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Embattled Grant Thornton vows to fight off £200m Patisserie Valerie lawsuit

Britain’s fifth largest accounting firm is facing a £200m lawsuit over the collapse of Patisserie Valerie amid claims of widespread bookkeeping fraud missed by auditors.

13th Jan 2021
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Grant Thornton has promised to “rigorously” defend itself in court over alleged accounting failures related to the collapse of Patisserie Valerie.

The challenger accountancy firm is being sued for £200m by the liquidators of the cake shop, which it audited for more than a decade.

A £40m black hole was initially discovered in the accounts in 2019, amid rumours of fraudulent invoices and significant malfeasance, forcing the chain into administration.

The first set of restructuring and insolvency specialists at KPMG later said the missing total was nearer £95m.

Investigators said false cheques worth millions of pounds had been cashed, along with fraudulent entries in ledgers that had been used to exaggerate the firm’s financial health. Off the books, overdrafts topping £10m had been run up in bank accounts linked to the company.

Several members of the cake shop’s team were suspended when the incidents came to light, as forensic investigators and regulators began poring through the historic audits.

The bakery chain was valued at £450m before the potential fraud was uncovered, and the administration wiped out shareholders.

Liquidators FRP Advisory said Grant Thornton’s negligence in the preparation and conduct of 2014 to 2017 financial statements meant it had insufficient funds to continue trading. It said “accounting failures” were behind the collapse. Lawyers from London firm Mishcon de Reya have been engaged to lead the case against the accountancy firm. 

Such large claims against accounting firms in the UK courts are relatively rare; liquidators at Carillion took two years to file a £250m suit against KPMG.

Both the Financial Reporting Council (FRC) the UK accounting regulator, and the Serious Fraud Office are investigating the matter.

“Patisserie Valerie is a case that involves sustained and collusive fraud, including widespread deception of the auditors,” said Grant Thornton in a statement. “The claim ignores the board’s and management’s own failings. As the matter is subject to an ongoing FRC investigation and civil claim, we are unable to comment further.”

FRP Advisory did not offer comment beyond a statement from November which said: “We can confirm that the joint liquidators of companies within the Patisserie Valerie Group have issued a claim for damages against Grant Thornton in respect of their negligent audits of the group companies’ financial statements for the financial periods 30 September 2014 to September 2017 inclusive.”

Patisserie Valerie’s largest creditor is former executive chairman Luke Johnson, who pumped more than £10m of his own money into the firm to stave off collapse.

Johnson told media he had been tricked by a false image of the firm’s health and the optimistic picture painted by Grant Thornton.

“One of the most astonishing aspects of the entire episode is the way in which it seems such an eminent firm had the wool pulled very comprehensively over its eyes,” he said. “They never raised any material issues about the quality of our accounts.”

An FRC spokesperson said: “The FRC’s investigation into the audit of Patisserie Holdings is at an advanced stage and Grant Thornton are continuing to cooperate fully with us. We are not able to provide any further information at this point.”

The SFO is conducting a criminal investigation into the business and accounting practices of individuals associated with Patisserie Holdings PLC, the cake shop’s parent company. Several arrests have been made in relation to this investigation, including one re-arrest.

“The investigation is ongoing and we can give no further information or comment at this time,” the SFO said.

Replies (8)

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By Justin Bryant
13th Jan 2021 15:31

Anyone who has done auditing will find this entirely unsurprising and I expect it's mostly just bad luck for GT, since at any firm it's the most junior, inexperienced people who do the most important (coalface) audit work and so it's actually surprising the wool is not pulled over their eyes more often by determined, clever & experienced fraudsters.

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Hallerud at Easter
By DJKL
13th Jan 2021 15:58

Wonder where internal audit were over these years, what about the company's audit risk committee, what were they doing, whilst it does sound bad for GT there are more actors in corporate governance than just the external auditors. (However easy a target they may be)

Regards the grunts at the coalface, part is I think an over reliance on analytical review (cheaper) and a lesser reliance on both compliance and substantive testing, I noticed this when we used to need to be audited by , by chance, GT, it was interesting to watch because prior to my taking the in house role I had been the member of staff at the firm I was then with who had previously performed my employer's audit, as a former auditor to me the combination over the last twenty years of tighter audit fee competition coupled with everyone has a laptop with the audit programme on it to be completed, has led to sampling sizes dropping and a tick box approach. (But then again, I know nothing, I am now a mere reactionary old fogey.)

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Replying to DJKL:
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By Justin Bryant
13th Jan 2021 16:08

One thing I learned as an auditor is that getting the B/S right should be your main concern. The P&L is simply a yearly movement in the B/S and any immaterial B/S unders/overs probably net out anyway in the P&L bottom line i.e. you should be focused on whether there is a material over/under statement in assets/liabilities respectively and it's not rocket science to work out if that's the case (but the juniors can easily have the wool pulled over their eyes as explained above).

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Replying to Justin Bryant:
Hallerud at Easter
By DJKL
13th Jan 2021 17:02

Not if it is at the expense of testing internal controls, it is these which ought (absent collusion) have helped control things like creating new suppliers/changing bank details etc, it seems in the case in question that payments were possibly redirected, posted to supplier accounts but not sent to real suppliers but elsewhere, so one compliance test that might have caught this is reviewing say supplier statement recs done with say the PL team performing these but a cashroom team controlling payments, of course that presupposes that these days there are staff performing PL recs which the auditor can test

Audit really ought not to be chasing frauds but it ought to be mindful of their possibility and designed to test the controls that ought to make them difficult to undertake, then again if collusion the best controls in the world can be side stepped.

I spent bits of my apprenticeship in the 80s auditing subs etc of quoted /large companies in the Glasgow area (Woolworths/Fenners/Nissan/ United Biscuits) virtually all had very robust controls in place as that was considered a key part of the FD's job, catch these days is maybe the sexy bits (mergers / acquisitions/ project appraisal) grab their attention and the basics get missed.

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By PA33
14th Jan 2021 10:42

I do have some sympathy for GT as auditors - as mentioned above and also in various previous news reports about the collapse there were £ 10m (or more - depending on which report) of off the books overdrafts which will have contributed to said collapse.
Auditors can only audit what is presented to them - if they are not given bank statements for bank accounts that are not reflected in the ledger it is difficult to see how they can be held responsible?
They will have no doubt asked for a list of all bank accounts for the business and will likely have been given a list of the accounts which are reflected in the financial ledgers.
Re: the existence of fraudulent transactions, if these are not picked up in the sample selected for testing then it's also difficult for auditors to confirm or question these specific transactions. If the false cheques mentioned above were all for an immaterial value then it is unlikely they would be selected for sample testing.

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Replying to PA33:
Hallerud at Easter
By DJKL
14th Jan 2021 11:36

Re cheque quantums, compliance testing re controls in my day would have selected at random irrespective of size, in fact even with transactional substantive testing size was not a selection issue. Where I was balance sheet testing then yes, size mattered, debtors selected by say monetary unit sampling would more likely select the larger ones. I was a tad sad back then, I devoured the firm's audit manuals, both the Chalmers Impey one and its replacement Hodgson Impey one, the CI one had sampling tables, stats formulas, narratives re types of testing and as it had been superceded I was allowed to keep it when I left HI in 1987, I now somewhat regret I left it in my later employer's library when I departed auditing in 1999.(So anyone who has the A5 size red ring bound CI 80s audit manual, I would be interested in acquiring it)

I get the issue with unknown bank accounts, especially if not with a bank with which the business already had a relationship, as bank letters (however woeful banks are at accuracy re these) would not have detected.

If this one ends up in court (no settlement) the detailed arguments as to what GT ought to have done differently will be very interesting.

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Nefertiti
By Nefertiti
14th Jan 2021 18:11

LOL another day, another scandal, this time £200m missing and the dumb auditors never picked it up. When will the sheeple wake up and realize that ethics are just in textbooks and that high profile auditors are nothing more than just a famous name that unfortunate victims trust. It is all about money, if you pay enough you can get anything approved and certified by anyone. Now let the excuses begin to justify this one and then we can all forget it in a couple of days as usual - until the next scandal.

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Replying to Nefertiti:
Hallerud at Easter
By DJKL
14th Jan 2021 20:59

I think here that is unfair, they appear to have employee fraud and possibly collusion, the main shareholder threw £10m in to shore things up which is a strange act by him if he knew the accounts were ****, the key is not that a fraud went undetected, the key is did the auditors take reasonable care when approaching the audit?

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