Grant Thornton fined £2.3m for Patisserie Valerie scandal

Accountancy firm Grant Thornton has been fined £2.3m for failures in its audits of collapsed cake chain Patisserie Valerie.

The fine was for audits carried out between 2015 and 2017, regulator the Financial Reporting Council said.

It said Grant Thornton had "missed red flags" and failed to "question information provided by management,"

Grant Thornton admitted to not following audit rules. It must report annually to show how it is improving.

David Newstead, who carried out the audits, was also fined £150,000 for his role in signing off the accounts.

Claudia Mortimore, deputy executive counsel to the FRC, said: "This decision notice sets out numerous breaches of relevant requirements across three separate audit years, evidencing a serious lack of competence in conducting the audit work."

The fine was originally £4m, but was adjusted for aggravating and mitigating factors and discounted to £2.34m.

Mr Newstead's £150,000 fine was adjusted to £87,750 for the same reasons. In addition he has been banned from carrying out audits for three years.

Series of errors

"The package of financial and non-financial sanctions should help to improve the quality of future audits," said Ms Mortimore.

Grant Thornton - Britain's sixth largest accountancy firm - had previously been fined £650,000 in December 2019 over the botched audit of a listed company.

The Financial Reporting Council said it fined the accounting firm after it identified a series of errors surrounding its work for an unnamed company in 2016.

What happened at Patisserie Valerie?

In October 2018, Patisserie Holdings announced that its board had been notified of potentially fraudulent accounting irregularities.

The company subsequently entered into administration, leading to the closure of 70 stores and more than 900 job losses.

The collapse followed the discovery of a huge black hole in the firm's accounts, eventually valued at £94m.

After it went into administration, the cafe chain was found to have overstated its cash position by £30m and failed to disclose overdrafts of nearly £10m.

In June 2019 five people were arrested and questioned over the alleged accounting fraud, the Serious Fraud Office reported.

A spokesperson for Grant Thornton said the company has invested significantly in audit practice since the scandal.

He added: "We have co-operated fully with the FRC and acknowledge the investigation's findings relating to our audits in 2015-2017.

"We regret the quality of our work fell short of what was expected of us in this instance."

A civil case had previously been launched against Grant Thornton by liquidators at FRP Advisory, claiming the auditor was negligent.

Patisserie Valerie was an unusual corporate collapse. Most come with some type of warning - a whistleblower, a deteriorating trading performance or the resignation of key executives - but the bakery chain simply imploded. It had expanded quickly and appeared to be in the rudest financial health until it realised its accounts were a fiction. The cash position was wildly inflated and there were two bank loans of which the board was not aware.

The shares were suspended in October 2018, and despite an emergency cash injection from shareholders led by chairman Luke Johnson, the company was put into administration the following January. A management buyout meant a slimmed down version of the chain continues to trade. That might have been the end of it, but the timing of the default meant it led to profound reform in the mechanism of safeguards around British companies, some of which are still being implemented and indeed bickered over.

There had been a similar failure 10 months earlier, when Carillion, a giant construction and services group, also ran out of cash. With Carillion, there were more warnings, but eventually its accounts also proved to be wildly at odds with the reality of its financial position. Its demise led to calls for changes to how audits are conducted, and when the bakery chain went under, those calls became deafening.

Several reviews of auditing and the audit profession were set in motion. The largest of these was the Kingman review, named after its chairman Sir John Kingman, the former Treasury mandarin who now chairs the FTSE 100 insurance and savings group Legal & General. He recommended the creation of a new regulator, which is due to become reality in two years' time. The big audit firms have also had to separate their audit arms from the rest of their accounting business - and look at proposals to share their work on the largest companies with smaller firms.

The spokesperson for Grant Thornton said: "We 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.

"We recognise that there were shortcomings in our audit work; however, our work did not cause the failure of the business."