MPs have accused two of the UK’s Big Four accounting groups of being “complicit” in the failure of Thomas Cook, slamming one, the travel group’s former auditor PwC, over an alleged conflict of interest in its pay advice to executives.
EY, which audited Thomas Cook from 2017 until it went bust last month, and PwC, which checked its books between 2007 and 2016, were forced to defend their audits in a Commons business select committee hearing on Tuesday.
MPs criticised the auditors for repeatedly signing off the company’s accounts with a clean bill of health despite admitting they had raised significant risks to its financial stability with its board and had concerns over some of its accounting practices.
Rachel Reeves, who chairs the committee, said PwC should have more aggressively challenged management on its allocation of large exceptional items. She also said EY had displayed “no learning” on the appropriate accounting treatment of large amounts of goodwill from the failure of Thomas Cook.
Ms Reeves said the failure of the travel group showed legislation was needed to force a separation of the Big Four accountants, which also include Deloitte and KPMG.
“How many more company failures, how many more egregious examples of accounting do we need before your industry opens its eyes and recognises you’re complicit in this and that you need to reform?” Ms Reeves said.
PwC was also challenged by MPs over a conflict of interest for advising bosses on their pay and bonuses while it was the company’s auditor.
Hemione Hudson, head of audit at PwC, said the firm would not take on the controversial dual role today “even if it were permitted by the rules” because of the “current climate”, referring to the unprecedented scrutiny of audit firms in the wake of a string of corporate failures.
PwC earned £4m providing remuneration advice to Thomas Cook between 2007 and 2011. Accountants have been banned from providing such advice to the companies they audit since 2016. In total, PwC was paid £21m by Thomas Cook for non-audit services during its tenure as auditor.
“At the time it was appropriate, I don’t believe it impacted our audit quality, but I do think in the current climate we wouldn’t do it,” Ms Hudson said.
However, her defence was criticised by Ms Reeves, who said it implied “that PwC only does the right thing because it is expected of it, rather than because it recognises that the model that existed previously gave rise to conflicts of interest, which is why the law was changed”.
Thomas Cook’s collapse has drawn attention to the way it reported historic one-off charges, as well as its treatment of goodwill and its heavy debts. Its accounts have been scrutinised for stripping out “exceptional items” totalling £1.8bn over eight years, which flattered its headline financial results.
Millions of pounds in bonuses paid to executives are also under the spotlight, as they were calculated in part from the underlying operating profit figure once exceptional items were removed.
Thomas Cook has also been questioned for taking more than a decade to write down £1.1bn of goodwill from the acquisition of MyTravel in 2007.
EY is being investigated by the Financial Reporting Council over its 2018 audit of Thomas Cook. The regulator said it would “keep under close review” the scope of its investigation and the question of whether to open any further probes.