Accountancy firm Grant Thornton is caught up in a scandal over Patisserie Valerie. The company is fined £2.3 million for failures in its audits of the collapsed cake chain.
According to regulator Financial Reporting Council (FRC), the fine covers audits carried out between 2015 and 2017. Grant Thornton allegedly “missed red flags” and failed to “question information provided by management”.
The accountancy firm admit to not following audit rules, and must now report every year to show its improvements.
The particular accountant who did the audits, David Newstead, also received a fine of £150,000 for his part in signing off the accounts.
Deputy executive counsel to the FRC, Claudia Mortimore, says numerous breaches of relevant requirements occurred across three separate audit years. This shows “a serious lack of competence in conducting the audit work”. She hopes that the sanctions will “help to improve the quality of future audits”.
The original fine of £4m was adjusted for mitigating factors, and reduced to £2.34m. Mr Newstead also had his fine adjusted for the same reasons, lowering it to £87,750. In addition, he has a three year ban on carrying out audits.
Grant Thornton are Britain’s sixth biggest accountancy firm, but this isn’t the first time they have faced fines over errors in their work. In December 2019 they received a £650,000 fine over a botched audit. While in 2016, the FRA identified a series of errors in its work for another company.
What happened at Patisserie Valerie?
The collapse of Patisserie Valerie came unexpectedly without warning. The chain achieved quick expansion, appearing in good financial health. That is until realising its accounts were all fiction, and its cash position wildly inflated. On top of this there were two bank loans which the board did not know about.
The board of Patisserie Holdings announced in October 2018 that it received notification of potentially fraudulent accounting irregularities. Shares were suspended at this time. Shareholders put in emergency cash injections, but could not save the company. The company then entered into administration the following January, resulting in 70 stores closing and over 900 people losing their job. A slimmed down version of the chain continues to trade, thanks to the management buyout.
The collapse came after the discovery of a large hole in the company’s accounts, valued at £94m.
After going into administration, it was found that the chain overstated its cash position by £30m and did not disclose overdrafts of almost £10m.
The Serious Fraud Office arrested five people in June 2019, questioning them over allegations of accounting fraud.
A Grant Thornton spokesperson says that since the Patisserie Valerie scandal, the company has made significant investments in audit practice. The firm has “co-operated fully with the FRC and acknowledge the investigation’s findings” in relation to audits completed in 2015 to 2017. They “regret the quality of [their] work fell short of what was expected” from them.
Allegations of negligence
Liquidators at FRP Advisory previously accused Grant Thornton of negligence, and launched a civil case against them.
The Grant Thornton spokesperson says the firm “recognise” their mistakes in the audit, but maintain that their “work did not cause the failure of the business”. The company will “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”.
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