Case Studies

What was the Patisserie Valerie controversy?

by Alex Crimmins

What was the Patisserie Valerie controversy?

Well, if you were to ask for a case study on boardroom fraud and how a company’s directors failed their business, staff, and customers, you don’t have to further than this. 

Here are the main details:

  • The business overstated its monetary position by £94m
  • Executives sold £13 million of shares just before ‘accounting irregularities’ revealed
  • To date, six people have been arrested
  • The auditors are being sued for £200m for failing to ‘spot’ the fraud

Accounting fraud typically happens in the shadows, rarely makes the news cycle, and doesn’t hold much interest for people. However, when such fraud results in the death of a significant UK high street business with over 170 stores, employing over 2,700 people and generating annual sales of £100 million, people pay attention.

As a case study on the failure of a boardroom and its auditors, the sorry tale of Patisserie Valerie has it all – immense accounting fraud, the liquidators blaming the auditors for not spotting it, and the auditors (Grant Thornton) blaming the board of the company for “widespread deception of the auditors”.

Grant Thornton, the UK’s sixth-largest accounting firm, is now facing a £200m lawsuit. Patisserie Valerie’s liquidators are suing the firm because, as auditors of the bakery chain for twelve years, Grant Thornton “failed to see or reveal a severe manipulation of its books”.

Whoever started the fraud and how it escalated remains to be seen, but the case of Patisserie Valerie is one that every director, non-executive director and every auditor should learn from. A systemic failure of corporate governance exhausted this once expanding business.

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What was the Patisserie Valerie controversy?

It started with fraud. The business kept reporting it had more money than it had. This went on from 2014-2017. What warning bells should the auditors have spotted?

In February 2018, when the company’s shares reached new heights, the CEO Paul May, the finance director Chris Marsh, and the non-executive director James Horler cashed in stock amounting to nearly £6 million.

In May 2018 Patisserie Valerie publicly insisted the chain was performing well, despite its competitors Cote and Carluccio’s closing stores.

In June 2018, members of the board sold a further £7.2 million worth of shares.

In October 2018 the personal finance site ‘This is Money’ published an article asking: “After Patisserie Valerie bosses sell £13 million shares months before the scandal, why didn’t anyone in charge see their cakes were sinking?”.

On October 10, 2018, the wheels began to come off openly. The company admitted to the market that it had discovered ‘accounting irregularities’. The CFO, Chris Marsh, was suspended from his role. The company asked that its shares be suspended from trading. Later that day it came out that the business owed HMRC £1.4 million in tax.

On October 11, the company announced it was heading for bankruptcy. There was a “material shortfall between the reported financial status and the actual financial status of the business” and that without an immediate injection of capital, the company couldn’t continue trading.

On October 12, the 44-year-old CFO, Chris Marsh was arrested on charges of fraud and a police investigation was launched.

“A confidential whistleblowing policy and system is an effective way for all board members and employees to report misconduct.”

David Duffy

What was going on in the boardroom?

According to a report in the Financial Times, the business had overstated its monetary position by £94m. Cheques worth millions of pounds and thousands of fraudulent ledger entries artificially inflated its financial position. Other, hidden bank accounts had run up overdrafts of as much as £10m.

Could this boardroom fraud have been prevented?

It’s the natural next question for someone asking, “what was the Patisserie Valerie controversy?”. And the answer is: probably.

The company’s executive and its non-executive directors should have spotted this fraud. The auditors should have noticed something was awry. It is unlikely that the CFO acted alone. Perhaps other directors or even the entire boardroom helped to falsify the company’s accounts?

The question everyone must ask is, why did no one speak up? The reasons could be as simple as conspiracy and fear – fear of being found out, fear of being fired.

“To help prevent the type of fraud committed by directors of Patisserie Valerie, companies should have a system that allows executives and employees to report irregularities,” says David W Duffy, CEO of The Corporate Governance Institute. “A confidential whistleblowing policy and system is an effective way for all board members and employees to report misconduct. It is the duty of the board to put in place the governance, policies and procedures to avoid reputational and financial damage such as this.”

The UK’s Serious Fraud Office has been investigating the case for two years, and six people have so far been arrested. They have been released without charge pending investigation.

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