Sanctions against Ernst & Young LLP and Richard Wilson
News types: Investigations
Published: 10 April 2025
This Press Notice concerns the outcome of an investigation into the relevant Statutory Auditor(s) and/or Statutory Audit Firm(s)*. It would not be fair to treat any part of this announcement as constituting or evidencing an investigation into, or any findings in respect of the conduct of, any other persons or entities.
The Executive Counsel of the Financial Reporting Council (FRC) has issued a Final Settlement Decision Notice under the Audit Enforcement Procedure and imposed sanctions on Ernst & Young LLP (EY) and Richard Wilson (Mr Wilson), audit engagement partner, in relation to the audits of Thomas Cook Group plc (the Company/Thomas Cook) for the financial years ended 30 September 2017 and 30 September 2018.
EY and Mr Wilson have each admitted serious breaches of standards relating to the work performed on two important areas of the financial statements: Goodwill impairment and Going Concern, as well as failing to adequately consider a risk to EY’s independence during the 2018 audit.
The following sanctions have been imposed:
EY:
- A financial sanction of £6,500,000, discounted by 25% for admissions and early disposal to £4,875,000;
- A published statement in the form of a severe reprimand;
- A declaration that the 2017 and 2018 audit reports did not satisfy the Relevant Requirements; and
- An order requiring EY to take specified action designed to prevent the recurrence of the contravention, namely to: (1) conduct a bespoke review and produce a report in relation to a selection of audits determined by the FRC, to evaluate the audit work performed for Goodwill Impairment and Going Concern and (2) assess the efficacy of remedial actions implemented by EY in preventing the recurrence of breaches and report to the FRC on any deficiencies identified and any further remedial steps to be implemented. EY are separately ordered to review its current training programmes designed for responding to risks to independence and propose any changes necessary to guard against the breaches.
Richard Wilson:
- A financial sanction of £140,000, discounted by 25% for admissions and early disposal to £105,000;
- A published statement in the form of a severe reprimand; and
- A declaration that the 2017 and 2018 audit reports did not satisfy the Relevant Requirements.
EY has also paid the costs of Executive Counsel’s investigation.
The sanctions imposed take account of a number of factors, including the seriousness of the breaches and the financial strength of the auditor, as indicated by the turnover of the firm. It is not suggested that the breaches were intentional, dishonest, deliberate or reckless. Further, both EY and Mr Wilson cooperated with Executive Counsel’s investigation.
Thomas Cook’s Goodwill balance was significant as it comprised £2.6 billion across the whole group (approximately 40% of total assets). In both audit years, EY and Mr Wilson failed to approach this audit area with sufficient professional scepticism in order to properly corroborate management’s assumptions and estimates supporting the Goodwill impairment model. The failings for the audit of Goodwill in 2018 were particularly serious given Thomas Cook’s deteriorating trading performance, which heightened the risk that the Goodwill balance could be impaired.
In relation to Going Concern, where there are breaches in the 2018 audit only, EY and Mr Wilson failed to adequately challenge management with regards to sensitivity testing, liquidity and financial covenant headroom, and as such were not in a position to properly conclude on whether a material uncertainty existed that might cast significant doubt upon Thomas Cook’s ability to continue as a Going Concern. This was a key responsibility that EY and Mr Wilson did not fulfil adequately under the relevant auditing standards and was an important matter to users of the financial statements.
The breaches of auditing standards accepted by EY and Mr Wilson relating to the Goodwill impairment and Going Concern work included areas such as risk assessment, the performance of procedures to obtain and evaluate audit evidence, communication with those charged with governance as well as disclosures in the accounts. The breaches include auditing standards dealing with the exercise of professional scepticism, partner supervision and audit documentation which are central to the performance of an audit.
Ultimately, as a result of the breaches by EY and Mr Wilson, both audits failed in their principal objective: that of obtaining reasonable assurance that the financial statements were free from material misstatement. However, no assertions are made that any balances or amounts in either the 2017 or 2018 financial statements were in fact misstated, nor that the adoption of the Going Concern basis of accounting was not appropriate.
Claudia Mortimore, Deputy Executive Counsel, said:
“Thomas Cook’s Goodwill Balance and Going Concern status were fundamental to its financial position and performance. EY and Mr Wilson were subject to a public interest duty to comply with auditing standards and robustly challenge the forecasts and assumptions that underpinned Thomas Cook’s valuation of Goodwill. Similarly, in relation to Going Concern they should have exercised sufficient professional scepticism and obtained sufficient corroborative evidence to satisfy themselves that Thomas Cook’s low liquidity headroom and financial covenant risks had been reduced to an appropriate level.
EY and Mr Wilson’s failure to challenge robustly and to apply sufficient professional scepticism in these crucial areas led to significant breaches of auditing standards in both audit years. The failings in 2018 are particularly serious given Thomas Cook’s financial position and the heightened risks surrounding the audit work. EY’s remedial measures together with the programme of non-financial sanctions are designed to prevent such failures being repeated.”
*Defined terms in this press notice refer to terms defined in the FRC’s Audit Enforcement Procedure.