PATISSERIE HOLDINGS (CAKE)

[Heinous]

Its an interesting question as to in what circumstances accountants are not responsible for a failed audit. The idea of the audit is to check for the accounts being wrong.

The rules on audit are so loose that audit is largely a cash-creation scheme for auditors, rather than a serious oversight of company finances.
In almost every referral to the receiver someone says "But why didn't the auditors see that coming" and the response from the auditors is almost invariably "Well fancy that, but under rule xx.X.xx we didn' bother with that."
You may well ask "who watches the watchers?", and of course the City is laden with regulations and committees. Whose standard comment is "Whatever".
You may think I'm a tad over-cynical, but can anyone cite more than one example* in the past 10 years of auditors being brought to heel?

*One in 10 years would simply be window dressing; two would be interesting, and three, of course, would be draconian.

[dealtn]

You may think I'm a tad over-cynical, but can anyone cite more than one example* in the past 10 years of auditors being brought to heel?

*One in 10 years would simply be window dressing; two would be interesting, and three, of course, would be draconian.

In 2018 KPMG were sanctioned and fined for 4 audits, those of Quindell, Ted Baker, Equity Syndicate, and Co-Operative Bank.

Having comfortable exceeded your target of "more than one example" (and the draconian threshold of three you set yourself), and in a single year it seems not a decade, I gave up looking for other examples.

[Heinous]

Having comfortable exceeded your target of "more than one example" (and the draconian threshold of three you set yourself), and in a single year it seems not a decade, I gave up looking for other examples.

Thank you. I clearly should have done the search myself. My apologies.
Good to know that we're protected by such a draconian regime, though, isn't it?

[dealtn]

Having comfortable exceeded your target of "more than one example" (and the draconian threshold of three you set yourself), and in a single year it seems not a decade, I gave up looking for other examples.

Thank you. I clearly should have done the search myself. My apologies.
Good to know that we're protected by such a draconian regime, though, isn't it?

It could and should be tougher, but not an area I have any particular expertise. It does seem that "lessons learnt" either aren't, or take an incredible amount of time.

[johnhemming]

It could and should be tougher, but not an area I have any particular expertise. It does seem that "lessons learnt" either aren't, or take an incredible amount of time.

The difficulty, of course, is that auditors are appointed by the directors (proposing a motion to the Shareholders) and hence to keep the fees coming they need to keep the directors happy. To get around this there would need to be some process of appointment properly independent of the directors.

[Markab01]

Having comfortable exceeded your target of "more than one example" (and the draconian threshold of three you set yourself), and in a single year it seems not a decade, I gave up looking for other examples.

Thank you. I clearly should have done the search myself. My apologies.
Good to know that we're protected by such a draconian regime, though, isn't it?

It could and should be tougher, but not an area I have any particular expertise. It does seem that "lessons learnt" either aren't, or take an incredible amount of time.

I totally agree with you, never mind this fine, slap on the wrist and lessons will be learnt palaver.
Let's make it truly draconian to make the auditing companies sit up and take notice.

How bout first time a fine and lessons will be learnt bumf.
Second time 10 times the previous fine
Third time, if they still haven't learnt the lessons, all partners to be stripped of accountancy qualifications and accreditations and banned from working in any aspect of the finance industry for, say, the next ten years.
When the livelihood of the bosses is being put on the line then change may occur.

[dealtn]

Thank you. I clearly should have done the search myself. My apologies.
Good to know that we're protected by such a draconian regime, though, isn't it?

It could and should be tougher, but not an area I have any particular expertise. It does seem that "lessons learnt" either aren't, or take an incredible amount of time.

I totally agree with you, never mind this fine, slap on the wrist and lessons will be learnt palaver.
Let's make it truly draconian to make the auditing companies sit up and take notice.

How bout first time a fine and lessons will be learnt bumf.
Second time 10 times the previous fine
Third time, if they still haven't learnt the lessons, all partners to be stripped of accountancy qualifications and accreditations and banned from working in any aspect of the finance industry for, say, the next ten years.
When the livelihood of the bosses is being put on the line then change may occur.

If you make it that tough then you won't have audits. That would be worse from an investors perspective.

[scrumpyjack]

The idea of the audit is to check for the accounts being wrong.

Well not really. The legal requirement is for the auditors to decide, and report, on whether the accounts 'show a true and fair view' and comply with legal requirements. The directors could present the same set of figures in many ways, and each could be considered 'true and fair' .

They are entitled to trust that the directors are honest unless they have strong grounds to think otherwise, in which case they would resign as auditors, as does happen. A judge eons ago ruled that the auditor is a watchdog, not a bloodhound.

Nevertheless there are many examples (eg cake and wirecard), where in retrospect it seems incredible they didn't spot it!
It is not the auditors job to find fraud, but they should be looking sufficiently deeply to have a firm basis for the 'true and fair' opinion and a material level of fraud would make the accounts not true and fair.

[Dod101]

Yes scrumpyjack has put the case I think very well if I may say so and is the sort of thing I was trying to say in November 2019. I have known a lot of auditors in my time both professionally and otherwise and I am inclined to think that there are on the whole honest but not necessarily sleuths or bloodhounds as Scrumpyjack comments.

I think in the case of CAKE that the directors were negligent in not knowing their company well enough. Their results were so out of line with the standard for the industry that that alone should have made them wary, and it is clear that they were not very good at 'reading' their Finance Director, ore maybe they just did not want to.

Dod

[Heinous]

I have no problem with them being 'watchdogs' rather than 'bloodhounds', provided they aren't asleep on the job. But the trouble is, the one who watches the watchers - the FCA - is dependable in their ability to issue 'slaps on the wrist' or risibly small fines.
No wonder Private Eye calls them the Fundamentally Complicit Authority.

[SteMiS]

Grant Thornton said: “We will rigorously defend the claim. Patisserie Valerie is a case that involves sustained and collusive fraud, including widespread deception of the auditors. The claim ignores the board’s and management’s own failings.

Its an interesting question as to in what circumstances accountants are not responsible for a failed audit. The idea of the audit is to check for the accounts being wrong. I would have thought material fraud was part of this (cf Wirecard).

Without having really studied the issue it looks like there was some fraud going on for a number of years.

I think the auditors might have a defence if the accounts had accurately reflected the companies financial position (i.e. the fraud had been 'accounted for'). However it's pretty clear that this wasn't the case for PV, which had signficant unrecorded bank overdrafts and understatement of creditors. Rather than having £24m in the bank they actually had net overdrafts and were unable to pay their bills.

From what I understand the fraud possibly dated back to even before the listing and that there were thousands of fake journals put through the company books, involving collusion between quite a few of the accounts staff (some probably under fear of losing of their jobs). As someone who spent 6 years in the audit profession its a pretty staggering miss by Grant Thornton and, even if they aren't civilly liable, one really has to question the standard of their audit...

[johnhemming]

From what I understand the fraud possibly dated back to even before the listing and that there were thousands of fake journals put through the company books, involving collusion between quite a few of the accounts staff (some probably under fear of losing of their jobs).

It does look like this. There was some misrepresentation going to on the board. Hiding bank accounts is an interesting thing. Logically there should be some mechanism for the board to know what banks they have accounts with. It is difficult, however, as one should be able to assume that the FD it not concealing loans from the board.

[ADrunkenMarcus]

From what I understand the fraud possibly dated back to even before the listing and that there were thousands of fake journals put through the company books, involving collusion between quite a few of the accounts staff (some probably under fear of losing of their jobs). As someone who spent 6 years in the audit profession its a pretty staggering miss by Grant Thornton and, even if they aren't civilly liable, one really has to question the standard of their audit...

Not good!

And the entries get more and more out of line with reality, spinning out of control until complete collapse. For example, *if* the accounts are showing newly opened stores are profitable then the Board will decide to open more - yet they weren't so in reality in causes more and more cash flying out.

What prospects for criminal charges?

Best wishes

Mark.

[SteMiS]

From what I understand the fraud possibly dated back to even before the listing and that there were thousands of fake journals put through the company books, involving collusion between quite a few of the accounts staff (some probably under fear of losing of their jobs).

It does look like this. There was some misrepresentation going to on the board. Hiding bank accounts is an interesting thing. Logically there should be some mechanism for the board to know what banks they have accounts with. It is difficult, however, as one should be able to assume that the FD it not concealing loans from the board.

I believe that board minutes were forged to support new bank accounts (and overdraft facilities) which were then not disclosed to the auditors. However failure of diligence occurred across a whole range of institutions. In my day as an FD, banks would ask for copies of audited accounts and you would have thought that they would have noticed the absence of bank lending in them when they were aware that they had a substantial bank overdraft with the company (or indeed that they hadn't even received a bank letter from the company). Clearly not....

It's also hard to understand how the auditor, when vouching cash transactions, failed to notice that they hadn't sent bank letters to one of the banks involved. To go from £24m of cash to a reality of substantial bank debt either requires some big unrecorded cash transations or a large amount of little ones. Difficult to see how that was missed.

Part of the problem, I think, is that bank reconciliations and bank letters is the job of the most junior member of the audit team. Frankly most of them are green as grass (as I was at that time) and often under pressure to finish their work in an allotted time allowance. They don't really understand how accounts departments work and whilst I'm sure there would be clues all over the place, they probably aren't experienced enough to spot them.

[dspp]

From what I understand the fraud possibly dated back to even before the listing and that there were thousands of fake journals put through the company books, involving collusion between quite a few of the accounts staff (some probably under fear of losing of their jobs).

It does look like this. There was some misrepresentation going to on the board. Hiding bank accounts is an interesting thing. Logically there should be some mechanism for the board to know what banks they have accounts with. It is difficult, however, as one should be able to assume that the FD it not concealing loans from the board.

I believe that board minutes were forged to support new bank accounts (and overdraft facilities) which were then not disclosed to the auditors. However failure of diligence occurred across a whole range of institutions. In my day as an FD, banks would ask for copies of audited accounts and you would have thought that they would have noticed the absence of bank lending in them when they were aware that they had a substantial bank overdraft with the company (or indeed that they hadn't even received a bank letter from the company). Clearly not....

It's also hard to understand how the auditor, when vouching cash transactions, failed to notice that they hadn't sent bank letters to one of the banks involved. To go from £24m of cash to a reality of substantial bank debt either requires some big unrecorded cash transations or a large amount of little ones. Difficult to see how that was missed.

Part of the problem, I think, is that bank reconciliations and bank letters is the job of the most junior member of the audit team. Frankly most of them are green as grass (as I was at that time) and often under pressure to finish their work in an allotted time allowance. They don't really understand how accounts departments work and whilst I'm sure there would be clues all over the place, they probably aren't experienced enough to spot them.

Stemis,
Where are you seeing the reporting on this ?
regards,
dspp

[scrumpyjack]

On the issue of bank accounts, I suspect that E&Y are in deeper trouble re Wirecard than Grant Thornton re CAKE.

E&Y apparently failed to get direct confirmation of account balances over a billion on accounts they knew about. CAKE directors hid the existence of one or more overdrawn bank accounts so GT had no knowledge the account(s) even existed.

Lucky for E&Y and GT partners that they now have limited liability as all the big firms are LLPs, unlike when I was a partner in a large accounting firm

[SteMiS]

It does look like this. There was some misrepresentation going to on the board. Hiding bank accounts is an interesting thing. Logically there should be some mechanism for the board to know what banks they have accounts with. It is difficult, however, as one should be able to assume that the FD it not concealing loans from the board.

I believe that board minutes were forged to support new bank accounts (and overdraft facilities) which were then not disclosed to the auditors. However failure of diligence occurred across a whole range of institutions. In my day as an FD, banks would ask for copies of audited accounts and you would have thought that they would have noticed the absence of bank lending in them when they were aware that they had a substantial bank overdraft with the company (or indeed that they hadn't even received a bank letter from the company). Clearly not....

It's also hard to understand how the auditor, when vouching cash transactions, failed to notice that they hadn't sent bank letters to one of the banks involved. To go from £24m of cash to a reality of substantial bank debt either requires some big unrecorded cash transations or a large amount of little ones. Difficult to see how that was missed.

Part of the problem, I think, is that bank reconciliations and bank letters is the job of the most junior member of the audit team. Frankly most of them are green as grass (as I was at that time) and often under pressure to finish their work in an allotted time allowance. They don't really understand how accounts departments work and whilst I'm sure there would be clues all over the place, they probably aren't experienced enough to spot them.

Stemis,
Where are you seeing the reporting on this ?
regards,
dspp

I don't recall where I got the information from originally but there is a report here, for example, which quotes the PwC report identifying forged minutes (and indeed signatures) used to take our bank overdrafts

https://www.mca-insight.com/finance/pwc ... 91.article

A report by PWC into the suspected fraud at the heart of the collapse of Patisserie Holdings has allegedly uncovered forged company minutes used to take out overdrafts of almost £10m and fictitious invoices for shop refurbishments.

The report has been leaked to The Times, which reports that signatures of senior directors were forged on bank contracts.

I don't subscribe to the Times but there seems to be a number of reports on it's web site.

The whole management reporting system in Pattiserie Valerie must have been utterly hopeless. It's a typical, bog standard branch business and you'd expect branch reporting and accountability which should have picked up fake margins and refurbishment costs. What the CEO and audit committee were doing, god only knows.

[dspp]

On the issue of bank accounts, I suspect that E&Y are in deeper trouble re Wirecard than Grant Thornton re CAKE.

E&Y apparently failed to get direct confirmation of account balances over a billion on accounts they knew about. CAKE directors hid the existence of one or more overdrawn bank accounts so GT had no knowledge the account(s) even existed.

Lucky for E&Y and GT partners that they now have limited liability as all the big firms are LLPs, unlike when I was a partner in a large accounting firm

As Maggy once said, when told that something was "too big to be allowed to fail", she responded "we must change that".

Indeed !

I don't suppose I will be the only person thinking that the auditors should have their hands in the same vice as the clients (shareholders) and feel at least some of the same pain.

regards, dspp

[Dod101]

On the issue of bank accounts, I suspect that E&Y are in deeper trouble re Wirecard than Grant Thornton re CAKE.

E&Y apparently failed to get direct confirmation of account balances over a billion on accounts they knew about. CAKE directors hid the existence of one or more overdrawn bank accounts so GT had no knowledge the account(s) even existed.

Lucky for E&Y and GT partners that they now have limited liability as all the big firms are LLPs, unlike when I was a partner in a large accounting firm

And I suspect that that is part of the problem. When partners were exposed to their last brass farthing I am quite sure that they would have been much more cautious than they need be nowadays. It may not even be a conscious decision but simply human nature.

I read somewhere not so long ago that Bailie Gifford is the only unlimited partnership left in the UK. Not everyone seems to understand the significance of that and of course BG's business is very different from an auditing practice.

Dod

[scrumpyjack]

Reminds me of the joke about the notice up on the wall at a firm of stockbrokers in 1974 when the market had lost 2/3rds of its value and the big brokers were partnerships.

'Staff this Christmas can choose either a Turkey or a partnership. Please respond promptly as the supply of turkeys is limited'