On 22 January 2019, Patisserie Valerie announced that it had failed to secure an extension to its lending facilities and that it was to enter administration. Patisserie Valerie is the latest high-profile company to collapse because of fraud and inaccurate data. The case raises some of the same issues as the failure of Carillion, namely:
- Quality of the audit work performed by the external auditors.
- Lack of strong internal controls.
- Poor governance.
Role of the external auditors
Former Patisserie Valerie auditors, Grant Thornton, is under investigation by the Financial Reporting Council. The collapse follows the official launch of the Business, Energy and Industrial Strategy (BEIS) Committee’ s new inquiry examining the future of audit in November 2018. Rachel Reeves, Chair of the BEIS Committee said that:
“Misleading audits have been at the heart of corporate failures over recent decades. Recent accounting scandals at BHS, Carillion, and at Patisserie Valerie have shown accounts bearing closer resemblance to works of fiction than an accurate reflection of the true financial performance of the business. Repeated accounting failures have contributed to the collapse of major businesses and undermined public and investor confidence.”
Lack of internal controls
On 16 January 2019, Patisserie Valerie provided a company update announcing that:
“The work carried out by the Company’s forensic accountants since [10th October 2018] has revealed that the misstatement of its accounts was extensive, involving very significant manipulation of the balance sheet and profit and loss accounts. Among other manipulations, this involved thousands of false entries into the Company’s ledgers.”
A strong internal audit or quality and assurance function is core to effective governance. The internal auditors provide senior management, the Audit Committee and the Board of Directors with assurance that helps them fulfill their duties as board members. NEDonBoard will be hosting an Audit Committee, Oversight of the Internal Audit function Board Best Practice® evening event on 26 March 2019.
Corporate governance failures
Luke Johnson was the executive chairman of Patisserie Valerie. His reputation has been severely damaged by its collapse. Prior to the scandal, he sat on the board of at least 17 operating companies, more than half of which he chairs. This compares to our NEDonBoard community of experienced non-executive directors (NEDs) who typically hold between three to five board positions.
NEDonBoard is supporting its community in understanding the responsibilities of the NED and board member roles. While training and professional development is no guarantee of effective governance, it does help. NEDs and board members should be clear about what the role of company director entails. They must understand that there are legal duties and liabilities, and that their reputation is at risk.
Directors may have lacked the skills required to address the challenges faced by Patisserie Valerie. They appear not to have picked up several red flags. It is likely that NEDs did not ask the difficult and challenging questions, and that the dynamic in the boardroom was influenced by the executive chairman. The NEDs could have:
- Asked why Patisserie Valerie generated significantly higher operating margins than its peers.
- Investigated the company’s relationships with key suppliers and asked about payment terms, especially after practices at Carillion emerged in the press and in the BEIS investigation report.
- Asked about the leases, whose committed amount remained flat, despite the growth in the number of stores.