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Grant Thornton fined £2.35m for ‘lack of competence’ in Patisserie Valerie audit

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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.

27th Sep 2021
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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.”

Questionable penalty

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.”

Administration quickly followed as a separate investigation by KPMG, also the cause of some controversy, found the bakery had overstated its cash position by £54m.

Basic failings

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.

More headaches

The Serious Fraud Office is also investigating the collapse of Patisserie Valerie, having arrested former finance director Chris Marsh and several others.

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.

Replies (27)

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By Hugo Fair
27th Sep 2021 18:47

Opening sentence says it all really .. "told to improve its culture of challenging suspected fraud for failings in relation to its audit." Isn't that the bedrock of audit (as opposed to random sampling by juniors and schmoozing by seniors)?
It's a bit like fining an aircraft manufacturer after a series of crashes due to wings falling off - and telling them that they must improve their culture of structural stress testing before crossing their fingers and issuing a certificate of airworthiness!

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Replying to Hugo Fair:
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By Alexerg
30th Sep 2021 21:21

---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.”---
Which brings one to wonder what they are being paid for.

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By GHarr497688
27th Sep 2021 20:50

The big boys have much lower standards than smaller firms of Accountants. I could write a book from my knowledge over the years from capital introduced to fund a capital purchase contra'd to a BIG firm I lost out too certifying Accounts that contained material errors. And the rest......

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By Iamarobot
27th Sep 2021 21:22

The more I read about these failed audits, the worse it seems to be. I would not trust GT to audit a petty cash tin. Not sure why anyone relies on their audit reports.

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By flightdeck
29th Sep 2021 14:22

I have the exact thought - these audits are not untrustworthy. The fines are vanishingly small to change their behavior. There needs to be personal liability.

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By thomas34
28th Sep 2021 08:14

The fine says it all about the treatment meted out to the "big firms" compared to the poor sole practitioner who falls foul of the rules. I know we're comparing the FRC against one of the RPB's but according to their website GT have around 185 UK partners. This means that they each have to shell out around £11,000 per partner, a derisory sum given what I consider to be the worst audit errors I can ever remember. I recall they hid bank borrowings in undeclared bank accounts - I never did fathom how their double entries worked in those cases.

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By Iamarobot
28th Sep 2021 11:17

I love the statement that they fell below the required standard in this case. As if this is a one off.
All their audits will be defective in some way. They have got away with poor auditing so far in these other cases.
Remember that Patisserie Valerie should have been a simple audit. Stock should be low because it goes off quickly. Debtors should be low because it a cash on delivery business. Only the credit card sales should produce a year end debtor.

Imagine if GT had to audit something that requires judgement like construction, banks, insurance companies etc.

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By paulwakefield1
28th Sep 2021 11:21

The FRC report is a fascinating read. There are bits where, to be honest, an element of "There, but for the grace of God, go I" creeps in until you realise the scale. But there other jaw dropping bits - Para 5.13 is a classic.

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Replying to paulwakefield1:
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By mkowl
29th Sep 2021 09:48

paulwakefield1 wrote:

The FRC report is a fascinating read. There are bits where, to be honest, an element of "There, but for the grace of God, go I" creeps in until you realise the scale. But there other jaw dropping bits - Para 5.13 is a classic.

I read it, but it was the basic faults in the simple areas on the bank reconciliations. Failure to check what appears to be dubiously entered uncredited lodgements to post year end bank statements. I can't profess I was a good auditor, my documentation was more in my head than on a file, but my accounts prep training meant I probably over-audited the bank side. The old mantra that was rammed into me, if that don't balance then nothing else is right. Perhaps that is the problem the wet behind the ears audit staff simply do not get involved in the muck and bullets of accounts prep and miss the obvious because the computer is right

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By johnjenkins
29th Sep 2021 09:54

If it's not material, which can be a large figure, then don't bother looking. (not my modus operandi)

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By Rgab1947
29th Sep 2021 11:05

First place I look is bank.

But with software nowadays double entry is not something the digitally trained seem to think much about. And recons? "But its top of the range software. That does automatic recons."

Yes well.

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By johnjenkins
29th Sep 2021 09:52

So why are they still allowed to carry out audits? In fact why are they still allowed to trade?

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By Ben Alligin
29th Sep 2021 10:03

Fancy a giggle:

'...our reputation is built on the quality of the work we deliver. Our approach to quality assurance is designed not only to ensure compliance with all relevant regulatory requirements, but more importantly to ensure that we deliver the absolute best to our clients every time we work with them'

'Auditing and financial reporting remains high on the agenda as the implications of not getting it right can be serious'

Quotes taken directly from the face of Grant Thornton's website this morning. No mention of their utter incompetence or recent FRC report findings. Is this misleading advertising?

No doubt the ICAEW will take issue with their website!!

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By Ben Alligin
29th Sep 2021 10:13

The website that keeps on giving:

'As a business adviser with more than 25 years' experience specialising in audit and non-financial assurance work, I have assisted businesses grow from start-up through to ultimate exit' so says David Newstead Audit Director London

What a lovely euphemism, the 'ultimate exit' in this case was the collapse of Patisserie Valerie.

Finally before I get down to some proper work this morning, the GT News Centre reports a top story this morning, namely that GT is named as Top 10 Employer for working families. The FRC report fails to get a mention in their News Centre - how very odd.

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By Mr J Andrews
29th Sep 2021 10:13

You can't really blame the young trainees out on their evidently unsupervised fiasco. And no mention of how many GT heads rolled. Ah well; better luck next time.

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By Marlinman
29th Sep 2021 10:31

It makes me chortle to read about the big firms getting into trouble for shoddy workmanship. A spokesman for the firm then says regrettably this job fell short of our normal high standards- what every bloody month?

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By Rgab1947
29th Sep 2021 11:01

Here we go again. Another big firm getting caught out. Nothing new is there.

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By petestar1969
29th Sep 2021 11:03

No surprise here. I was on a joint audit about 20 years ago, we did part of it and GT did the rest. The collective experience of the GT team of 3 was about 18 months, they had absolutely no clue. One of them is likely a partner now......

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By jamiea4f
29th Sep 2021 11:30

I bet GT will be crying in their beer over this slap on the wrist…. Who exactly benefits from this fine, the people who lost their jobs, the creditors who lost money…? You know this isn’t the first and probably won’t be the last.

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By WALLENDER
29th Sep 2021 11:47

The fine is to low. Until fines are "eye wateringly" large then nothing will change. Most of the errors were auditing 101 errors. An audit partner responsible for this type of error beggers belief. As for GT claiming that the Directors of PV should have known what was going on and GT counter suing is laughable. Whatever the Directors knew or didn't know is no excuse for the shambles of GT's contribution to the audit, or lack of, and GT should not be trying to apportion blame as some kind of smoke screen for their own abysmal failings.

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By indomitable
29th Sep 2021 11:51

I love this statement

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.”

Says it all really!!

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By Wiganer Elaine
29th Sep 2021 12:09

It's the age old dilemma that the big audit firms seem to have: do you bite the hand that feeds you, do you qualify the accounts or even refuse to sign them off?

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By MattS
29th Sep 2021 12:20

Very interesting to read the that senior statutory auditor will be prohibited from signing for a three year period.

I cannot recall seeing this before (I may have over looked) - is this a new way forward for the FRC?

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By MattS
29th Sep 2021 12:20

Very interesting to read the that senior statutory auditor will be prohibited from signing for a three year period.

I cannot recall seeing this before (I may have over looked) - is this a new way forward for the FRC?

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By North East Accountant
29th Sep 2021 12:58

Many years ago we took 3 audits of a top 4 firm and the level of errors in the previous year astounded me.

I will not even sign off a little quarterly bookkeeping/VAT job without a copy of the actual bank statements for all bank accounts.

It's all pretty basic stuff.....surely?

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By Marlinman
29th Sep 2021 15:05

Bigger isn't better. I'd rather stay small, do a good job for a fair price and have a stress free life.

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By AndyC555
29th Sep 2021 15:43

"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.”"

Says the man who in his calculation of the Tax Gap added £28bn to his calculation in respect of tax debts not collected, apparently not noticing that that was the figure for tax owed on a particular date and £25bn of that was subsequently collected.

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