Oral evidence: Thomas Cook, HC 39
Oral evidence, 22 October 2019.
Witnesses
Christabel Cowling, Paul Cragg, Hemione Hudson and Richard Wilson.
Chair
Thank you very much to the four of you for coming to give evidence to our Select Committee this morning in our inquiry into the collapse of Thomas Cook. May I ask you—perhaps PwC first and then EY—if you can confirm that, in your opinion, in each of the years that you audited Thomas Cook’s accounts those accounts provided a true and fair view? Perhaps Hemione can go first, or Paul Cragg?
Hemione Hudson
I am happy to start. Yes, I can confirm that we have had time to reflect and we stand behind our opinion in each of the years that we signed, up to and including 2016.
Chair
In what years did you audit Thomas Cook, Hemione?
Hemione Hudson
The firm audited Thomas Cook from 2007 to 2016; I personally was not involved.
Chair
In reaching those conclusions, did PwC have any concerns about those accounts?
Hemione Hudson
During the process of each of the audits, there was considerable debate and challenge of the board. A number of issues were raised, and significant risks were drawn to the attention of the audit committee and the board in every one of those years, yes.
Chair
What were the serious concerns?
Hemione Hudson
The significant issues varied, depending on the year, but quite often “a going concern” was raised. Goodwill was—
Chair
In what years was “a going concern” raised?
Hemione Hudson
“A going concern” was raised in a number of years. It was certainly raised in 2011, for example. At that time, it was a significant issue, which in fact delayed the signing of the accounts. The annual report signing was delayed because further evidence was needed to support the financial position of the company, and the board and management needed to enter into further financial arrangements, which they eventually did. After they had done that and we had checked those conditions, we were able to sign.
Chair
Can you give us an example of when PwC had to get Thomas Cook to reassess, record or present something differently before you were able to give the opinion that Thomas Cook’s accounts provided a true and fair view?
Paul Cragg
Perhaps I could answer that. Certainly throughout the four years that I was the audit partner, which was for the financial years ending 2013 to 2016, we objectively challenged management on a number of areas with regard to separately disclosed items in each of those years. We did require management to restate items out of “separately disclosed” and into the profit before separately disclosed items.
Chair
Why did you stop being the auditor for Thomas Cook in 2016-17?
Paul Cragg
Thomas Cook being a listed entity was obliged to conform with the European regulations adopted by the UK with regard to audit firm tendering and mandatory firm rotation. The board decided in 2016 that they would put their audit out to tender for the 2017 year-end.
Chair
Did you bid for that work?
Paul Cragg
We did. I personally did not lead our re-tender. We did re-tender for that audit, and the audit committee appointed EY to do the audit.
Chair
What was the feedback on why you were not reappointed?
Paul Cragg
I was not part of that discussion with management or the audit committee.
Hemione Hudson
I was not part personally either but, looking at the feedback, it was simply that they thought EY was better positioned to do the audit going forwards.
Chair
You must have asked for feedback on why after 10 years they decided that they did not need your services any more.
Hemione Hudson
Yes, and the mandatory firm rotation would have meant that they would have had to change at some point anyway. The other—
Chair
Yes, but not in that year.
Hemione Hudson
No, not in that year. The other piece of feedback that we had was that they preferred the partner model that EY put forward. We had put forward a two-partner model; EY had put forward a single-partner model, and they preferred it.
Chair
Were you disappointed not to win that work?
Hemione Hudson
Yes, it is disappointing not to win work.
Chair
Christabel, in the years that you audited Thomas Cook’s accounts, in your opinion did those accounts provide a true and fair view?
Christabel Cowling
We audited the accounts in 2016-17 and for the half-year in May 2019, and we do think that the accounts in those years presented a true and fair view, yes.
Chair
In reaching that conclusion, did you have any serious concerns?
Richard Wilson
Perhaps I may intervene on that question. It was 2017 and 2018 we were the auditors. Yes, we did have concerns, in particular in 2018, because 2018 was a difficult year for Thomas Cook in terms of performance. That led us to scrutinise in a lot of detail certain areas, such as separately disclosed items, where we asked through the audit committee for significant adjustments to be made to the adjustments that had been originally recorded in the financial statements. On the issue of “a going concern”, we spent a lot of time understanding how the directors were reaching their opinion that the company was a going concern. We also had concerns in relation to goodwill. With the goodwill asset, we looked very hard in particular at the UK tours business, and the impact on revised forecasting that might have on the carrying value of that goodwill. In relation to all of those points, the most significant one in terms of an adjustment that was made by the board of directors was in relation to significantly disclosed items.
Chair
For the separately disclosed items, which we discussed at some length last week with Peter Fankhauser and the rest of the team there, which ones were you, EY, successful in getting reclassified, if any?
Richard Wilson
The totally amount that we asked Thomas Cook to reclassify from separately disclosed items into underlying profit amounted to £35 million.
Chair
That is not a huge amount, is it, in the scheme of things?
Richard Wilson
It is relative to what was disclosed as underlying profit. It was an important element in looking at the dynamics that presented out in terms of the performance of the business. We felt that £35 million was a material adjustment to be made, and had it not been made, we would not have been able to sign off a clean opinion on the accounts.
Chair
What impact did that have on the profits of the business?
Richard Wilson
It reduced the profits to £250 million for the year, and it was actually the prompt for the third profit warning.
Chair
Okay. You mentioned the goodwill, Richard Wilson. When they did eventually write down the goodwill? The goodwill was written down by £1.1 billion. Should that, in hindsight, have been written down sooner?
Richard Wilson
I looked at that during the course of our half-year review and thought about whether any of the issues that had arisen during the course of the writedown considerations at that point were there at 28 November when I signed off the audit opinion, and I felt that actually the decision that was reached at that time, in terms of the carrying value of the goodwill, was still a reasonable opinion to take. We did actually ask the company in their accounts to disclose, as is required by the accounting standard—because the UK goodwill was the most vulnerable to impairment. We asked them to state those matters that, if they arose, could give rise to an impairment; so there was very full disclosure in the accounts about the risks of the UK goodwill. When we looked at the position at 2019 half year there were three key elements that had affected the impairment. One was the discount rate that needed to be applied to the discounted cashflows, which had risen significantly from the period November through to March, which reflected the credit risk that had been attached to Thomas Cook. One was a revised forecast by management of the performance of the UK tours business. The other was that under the accounting standard, because it is an infinite life asset, goodwill is normally tested for impairment once a year at the same time. In testing it at the half year you were looking at a balance sheet for that particular business unit which was different in the way in which the constructs worked, which gave rise to a higher value, which had to be covered.
Chair
Antoinette Sandbach will come on to these issues a little bit later, but it seems unlikely to me that within six months goodwill could be worth £1.1 billion less than it was six months previously. In hindsight, Richard Wilson, do you think you should have been a little bit tougher on Thomas Cook and interrogated the numbers a little bit more? It seems unlikely that a combination of the discount rate, the revised performance and the new tests for impairment meant that within six months the goodwill could be worth £1.1 billion less than it was previously.
Richard Wilson
I can understand why that question is being asked. The basis behind the goodwill on 26 November was the revised plan that the company had prepared very recently, which had already stripped out significant upside in the business unit. They had taken that down considerably in their forecast, which was also used for their discussions with their banks. The discount rate was significantly lower and the movement in discount rate could have an impact of £200 million on the—
Chair
Perhaps I could put it a different way. In hindsight the goodwill could not have been worth £1.1 billion six months earlier, could it?
Richard Wilson
With hindsight, with information that I did not have at the time that I signed off the November accounts, then I think the answer has to be yes, with hindsight.
Chair
As I say, Antoinette will come on and ask a little bit more about those issues. Can I ask again, both PwC and EY, did either of you during your time as auditors of the Thomas Cook Group undertake other work for Thomas Cook Group—for example consultancy or advisory work? Hemione, can I ask you that question first?
Hemione Hudson
Yes, we did.
Chair
And what was the nature of that work?
Hemione Hudson
There were a number of different pieces of work that we did over the years.
Chair
Can you detail those please?
Hemione Hudson
I do not have all of the details to hand, but the large pieces of work were in relation to the transactions that Thomas Cook underwent, and reporting accountant work that we performed in relation to that. There were a variety of other pieces of work as well.
Chair
And how much were you paid for those pieces of work, and in what years did they occur?
Hemione Hudson
Over the period from 2007 to 2016 when we were the auditors the total amount was £2.1 million; I am sorry—£21 million.
Chair
You are auditors. There is quite a big difference, Hemione. Of that £21 million can you break that down by years and by the types of work?
Hemione Hudson
Yes, I have some of that information here. There was much more of the non-audit services work in the early years. For example, in 2007 the non-audit work was £4.3 million, and in 2008 it was £2.9 million. Obviously, the rules in relation to non-audit services have changed considerably over this time period, and at all times the work that we did was in accordance with the rules that were in place at the time. As the EU regulations came into the UK, there are now considerable restrictions on what non-audit services work can be performed.
Chair
Do you think that those changes to the rules are right? Do you think that they are a good thing?
Hemione Hudson
I think they have definitely followed societal expectations. In the past, where we relied on the processes that we have—and we have strong processes for understanding what the nature of the work is, and whether or not there are any threats to independence and managing any threats—
Chair
But do you think that the rules that are in place now are better for ensuring that there is genuine independence?
Hemione Hudson
I think they are better for giving confidence to people about the independence. I do not think that we were in a position whereby the non-audit services that we provided did impair our independence, but I think the perception of that undermines the trust in audit.
Chair
And had the rules not changed, presumably you would have carried on doing that sort of work.
Hemione Hudson
Well, earlier this year we made a voluntary commitment to stop providing anything other than audit and audit-related services to companies that we audit in the FTSE 350, not because the rules required us to but because we think it is the best thing to do to restore trust in audit.
Chair
There is a difference though, isn’t there? You are doing this because you think that it is what society expects, and it is about restoring trust, rather than you actually thinking that it is right thing to do because it might improve the quality of your work.
Hemione Hudson
The reputation of audit and trust in audit is really important to audit. I do not think that doing those non-audit services would have impacted the quality of the audit work, but it is very important that we have a trusted audit profession.
Chair
I guess it is about the difference between treating someone nicely because I think it is the right thing to do or because they might think that I am a better person if I do that. It sounds from your answers, Hemione, that PwC does the right thing because that is what society expects rather than because you recognise that it is the right thing to do.
Hemione Hudson
I think we do recognise that it is the right thing to do.
Chair
That is not what your answers to the questions have implied. Your answers to the questions imply that PwC does the right thing because that is what is expected of it, rather than because it recognises that the model that existed previously gave rise to some of those conflicts of interest, which is why the law was changed.
Hemione Hudson
I understand entirely what you are saying. It is also a question of transparency. Within the firm, we have relied on processes and controls that are not obvious to the outside world. That is why we got comfortable, but I recognise that they are not apparent to the outside world and now it is a better thing to do to have the environment that we have.
Chair
Let’s move on, with PwC still. You gave me the numbers for 2007 and 2008. Perhaps you could give to the Clerks, so we can publish, the details of what you earned for non-audit services in each of the years that you audited Thomas Cook’s accounts, and what that remuneration was for. Is that something that you can do for us today?
Hemione Hudson
Yes, I am happy to do that.
Chair
Thank you. You were Thomas Cook’s auditors, as we know, until 2016. It was reported that between 2007 and 2012 PwC earned £4 million providing recruitment and remuneration advice to Thomas Cook. Is that correct?
Hemione Hudson
In 2007 to 2009 we were advisers to the remuneration committee, that is correct.
Chair
What was the advice that you were providing during that period to Thomas Cook?
Hemione Hudson
I am not close to the actual advice that was provided, but it was as advisers to the remuneration committee.
Chair
Yes, you have already said that. Did that advice extend to calculating or advising on how bonuses were devised or paid?
Hemione Hudson
It would not have extended to calculating bonuses, but it would have extended to advising on remuneration policy.
Chair
Did you not think that some detail about this might have been a useful thing to bring to the Committee today?
Hemione Hudson
The detail that we have, I have. Given data retention, we do not have the files.
Chair
You do not have the files.
Hemione Hudson
We do not have audit files that go back to 2007.
Chair
These are not audit files; these are files on the advice. This is not audit work, is it? That is the whole point, Hemione Hudson. This is on advisory work that you were doing for a company that you were also auditing. Are you saying that you do not have details of what advice you gave to the business—to the remuneration committee—between 2007 and 2012?
Hemione Hudson
I do not have the details, but I can certainly see what details we do have. We do not have any audit files that would have looked at the assessment of conflicts and independence, because we no longer retain those.
Chair
How long do you have to retain audit files for?
Hemione Hudson
Seven years.
Chair
How long do you have to retain files on advice?
Hemione Hudson
I am not sure.
Chair
The Financial Times also reported that Thomas Cook used a controversial accounting policy under which it stripped out exceptional items totalling £1.8 billion over eight years—eight years during which PwC was the auditor—which flattered the company’s headline financial results. The resulting underlying operating profit figure was used to calculate bonuses for Thomas Cook. Did you sign off the exceptional items as Thomas Cook’s auditors between 2008 and 2016?
Hemione Hudson
Yes, we did. They were part of the financial statements.
Chair
As the auditors, you would have been aware that stripping out the exceptional items flattered the underlying profit figures. As consultants, did you base your advice regarding remuneration and bonuses on those underlying profit figures, regardless of what you knew about the separately disclosed items?
Hemione Hudson
There are a couple of different things there. As the auditors, the presentation of separately disclosed items is to ensure there is transparency about what is from the underlying business and what are the impacts of separate, significant situations.
Chair
In your experience as an auditor, would you say that £1.8 billion of exceptional items over eight years was a large or a small number of such items?
Hemione Hudson
I would say it was a large number, definitely.
Chair
Yet you were advising the remuneration committee to pay bonuses based on some of those costs being taken out of the underlying figures. Is that correct?
Hemione Hudson
Our advice to the remuneration committee was only advice. The policy was always approved by the remuneration committee and also by shareholders, and the policy under which the bonuses were paid changed every year and was approved by shareholders. Our advice to the remuneration committee ceased in 2009.
Chair
Can you remind us how much PwC was paid for that advice to the remuneration committee?
Hemione Hudson
It was about £1.8 million.
Chair
In what years was that paid?
Hemione Hudson
Some of it was paid in 2007, some in 2008, and some in 2009.
Chair
In its 2009 annual report, Thomas Cook’s remuneration committee stated that it “was mindful of the dual role” of PwC as both its advisor and the external auditor of the company. Did they raise any concerns with you, and were you mindful of that dual role, too?
Hemione Hudson
Yes. We were the advisors to the remuneration committee of MyTravel before the merger. At the time of the merger, it was considered by the remuneration committee; it was also considered in conjunction with the audit committee, as to whether they wanted us to continue as advisors, and it was discussed with us. They decided they would like us to continue as advisors for a short period of time to give them some continuity. We then assessed it from a conflict perspective to see whether we felt there was a conflict or an independence issue. We had entirely separate teams, and considered that there was not. It was a permissible service at the time; we considered it was not, therefore, an independence issue.
Chair
Do the audit partners benefit from the profits of the whole of PwC’s business, or just from the profits in audit?
Hemione Hudson
Partners benefit from the profits across the whole firm, but their objectives—
Chair
So if you are making a profit on the remuneration work, the auditors who are auditing that company also benefit, in which case, how can you ensure that you really have that separation of interests, Hemione Hudson?
Hemione Hudson
As I said, partners benefit from the profits of the whole firm, but the objectives that each partner is set and against which they are assessed are specific to their own roles. Audit partners are therefore assessed based on the objectives that they are set, including audit quality.
Chair
What were the profits of PwC last year?
Hemione Hudson
The profits for the audit practice were £127 million and the revenue for the whole firm was £3.4 billion.
Chair
What were the profits for the whole firm?
Hemione Hudson
I don’t have that number, but we can get that to you.
Chair
What were the total profits?
Hemione Hudson
That’s the number that I don’t have, which I will get to you.
Chair
Were they more or less than the profits you made from the audit work?
Hemione Hudson
More.
Chair
By a degree of-?
Hemione Hudson
The audit practice is only 20% or 21% of the firm, so the total profit is obviously—
Chair
I put it to you, Hemione Hudson, that the audit partners will want to ensure the success of the consultancy business because their profits and their remuneration depend on the profits and success of the whole business. Is that right?
Hemione Hudson
We certainly all share in the same profit pool, but the objectives that all partners are set are specific to their role.
Chair
Yes, but the profits and the remuneration are based on the whole business. Do you not understand why some people—including myself and I expect most members of this Committee, if not all of us—think that it is impossible to separate out and get rid of the conflicts of interest when the remuneration of the people doing the audit work depends on the success of the other parts of the business, advising the same firm that they are auditing? You said before that the rules had to be changed to reduce some of those conflicts of interest; can you not see that those conflicts of interest still exist in reality, and certainly in the view of most people?
Hemione Hudson
I do understand how people are concerned about conflicts of interest and incentives of partners when we share in the same profit pool. I also understand the need for us to access skills for high-quality audits across a breadth of skill sets that are not all within the audit practice. If I look at our most complex audits, 15% to 20% of the time spent is by people outside the core audit practice, with skills that we need access to.
Chair
So would you have been accessing people in the remuneration team to do the audit?
Hemione Hudson
No, we had entirely separate teams. Those are part of the processes we have.
Chair
Then if the teams are entirely separate, why not just separate out the two parts of the business? This is a wider issue, but you cannot on one hand say that you relied on the skills of the people in the other part of the business, and then say that they were totally separate. Those two things cannot be true at the same time. That is the problem, and that is where I am afraid your argument and the argument of all your businesses falls down. With hindsight, should you have continued the dual role, and would you do so today?
Hemione Hudson
We certainly would not do so today, because it is not permissible today.
Chair
You certainly would not do so today, so in hindsight, was it the wrong thing to do both—to provide advice to the remuneration committee on setting bonuses, and at the same time to audit the business? In hindsight, was that the right or the wrong thing to do?
Hemione Hudson
At the time, it was appropriate given the rules—
Chair
I have asked you a different question, and you know that. My question was whether, in hindsight, that was the right or the wrong thing to do.
Hemione Hudson
I do not believe that it had an impact on our audit quality, but I think that in the current environment we would not do it, and I would not do it again.
Chair
It is a lot more than that. Would you be allowed to do it today, under the current rules?
Hemione Hudson
No.
Chair
No, so it is not just that you would not do it. I put it to you that, if the rules had not changed, PwC would be doing exactly the same thing today that they did in the past, and that the behaviour of your firm and the other big audit firms only changes because the rules change. That is the only thing that actually changes your behaviour.
Hemione Hudson
I think we would not do it today, even if it were permitted by the rules. I do understand people’s concerns. I understand that we need to move further than the rules, and we have done so this year, by stopping providing non-audit services to clients in the FTSE 350.
Chair
And that was because of the challenge to PwC, which of course was also implicated in the collapse of Carillion. It is only public pressure and a change in the laws that get your companies to change. Without changes in the laws, you would carry on doing things exactly as they were before, which is why it is so imperative that the Government actually change the law to stop companies like yours doing work on the consultancy side and the audit side.
Mark Pawsey
I want to ask some questions about the principle of a going concern. Mr Cragg, you are an audit partner at PwC. Separately from the Thomas Cook stuff, could you give us an outline of what the going concern provisions of an audit are?
Paul Cragg
The company needs to form a view as to whether it will prepare its accounts on a going concern basis, which means that the directors need to be—
Mark Pawsey
The company needs to form a view, or the auditors?
Paul Cragg
The company first needs to form a view, because they are their accounts, with regard to whether they believe they will be able to meet their liabilities as they fall due for the 12 months from the date of the signing of the accounts. The auditor, and I as audit partner, need to be comfortable and satisfied, based on the audit procedures that I have performed, that the assessment made by management is appropriate and that the accounts should be prepared on that going concern basis.
Mark Pawsey
Most directors are going to be pretty optimistic and bullish, aren’t they, and they will want their business to continue. In 2011, were you involved in the audit?
Paul Cragg
No, I was not involved in the audit in 2011. I came on to the audit in 2013.
Mark Pawsey
But you will be aware of what happened in 2011, when PwC’s management letter to Thomas Cook demonstrated that there were concerns about whether the business was a going concern, and Hemione Hudson told us that earlier. Can you tell us a bit more about those concerns?
Paul Cragg
I was not party to all the discussions—
Mark Pawsey
You inherited looking at the company’s accounts only two years later, so you must have known what was happening previously.
Paul Cragg
Between those two years—between 2011 and 2013—the company had had a significant refinancing. In May 2013 it had an equity injection—
Mark Pawsey
Sure, and your colleagues at PwC had done the audit, so you must know fully what the position of the company was only two years before you started personally to get involved.
Paul Cragg
The trading performance of the business had declined, as Hemione said earlier, which had caused impairment of goodwill in that year and a challenge to the going concern opinion. I think it was the year that we delayed the signing of the accounts.
Mark Pawsey
Absolutely. Hemione told us that, so I am asking for a bit more detail about why that was the case.
Paul Cragg
Because in forming the assessment of the going concern, and our audit of that, we were unsatisfied that the company had sufficient financial resources to meet their liabilities as they fell due. As a result, the company had to take additional funding.
Mark Pawsey
What action did the company take to cause PwC to say, “We had some previous concerns about whether this is a going concern. Those have now been resolved”?
Hemione Hudson
The banks provided £200 million of additional financing.
Mark Pawsey
Did the company go out and source that financing because of your concerns about whether they were a going concern?
Hemione Hudson
Yes, that was certainly part of it. There were considerable challenging discussions. They put out a statement saying that they were reconsidering their financing. We delayed the annual report. After they had secured the additional financing, and we had checked it, we did sign off the accounts.
Mark Pawsey
Did PwC have any hand in securing the additional £200 million of financing?
Hemione Hudson
No.
Mark Pawsey
It was totally separate and independent.
Hemione Hudson
Yes.
Mark Pawsey
Okay. I turn now to EY. Can you tell us about your concerns about the going concern provisions within the most recent accounts that you prepared?
Richard Wilson
Certainly. When we were looking to complete the 2018 audit, as has been said, we looked at the basis by which the directors had concluded that the accounts could be prepared on a going concern basis. We focused on two areas in detail—
Mark Pawsey
Sorry, accounts could be prepared on a going concern basis—does that mean the same as the auditors approving that the business is a going concern, or is that something different?
Richard Wilson
It is the director’s responsibility. The audit profession had to ensure that the directors had valid reason to state that the accounts could be prepared on a going concern basis.
Mark Pawsey
Of course, lots of people were relying on the statement that you approved—the staff who work in the business, and the customers who were spending money with them. You were making a pretty responsible opinion. Are you happy with that?
Richard Wilson
At the time we drew that conclusion, we had done a lot of work in two areas to be satisfied with that statement. One reform that helped considerably to understand the accounts was the extended auditor’s report. It set out in a lot of detail—as opposed to previous periods when that report was pretty thin—what we did as the audit firm in relation to going concern. We sought first to establish that Thomas Cook still had the support of its lenders. In December 2017 the group issued a new bond, and it also entered into a new revolving credit facility with its banks. In December `17 there was clear evidence that lenders still supported Thomas Cook. As we approached the year end, in the course of the audit—
Mark Pawsey
Sorry, when was the year end?
Richard Wilson
September 2018 was the year end for Thomas Cook. When we were in the Thomas Cook offices in late October, we were advised by the company that it had been to see its lenders. Attached to the lending facilities were banking covenants, which had to be passed. Thomas Cook had looked at its banking covenants and decided that it needed some relief from the lenders for quarter 1 and quarter 2 of 2019, and for quarter 1 and quarter 2 of 2020—it was a little bit more breathing space for passing the tests that the lenders had set. The lenders approved those reliefs—again, the lenders continued to support Thomas Cook.
Mark Pawsey
As auditors, were you satisfied with those provisions that meant that Thomas Cook overcame the going concern test?
Richard Wilson
We did a lot of work in that area. The company sensitised its views on the next 12 months. We also added additional sensitivities to test what could be severe but plausible downside scenarios. Under those scenarios, the company passed the covenant test, but we highlighted in our auditor’s report that in quarter 3 and quarter 4 of the financial year 2019, those tests were very tight.
Mark Pawsey
In the absence of this new relationship with the lenders, you would not have been able to say that the company was a going concern. Is that a fair statement?
Richard Wilson
Would it be helpful if I moved on to what happened in March and May, to make it a little clearer?
Mark Pawsey
Yes.
Richard Wilson
On 20 March I received a call to visit Thomas Cook. I met the finance director and AlixPartners, which had been brought in to assist Thomas Cook in going back to the banks for further funding. At that point we were considering what was required for the board of Thomas Cook to confirm that on 31 March the organisation remained a going concern. Based on the numbers that they were showing me, including a pack that they had taken to the banks, and the additional facility of £300 million that they were looking for, in order to sign off on a going concern, I needed the banks to commit to that in writing. It was going to be a short-term facility from 1 October to 30 June 2020, to give the company headroom to make the going concern statement in May 2019. I left that with them. When we returned to do our half-year review, I brought in some specialists in the area to help me determine where the company had reached. The banks confirmed that they were prepared to issue the £300 million facility, but they attached a condition to that. The company had announced in February a strategic review of the airline. While we were doing the half-year review, we were aware that they had had a number of indicative but non-binding bids for the airline, plus indicative but non-binding bids for other parts of the business, so they had a variety of options available to them. The banks had placed a condition on the new facility that they had to have, by 30 September, a binding commitment to purchase the airline. If that was in place by that point—it did not have to be completed by 30 September—the new facility would be made available to them. I was asked my view as to whether this caused a material uncertainty in relation to going concern, and I confirmed that, based on what they had advised me, this did cause material uncertainty on going concern, and I felt that the directors should have made that clear in their report.
Mark Pawsey
And the directors knew that at that time?
Richard Wilson
They did.
Mark Pawsey
So on 31 March, so far as EY was concerned, this business was a going concern. However, it clearly was not, because a going concern needs to be able to trade for the next 12 months, and the business failed. Where did your going concern assessment go wrong?
Richard Wilson
I did not confirm that it was a going concern; I said that there was a material uncertainty over its continuing.
Mark Pawsey
So the business was not a going concern?
Richard Wilson
It would have been had they been able to—
Mark Pawsey
Either it was or it wasn’t.
Richard Wilson
It would have been had they had access to the new facility, but there were restrictions on that.
Mark Pawsey
So therefore it was not a going concern on 31 March. Is that what you are telling us, Mr Wilson?
Richard Wilson
If they had access to the facility—
Mark Pawsey
That is an “if”.
Richard Wilson
Yes, which is why it was identified as a material uncertainty.
Mark Pawsey
And it therefore was not a going concern at 31 March?
Chair
If they did not have that access?
Richard Wilson
If they didn’t have it, no. They would get it if they sold the airline or entered into—
Mark Pawsey
So at that time it was not a going concern. Okay.
Antoinette Sandbach
The evidence that we had from Thomas Cook’s board was that the level of debt that they were carrying effectively caused the problems. We were told that they looked at selling the airline but could not do it because it would have led, effectively, to the insolvency of the company. In other words, because they were so highly geared, in terms of carrying debt, there was nothing they could sell to reduce their debt levels without putting the company into liquidity. How on earth, if that was the position the company was in, could you call it a going concern?
Richard Wilson
I was not involved with anything that happened after we issued our report on the half-year review. At the time we issued our report—
Antoinette Sandbach
Sorry, could you just answer the question, as an auditor or accountant? If you are carrying high debt levels and want to write down or reduce some of your debt, one way to do that is by selling assets that you have. As we see from the evidence given to us, the company looked at every part of their business and what they could sell to reduce their debt levels, and they concluded that they could not do it—they could not sell anything—because it would have left the rest of the business trading while insolvent, effectively. That situation did not arise over one year, did it?
Richard Wilson
That was not the position when the half-year review was completed. At the time the half-year review was completed, it was the intention to continue to seek buyers for the airline.
Antoinette Sandbach
Did you undertake, as auditor, an assessment of whether, if that happened, the company would still be a going concern?
Richard Wilson
We looked at the indicative prices that had been offered by the potential buyers that were there when we were undertaking our half-year review. A wide range of prices had been offered by a variety of parties.
Antoinette Sandbach
The evidence that we had from the chief executive was that they looked at this but they could not sell the airline, because that would have put the rest of the group into insolvency.
Christabel Cowling
Thomas Cook’s management were working after the half-year review, and until the company went into liquidation, to try to restructure the business. They believed that they had a deal that would do that, which did not include selling the airline, at the end of the day. They had a deal with Fosun, in principle, to sell the tour business, and Fosun were going to take a stake in the airline. That would have allowed for the restructuring of the group, which would have prevented the group going into liquidation, if that deal could have been completed.
Antoinette Sandbach
Even though it was in the position, as the evidence given to us shows, where it could not sell any assets, because if it did the rest of the group would be put into liquidation.
Christabel Cowling
The Fosun deal would have—
Antoinette Sandbach
I am not talking about Fosun; it didn’t happen. My concern is about a company that is so heavily leveraged—so geared up—and had such a high level of debts. It is the equivalent of the mortgage on your house, where you might look at the car or try to sell off the garage, or whatever. There is nothing that you can sell to pay off the level of debt without reducing income, meaning that the company was insolvent.
Christabel Cowling
The restructuring that they were proposing and working towards in September would have converted the debt into equity in the group. While they were selling assets there, they were also freeing the group from that immediate debt burden.
Antoinette Sandbach
But this was not a situation that they got into overnight. They had refinanced. What was it called? Operation?
Paul Cragg
It was around 2013.
Antoinette Sandbach
Exactly. When you were doing the accounts, they had refinanced to the tune of £1.6 billion, just five years before.
Paul Cragg
A little over £400 million of that was equity. The rest was a replacement, if you like, and extension of bank facilities.
Peter Kyle
The problem is that you are looking at the world from 2018 forwards, but we are looking at it from 2019 backwards. It is palpable when you see it from our perspective, and you listen to the people who were managing the company at the time. Having a £150 million debt servicing burden and seeking to flog the only asset you had—which was the airline business, because everything else was intangible—made it almost impossible to have a decent restructure, because nobody would invest in a company with no assets. It is inconceivable to me that you, with your experience, would think that that kind of future pointed towards a sustainable business—it is inconceivable.
Chair
Richard Wilson, you are nodding.
Richard Wilson
I was just reflecting on that point that the absence of an airline would mean that Thomas Cook couldn’t be successful. Thomas Cook had a lot of successful operations across Europe, particularly in the Nordic region and their business in continental Europe. There is no doubt that the UK business unit required some turn around. I think that the sale of the airline was part of the strategy to move Thomas Cook towards a different style of offer, in terms of the strategic direction of the business. However, regarding the decision as to which assets to sell, on 31 March, when we were issuing the review opinion—notwithstanding what the directors have said after that date—the board had announced that they were planning to sell the airline, but that was an important part of securing additional finance from 1 October. If they did not sell the airline, that additional finance would not have been there.
Peter Kyle
The point I am making, which you know well, is that you might find a way of working within existing accounting law and the technical aspects of the law, but it is not common sense. Look at the environment you were operating in last year. If you strip away the only part of the business that has any assets—the airline business—you have a business that doesn’t own cruise ships, property abroad or any hotel chains, so it is not getting any income from those. Therefore, if there is a downturn—we are looking at a world where risk is huge. Brexit is approaching and there are potential recessions in other parts of Europe. Travel patterns were very disrupted by weather and terror. Those were real, living challenges that you faced. If you strip away all the assets, you have an incredibly volatile business. It fails the common-sense test that you would look at that environment, strip away the only bit of the business that has assets and say with your hand on your heart, “This is a business that is still going to be trading in a year’s time, or 10 years’ time.” It doesn’t make sense to me. How can you justify that?
Richard Wilson
The decision around the strategy of the business is the decision of the board of directors. We have only two touchpoints with the shareholders: the annual audit, where we issue a full report; and the half-year review, where we issue a review opinion—it is not an audit as such. When we were issuing our report on the half-year review, we considered the information that was provided to us by the directors at that time. That was the information that we were provided with. They also advised us that they did have other options, but at that point their option was to secure a sale of the airline.
Peter Kyle
So you just take anything they tell you at face value? You don’t read a newspaper and say, “It’s quite difficult in parts of the world because there’s been a terror attack in Tunisia”?
Richard Wilson
This is a business that is vulnerable to that type of issue—there is no question about that—and there has been vulnerability in the past. In 2016 there were terrorist attacks in Egypt, Tunisia and Turkey, which forced a setback. We looked at this as part of our assessment in November. We looked at how the company had responded to these types of events in the past, and in 2016 they had taken a £100 million hit to revenue as a consequence of the terrorist attacks. The company was able to put in mitigation to save cost as a consequence by reducing hotel capacity and reducing airline capacity. There were mitigating factors that the company could bring in. When we looked at the hit position in November 2018, we looked at what could be a reasonable diminution in revenue and at what could be a reasonable form of mitigation by the company, in terms of their ability to reduce costs. We overlaid that with our own assessment of what would happen if all those mitigations that they said could happen couldn’t. We did all that testing during the course of our audit.
Chair
Richard Wilson, how much was EY paid by Thomas Cook for the work that you did over the period of two and a half years?
Richard Wilson
We were paid a fee of £3 million for the 2017 audit and £3.8 million for the 2018 audit.
Chair
And the work in 2019?
Richard Wilson
We had been paid £800,000.
Chair
Are you owed any money by Thomas Cook?
Richard Wilson
We are owed money by Thomas Cook.
Chair
How much?
Richard Wilson
We are owed approximately £900,000.
Chair
Is that for the work that you did in 2019 and a bit of 2018?
Richard Wilson
None relating to 2018. In 2019, in addition to the half-year review and our initial planning, the company had also started making plans to have a shareholder vote on the equity transaction that was being planned. Part of the work that is required for that is a document to be sent to shareholders. It is generally the auditor that is involved in making sure the information in that document is supportable. We had started work on that document.
Chair
And how much were you supposed to be paid for that?
Richard Wilson
I think the fee we proposed to Thomas Cook was £1.3 million.
Chair
£1.3 million? Gosh! That is a big document. Did EY do any non-audit work for Thomas Cook during the two and a bit years that you audited their accounts?
Richard Wilson
Let me start with 2018. In 2018 the only work we did that was non-audit, in terms of how it is defined in nature, was work that was required attached to a bond issue in December 2017, which I mentioned earlier. Bondholders tend to ask for a firm to provide some assurance around the numbers in the document. We did that.
Chair
How much was that worth?
Richard Wilson
That was about £400,000. We also did the half-year review. Under the Financial Reporting Council’s ethical standards, the half-year review undertaken by an auditor is classified as non-audit work; it is an “other assurance”-type activity. That was £284,000.
Chair
Any other?
Richard Wilson
An assortment of others, which were all in themselves quite small. This is, again, attached to our role as auditors. In many jurisdictions, including the UK, to get an ATOL certificate you have to provide certain certificates signed by the auditor. That is true across many European countries. They add up, in total, to quite a large number—about £100,000.
Chair
In total, in the two and a bit years that you audited Thomas Cook, how much did you earn in non-audit fees?
Richard Wilson
It was approximately £800,000 in 2018 and a much smaller amount in 2019—err, 2018. When we took over as auditors—
Chair
Do you know what it was in total?
Richard Wilson
Let me just check that.
Christabel Cowling
I think it was around £300,000 in 2018.
Richard Wilson
Which was predominantly the half-year review.
Chair
You also mentioned the £400,000.
Christabel Cowling
That was in 2017.
Chair
In total, you have given me £1.3 million, £0.4 million and £284,000, which is about £2 million. Is that the total of the non-audit work?
Richard Wilson
£1.3 million was 2019—that is relating to the current year. The 2018 number was £800,000, and the 2017 number was about £300,000.
Chair
So in total it was about £2.4 million?
Christabel Cowling
Yes.
Richard Wilson
But what we also did when we became the auditors was that all our provision of services, other than the audit, had to be approved by the audit committee. When I looked at the audit committee rules on the provision of non-audit services, they allowed fees of up to £50,000 to be incurred by the auditor without audit committee approval. I recommended that it was changed; that became £5,000.
Christabel Cowling
Just to be clear on those numbers, all the work that we did while we were auditors of Thomas Cook was work required to be done by the auditor. This is not discretionary work or advisory work.
Chair
So under the new rules you would still be able to do this.
Christabel Cowling
Under the proposed new ethical standard, they would still be considered essential non-audit services, yes.
Vernon Coaker
To EY, alongside an audit you can publish management letters. The management letters for 2017 and 2018 show a significant rise in both the number of issues of concern and the levels of concern. How did the company respond to the fact that you recognised, or pointed out, a significant change in your level of concern, and were you satisfied with that? Also, did you qualify your accounts as a result of this increased level of concern in either of the years?
Richard Wilson
I will deal with your second point first, then come back to your first question. No, we didn’t qualify—
Vernon Coaker
In either year?
Richard Wilson
No, we didn’t qualify on that. The reason is that when an auditor looks at the internal control environment, they are not looking at the environment in terms of reporting on it publicly; it is work that we do to try to frame the way in which we will approach the audit. It is not part of the requirement for an auditor to sign off on the internal control environment. Where it is weak, we would do audit procedures that acknowledge that the control environment is weak and look to audit notwithstanding the problems in the control environment. What we then do is report to the audit committee those areas that have given us the most concern—and management, of course—and make strong recommendations, as you will see in that letter, where we believe improvement should be brought in. This is done, obviously, to make the company better and stronger.
Vernon Coaker
Since they collapsed a year after, did it make them better?
Richard Wilson
No. You are right; in 2018 the control environment that we reported to the audit committee had weakened from 2017. In my experience, where a company is experiencing difficult times and struggling with the financial performance, it puts a real strain on the control environment and it is inevitable, in some ways, that that control environment comes much more under the microscope, and under strain and stress, than it would do in a company that is performing well.
Vernon Coaker
Let me read you something from the management letter, which goes back to the really important questions that the Chair was asking of PwC right at the beginning. The public will find it astonishing that you did not qualify the accounts, as you have just said, whatever the rules say. On separately disclosed items, you said, “the group accounting policy on SDIs also provides in our view too much scope for interpretation and”—listen to this, Mr Wilson—”potential manipulation”. Anybody reading that—if my tax person said, “You have potentially manipulated your tax return”—for goodness’ sake! What did you think, as one of the biggest audit companies in the country and probably in Europe, about putting in an account where there was a possibility of “potential manipulation”? Was it just, “Well, we will see how they respond to that.”? What on earth did EY mean by that? What happened?
Richard Wilson
It means what it says. What happened was, we audited separately disclosed items in a huge amount of detail. We went in—
Vernon Coaker
Sorry to interrupt. The key question to answer is, why weren’t the accounts qualified as a consequence of something as significant as potential manipulation being included in your management letter?
Richard Wilson
They were not qualified because I asked for the company to change the separately disclosed items to the tune of £35 million. On your point about the control environment, what I also did was refer the matter to the audit committee. In the annual report and accounts, the audit committee, in its report on the state of internal control, makes reference to this as a serious deficiency in internal control which is to be remedied.
Vernon Coaker
You have described other things as exceptional. I am not an accountant or an auditor, but I think people seeing this would apply it to their own lives. On “potential manipulation”, I am not saying it is criminal, but is it civil? Clearly, as a firm you cannot manipulate something to potentially hide or disguise something so that people cannot properly understand what is going on. EY, one of the biggest names in Europe, and probably globally, puts that in and then does not qualify the account. How does it generate confidence among the public that when big companies are audited, as the Chair said at the beginning, they are being held to account, and that the money invested in them and people’s jobs are not being gambled for a quick buck?
Christabel Cowling
We identified that there was potential for mis-statement of these SDIs. In our audit work, we did additional procedures to ensure that that potential for manipulation had not happened. In our audit work, in 2018, we found a significant quantity of SDIs, as Mr Wilson has said, that we did not think should be SDIs and we insisted that management change that. Ultimately, where we got to in the 2018 audit was that we were comfortable that the SDIs, as disclosed, were in accordance with the accounting policy, and we ensured that the disclosure in the accounts was right. We were aware that there was an opportunity for manipulation, which was what the management letter said. To address that, we amended our audit procedures so that, when we gave our opinion, we were comfortable that the SDIs had not been manipulated.
Richard Wilson
In our audit report attached to the November 2018 accounts, we did set out the concerns we had over SDIs. You see in the third column of our report our strong recommendations that management improve both the recognition of SDIs and the oversight that should have been provided by the group but that was not provided.
Anna Turley
I will ask briefly about materiality. I am not an auditor or an expert but I understand that the levels of materiality were around £14 million or £15 million, which I understand is relatively high based on a percentage of around 5% of underlying profit. Is that high? If so, why was it so high?
Richard Wilson
It is not high compared with the norm. When we set materiality, what we do is look at similar companies and how materiality is set, not just by EY but by other firms. That is really just a starting point to help us think about how we frame the approach to our audit. It is really around how an informed person might be influenced if there is an error of £14 million in the accounts. We then break that down before we start allocating it across the various component parts of Thomas Cook. Because Thomas Cook was spread over so many entities, we review the risk that lies within each of those entities. In some cases, the materiality we would have used for doing the work in those locations could have been as low as £700,000. It is a starting point; we are not saying that we do everything to that limit. It is just a starting point, to help us frame the approach that we take. That is not uncommon. The point is also that we take it on underlying profit: we do not include the separate disclosed items. That is because we make a decision at the start. Again, it is identified in our audit report that we are conscious of how underlying profit was used. It is used by shareholders in terms of how they model, it is used by lenders in considering the lending, and it is also used as part of the directors’ bonus scheme, so we take that as a serious consideration. On the areas where we have identified the weaknesses in certain disclosed items, as I said a few minutes ago, we dive down into a lot more detail. In fact, we were auditing numbers as low as £1,000.
Anna Turley
So it was clear that you were concerned about errors anyway.
Antoinette Sandbach
Mr Wilson, in June 2017, the Financial Reporting Council issued its report on KPMG and audit quality inspection. That highlighted concerns around insufficient challenges by auditors of management’s assumptions in relation to the impairment of goodwill and other intangibles. Were you aware of that?
Richard Wilson
Yes.
Antoinette Sandbach
In that case, knowing that goodwill had not been written down since 2013, why did you continue to—I think there was £1.7 billion-worth of goodwill on the UK side of the business alone, which is the one that you assessed as being vulnerable.
Richard Wilson
It was about £1 billion. It was less than that £1.7 billion—the UK bit.
Antoinette Sandbach
Right, but you were aware that the UK part of the business was struggling.
Richard Wilson
Yes, we were aware that it was struggling. That is correct.
Antoinette Sandbach
In fact, you had issued a whole load of warnings about your concerns within the group, much of which related to the UK part of the business.
Richard Wilson
Yes.
Antoinette Sandbach
So why didn’t you amortise or do a write-down of goodwill at that time?
Richard Wilson
In relation to your first point about amortisation, international accounting standards say you can’t; you have to do the impairment test every year. That is what Thomas Cook did: it did the impairment test.
Antoinette Sandbach
International accounting rules don’t say that you can’t. And UK company law puts different requirements on directors, rather than the international accounting rules. In other words, there is the impairment test, as you say, but the reality is that goodwill was impaired, wasn’t it, given the problems over leases that you had highlighted in your reports, largely relating to the UK side of the business, and the risks that there were over FX exchanges? All of those were matters that you raised in your letters to the management, which must have had an impairment on goodwill. You were nodding there.
Richard Wilson
I was preparing myself to answer. When we looked at the goodwill impairment test in November—it comes back to the point that listed companies in the UK have to comply with international accounting standards.
Antoinette Sandbach
They also have to comply with UK company law.
Richard Wilson
They do.
Antoinette Sandbach
You are accounting in the context of UK company law, which requires the directors to balance their obligations. When you are looking at international accounting rules, you are not only looking at the international accounting figures; you are also looking at UK company law obligations on directors, are you not?
Richard Wilson
Correct. Coming to the goodwill, under international accounting standards this is deemed to be an indefinite-life asset.
Antoinette Sandbach
That is not strictly true, is it? There are different treatments as to whether or not it is considered to have a life-span of over 20 years or under 20 years, and the impairment test needs to be employed if there is considered to be a goodwill of over 20 years. The acquisition of MyTravel had been over 10 years previously, so you are halfway into that period, and yet there had been only two write-downs of goodwill. Is it not the fact that audit companies have taken goodwill valuations and rather blithely upheld them, without looking at the obligations of directors in terms of how they have to balance the obligations between shareholders, employees, pension fund liabilities and the other liabilities stated in the Companies Act?
Christabel Cowling
What is required under accounting standards and what is required in the Companies Act is the same, which is the fair presentation of the value of goodwill. The way we do that is to test it for impairment annually.
Antoinette Sandbach
Let us just take that system. In 2017, you say the goodwill was fine. A year later, you are asking for write-down of £1.1 billion in goodwill—£1.1 billion in 12 months.
Richard Wilson
We identified the UK goodwill in the 2018 audit. When you look at an indefinite-life asset, standard valuation techniques are used to determine the support or otherwise for a goodwill balance on the balance sheet—
Antoinette Sandbach
Can you just get to the nub of how it was that, having decided you were not going to do any impairment tests in 2017, there is a £1.1 billion write-down of goodwill 12 months later?
Richard Wilson
The company did a reforecast in the early part of 2019, which revised downwards the performance of the UK business again, having already written it down in the plan they prepared in late 2018. That had an influence on it.
Antoinette Sandbach
That relates to trading.
Richard Wilson
That relates to cash flows.
Antoinette Sandbach
Yes, but that is not goodwill.
Richard Wilson
It is discounted cash flows that underpin the goodwill value.
Antoinette Sandbach
So, this is a company that had to refinance a number of times—it took on £1.5 billion of debt under the PwC audit in 2013—and you are saying that the goodwill that was reflected in the accounts reflects that. The reason they refinanced was because they were in trouble. They were not getting the cash flow to finance their debts.
Richard Wilson
On the UK tours business goodwill, when you do an impairment test you attach it to the other assets and liabilities within that business unit. You then take the discounted cash flows that you believe that business unit will generate. Because it is an indefinite-life asset, inevitably a large proportion of that value is into perpetuity. It is the fact that in that regard, a lot of the value of the UK tours business was based on the assumption that management would turn around the business and generate the cash flows.
Antoinette Sandbach
Ah—the word in there is “assumption”.
Richard Wilson
Yes.
Antoinette Sandbach
The warning in 2017 to KPMG was that there was insufficient challenge to management assumptions. Given that Carillion collapsed in January 2018 with a reported 35% of its assets being attributed to goodwill, which had not been impaired for a number of years, what was your approach to the collapse? Did it lead you to any change in practices as auditors?
Richard Wilson
It did. In relation to the 2018 goodwill, we received the company’s revised business plan for the whole business, including the UK tours business. This was prepared in late October as a prudent plan, having taken out considerable amounts of income growth from that plan to the previous plan.
Antoinette Sandbach
All of this is around challenge to directors. Peter Kyle has already outlined that this business is uniquely exposed to risk, with terrorist attack and the particular vulnerability over Brexit. There must have been a particular vulnerability to foreign exchange cash flows, because Thomas Cook’s UK business would have been paying in pounds, and we have seen a 20% depreciation in the pound in relation to Brexit uncertainty. What was it that allowed you to ignore those risks?
Christabel Cowling
I do not think we did ignore those risks. When we looked forward and looked at the business plan, we took account of those risks. We sensitised business downward. We did not ignore and were not blind to this being an incredibly judgmental area. We did two things in response to that. We got comfortable at the position at the end of 2018. However, we included details in our audit report of the issues in this and we insisted that management increase their disclosures in the accounts so that anyone reading them could see what changes would lead to an impairment in goodwill.
Antoinette Sandbach
In hindsight, looking at the £1.1 billion of write-down in goodwill, do you think your impairment test was right?
Richard Wilson
As I said earlier, with hindsight, if I was signing the audit opinion on 19 May 2020, I would have come to a different conclusion. But I wasn’t; I was signing the audit opinion on 28 November.
Antoinette Sandbach
Some of us may think the challenge was different, and actually auditors need to challenge the assumptions around goodwill more. Mr Cragg, during your time as auditors, the group wrote down goodwill in only two years, and I think those were 2011 and 2012. Did you play any part in the group’s decision to impair goodwill in those years?
Paul Cragg
I was not the audit partner in 2011 and 2012.
Antoinette Sandbach
That was not the question.
Paul Cragg
As a firm, yes, we clearly did. We reviewed the analysis that management put to support their carrying value of goodwill and we ran downside scenarios to determine what could happen in the business if a more prudent position was taken. On the back of that, goodwill was impaired.
Antoinette Sandbach
I think you said you came in 2013, so you were 2013 to 2016.
Paul Cragg
That is correct.
Antoinette Sandbach
In none of those years was goodwill impaired.
Paul Cragg
That is correct.
Antoinette Sandbach
Did you not question why it was not impaired?
Paul Cragg
Well, each year we reviewed management’s assessment of goodwill and the impairment test that they did. We challenged that extensively. We ran—
Antoinette Sandbach
Did you have concerns? You have an ability to raise concerns, don’t you?
Paul Cragg
We did. We raised it as a key audit matter in our audit opinion. We raised it and discussed it with the audit committee in each of those years. We satisfied ourselves that, having run scenarios which were much more prudent than management’s own estimate of performance, there was sufficient headroom in the carrying value of future cash flows to support the goodwill. The UK business, which much of the goodwill was attributed to and which was probably the most sensitive during 2013 to 2016, actually improved its performance quite significantly as a result of the turnaround plans that management talked to the Committee about last week.