Who will bear the biggest cost of Patisserie Valerie’s accounting fraud as the chain goes into administration?
Less than four months after a multi-million pound black hole was discovered in its accounts, Patisserie Valerie has gone into administration after it was unable to renew its bank financing.
Whilst many of us will suffer the minor inconvenience of having to find somewhere else to buy our morning coffee and croissant, spare a thought for the chain’s 3,000 staff, nearly a third face losing their jobs. For many this happened overnight as 71 outlets closed for business.
Investors are also set to lose out. Whilst shares were suspended from trading on AIM when accounting irregularities were first discovered, many will have hoped that things weren’t as bad as first thought and that the company would recover over time. It turns out things were worse. Forensic accountants appointed by the company to undertake an internal investigation have identified very significant manipulation of the balance sheet and profit & loss accounts, suggesting the fraud may have been perpetrated over a number of years.
Investigators hard at work behind the scenes
Whilst administrators look for a buyer in a bid to rescue the company (they are already in talks with former Druckers businessman David Scott), they will no doubt be very interested in the outcome of this and the many other investigations going on behind the scenes. One of the key questions for the investigators is where has the money gone and can any of it be recovered? The longer the fraud has been going on, the more likely it is that the money has been spent and won’t be recovered. Unfortunately, fraudsters don’t tend to keep their loot under the mattress for a rainy day, instead frittering it away on lavish lifestyles, expensive cars and luxury holidays. There is always the chance of there being some more substantial assets such as properties in the mix. However, unsurprisingly, these are often bought in the names of other individuals (usually friends or relatives).
The company’s auditors may find themselves in hot water
The FRC is looking into how and why Grant Thornton didn’t pick up such a significant fraud in their annual audits. They were long standing as the group’s auditors and there was no change when the group listed on AIM in 2014. Could it be a case of the auditors being in place too long and becoming too familiar with the business that they became ineffective? Auditors typically undertake analytical reviews of performance from one year to the next. This is good when there have been significant changes in business performance but, when amounts extracted by a fraudster are gradually increasing, there may be no obvious cue that something is awry.
A single person of interest
The company’s ex-CFO is being investigated by the FRC and the SFO. In fact he’s the SFO’s only person of interest indicating that there is no suspicion of collusion. If the fraud is all down to one man, it’s a huge corporate governance failure. Although AIM listed companies aren’t subject to the UK Corporate Governance Code, the company’s accounts openly state that the directors recognise the value and importance of good corporate governance. Was it a case of poor risk assessment or failure to implement what would otherwise have been considered a good set of policies and procedures? Or was it simply that the fraudster was so high up the food chain that he was simply able to bypass the company’s procedures while no one was watching or willing to question him?
Let’s watch this space…