Law Suit Launched Against Grant Thornton over Patisserie Valerie Audits

The Daily Telegraph and some other sources have reported that the liquidators of Patisserie Valerie (CAKE) have filed a claim in the High Court against Grant Thornton over the audits of Patisserie Valerie in the years before it went into administration.

I reported previously that the accounts of Patisserie were a complete fiction see Reference 1 below – with the assets of the firm overstated by more than £90 million.

The liquidators are FRP Advisory and they have appointed lawyers Mischon de Reya to pursue the case. Will this mean that if the action is successful that ordinary shareholders will see any return? Highly unlikely I would guess as secured creditors will take priority, and those include the former Executive Chairman of the company, Luke Johnson, who lent the company many millions in an attempt to keep if afloat before it failed. In addition there will be very substantial legal costs which cannot always be recovered in full even if the action is won. In addition, administrations and liquidations always consume a very large amount of cash.

Grant Thornton only recently lost another legal action over their audit work at AssetCo where they not only blamed everyone else for the defective accounts but actually claimed that AssetCo was better off not knowing the truth of its own financial position! See Reference 2 below.

The Financial Reporting Council (FRC) have proposed to tighten up the responsibility of auditors to identify fraud (see Reference 4) which has been far too lax in the past. But the Patisserie action will depend on the historic rules. However the Courts have clearly made it plain that irresponsible audits will not be totally excused. Without wishing to prejudge the case, Grant Thornton looks like they will have a lot of explaining to do because the fraud looks a simple case of assets such as cash being grossly overstated. Grant Thornton have however said they will “rigourously defend the claim”.

Reference 1: Patisserie Administration: https://roliscon.blog/2019/03/16/patisserie-and-interserve-administrations-plus-brexit-latest/

Reference 2: AssetCo case: https://roliscon.blog/2019/02/06/assetco-case-and-grant-thornton-defense/

Reference 3: Daily Telegraph article: https://www.telegraph.co.uk/business/2020/11/20/grant-thornton-hit-legal-challenge-collapse-patisserie-valerie/

Reference 4: FRC Tightens Audit Rules: https://roliscon.blog/2020/10/29/preventing-fraud-in-accounts-fca-tightens-audit-rules/

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Edinburgh IT Fires Manager and Grant Thornton Fined

The Edinburgh Investment Trust (EDIN) has fired fund manager Invesco. This company is an equity income trust focused primarily on the UK, although it also has an objective to increase the Net Asset Value per share in excess of the growth in the FTSE All-Share Index. But in the last few years it has signally failed to achieve that objective. According to the AIC it has fallen behind the sector average in growth in net asset value per share in all of the last year, the last 3 years and the last five years. In the last year alone the total return was 7.0% versus 15.6% for the sector. In other words, it’s a pretty abysmal record.

The company is appointing Majedie Asset Management as the new manager. This is what the company had to say about the reason for the change: “As detailed in the Interim Results announcement also published today, the Company has experienced another period of weak investment performance. This extends the period of underperformance relative to the Company’s benchmark to over three years and is a major disappointment for the Board as well as our shareholders. The Board understands that all good conviction fund managers experience periods of underperformance and a focus on long-term results requires shareholders sometimes to bear bouts of relative weakness especially during times when the fund manager’s style is out of favour. However, your portfolio has suffered from a number of stock specific issues: that is to say large falls in prices of stocks held in the portfolio, the cause of which is specific to each stock rather than resulting from broad market movements. Collectively these stocks have been a significant contributor to the weak performance of the Company and increasingly has led the Board to question the effectiveness of the investment process”.

These are the top ten holdings in the trust: BP, British American Tobacco, Legal & General, Next, Shell, Tesco, BAE Systems, Roche, British Land and Derwent London.

Comment: Firing an investment manager does not happen very often, but certainly the board of the company seems to have given the manager quite long enough to show that improvement was taking place. Shareholders will question whether they allowed the underperformance to go on way too long.

Grant Thornton has been fined £650,000 by the Financial Reporting Council (FRC) after identifying various failures in an audit on an unnamed company in 2016. They refuse to disclose which company was involved.

Grant Thornton has been involved in a number of poor or defective audits, such as at Patisserie Holdings, Vimto, Globo and Salford University. The FRC claims that “We promote transparency and integrity in business” on its web site so why should we not be told the company concerned? It is surely not in the public interest to conceal the name of the company. They clearly still have a “cultural” problem about how they handle investigations.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Staffline Issues, Audit Purpose and News on Patisserie

Yesterday Staffline Group (STAF) issued a statement first thing in the morning saying that the publication of results scheduled for that day would be delayed. The shares promptly dropped by about a third. Later in the day it stated that “the company can confirm that this morning concerns were brought to the attention of the board relating to invoicing and payroll practices within the Recruitment Division”. A full investigation was promised and the shares were then suspended. Is this yet another accounting scandal in an AIM company one wonders? Generally after such announcements, only bad news comes out.

Staffline is a recruitment/staffing and training business. It’s one of the largest AIM companies with revenue of nearly a billion pounds and reported profits of £71 million last year. It has been growing rapidly in recent years.

I have never held the stock although I did see a presentation by the company a couple of years ago. In general I don’t like employment businesses as they tend to follow economic cycles and the sector has few barriers to entry. I also considered the company to be at risk from regulatory and tax problems. The company also has considerable debt which is odd for this kind of business which generally have a “capital light” structure. Investors might have been concerned by the announcement on the 8th January that net debt had risen to £63 million at the 2018 year-end.

Investors will have to keep their fingers crossed for further news.

I covered in some previous blog posts the issue that audit quality is generally poor and that false accounts and outright fraud are regularly missed by audits – and it’s not just one or two firms – the whole audit industry seems to be incompetent in that regard. The Commons BEIS Committee held a meeting yesterday and one of the witnesses was David Dunckley, head of Grant Thornton, who audited the accounts of Patisserie (CAKE). He admitted that auditors did not look for fraud when auditing accounts and that there was an “expectation gap”. Committee members were not impressed.

Meanwhile Investor’s Champion revealed that Luke Johnson and Paul May, directors of Patisserie, owned a property that was leased back to a subsidiary of the company. As a related party transaction this should have been disclosed in the Patisserie accounts but was not.

The FT also disclosed that at least 30 shareholders had signed up to support a legal case with law firm Teacher Stern. But other investors are talking to other solicitors. In such cases it can be many months before the basis of a claim is clear and solicitors tend to jostle for the business of pursuing a claim in the meantime – one might call some of them “ambulance chasers”. Investors are advised not to spend money on such actions until the basis of a claim, and the ability to both finance an action and identify asset rich defendants is clear.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Lehman Collapse, Labour’s Employment Plans, Audit Reform Ideas and Oxford Biomedica

There was a highly amusing article in today’s FT by their journalist John Gapper explaining how he caused the financial crisis in 2008 by encouraging Hank Paulson, US Treasury Secretary, to resist the temptation to rescue Lehman Brothers. So now we know the culprit. Even more amusing was the report on the previous day that the administrators (PWC) of the UK subsidiary of Lehman expect to be left with a surplus of £5 billion. All the creditors are being paid in full.

Why did Lehman UK go bust then? They simply ran out of cash, i.e. they were cash flow insolvent at the time and could not settle payments of £3bn due on the day after their US parent collapsed. Just like Northern Rock where the assets were always more than the liabilities as also has been subsequently proven to be the case.

Perhaps it’s less amusing to some of the creditors of Lehman UK because many sold their claims at very large discounts to third parties rather than wait. Those that held on have been paid not just their debts but interest as well. So the moral is “don’t panic”.

Lehman’s administration is in some ways similar to the recent Beaufort case. Both done under special administration rules and requiring court hearings to sort out the mess. PWC were administrators for both and for Lehman’s are likely to collect fees of £1billion while employing 500 staff on the project. It may yet take another 10 ten years to finally wind up. Extraordinary events and extraordinary sums of money involved.

An editorial in the FT today supported reform of employment legislation as advocated by Labour’s John McDonnell recently. He proposed tackling the insecurity of the gig economy by giving normal employment rights to workers. I must say I agree with the FT editor and Mr McDonnell in that I consider that workers do have some rights that should be protected and the pendulum has swung too far towards a laissez-faire environment. This plays into the hands of socialists and those who wish to cause social unrest. Even the Archbishop of Canterbury suggested the gig economy was a “reincarnation of an ancient evil” and that it meant many companies don’t pay a living wage so employees rely on state welfare payments. A flexible workforce may give the country and some companies a competitive advantage but it takes away the security and dignity of employment if taken to extremes. The Conservative Government needs to tackle this problem if they wish to be certain of getting re-elected. If you have views on this debate, please add your comments to this blog.

Mr McDonnell also promoted the idea of paying a proportion of a company’s profits to employees – effectively giving them a share in the dividends paid out. That may be more controversial, particularly among shareholders. But I do not see that is daft either so long as it is not taken to extremes. After all some companies have done that already. For example I believe Boots the Chemists paid staff a bonus out of profits even when a public company.

Another revolutionary idea came from audit firm Grant Thornton. They suggest audit contracts should be awarded by a public body rather than by companies. This they propose would improve audit standards and potentially break the hold of the big four audit firms. I can see a few practical problems with this. What happens if companies don’t judge the quality of the work adequate. Could they veto reappointment for next year? Will companies be happy to pay the fees when they have no control over them. I don’t think nationalisation of the audit profession is a good idea in essence and there are better solutions to the recent audit problems that we have seen. But one Grant Thornton suggestion is worth taking up – namely that auditors should not be able to bid for advisory or consultancy work at the same company to which they provide audit services.

Oxford Biomedica (OXB) issued their interim results this morning (I hold the stock). They made a profit of £11.9 million on an EBITDA basis. OXB are in the gene/cell therapy market. What interests me is that there are some companies in that market, at the real cutting edge of biotechnology with revolutionary treatments for many diseases, that are suddenly making money or are about to do so. That’s often after years of losses. Horizon Discovery (HZD) which I also hold is another example. Investors Chronicle recently did a survey of similar such companies if you wish to research these businesses. It is clear that the long-hailed potential of cell and gene therapy is finally coming to fruition. I look forward with anticipation to having all my defective genes fixed but I suspect there will be other priorities in the short term particularly as the treatments can be enormously expensive at present.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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