Auditors repeatedly asked Thomas Cook management for reassurances the business was not at risk of going bust for a decade before its collapse, MPs heard on Tuesday.
Hemione Hudson, head of audit at PwC, told the Business, Energy, and Industrial Strategy (BEIS) select committee there was “considerable debate and challenge of the board” of Thomas Cook while PwC was auditor between 2007 and 2016.
“Quite often going concern was raised,” Hudson told MPs.
‘Going concern’ is an accounting label given to a business that can continue to pay its bills for the next year. If a business is not a ‘going concern’ it will most likely have to raise money or risks going bust. Auditors have a duty to warn investors if they think a business is at risk of losing its ‘going concern’ status.
“The company needs to form a view with regard to whether or not they believe they’ll be able to meet their liabilities as they fall due from the 12 months from the date of the signing of the accounts,” Paul Cragg, an audit partner at PwC, told MPs. “The auditor, and I as audit partner, need to be comfortable… that the assessment made by management is appropriate.”
Hudson said PwC had a “significant issue” with Thomas Cook’s status as a ‘going concern’ in 2011, which “delayed the signing of the accounts.”
“Further evidence was needed to support the financial position of the company,” she told MPs.
Cragg said: “The trading performance of the business had declined, which had caused impairment of the goodwill in that year.”
Thomas Cook raised an additional £200m from banks after PwC challenged the ‘going concern’ basis in 2011, Hudson said, after which PwC agreed to sign off on the accounts.
Richard Wilson, an audit partner at EY, said his firm also had concerns about the viability of the business after EY took over as Thomas Cook’s auditor in 2017.
“We spent a lot of time understanding how the directors were reaching their opinion that the business was a going concern,” Wilson told MPs.
Both EY and PwC’s partners said they also challenged management on issues such as the disclosure of exceptional items and goodwill, an accounting term given to the ‘intangible’ value of things like brand and market standing.
The comments came on the second day of the BEIS Select Committee’s inquiry into the collapse of Thomas Cook. The 178-year-old travel firm went into liquidation at the end of September after failing to agree an 11th-hour rescue deal.
Auditors had been criticised by MPs and in the press for failing to challenge Thomas Cook’s management. Issues include the high goodwill Thomas Cook awarded itself, the £1.8bn in “exceptional items” that the company booked over eight years, and potential conflicts of interest for auditors conducting consultancy work elsewhere in the business.
MPs heard that PwC earned £21m in consultancy fees from Thomas Cook during the years it was auditing the business. Hudson said auditing was only 20% of PwC’s overall business but said: “At the time, it was appropriate.” She insisted that the audit business was independent of the consultancy business.
“I put it to you Ms. Hemione Hudson that the audit partners want to ensure the success of the consultancy business because their profits and their remuneration depend on the profits and success of the whole business,” BEIS Select Committee chair Rachel Reeves said.
“Partners do benefit from the profits of the whole of the firm but the objectives that each partner is set and against which they are assessed are specific to their own roles,” Hudson said.