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Thomas Cook collapse: accounting watchdog weighs up investigation

Financial Reporting Council has power to impose penalties in event of irregularities

Britain’s accountancy regulator is considering urgently whether to investigate the collapse of Thomas Cook and impose punishments if deemed necessary.

The Financial Reporting Council (FRC) has the authority to investigate and sanction auditors of companies and individuals who are members of the accounting profession. The regulator announced it was considering an investigation after the government fast-tracked the Insolvency Service’s investigation into the collapse of the 178-year-old travel firm.

Thomas Cook’s auditor is EY, which took over from PwC in 2017. Both are among the UK’s so-called big four accountancy firms.

The tour operator has had a series of finance chiefs over the past two years as its problems deepened. It has also faced questions about its accounting methods.

Sten Daugaard took over as chief financial officer in December 2018 from Bill Scott, who quit after less than a year in the job after Thomas Cook issued a profit warning. Scott replaced Michael Healy in January 2018 when Healy stepped down after five years in the job.

The FRC said: “In light of recent developments at Thomas Cook we are considering whether there is any case for investigation and enforcement action as a matter of urgency and in cooperation with the Insolvency Service.”

Daugaard changed the way Thomas Cook reported its accounts to include items that had been treated as exceptional costs for several years, including when paying directors and meeting banking covenants.

EY disagreed with the company’s treatment of these items. In first-half results reported last November Thomas Cook recognised £28m of charges comprising a £14m write-off of payments from hotels and £14m of flight disruption and business transformation costs.

Daugaard told analysts in November that when he had looked at the books “one thing that I could immediately observe was the size of the exceptionals”.

In May, the company reported a £1.5bn first-half loss and published its third profit warning in less than a year. It had £1.2bn of debt and was forced to write down the value of its MyTravel UK package holiday business by £1.1bn. In that set of accounts EY warned there was “significant doubt” whether Thomas Cook could continue as a going concern.

Thomas Cook collapsed in the early hours of Monday after failing to secure a funding lifeline, placing 9,000 UK jobs at risk and leaving 150,000 British holidaymakers stranded abroad. The Civil Aviation Authority has launched a pop-up airline of 40 chartered jets to bring the holidaymakers home.

The FRC’s enforcement division conducts investigations and can bring prosecutions against auditors, actuaries and accountants “where there appears to be misconduct or a breach of the relevant professional standards”.

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