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Watchdog launches investigation into Thomas Cook’s auditors

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The UK’s accounting watchdog has launched an investigation into Thomas Cook’s auditors following the collapse of the world’s oldest travel firm last week.

The Financial Reporting Council announced this morning that it would be reviewing the actions of Ernst and Young (EY), one of Britain’s big four accountancy firms.

EY took over from fellow auditing giant PwC in 2017, with the investigation set to focus on Thomas Cook’s financial statements for the year to September 30, 2018.

Thomas Cook reported pre-tax profits of £250million in its 2018 statement, a figure reached after it wrote off £150million in costs as ‘exceptional’ and ‘one-off’.

EY challenged this decision and ‘strongly urged’ Thomas Cook to be careful over what costs were declared exceptional in the future.

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Thomas Cook staff are pictured at their union office in Glasgow following the firm’s collapse last week

EY took over from fellow auditing giant PwC in 2017, with the investigation set to focus on Thomas Cook's financial statements for the year to September 30, 2018

EY took over from fellow auditing giant PwC in 2017, with the investigation set to focus on Thomas Cook’s financial statements for the year to September 30, 2018

The £250million figure was also used to calculate bonuses for bosses and comes as executives have been slammed for pocketing £47million over the past decade.

EY signed off on the figures but recommended  Thomas Cook ‘strengthen the process of identifying and approving’ the ‘one-off’ costs going forward. 

Today, the watchdog it would ‘keep under close review both the scope of this investigation and the question of whether to open any other investigation in relation to Thomas Cook, liaising with other relevant regulators to the fullest extent permissible.’

The investigation is likely to take up to two years, with EY facing a tribunal should any wrongdoing be discovered by the watchdog, with the firm facing possible sanctions.

It comes as more questions have been raised around pay and bonuses as figures revealed chief executive Peter Fankhauser landed more than £8million in pay and bonuses in four years.

Mr Fankhauser, who took on the role in late 2014, pocketed £8.3million in pay, benefits and bonuses between 2014 and 2018 – including a mammoth £2.9million share award in 2015.

Thomas Cook passengers queue in front of check-in desks on the second day of repatriations at Reus airport last week

Thomas Cook passengers queue in front of check-in desks on the second day of repatriations at Reus airport last week

Thomas Cook was warned by auditor Ernst & Young about its accounting methods of writing off large sums as 'exceptional costs' to make underlying profits appear larger. In 2018 the firm wrote off £150million as 'one-off' costs to help boost the business online, reporting its underlying profits as £250million, a figure then used to calculate bonuses for bosses. This graph shows both the underlying profits and operating profits for Thomas Cook since 2013

Thomas Cook was warned by auditor Ernst & Young about its accounting methods of writing off large sums as ‘exceptional costs’ to make underlying profits appear larger. In 2018 the firm wrote off £150million as ‘one-off’ costs to help boost the business online, reporting its underlying profits as £250million, a figure then used to calculate bonuses for bosses. This graph shows both the underlying profits and operating profits for Thomas Cook since 2013

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Prime Minister Boris Johnson waded into the debate on Monday over how Thomas Cook failed, questioning how directors could pick up such large sums while their businesses go ‘down the tubes’. 

Thomas Cook’s annual reports show that top executives at Thomas Cook shared more than £16million between them in pay and perks over the past five years while the group’s profits have been in sharp decline.

It was weighed down by a £1.7billion debt mountain after a number of ill-fated deals which meant it was left struggling to sell enough holidays to meet the interest payments.

Despite increasingly under-pressure profits, Thomas Cook paid its chief executives – Mr Fankhauser and predecessor Harriet Green – £9.4million over the past five years.

Its chief financial officers – Bill Scott and predecessor Michael Healy – bagged more than £7 million between them.

Peter Fankhauser, the Swiss chief executive taken on in the immediate years before its collapse yesterday, has taken home £8.4millon since 2014

Peter Fankhauser, the Swiss chief executive taken on in the immediate years before its collapse yesterday, has taken home £8.4millon since 2014

The most controversial payments were received by Manny Fontenla-Novoa. The Spanish-British businessman’s huge pay packages totalling £16.8million led the company to introduce internal ‘clawback’ measures in 2012

The most controversial payments were received by Manny Fontenla-Novoa. The Spanish-British businessman’s huge pay packages totalling £16.8million led the company to introduce internal ‘clawback’ measures in 2012

Mr Healy was awarded a £2.5million share bonus in 2015 as part of a lucrative long-term performance share plan that paid out handsomely that year.

Neither Mr Fankhauser nor Mr Scott have received awards under the long-term performance share plan in recent years and neither received an annual bonus in 2017-18.

While anger is mounting over the level of pay at the group, investors have voted in support of executive remuneration in annual shareholder meetings.

However, the conduct of directors will come under scrutiny in the Insolvency Service probe, which Business Secretary Andrea Leadsom asked to be fast-tracked.

She has also written to the Insolvency Service asking for it to consider director conduct ‘immediately prior to and at insolvency’.

Harriet Green, who ran the firm between 2012 and 2014 and faced controversy over an £80,000 yearly hotel and travel bill, took home almost £11million in total pay

Michael Healey was chief financial officer from 2012 to 2017.

Harriet Green, left, who ran the firm between 2012 and 2014 and faced controversy over an £80,000 yearly hotel and travel bill, took home almost £11million in total pay. Michael Healey, right, was chief financial officer from 2012 to 2017. Over this period he was paid £2.8million in salary and picked up performance bonuses of £4.6milion

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