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Grant Thornton has been fined more than £2.3m for a “serious lack of competence” in its audits of UK café chain Patisserie Valerie, which collapsed in January 2019 amid allegations of fraud.
If the auditors had done their job properly, they “should have identified clear indicators of the risk of material misstatement [of Patisserie Valerie’s accounts] due to fraud”, the Financial Reporting Council said.
The Financial Reporting Council also ordered the UK’s sixth-largest accounting firm to pay its investigation costs of more than £650,000, taking the total penalty to almost £3m.
The regulator imposed a £87,750 fine on David Newstead, who led Grant Thornton’s audit, and banned him from carrying out statutory audits for three years.
The penalty for Newstead, who remains at Grant Thornton but is no longer a partner, is about a fifth of the average £417,000 pay received by the firm’s partners last year. Grant Thornton confirmed it would pay his fine and costs.
The fines, which relate to Grant Thornton’s clean audit opinions on Patisserie Valerie’s accounts for the financial years ending 2015, 2016 and 2017, were reduced from £4m for the auditor and £150,000 for Newstead to reflect co-operation by both and admissions of their failings.
The FRC’s investigation was one of several legal and regulatory cases examining the demise of Patisserie Valerie.
The UK’s Serious Fraud Office is conducting a separate criminal investigation into the business and accounting practices of individuals associated with the Patisserie Valerie group. Several arrests have been made but no charges have been announced.
The FRC’s decision was not a finding of fraud and the watchdog said the auditors would have deserved to be sanctioned whether or not a fraud was committed.
Patisserie Valerie was audited by Grant Thornton from 2007 and listed its shares on Aim in 2014.
It entered administration in January 2019, about three months after it said that its board had been notified of potentially fraudulent accounting irregularities. It had a market valuation of almost £600m when the alleged fraud was uncovered.
The collapse led to the closure of 70 stores and more than 900 job losses but some of the stores were rescued after buyers were found.
Claudia Mortimore, deputy executive counsel to the FRC, said the findings showed “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,” she said.
The watchdog found that serious breaches across four areas of the audits meant Grant Thornton failed to provide reasonable assurance that the financial statements were free from material misstatement, whether caused by fraud or error.
Auditors failed to test disproportionately large receipts adequately or to properly consider the patterns of revenue purportedly received from voucher sales, the FRC said.
In one example, Patisserie Valerie’s figures showed that 73 per cent of the group’s entire annual revenue from a third party voucher company was received in a single payment three days before the end of the 2016 financial year ended. This called for further investigation, but none was carried out, the FRC said.
The regulator also found that evidence provided for cash transactions included numerous documents that should have raised concerns about their authenticity but auditors failed to act.
Examples included third party invoices with missing company logos, typing errors and incorrect addresses.
Breaches were often repeated year-on-year and in relation to several legal entities, the FRC said, and revealed “a pattern of serious lapses in professional judgment” and “failures to exercise professional scepticism”.
In addition to a fine, the FRC ordered Grant Thornton to review its culture of challenging clients in its audit practice and deliver an annual report to the watchdog for three years on the progress of actions to improve its audit quality.
Grant Thornton and Newstead were issued with public reprimands by the regulator.
“We regret the quality of our work fell short of what was expected of us in this instance,” said Grant Thornton, adding that it co-operated fully with the FRC.
“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 — evidenced most recently in our latest [audit quality review] scores.”
Grant Thornton said it would continue to defend a £200m negligence claim brought against it by Patisserie Valerie’s liquidators, which it said “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,” it said.
Newstead declined to comment.
The fine is the latest in a series of regulatory and legal problems for Grant Thornton, which was ordered by the Supreme Court in June to pay £13.4m in damages to Manchester Building Society for negligent accounting advice.
It is the subject of two other FRC investigations for its audits of retailer Sports Direct and outsourcer Interserve.
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