EY Slapped with ₹52 Crore Penalty Over Thomas Cook Audit

Global auditing giant Ernst & Young (EY) has been penalized ₹51 crore by the UK’s Financial Reporting Council (FRC) for significant breaches in auditing standards during its review of Thomas Cook’s financial statements. The travel company's collapse in 2019, burdened by ₹1.78 lakh crore in debt, triggered the FRC's investigation.

The FRC's probe revealed substantial failings by EY and its audit partner, Richard Wilson, in their assessments of Thomas Cook’s 2017 and 2018 financial reports. Auditors were found to have lacked sufficient professional skepticism and failed to adequately challenge the company’s management, compromising the audit's integrity as the business faced imminent failure.

Thomas Cook's demise, marking the end of the 178-year-old company, resulted in significant job losses and a massive repatriation effort for stranded travelers. Critical audit lapses identified by the FRC included EY's inadequate assessment of Thomas Cook’s "going concern" status and insufficient scrutiny of the company’s goodwill valuation, which constituted a substantial portion of its assets.

Furthermore, EY failed to address a potential "familiarity threat" arising from a restructuring partner's close relationship with Thomas Cook’s CFO, raising concerns about audit independence. Despite the FRC acknowledging that the breaches were not intentional, they were deemed severe.

The initial fine of ₹68.25 crore was reduced to ₹51 crore after EY admitted its shortcomings and cooperated with the investigation. Similarly, Wilson’s personal fine was lowered. EY also agreed to cover the FRC’s investigation costs.

EY expressed regret for the audit failures, stating, "We deeply regret that the 2017 and 2018 audits of Thomas Cook fell below the standards we expect." The firm outlined its commitment to learning from these errors and has implemented measures to strengthen its audit procedures, training, and methodologies, including investments in new technology and fostering a culture of professional skepticism.