Thomas Cook management under fire for litany of accounting failures
The directors of Thomas Cook have been savaged for accounting practices that led to the world's oldest travel company entering liquidation on Monday, as experts believe it is becoming too easy for firms to hide bad news in opaque reports.
Eleventh-hour talks to secure a further £200m in funding – after a proposed injection of £900m – ended without an agreement and Thomas Cook went under at 2am on Monday morning.
AlixPartners UK LLP and KPMG will be appointed as special managers for the various parts of the business.
As it ceased to trade with immediate effect, the 178-year-old company left around 600,000 people stranded, including around 150,000 British citizens currently being repatriated.
The travel firm employs more than 22,000 staff around the world. Its 9,000 UK-based staff now face having to apply to the Insolvency Service for payment of wages after being informed they would not be paid their September salaries.
A litany of accounting failures
“It is obvious there has been no financial control in that company for some time,” said Adnan Sajid, corporate finance partner at UHY Hacker Young in Manchester. “Looking at the books, you can see a litany of accounting failures.”
He told AccountingWEB the firm did not have enough structural capital, would struggle to survive even minimal trading difficulties, and there had been no challenge of this at senior level.
“It’s a sad day for a British institution, that many people trust, but I don’t think it was unpredictable,” said Sajid. “This is a two-to-three-year problem, and they should have come to the experts a long time ago to help with things like migrating the business away from retail, better managing the balance sheet.”
Auditors Ernst & Young took over the reins from PricewaterhouseCoopers in 2018, and immediately warned it had “strongly recommended” to management that they strengthen the process over the “identification and approval” of exceptional items listed in its annual report.
EY’s late flagging of Thomas Cook’s tendency to classify costs as exceptional wherever could was ultimately not enough to avert the company’s doomed course.
Both EY and PwC declined to offer comment.
The Financial Reporting Council, the UK’s accounting regulator, told AccountingWEB it was monitoring the situation, and on Tuesday released a statement indicating imminent action.
“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,” the FRC said.
“I would be angry if I was a shareholder, angry as an employee, and angry as a regulator,” said Sajid. “The regulators need more teeth at government level, and to be able to force firms such as travel companies to hold more capital in relation to sales.”
Burying bad news
The debacle ultimately highlights a much deeper problem with financial reporting, said Ian Smith, general manager and finance director at document management and purchase process provider Invu.
“This collapse shows there is a big problem with financial reporting in the UK and that it is too easy for companies to bury bad news in their reporting,” said Smith.
He said Thomas Cook’s Group accounts for the year-end September 30 contains a 194-page set of accounts, which presents positive earnings several pages before the losses are made clear.
“Only on page 118 do you see the profit and loss, and not until page 122 do you see the weak balance sheet,” he said. “The question you need to ask is, how many shareholders just judged them on earnings before interest and tax? Even if you argue that the buyer is ultimately responsible for properly checking the quality of what they’ve bought this still shows a big shortfall in accounts reporting. Surely, in this case, less is more?”
Air of desperation
Thomas Cook ran hotels, resorts and airlines for 19 million travellers a year in 16 countries, generating revenue in 2018 of £9.6bn, with £1.7bn of debt.
It had been meeting with potential creditors for several months, but the final request for an extra £200m sank the deal, as Royal Bank of Scotland baulked at the firm’s accounts.
Fosun, whose Chinese parent owns all-inclusive holiday firm Club Med, had initially proposed to pump £450m of fresh capital into Thomas Cook in return for least 75% of the tour operator business and 25% of its airline.
The travel company’s lending banks and bondholders were also to supply £450m and convert the existing debt to equity, giving them in total about 75% of the airline and up to 25% of the tour operator business.
The talks failed, however, leading to the implosion.
“There was an air of desperation around the negotiations,” said Sajid. “Directors of a PLC of this size should really be looking at themselves: have they really done the right thing for this company?” He said the negotiations amounted to “too little, way too late”.
“A few hundred million thrown in might have got them through the summer, but they would be looking at a January liquidation anyway,” said Sajid. “There was no point throwing £250m of taxpayers’ money into a black hole. A lot of people, not least senior management, have a lot of questions to answer.”
Another high street casualty
Experts believe the rarity of such a travel operator going under is an indicator of further problems for Britain’s high street names, and may even point towards a recession.
“The past few years alone has seen established names such as Maplin, House of Fraser, and now Thomas Cook run into trouble, and 2020 could also be a tough year for businesses that aren’t able to react quickly to changes in market conditions,” said Cato Syverson, chief executive of credit checkers Creditsafe.
Although the firm claimed Brexit was having an impact, health secretary Matt Hancock denied the firm's worries were related to Britain’s departure from the EU and uncertain trading conditions.
Hancock said long-term problems with the business and the consumer move to online bookings, were part of many “systemic” issues it faced.
“Are other companies to follow? One hopes not,” said travel and tourism expert Dr Neil Robinson, of the University of Salford Business School. “Their price, promotion and how people actually booked Thomas Cook holidays did not keep pace with changing technology and demand, for example, they still had a lot of high street outlets, which incur rental and other costs.”