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Baking bad: Patisserie Valerie collapses into administration

23rd Jan 2019
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Patisserie Valerie
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Patisserie Valerie has collapsed into administration after it was unable to extend its bank facilities due to “significant fraud” in the company’s past accounts.  

The Patisserie Valerie saga started last year after accounting irregularities left the nearly century-old business saddled with a tax bill of more than £1m, a winding-up order and a £20m hole in its accounts. The irregularities had led it to significantly overstate its cash position for years.

The holding company behind Patisserie Valerie quickly suspended its shares, and with it the company’s FD Chris Marsh. Marsh’s departure was followed by chief exec Paul May, and a new senior leadership team was drafted in to bring the business back from the brink.

A collapse was avoided through a unsecured £20m loan from the company’s chairman, entrepreneur Luke Johnson, and the company raised another £15m from its shareholders by issuing new shares.

Just over a week ago, interim CFO Nick Perrin offered a sanguine take on the company’s future in a written response to Business, Energy and Industrial Strategy Committee chair, Rachel Reeves MP.

Perrin indicated that repairs of Patisserie Valerie’s financial situation were well underway, but the going was slow. “This is a complex and time-consuming task,” Perrin wrote. “We are gradually ensuring that overdue payments are made and that terms agreed with suppliers are adhered to, but there remains much to do to complete this task.”

Perrin’s careful optimism quickly dissipated, however. In a company update on 16 January, Patisserie Valerie said the company's forensic accountants had “revealed that the misstatement of its accounts was extensive, involving very significant manipulation of the balance sheet and profit and loss accounts.

“Among other manipulations, this involved thousands of false entries into the Company's ledgers. It will take some time before a reliable trading outlook can be completed while the above work streams progress.

“The initial indications from the work carried out to date is that the cash flow and profitability of the business have been overstated in the past and is materially below that announced in the trading update on 12 October 2018, which was based on limited work carried out over a 48-hour period.”

This discovery appears to have been the coup de grâce​ for the ailing business, as discussions with its bank fell apart because of the past fraud. According to Simon Bittlestone, the CEO of MetaPraxis, the late discovery of the fraud “is categoric proof that its management information was simply not good enough”.

“Its accounting system had become so complex that it hid any understanding of the underlying business performance. The fact is that if those not implicated in the scandal had effective management information that allowed them to cut through the noise, they would have spotted such colossal mistakes far earlier.”

The travails and eventual collapse of Patisserie Valerie has also been an ignominious episode for its erstwhile auditor, Grant Thornton. The auditor failed to flag the irregularities, for which it could now face serious consequences.

The cakemaker’s collapse leaves more than 3,000 jobs at risk, and about 70 of the cafe group’s nearly 200 stores and concessions will close immediately, with the loss of about 900 jobs.

Patisserie Valerie’s directors have appointed KPMG as administrators to the company and its various subsidiaries.

Commenting on the administration, Rachel Reeves said: “This is terrible news for Patisserie Valerie’s staff, shareholders and suppliers. I hope the administrators will make every effort to safeguard jobs and protect the interests of suppliers.

“The extraordinary black-hole in Patisserie Valerie’s accounts which has led to this administration raises grave corporate governance concerns and poses serious questions regarding the effectiveness of the auditor and the current arrangements for regulation. The BEIS Committee will picking up these issues in the context of our current inquiry on the future of audit.”

Replies (17)

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By tom123
23rd Jan 2019 15:13

Clever headline!, whilst of course tragic for those affected.

Shows how determined fraudsters can cause trouble.

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By Justin Bryant
23rd Jan 2019 16:26

That is of course true to an extent, but when a fraud as big as this goes unnoticed by a top 10 auditing firm it makes you rightly wonder what is the point of an audit and how many other large companies are there that can suddenly implode like this (quite a few I suspect)?

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By jberezny
24th Jan 2019 13:04

Massive collusion among management is difficult, but not impossible to detect.

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By pauljohnston
24th Jan 2019 09:45

Who benefited from the fraud - is this apparent

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By SJH-ADVDIPMA
24th Jan 2019 09:46

The ubiquitous circumstance of the chasm between board room and shop floor finance. I've seen it time and again in multi nationals. The 'fake it' senior finance people , ingeniously coming up with explanations for reported performance, that are far from the truth, lead board rooms into a financial reporting maze. Ceos and non execs need some serious reality checks , i would assume my management accounts were largely garbage , until proven otherwise if I were heading a group.

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By k743snx
24th Jan 2019 10:05

Well, at least nobody's blamed Brexit yet....

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Caroline
By accountantccole
24th Jan 2019 12:02

I've boycotted them since I found out they backed it, and I eat a lot of cake......

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By carnmores
24th Jan 2019 18:12

so its all your fault then ;-)

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By Steve951
24th Jan 2019 10:25

I'd be interested to know who was responsible for the 'thousands of false entries', surely not a single individual.
I have experienced many FD's 'smoothing' performance via false accruals & pre-payments, with senior finance staff turning a blind eye.
I have always red-flagged this as hiding true performance (preventing resolutions being found & implemented to correct under-performance) and making trend analysis & accurate forecasting basically useless.

Unfortunately very few speak up in fear of loss of employment or stalling career progression.

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By Terry Hyman
24th Jan 2019 12:08

This sorry saga will no doubt result in much blame being aimed at the Board, the auditors, the staff who fabricated false accounting entries and those allegedly involved in fraudulent activity.
However my beef is with the banks who provided the overdrafts and were much involved in the collapse of the company. I would like to know what due diligence was instigated by the banks when the company requested overdraft facilities, bearing in mind that this was a company, ostensibly doing really well, with significant cash reserves. Why would they have needed such facilities?
I hope that the Administrators follow this up as part of their remit.

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By DMBAcc
24th Jan 2019 14:16

My prediction - nothing will change. Too much power in too few hands. Self interest above what is right and proper. This is found in every facet of our society. Remove one corruption and it will soon be replaced by another. how many times have the Big Four failed (should I mention Curillium and many others before?). You mention big banks - but look at the revolving door of staff between them and the authorities supposedly monitoring them?

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By tedbuck
24th Jan 2019 16:38

Sorry to lose a good tea shop which is a great pity but perhaps Druckers will rescue the important bits - Those near me!

To lose such a large sum of money really smacks of gross negligence somewhere in the Company. Where is the money then? Or is this one of those manipulate the figures and borrow to finance the losses? Seems a touch short sighted and surprising the auditors didn't notice anything amiss, but then that is the tick-box culture for you - it stops people thinking about what they are actually looking at. More to come no doubt!

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Hallerud at Easter
By DJKL
24th Jan 2019 22:26

Where were internal audit in all this?

Where were the internal controls?

Nobody in the finance team spotted any of the thousands of entries in the records and queried any of them?

Dodgy accounting practices/ policies I can sort of understand but dodgy entries on the scale mentioned, unless to reflect said poor accounting policies ,is pretty hard to believe went unnoticed.?

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By AndrewV12
28th Jan 2019 12:47

Extract above
'A collapse was avoided through a unsecured £20m loan from the company’s chairman, entrepreneur Luke Johnson, and the company raised another £15m from its shareholders by issuing new shares.'

That 15 M was money well spent.

Further extract above
“Among other manipulations, this involved thousands of false entries into the Company's ledgers.

Who makes these false entries and on who's orders, its debatable whether the auditors should have picked them up.

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By AndrewV12
28th Jan 2019 13:17

If only they could have held on to the 5th February when the Chinese year of the pig starts. It might have just saved their bacon.

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By James Samuels
29th Jan 2019 17:22

How can a company audited by a reputable firm crash so spectacularly?

It's interesting to read P May's Director's report in the accounts to Sept 17 states that "the company's control systems included a comprehensive budgeting system, Board level approvals and recruitment of personnel with the highest levels of integrity". Eh?

How can auditors help clients enforce budgetary controls and eliminate fraud?

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By Justin Bryant
04th Feb 2019 15:50
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