Grant Thornton fined £2.34m over Patisserie Valerie audit

Audit accountancy firm Grant Thornton (GT) has been fined £2.34 million after an investigation found ‘serious lack of competence; in its audits of cake chain Patisserie Valerie.

The audits carried out in 2015, 2016, and 2017 gave the company a clean bill of health – before it disclosed potential fraud in 2018 and subsequently collapsed, resulting in the loss of 70 stores and more than 900 jobs.

The Financial Reporting Council (FRC) has imposed sanctions against Grant Thornton and David Newstead, Audit Engagement Partner.

The FRC said GT had acted as statutory auditor for Patisserie Holdings Plc since 2007 and signed off clean audit opinions for the financial statements in each of the FY15, FY16 and FY17 Audits. In October 2018, Patisserie Holdings Plc announced that its board had been notified of potentially fraudulent accounting irregularities and the company subsequently entered into administration, leading to the closure of 70 stores and more than 900 job losses.

Sanctions have been imposed against GT:

• A financial sanction of £4 million (adjusted for aggravating and mitigating factors and discounted for admissions and early disposal to £2.34 million);
• A suite of non-financial sanctions, including reporting to the FRC annually for three years on the impact of GT’s remedial actions (including a root cause analysis) on audit quality; a review of the audit practice’s culture relating to challenge; and additional monitoring in relation to bank and cash audit work; and
• A declaration that the Statutory Audit Report for each of the three years did not satisfy the Relevant Requirements, together with a published statement in the form of a Severe Reprimand.

The following sanctions have been imposed against Mr Newstead:

• A financial sanction of £150,000 (adjusted for aggravating and mitigating factors and discounted for admissions and early disposal to £87,750);
• A three-year prohibition from carrying out Statutory Audits and signing Statutory Audit Reports; and
• A declaration that the Statutory Audit Report for each of the three years did not satisfy the Relevant Requirements, together with a published statement in the form of a Severe Reprimand.
• GT will also pay Executive Counsel’s costs of the investigation.

GT and Newstead have accepted failures in their audit work relating to the following four areas: Revenue,  Cash, Journals  and Fixed Asset Additions.

In each of the three years, the audit work included serious breaches of Relevant Requirements across the four different audit areas, often repeated year on year, and in relation to several legal entities. The breaches reveal a pattern of serious lapses in professional judgement, failures to exercise professional scepticism, failures to obtain sufficient appropriate audit evidence and / or to prepare sufficient audit documentation.

In determining the sanctions to be imposed, Executive Counsel has taken into account the size / financial resources and financial strength of GT and the effect of a financial sanction on its business, in accordance with the FRC Sanctions Policy, in addition to the remedial actions already undertaken by GT and Mr Newstead. The discounts given for mitigation and settlement (an adjustment of 10%, and a further discount of 35% respectively) reflect the exceptional level of co-operation provided by GT and Mr Newstead during Executive Counsel’s investigation.

Claudia Mortimore, Deputy Executive Counsel to the FRC, said “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.”