Patisserie Valerie has had a stormy few weeks after it was called out for “accounting irregularities” in October 2018 and fraud was found on the cake chain’s accounts.
Since the discovery, CFO Chris Marsh has been arrested, released on bail, and then has subsequently resigned over the state of affairs.
The business was kept afloat thanks to executive chairman, Luke Johnson, who pumped in £20m. Other City investors also poured money in to stabilise the situation.
Now the parent company, Patisserie Holdings, is looking for a new auditor to replace Grant Thornton, who will be investigated for its audit work on the cake shop’s accounts for financial years 2015, 2016, and 2017.
Likely candidates include Big Four firms PwC, Deloitte, and EY.
The Serious Fraud Office have also opened a criminal investigation into who they simply call “an individual”. The identity of this person has not yet been revealed.
While investigations continue, we ask, why and how did this happen?
Accountancy Age caught up with Gavin Pearson, forensic accounting and expert witness partner at Quantuma.
What do we know about the case?
Pearson explained that, while we know a lot more than we did when the case first opened, there is still no concrete insight as to what went on with Patisserie Valerie’s accounts. PwC is conducting the investigation alongside trained lawyers.
Pearson said: “I know that investors are quite unhappy that more information hasn’t been given at this point.”
He added: “What seems to have happened is that the accounts were misstated, it would appear, over a number of years for there to have been the massive difference between the actual overdrawn position and the cash of over £20m which was supposed to have been in the bank.
That suggests it was something that happened over a prolonged period and that, most probably, revenues and profits had been overstated during that period and that obviously raises a number of questions.”
Pearson suggested three key questions need to be answered.
- How were the accounts misstated so much?
- Where’s the money actually gone?
- Assuming it was over a prolonged period how did the auditors not pick up on it?
He expanded: “These are three separate questions and as a forensic there’s two interesting dimensions to them. One being what will we learn from the investigation about what actually went on, how was the fraud committed, who did what, and where did the money go?
“But also we’ve got to ask – is there a claim to be made, whether against the directors or auditors, in terms of whether shareholders or others might be looking to recover money they’ve lost because obviously the shares have been suspended, loads more money has had to be pumped in, and shareholders will have lost a lot of money.
How was the immediate aftermath handled?
One interesting element of this case was the chairman’s personal involvement in ensuring the business stays afloat.
Pearson commented: “I think this is an unusual situation because you’ve got a high-profile chairman, firstly who had the money to pump in in the first place because he’s a high wealth individual and secondly he does seem to have taken some form of personal responsibility.
“There’s also a selfish motivation because if he hadn’t pumped the money in the group may have gone bust and he may have lost the money he’s previous got in the business so it’s probably a bit of PR and a bit of good business sense assuming there is a fundamentally good business under there, which no one really knows.
“I think it probably is just a PR exercise. Apart from anything his reputation is probably tarnished because this has happened at Patisserie Valerie. I suspect once the ship has steadied he will take a step back from this and presumably will want to get involved in other businesses again. I think at the moment he will want to be seen as devoting all his time to that.”
What impact has the incident had on the business already?
“Obviously their shares were suspended so shareholders can’t sell them. The shares are going to be worth a fraction of what they previously were, not only because there’s this huge gap in its balance sheet so there’s a load of cash that’s not there but it also seems that its performance over the last number of years has been overstated.
“Everyone thought this was a business doing amazingly well compared to most of the casual dining sector and actually it seems it wasn’t doing nearly as well as everyone thought. The share price is derived from what investors see its current performance and future prospects to be and if those are much worse then the company is worth far less than they otherwise would have been. Until we know exactly what’s gone on, its not possible to put a number on that.
How does the investigation work?
Investigators will be tasked with going back over the records of Patisserie Valerie from the past few years to look at where the money has gone that was supposed to be there and how the accounts were so overstated.
Pearson explained: “It does seem that the performance has probably been overstated in previous years so [investigators] will be looking at what the true performance of the business was. It’s a pretty simple business because they have a lot of shops, they pay rent, they pay staff costs and then they sell cakes. Most of their sales are going to be for cash. So it’s not a complex business with complex accounting policies. This is about properly going through everything to work out what’s gone on.”