of Thomas Cook's financial reporting. Thomas Cook filed for insolvency in September 2019, which had far-reaching consequences for the travel industry.
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