Patisserie Valerie finds ‘potentially fraudulent’ accounting anomalies

One of the UK’s largest café chains faces a potential auditing crisis, as it struggles with a £20 million black hole in its accounts. Patisserie Holdings had recently re-appointed Grant Thornton as its auditor, but the news places pressure on the relationship, especially in a climate in which top accounting groups have come under mounting scrutiny, following a litany of scandals.

First opened in 1926 in Frith Street, central London by the Belgian Madame Valerie, Patisserie Valerie has since grown into a chain of cafés that operates in the United Kingdom. The chain specialises in hand-made cakes, and its menu includes continental breakfasts, lunches and teas and coffees. The group’s umbrella, Patisserie Holdings, is the UK's largest patisserie cafe chain with over 150 sites nationwide. The company operates four brands alongside Patisserie Valerie; Druckers Vienna Patisserie, Baker & Spice, Flower Power City Bakery and Philpotts.

While the firm has expanded dramatically over its 92 year history, it has also been working to reduce its debt in order to secure its future. In April 2014 this saw the company announce plans to raise £33 million on the London Alternative Investment Market, using the sum to reduce its debt. The IPO was advised on by Grant Thornton, later seeing Patisserie Holdings named IPO of the Year at the Grant Thornton Quoted Company. The two firms have a long-standing relationship, and Grant Thornton was recently re-appointed as Patisserie Holdings’ auditor. At the café group’s 2018 AGM, shareholders voted by a margin of 96.86% to retain the services of the UK’s fifth largest auditing and advisory firm.

Now, however, that relationship has been thrown into question, as a number of awkward questions will need to be asked, following the discovery by Patisserie Valerie of "significant, and potentially fraudulent, accounting irregularities" in its accounts. The company has announced that as a result, "there is a potential material mis-statement of the company's accounts.” A spokesperson added that this has significantly impacted the company's cash position, while it could also lead to a material change in its overall financial position.

With British high-streets taking a sustained battering in 2018, amid declining consumer spending power and Brexit pricing pressures, the news could probably not have come at a worse moment. As part of the high-street scenery, the casual dining sector in particular has seen numerous restructurings and closures, so food and drinks chains have been placed in an especially precarious position. Patisserie Valerie’s position has not formally reached those levels, however shareholders will undoubtedly have been perturbed by the news in this context. 

As a result, Patisserie Valerie has asked for its shares to be temporarily suspended from trading while it deals with the problem, in the hope of preventing a slide in valuation. Meanwhile, it is also understood that while an investigation is carried out, Patisserie Valerie’s Chief Financial Officer Chris Marsh has been suspended from his role.

Entrepreneur Luke Johnson is the largest shareholder in Patisserie Valerie with a 37% stake, and is also Chairman of the company. He said of the situation, "We are all deeply concerned about this news and the potential impact on the business… We are determined to understand the full details of what has happened and will communicate these to investors and stakeholders as soon as possible."

Adding to the crisis, the British tax authority HM Revenue & Customs is understood to have since filed court proceedings to wind-up the chain. Patisserie Valerie reportedly owes a tax bill of £1.14 million. 

Auditing pressure

The discovery of the accounting black hole comes at a time when the UK’s political and state apparatus has placed the level of audit quality in corporate Britain under unprecedented scrutiny. While Members of Parliament censured the industry’s Big Four, the UK’s auditing watchdog, the Financial Reporting Council (FRC) has long been mooting a competition probe into the sector. During party conference season, meanwhile, the government’s opposition of the Labour Party became the latest group to publically consider breaking up the UK’s largest professional services entities, on the grounds of a conflict of interest.

Under the leadership of Sacha Romanovitch, Grant Thornton UK had been moving to reposition its focus to “profits with purpose,” meaning the firm would not only emphasise its own corporate social responsibility, but also move away from working for clients which lacked those same principles. This tactic was aimed at placing the firm in a more sustainable position, as well as making it a more credible source when lending its own voice to the discussion on auditing competition, while looking to avoid state intervention; something Grant Thornton has asserted would disrupt the dynamics of the market.

However, the potential for Grant Thornton to become mired in a further accounting scandal may put paid to these efforts, as it continues to be seen by critics as behaving similarly to the much maligned Big Four. Earlier this year, Grant Thornton UK was slapped with a £3 million fine for 'misconduct' over its auditing of Vimto-maker Nichols and the University of Salford from 2010 to 2013. The FRC fined Grant Thornton UK £4 million initially, but this was reduced to £3million as the firm settled the matter early. Four former Grant Thornton staff were additionally fined for their roles in the work, namely Eric Healey, Kevin Engel, David Barnes and Joanne Kearns.