The Thomas Cook collapse. What is Internal Audit’s involvement.

On Monday 23 September 2019, news spread that the 178 year old business had collapsed. This has been a long time coming for the company. As mentioned by Dominic O’Connell, BBC Business Correspondent, the business was buried in an approximate £2bn debt (including the pension). Capital raising occurred in 2013, however by 2017, the business was back in the red to the sum of £1.6bn. Despite the inability to repay debt, decreasing profit and goodwill making up almost 40% of total assets, the Board still made an assessment for FY18 that the accounts can be prepared on a going concern basis. Whilst I am not here to challenge management’s going concern assessment, or the external auditor for accepting it, I will question the extent to which Internal Audit should have been involved in identifying, and possibly, preventing, the collapse of such a legacy business.

The UK business scene has been in a bit of trouble for a number of years now. Debenhams, HMV, Homebase, Patisserie Valerie, House of Fraser, Toys ‘R’ Us, Maplin and Carillion, are just some of the big name businesses to either enter receivership or simply just collapse, over the past couple of years. It really isn’t the best look for businesses in the UK, particularly as many of these are long established companies. Whilst each of these businesses may have failed due to a variety of reasons, its often the external auditor which has taken the brunt of many of the falls. Take KPMG for instance, who have essentially been made the face of the Carillion collapse and hauled over the coals through parliamentary inquiries and FRC investigations. Further, Grant Thornton was hammered in the media as they mentioned that they are not looking for fraud at the exact same parliamentary inquiry as they were questioned over their role at Patisserie Valerie.

I have made my position quiet clear through various other blog posts. The standard of external audit can be significantly improved in the UK. I have even mentioned some things which could be implemented to address this. But Internal Auditors also need to improve.

As pointed out during the parliamentary inquiry into the Carillion collapse, Deloitte (the company’s internal auditor), was called out for failing to look at the bigger picture. Going by this logic, and what is presented in the 2018 Thomas Cook Annual Report, it would be almost fair for the Internal Audit team at Thomas Cook to face the same music as Deloitte.

The International Standards for the Professional Practice of Internal Auditing 2010 requires that the chief audit executive must establish a risk-based plan to determine the priorities of the internal audit activity, consistent with the organization’s goals.

A quick read over the annual report, and it becomes very apparent that there are a number of risks facing the business. A few quickly identifiable risks include:

• Cash Management (including Treasury and debt) – substantial amounts of debt and low cash reserves which do not cover the current trade payables balance.
• Brexit – Being cited as one of the causes for the lower customer numbers.
• Forecasting – Evident by the large misses in forecasted holiday numbers and actual numbers.
• Climate change – Hotter than normal weather also being identified as a contributing factor to the lower customer numbers.
• Expenses and Trade Payable – Expenses and costs increasing at a greater rate than revenue.

Above all, the strategy is a glaring issue. In big red writing on page 6 of the annual report, the company loudly states ‘Our Strategy is driving profitable growth’. A growth strategy for a business in such a negative financial situation is enough to make you worried, yet, if I link this back to our Internal Audit Standards, I question how aligned the audit plan was to the company’s strategy and how well the audit plan addressed the risks facing the business.

Whilst I appreciate I have no insight into what the Thomas Cook Audit Plan was, or how well aligned it was to the risks and strategy of the business, I wonder to what extent Internal Audit should be involved in not only calling out the company’s financial situation, but also calling out the company’s preparedness should the worst happen. In this instance, the collapse of the airline.

It makes me angry that the airline kept operating right up until the very last minute. Now, an estimated 180,000 Britons are left abroad, with the expected cost of the rescue mission likely to cost around £600m; the full cost likely to be funded by the taxpayer, as reported by the Express. Whilst every business certainly aims to grow and continue, it would almost appear ignorant of management of ignore the true financial situation and proceed with their profitable growth strategy.

Is it Internal Audit’s responsibility to call this ignorance out through their audits? Should Internal Audit:

• Be highlighting the seriousness of the financial situation?
• Identify or note opportunities for cost savings?
• Identify where the business is not prepared for a collapse?
• Highlight where the strategy is failing?

What is the extent that Internal Audit should be involved in preventing, or preparing, for a collapse?

As mentioned earlier, the situation at Thomas Cook has been in the making for years, and clearly there was minimal improvement in the company’s operations otherwise the business may have lived to see another day.

Whilst it is easy to comment from the outside, I could imagine that the last few years in the business would have been challenging, but as the number of businesses failing in the UK continue to appear in the news, we, as Internal Auditors, really need to start questioning the extent to which we call out the companies failures, either via its strategy or mismanagement, and the extent to which we should be responsible for identifying opportunities which may help the business.

I am keen for your thoughts. It’s not a situation an auditor would ever want to find themselves in, but something we could all take learnings from.