By Kaveri Niththyananthan
LONDON—TUI Travel PLC, Europe's largest travel operator, Thursday said Chief Financial Officer Paul Bowtell had resigned after an accounting error forced the company to write off another £88 million ($139.4 million) in "irrecoverable balances" and restate its earnings for fiscal 2009. Its shares tumbled almost 10% in London.
In an embarrassing admission, the company said an audit for the fiscal year ended September 2010 had highlighted the accounting error in the integration of IT systems at its U.K. mainstream business that had accrued over a period of four to five years. The error let the company's total write-off for 2009 to rise from £29 million to £117 million.
Chief Executive Peter Long said the issue had been identified when it reported its third-quarter results in August, but continued to investigate the matter and "only last night were we able to determine the scale of the problem."
As a consequence, the company restated operating profit for the fiscal 2009 down to £401 million from £443 million. Earnings per share were lowered to 21 pence from 23.8 pence. It also reduced opening reserves at Oct.1, 2008, to £2.21 billion from the £2.29 billion previously reported.
A spokeswoman said the issues were identified at the company's retail and tour operators businesses in the U.K. and stemmed from a discrepancy between two IT systems. The retail system documents prices at which holidays are sold and includes discounts and any free items that agents may offer, while the tour-operator system doesn't take discounts into account.
The discrepancy wasn't significant in previous years but became "more obvious" and was spotted during the economic downturn when more concessions were offered to help boost demand, the spokeswoman said.
The two systems were inherited through the merger in 2007 of First Choice Holidays PLC of the U.K. with the tourism operations of Germany's TUI /zigman2/quotes/206714402/delayed DE:TUI1 +2.58% AG that created TUI Travel, but responsibility still lies with its U.K. unit, which made the choice to continue using them.
TUI Travel said it is satisfied that weaknesses in the system had been rectified, but investors were rattled by the disclosure. In midday trading in London, TUI Travel's shares traded down 22 pence, or 9.6%, to 208 pence, making it the biggest loser in the benchmark FTSE 100 index, which traded up 0.5%. The stock has shed 11% in value since the start of 2010 amid concerns about cash-strapped consumers reigning in spending.
"It is now clear that at the time of merger there were weaknesses in the legacy systems we chose to use in the TUI U.K. business," Mr. Long said. "Despite the fact that this situation had built up over a number of years, Paul is behaving honorably and I am disappointed that he will be leaving the group."
The head of the U.K. unit, who has retired, and the finance director, who has departed, also were implicated. Mr. Long added Mr. Bowtell took the step to resign because he felt events "happened on my watch." Mr. Bowtell wasn't available to comment.
Mr. Bowtell, 42, joined the board of TUI Travel in June 2007. He was previously finance director at First Choice. Before that, his finance career included a period as finance director at British Gas, a unit of Centrica PLC.
Mr. Long said he had asked Mr. Bowtell to remain with the company to see through the full-year audit and production of the company's preliminary results. "I will miss working with him and wish him every success for the future," he added.
It is now for the nominations committee to decide how they will move to find his successor, Mr. Long said.
Broker Numis Securities said Mr. Bowtell has done the "honorable thing" by resigning but said, "This is disappointing news and will do little to dispel the feeling that the tour operators are low-quality businesses."
On Oct. 5 TUI Travel said it will incur additional charges for the 12 months to Sept. 30 relating to restructuring costs for Corsair and its U.K. operations.
"High levels of 'exceptional' costs have been a recurrent feature for the tour operators, resulting in a questionable quality of earnings and contributing, in our view, to the apparent low rating," Numis said.
TUI Travel said it remained confident that results for fiscal 2010 would be in line with previous guidance and that net debt will be lower than previous guidance.
The company said adjustments had been limited to a £5 million impact. It added the stronger recent trading trends flagged Oct. 5 had continued.
Write to Kaveri Niththyananthan at email@example.com