Grant Thornton fined £2.35m for ‘lack of competence’ in Patisserie Valerie auditby
Britain’s fifth largest accounting firm missed multiple red flags and showed “a serious lack of competence” in its audits of the collapsed high street cake store Patisserie Valerie.
Grant Thornton has been fined £2.35m and told to improve its culture of challenging suspected fraud for failings in relation to its audit of failed bakery Patisserie Valerie.
The high street chain collapsed in 2018, but the UK’s accounting watchdog said Grant Thornton missed multiple red flags during audits across 2015, 2016 and 2017, allowing management off the hook. Thousands of false entries in accounts, suspect invoices and basic failures of accounting protocol led to the chain’s unravelling, investigators said.
After more than 90 years in business, the fall of Patisserie Valerie cost more than 900 jobs across 70 closed stores, the Financial Reporting Council (FRC) said, before Irish private-equity Causeway Capital Partners stepped in to revive it.
Grant Thornton was fined £4m, reduced for an early admission, and is subject to a range of non-financial sanctions including annual reporting to the FRC for three years on the impact of its remedial actions. It must carry out a root cause analysis on audit quality and a review of the its culture relating to challenging suspected fraud.
It will also be subject to additional monitoring in relation to bank and cash audit work, and must sign a declaration that the statutory audit report for each of the three years did not satisfy the relevant requirements, together with a published statement in the form of a severe reprimand.
“We regret the quality of our work fell short of what was expected of us in this instance,” the audit firm said in a statement. “Since the period in question, we have invested significantly in our audit practice to better ensure consistent quality and have started to see the material outcome of this investment.
In 2019, the firm’s chief executive David Dunkley told MPs it was not the auditor’s role to identify fraud. “We are not doing what the market thinks,” Dunckley told a panel. “We are not looking for fraud and we are not looking at the future and we are not giving a statement that the accounts are correct.”
The regulator also imposed sanctions against audit engagement partner David Newstead in relation to audits of Patisserie Holdings Plc for the financial years ended 30 September, 2015, 2016 and 2017. Newstead was fined £150,000, falling to £87,750, due to mitigating factors and banned from carrying out statutory audits for three years.
The FRC said Newstead’s actions were still worthy of sanction regardless of whether fraud had been uncovered or not, and holding any misleading information would not be a defence for the poor quality of audit.
The FRC said it took Grant Thornton’s “size, financial resources and financial strength” into account in determining the level of sanctions. The accountants provided an “exceptional level of cooperation” with the investigation, it said. Grant Thornton had a net income of £471m in 2020, with an underlying trading profit of £72m, up 14% on the prior year.
The fine is lower than some of the record double digit charges that larger accounting rivals have absorbed following similar corporate collapses in recent years, prompting some head-scratching amongst industry watchers.
Lord Prem Sikka, Labour peer, accounting professor and market commentator, called the penalty “puny”, while Richard Murphy, Chartered Accountant and tax campaigner added: “When you can’t get something as basic as the cash right the fine needs to be a lot bigger than that.”
Red flags and suspect vouchers
The Final Decision notice from the FRC details an extensive list of failings in relation to the audits of the bakery, with numerous examples of potential fraudulent activity not challenged by the auditor.
In one year, Patisserie’s figures showed 73% of the entire group’s revenue came from vouchers from a third party, a single payment received on September 28, 2016. “This was
11 times the average monthly receipts in preceding months,” the FRC said. “This called out for further investigation, but none was carried out.”
It also emerged that false information may have been fed to Grant Thornton, but the auditor did nothing to verify certain facts.
In October 2018, Patisserie issued a statement that the board had been notified of “significant, and potentially fraudulent, accounting irregularities and therefore a potential mis-statement of the Company’s accounts,” the chain said. “This has significantly impacted the Company’s cash position and may lead to a material change in its overall financial position.”
A £40m black hole in the accounts was discovered, and just six days later, the bakery provided an update, stating: “The work carried out by the Company’s forensic accountants ... has 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.”
Figures also revealed how the bakery’s cash balance swelled each year from £6.1m in FY20165 to £21m in FY2017, significantly outpacing revenue or profit before tax. Grant Thornton audited the cash numbers by asking for information from senior management along with the banks, and despite inconsistencies appearing, did little to uncover how or why, the FRC said,
One bank told Grant Thornton that “at least” one dormant account had been reactivated and used, without Patisserie’s management informing them.
The FRC said: “These should have led [Grant Thornton] to challenge [Patisserie Valerie] management, review the evidence and representations obtained with increased professional scepticism, and perform a more detailed review of ... bank account activity. It did not.”
Grant Thornton also failed to spot inauthentic cash transactions, the regulator said, including invoices with missing company logos, typing errors, incorrect addresses, other falsified documents, or information that was completely misinterpreted. A bank letter stating Patisserie Valerie had a £4m overdraft facility was misread as meaning a bank account was £4m overdrawn, the regulator said.
Other mistakes pointed out by the regulator included “severe” errors around end-of-year testing of journal entries, which compromised the quality and depth of the auditing and led to inconsistencies that were left unexplained.
The auditor also misstated property, motor vehicles and equipment in the accounts, leading to a situation where £2m of fixed asset additions was wrongly categorised in the relevant years.
“These were not isolated shortcomings or failures,” the FRC said. “The failures were often repeated in each of the three years under consideration, and in relation to several legal entities in the group.” Important procedures or components of the financial statements, fundamental to the proper conduct of an audit, were neglected, investigators found.
“Some breaches related to basic requirements, evidencing a serious lack of competence in conducting the audit work,” the FRC said.
Grant Thornton said it would continue to rigorously defend the civil claim brought by Patisserie Valerie’s liquidators, which “ignores the board’s and management’s own failings in detecting the sustained and collusive fraud which took place”.
“We recognise that there were shortcomings in our audit work; however, our work did not cause the failure of the business,” Grant Thornton said.