On Tuesday, bosses at PwC will be probed by MPs who will investigate the potential conflict of interest the firm faced, when it advised Thomas Cook executives on their pay and bonuses while also acting as the travel firm’s auditor.
A parliamentary inquiry into the collapse of Thomas Cook is ongoing, focusing heavily on executive pay, the role of its auditors and accounting practices, with the inquiry’s terms of reference specifically citing the “audits conducted by PwC and EY”.
PwC audited the company between 2008 and 2016, before EY took over in 2017. PwC also provided “recruitment and remuneration” advice to Thomas Cook between 2007 and 2012.
At a hearing on 15 October, the collapsed firm’s bosses found themselves on the end of strong criticism from MPs for the millions of pounds of bonuses paid to directors in the years leading to it going bust.
Controversial accounting policy
The travel company used a controversial accounting policy that saw it cut out “exceptional items” totalling £1.8bn across eight years, flattering the company’s top-line financial results. These results were then used to calculate bonuses for Thomas Cook executives which did not reflect the true nature of the company’s finances.
PwC signed off this policy, but concerns were raised over the “identification and approval of separately disclosed items” by replacement EY when it took over in 2017. Around £28m of these costs were reclassified that year which led to a reduction in underlying earnings and triggered a profit warning.
Since 2016, UK accountants have been banned from providing advice on renumeration of directors at companies they audit.
PwC’s accounts show that it earned £4m from “recruitment and remuneration” advice to Thomas Cook between 2007 and 2012. PwC has said that they ceased to advise the travel company’s remuneration committee in 2009, and that a £1.7m free for remuneration services in 2011 had been for advice on the closure of a pension scheme.
“The non-audit work as advisers to the remuneration committee was approved in advance by the audit committee, complied with all relevant regulatory standards and was disclosed in the company’s annual reports,” PwC said.
Speaking to the Financial Times, the head of audit at a rival firm to PwC said: “Regardless of the rules, I’d have felt really uncomfortable offering remuneration advice to an audit client. I’ve never done it and I wouldn’t ever do it.
“PwC was advising on a remuneration scheme that protected management from exceptional items, while at the same time it was auditing the allocation of exceptional items.”
‘Aggressive’ accounting methods
In a letter written to MPs, the Institute of Directors highlighted “the allegedly aggressive accounting methods that were adopted at Thomas Cook,” while both the IoD and MPs have voiced concerns that the profit numbers from which director’s pay and bonuses were calculated from excluded the one-off negative items.
“Were accounting judgements therefore being affected by executive pay considerations?” asked the IoD in the letter.
In 2009, Thomas Cook’s annual report stated that the remuneration committee “was mindful of the dual role” being performed by PwC. It said: “PwC held this dual role because prior to the merger they had acted as remuneration adviser to MyTravel Group plc and external auditor to Thomas Cook.”
At the time, anger emerged amongst many investors as financial awards were being handed to the company’s bosses. A vote over boardroom pay in 2008 received only 4% support from independent shareholders after a one-time £5m bonus was given to then-CEO Manny Fontenla-Novoa.
PwC and EY executive are due to be grilled by MPs on Tuesday, 22 October. Meanwhile, the FRC, Britain’s accounting watchdog, has already begun an investigation into EY’s audit of Thomas Cook’s accounts.