The Daily Telegraph and some other sources have reported that the liquidators of Patisserie Valerie (CAKE) have filed a claim in the High Court against Grant Thornton over the audits of Patisserie Valerie in the years before it went into administration.
I reported previously that the accounts of Patisserie were a complete fiction – see Reference 1 below – with the assets of the firm overstated by more than £90 million.
The liquidators are FRP Advisory and they have appointed lawyers Mischon de Reya to pursue the case. Will this mean that if the action is successful that ordinary shareholders will see any return? Highly unlikely I would guess as secured creditors will take priority, and those include the former Executive Chairman of the company, Luke Johnson, who lent the company many millions in an attempt to keep if afloat before it failed. In addition there will be very substantial legal costs which cannot always be recovered in full even if the action is won. In addition, administrations and liquidations always consume a very large amount of cash.
Grant Thornton only recently lost another legal action over their audit work at AssetCo where they not only blamed everyone else for the defective accounts but actually claimed that AssetCo was better off not knowing the truth of its own financial position! See Reference 2 below.
The Financial Reporting Council (FRC) have proposed to tighten up the responsibility of auditors to identify fraud (see Reference 4) which has been far too lax in the past. But the Patisserie action will depend on the historic rules. However the Courts have clearly made it plain that irresponsible audits will not be totally excused. Without wishing to prejudge the case, Grant Thornton looks like they will have a lot of explaining to do because the fraud looks a simple case of assets such as cash being grossly overstated. Grant Thornton have however said they will “rigourously defend the claim”.
Reference 1: Patisserie Administration: https://www.sharesoc.org/blog/insolvency-and-administration/patisserie-and-interserve-administrations-plus-brexit-latest/
Reference 2: AssetCo case: https://www.sharesoc.org/blog/accounting-and-audit/assetco-case-and-grant-thornton-defense/
Reference 3: Daily Telegraph article: https://www.telegraph.co.uk/business/2020/11/20/grant-thornton-hit-legal-challenge-collapse-patisserie-valerie/
Reference 4: FRC Tightens Audit Rules: https://www.sharesoc.org/blog/accounting-and-audit/preventing-fraud-in-accounts-fca-tightens-audit-rules/
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
The responsibility for the accounts is primarily with the Directors surely? Luke Johnson ought to be in the dock as well. I am not a shareholder nor ever have been but I have been following this with interest.
After the PV scandal and a few similar ones where claimed “cash at bank” balances turned out not to exist, I wrote to the Institute of Chartered Accountants in England and Wales (of which I am a member) to suggest that audit reports specifically include the fact that this has been verified by the auditors. I have yet to receive any response.
But it is the directors and managers who are generally responsible, directly or indirectly, for these scandals, not the auditors – even if they and their insurers are the only “deep pocket” left standing.