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The auditors should be checking that material uncleared deposits at balance sheet date on the bank statement were clearing post balance sheet.
I suspect cheques payments were not reflected in the accounts and the amounts deposited on cheques which subsequently bounced filled in the hole between recorded cash and true bank position. An easy way to boost bank statement balances provided your auditors don’t check uncleared deposits on the bank statements. Perhaps he kept rolling the position to confuse the auditors.
The full article ..
THSBC and Barclays investigated over ‘secret’ Patisserie Holdings debts
The Financial Conduct Authority is investigating HSBC and Barclays over potential governance failings in their monitoring of current accounts and overdraft facilities for Patisserie Holdings, The Times has learnt.
The City watchdog is scrutinising the banks about bounced cheques worth millions of pounds that were paid into Patisserie’s accounts at the year’s end, which may have allowed the business to hide its true financial position.
It has questioned the regulatory compliance teams at both banks over the governance of two “secret” overdraft facilities for Patisserie, in which £9.7 million was run up.
The overdrafts were said to have been discovered by Patisserie’s board in October, when it revealed “significant, potentially fraudulent, accounting irregularities” and a £40 million hole in its accounts. An internal investigation discovered that Patisserie Holdings, the company behind the Patisserie Valerie café chain, had a net debt of £9.8 million, rather than the cash position of £28.8 million it reported in May.
A report by PWC, the accounting group, for Patisserie has revealed that funds were being moved between two current accounts through cheques paid in at bank branches, according to people who have seen the report. Each cheque would boost the bank balance of the Patisserie account temporarily at the end of the financial year. The cheque would bounce days later, but the updated bank balance would not be recorded.
“There are serious questions about why the banks didn’t raise an alarm,” a person familiar with the report said. “Patisserie’s stated cash position bore no resemblance to what the bank accounts had in them. Cheques were bouncing worth millions of pounds, yet Patisserie was reporting an ever-growing cash pile.”
The future of Patisserie was thrown into doubt again this week after it revealed that the potential fraud was more extensive than had been thought and that it had hired KPMG, another of the Big Four accountants, to carry out a “review of all options available”.
It said that forensic accountants had found “very significant manipulation” of its accounts and that its cashflow and profits were “materially below” those declared in October.
City investors, including those who backed a deeply discounted emergency £15.7 million placing in October to save the chain from collapse, are concerned that it could be put into administration or sold cheaply. They want the banks to give the company more time to turn itself around.
Patisserie has been locked in talks with its banks over its facilities before a deadline yesterday.
The scandal triggered investigations by the Serious Fraud Office and the Financial Reporting Council, as well as scrutiny of the company’s payment practices from the Commons’ business, energy and industrial strategy select committee.
A spokesman for the Financial Conduct Authority said: “We don’t comment on spec
According to Times bank accounts were fiddled by writing cheques between bank accounts at year end to show positive balances. The cheques would always bounce a couple of days later but apparently it was enough to fool everyone. Sounds like fiddling trading figures was a separate activity but indirectly supported the cash figs reported.
Still can't grasp how auditors didn't notice.
There is, and has never been money to be made in Cakes. High Street doom and gloom, people tightening belts, high-rents, and very labour intensive......and these fifty quid cakes don't get sold, the ten-quid ASDA cakes replace them during periods of uncertainty. You don't need a PHD in Economics to work this out surely?
Let me guess. Company will be put into administration, Luke Johnson will buy for £1, shareholders get nothing and Luke Johnson takes full control. Like taking candy from a child!
Agreement ended today. Presumably they are now completely in the hands of their banks and their facility will now be “on demand”. The fellow Jensen will be in here only to look after the bank’s interests. Presumably the KPMG work will show if this business model actually works, and if it does is their any equity value or will it just generate sufficient cash to slowly repay the banks. I feel sorry for the institutions that invested equity in October as that money must now be at great risk. I suspect a private equity solution.
It's not something I would be rushing into, might be a couple of years after relist as I'm quite patient and given time I believe they can get over this, might miss an initial uplift of course but plenty of other fish in the market in the meantime.
I'm not totally risk averse, Carillion is a good example, I actually made a little bit there on the way down but was out when it was at its riskiest point..
More interested in the story here than anything, and from experience I know easily auditors can be manipulated, seen it at several companies I worked for although I was never the one making the decisions. I don't know what they need to do to stop this happening but I don't believe there is an end to it as it stands.
threeputt
Would be interested in your take on this, seem to be in the same position as me - ie uninvested at present. Would you consider investing here or is it just that the story has caught your eye - with no skin in the game your objectivity would be welcome.
ps I'm not being smug about not being invested, I had Carillion shares in my SIPP so I know suffering!
not in here but fascinated by the story, been involved in several company audits and I know from experience some of the shenanigans pulled. Bobsto12 has it spot on below though, the bank balance cannot lie as it is the first point of proven reference for the auditors, and cannot easily be fraudulently reported. I note the cash balance has risen year on year however so they were cash generative it would seem.
Any views ?
KNIGELK
I concur. Thank you for remembering the effect on employees.
It is too easy for us investors to forget all except the impact on ourselves.
...but don't expect 50p on relisting
Abandons ship. Hmmm, maybe it wasn't his choice!
I have only just read yesterdays RNS properly. Bloody hell! The big question is that, once the true position per Oct '18 is established, is the business viable? If it is I will invest, if for no other reason it will be squeaky clean for years after re listing! I would like to see the chairman more focussed on this operation though, these multiple board positions must have been partially responsible for this - he's a proven talent but he got over confident and took his eye well and truly off the ball. And the hit for all this management consultancy work is going to hurt, big time, KPMG don't come cheap. From memory 10 years ago partners were charged out at £500 an hour, that's an awful lot of croissants.
Assuming the business model is proven then this is a good bet. Competitors, Costa etc ere no more than overpriced cafes now with mass produced 'Baristas', litter on the floor and dirty tables. I think PV has a place. Time will tell
Excellent idea. It would give investors more confidence in the financial reporting that's for sure!
Another super bland endorsement of a resigning Director!
Could this be sold for a penny too? Retail investors must start looking to invest in private equity as most listed companies are dodgy even though they are generously paid to do a good job.
A wholesale shake up of the system is required.
I worked in the actuarial side of life and pensions companies. It always struck me that there was a conflict of interest for auditors when they were paid by the companies that they audited and their ongoing engagement was decided by shareholders. In big companies large accounting firms are used where much of the work is done by juniors who have little option other than following orders, compromising the individual auditors impartiality.
I will be shot down for this but why not a fractional increase in corporation tax with the proceeds used to pay the fees of auditors randomly appointed so that there is no temptation to ingratiate themselves with the companys management?
whos next
Multi site cash business!!
Take a Google at "Vitaldent fraud". Another multi site cash business, in dental clinics believe it or not!
External auditors IMO should be experienced business people - preferably over 50 years old!!!
BT of course had a £500m+ Italian fraud problem so it can happen to a FTSE100 division as well as a minnow.
Accounting seems to have become more complex for its own good
I am suprised there are not more "spot checks" ......where a team just turns up un-announced and does some "spot checks" outside of the main audit
I obviously haven't seen the report from the forensic accountants but it's Audit 101 - get bank confirmation letters directly from the bank, perform substantive test of balance sheet reconciliations / bank recs. The P&L falls out. Too many audit teams focus on controls audits now . back to basics for the profession i would suggest. Especially GT given they appear to have not learned any lessons from Globo.
I've worked for years in the finance function head office of large groups and it's amazing what people will do if not scrutinised. Fiddled accounting is always a threat and is usually revealed by cash flow reporting.
Never came across fiddled audited bank balances though.
I have a degree of sympathy for Johnson as something very similar happened to me.
I was CEO of a company where the FD had a form of mental breakdown and started very cleverly hiding stuff. He waited for our auditors to finish their audit so that he'd have a full year to cover his tracks. Inevitably, it unravelled after about four months and, as ever, it was the bank balance which eventually revealed the truth.
The point of mentioning this is that a clever FD can hide stuff and if the CEO is complicit, it's near as damn it impossible for the non-execs to see it.
By the way, i'm not excusing anyone (myself included), I'm just pointing out the reality of life.
someone must have sitting there all day long putting in the fake transactions....mind boggling. Bernie Madoff type stuff.
Don't forget it could be a terrible outcome for employees too.
There are a number of problems like how far back in time does the fraud extend. It sounds pretty pervasive and was created by an accountant who knew how to hide it from fellow directors and analysts and auditors so won’t be pick easy to unpick even with the benefit of hindsight.
Unravelling all the wrong entries and trying to build the correct picture of finances for last three balance sheets periods and then considering whether any different accounting decisions should have been taken at that time will be very time consuming and expensive.
I suspect the revised profitability which is now emerging on current trading probably paints a far less rosy picture which is why KPMG are involved to try and help management navigate through the ongoing challenges of which stores should be shut etc.
Terrible outcome for shareholders.