The interesting news today, at least for a former shareholder in Patisserie Holdings (CAKE) as I am, was the announcement by the Financial Reporting Council (FRC) of fines on Grant Thornton and their Audit Partner over the defective audits of the company in financial years 2015, 2016 and 2017. The company subsequently collapsed in 2018 when it became apparent that the accounts were a work of fiction.
This is what the FRC had to say: “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 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. As a result of this investigation, GT has taken remedial actions to improve its processes and to prevent a recurrence of these types of breaches. The package of financial and non-financial sanctions should also help to improve the quality of future audits.”
The sanctions imposed include fines of £2.3 million on Grant Thornton and £87,500 on audit partner David Newstead, after taking into account mitigating circumstances and the financial resources of GT.
But the detail of the case makes for interesting reading, which can be obtained in the link from here: https://www.frc.org.uk/news/september-2021/sanctions-against-grant-thornton-uk-llp-and-david where the Final Decision Notice can be read.
It shows that not only did the audit fall down in many ways but that accounting practices at Patisserie were amateurish in the extreme with apparently no proper oversight by the directors. It includes such problems as:
- Large amounts of revenue recorded from voucher sales near the year end without being queried.
- Cash growth that was significantly larger than growth in revenue or profit, with repeated inconsistencies in bank statements and dormant bank accounts being reactivated but the auditors not informed.
- Reconciling items and journal entries being misused or without proper explanation. For example journal entries being used to record sales transactions, employee costs, etc. As a result there were many thousands of journal entries each year.
- Additions to fixed assets being miscategorised and wrongly capitalised. For example, motor car purchases being treated as “plant, equipment, fixtures and fittings”.
- Documents used as supporting evidence containing obvious errors or oddities such as lack of corporate logos, or invoices for vehicles with no vehicle identifications, remittance advices that looked like invoices, and alleged bank statements that appeared to be Excel spreadsheets.
The auditors failed to obtain sufficient evidence to support queried items or to challenge management’s explanations. Professional scepticism in the auditors was clearly lacking.
The liquidators of the company are pursuing a legal claim against Grant Thornton but according to a note in the FT they will continue to defend against that claim on the basis that it “ignores the board’s and management’s own failings in detecting the sustained and collusive fraud that took place”. GT claim that “our work did not cause the failure of the business”. At the end of the day that might have been so but if the defective accounts had been identified in 2015 or 2016 before the fraud became totally out of hand, perhaps the company could have been saved. It would certainly have saved me and many other investors from investing in the company’s shares after 2015.
The financial penalties for such incompetence are of course still trivial. Grant Thornton’s trading profit last year was £57 million.
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