The auditor of Patisserie Valerie has been fined £2.3m and accused of a “serious lack of competence” over its role in the accounting scandal that led to the collapse of the cafe chain.
Grant Thornton, which served as Patisserie Holdings’ auditor from 2007 until the company’s collapse in early 2019, accepted there were failures in the audit work, including statements around revenue, cash and the company’s fixed assets.
Patisserie Valerie had 200 cafes employing nearly 3,000 people when an accounting scandal prompted the chain to call in administrators in January 2019. About 70 of the group’s 200 stores closed immediately, resulting in the loss of 900 jobs, after the accounts had been overstated by approximately £94m.
The FRC said its investigation revealed “a serious lack of competence in conducting the audit work” between 2015 and 2017, and that Grant Thornton “missed red flags”. The FRC also imposed sanctions against the Grant Thornton partner David Newstead over his role in the scandal. Newstead will pay a near-£88,000 fine and has been banned from carrying out audits and signing audit reports for three years.
The regulator reduced Grant Thornton and Newstead’s penalties after they admitted to the breaches; they would otherwise have faced fines worth £4m and £150,000, respectively.
Grant Thornton has been ordered by the FRC to review its audit quality and culture around challenging stated accounts. It will also face additional monitoring in relation to bank and cash audit work, and will be forced to issue three annual reports on the impact of those ongoing reviews.
“The audit of Patisserie Holdings plc’s revenue and cash in particular involved missed red flags, a failure to obtain sufficient audit evidence and a failure to stand back and question information provided by management,” said the FRC’s deputy executive counsel, Claudia Mortimore.
“As a result of this investigation, [Grant Thornton] has taken remedial actions to improve its processes and to prevent a recurrence of these types of breaches,” Mortimore said. “The package of financial and non-financial sanctions should also help to improve the quality of future audits.”
Grant Thornton has also been ordered to pay for the costs of the FRC’s investigation.
A spokesperson for Grant Thornton said the firm cooperated fully with the FRC and acknowledged the investigations’ findings. “We regret the quality of our work fell short of what was expected of us in this instance,” the spokesperson said. “Since the period in question, we have invested significantly in our audit practice to better ensure consistent quality and have started to see the material outcome of this investment.”
However, the accountancy firm said it did not take full responsibility for the company’s failure. A spokesperson confirmed that the firm would “vigorously defend” itself in a separate legal battle brought by Patisserie Valerie’s liquidators, saying the claim “ignores 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.”