KPMG is under fire for appointing itself administrator of troubled bakery Patisserie Valerie despite knowing it was conflicted in performing the service.
The audit firm said last month that a second administrator would be required to pursue legal claims against Grant Thornton, which audits Patisserie Valerie, as it is also KPMG’s auditor.
“No shame, no common sense,” said Sam Gibbins, managing director of compliance consultancy Complilearn. “Given the current industry travails this seems, at best, poorly thought through from KPMG.”
KPMG, along with Deloitte, PwC and EY, are facing at-best a forced separation of their consulting and audit arms due to widespread concerns of conflicts of interest and anti-competitive practices, and at-worst a break up.
The government has decided to step in following the ineptitude of Britain’s accounting regulator, the Financial Reporting Council (FRC), which is soon to be replaced by a new body with greater legal powers.
Last month, the holding company for the Patisserie Valerie chain collapsed into administration having overstated its cash position by £54m, the preliminary report from KPMG found.
Initial estimates of the cash overstatement, made at the time an accounting fraud was discovered, were £40m. In addition, the company’s assets were overstated by £23m and the creditors understated by £10m, with the total overstatement of net assets amounting to £94m, the report added.
In the report, KPMG said it would not be “appropriate” for it to pursue legal claims against Grant Thornton on behalf of Patisserie Valerie’s creditors. Grant Thornton is under investigation by the UK accounting watchdog for its work on the bakery chain, which it had audited since 2006.
“This is hardly an ethical approach by KPMG for managing conflict,” said Simon Osborne, chief executive of the Institute of Chartered Secretaries and Administrators (ICSA).
KPMG was appointed as Patisserie Valerie’s administrator in January, following the discovery of enormous accounting fraud at the chain, and has earned about £1.5m in fees so far.
‘Passing around the carcass’
“What an interestingly vicious circle,” said Danny McLaughlin, a forensic accounting specialist and owner of McLaughlin Forensic. “Given this situation, KPMG is now suggesting that some aspects of the administration, legal claims etc., may need to be dealt with by another firm because of this conflict. It’s a hassle for the creditors, but hey, when large fees are in prospect, who cares about conflicts or public perceptions that they are money-grabbers with disregard for the most basic of ethical principles?”
The Big Four firm claims Patisserie Valerie’s directors knew before it was appointed that an additional administrator would later be required to investigate potential claims against Grant Thornton due to the conflict.
“This is an outcome that is entirely consistent with expectations and we must hope that after the revolution this sort of thing won’t happen again,” said Robert Stell, of Bradbury Stell accountants. “Let us hope that in the future it won’t be the same old faces passing around the carcass.”
Solicitors at law firm Teacher Stern have been instructed by Patisserie Valerie shareholders to pursue action against the bakery. As Patisserie Valerie’s net assets had been overstated by at least £94m, the firm’s shareholders are considering legal action in order to gain access to forensic accounting reports held by KPMG.
“This is not a new issue,” said SA Law corporate partner Vincent Billings. “Often parties who have suffered a loss will examine the work of professional advisers to see whether they have conducted themselves in an appropriate manner when supplying services.”
Patisserie Valerie’s creditors have approved the creation of a committee that will decide whether or not to appoint an additional administrator to pursue legal action against Grant Thornton in the next fortnight.
Luke Johnson, the former chairman of Patisserie Holdings, has joined the committee, alongside HMRC and Maitland, the PR consultancy that worked with Johnson for many years.
Johnson is the largest creditor to the group. He lent Patisserie Holdings, the owner of the Patisserie Valerie, Philpotts and Baker & Spice chains, a net £10m shortly after it revealed the accounting scandal that ultimately led to its downfall, and another £3m as it went into administration.
‘No other option’
Earlier this month, Rachel Reeves MP wrote to the FRC over her concerns of a review of KPMG’s audit practice.
Soon after, the FRC announced a review into governance, controls and culture at the Big Four firm’s audit practice, which descended into farce when it emerged the review would be led by former KPMG employee Sally Dewar.
Reeves, who chairs the Business, Energy and Industrial Strategy (BEIS) committee expressed surprise when she found out that Dewar was a KPMG alumni.
“On the face of it, there appears to be a clear conflict of interest here,” she said.
Reeves questioned the watchdog over its approach to potential conflicts, “real or perceived,” of a review into the firm being led by a former employee, and what steps it had taken in mitigating any conflicts.
KPMG is also subject to an ongoing investigation into materials provided by the Big Four firm to the FRC during its review of the firm’s Carillion audit.
The Competition and Markets Authority (CMA) has resisted calls for the breakup the quartet but said in a report earlier this month the option could be revisited within five years if the profession does not improve.
Lord Andrew Tyrie, head of the CMA, said the government had received recommendations to break-up the Big Four from three separate reports,including the Kingman review of audit regulation and the Brydon review of audit quality and effectiveness.
“In large part, they come to similar conclusions,” Tyrie said. “Conflicts of interest cannot be allowed to persist; nor can the UK afford to rely on only four firms to audit Britain’s biggest companies any longer.”