Company auditing EDDC under investigation for “Patisserie Valerie” black hole

“Accountancy firm Grant Thornton is under investigation for its role as the auditor of Patisserie Valerie, the bakery chain which nearly collapsed last month after it discovered a £40m black hole in its accounts.

The Financial Reporting Council (FRC) said it was investigating the audits of the financial statements of Patisserie Holdings – the chain’s parent company – for the years ended 30 September 2015, 2016 and 2017.

The accountancy watchdog said it was also investigating the “preparation and approval” of financial statements by Chris Marsh, the former finance director of Patisserie Holdings who was suspended from the company when the black hole was found in October. Marsh was subsequently arrested on suspicion of fraud and bailed, before resigning from the company.

A spokesman for the FRC said it had moved quickly to consider whether the case required an investigation and that this was just the beginning of a process which could take up to two years to complete.

“The important thing is to do a thorough job and get the right decisions. Investigators could have thousands of emails and different pieces of paper to examine, so it’s not something that can be done quickly,” he said.

Once the FRC has completed the investigation, it will decide whether it has a case against Grant Thornton and Marsh to be presented to a tribunal, which could ultimately lead to a fine or, in the case of individuals, banning them from practising as accountants.

A spokesman for Grant Thornton said: “I can confirm we have received a letter from the Financial Reporting Council informing us of its decision to commence an investigation, and we will, of course, fully cooperate in this matter.” …

https://www.theguardian.com/business/2018/nov/21/patisserie-valerie-accountants-face-black-hole-investigation

“How the Big Four accountancy firms have become guardians of greed”

“Accountancy is by ­reputation a boring ­profession. We imagine a middle-aged man in a dusty office totting up figures.

This image is just how the Big Four accountancy firms like it, not least because it hides what they really are – the handmaidens of greed, graft and crony capitalism.

Deloitte, KPMG, Ernst & Young and PricewaterhouseCoopers are supposed to be the guardians of good business but have become the pin-striped promoters of the worst corporate practices.

They signed off the accounts of the banks which collapsed, failed to raise the alarm over BHS and Carillion and helped firms avoid tax on an industrial scale.

If you want to know why capitalism has such a bad reputation you need to look at the very people supposedly responsible for policing it.

It was not always like this. When the big four started, they were simply auditors.

But the deregulation after Thatcher’s “big bang” in the 1980s saw banks turn to ever more inventive ways of making money.

They could bundle up debts and sell them on, and bet against how much money that would make.

Instead of loaning money to firms, the banks started buying them. Instead of investing, they speculated. And the accountancy firms wanted a slice of this action.

In addition to auditing, they started offering consultancy – often to the firms whose books they were meant to be checking.

Nobody seemed to care about this blatant conflict of interest… until things went wrong.

Take the collapse of Carillion, which went bust with debts of £7billion.

Ten months earlier, KPMG had given its financial statements its seal of approval.

Since 2008, KPMG had received £20.2million in fees from Carillion.

In the same period, Deloitte netted £12million and Ernst & Young £18.3million.

The real winner, though, was PwC – which banked £21.1million from Carillion and is expected to make £50million overseeing its liquidation.

MP Frank Field accused the accountancy firms of “feasting on the carcass” of the firm.

Defenders of capitalism like to claim it encourages competition but this does not appear to be the case when just four firms have a near monopoly of the market.

In the UK, they audit 341 of the 350 biggest listed companies. And why go elsewhere when you can hire firms apparently willing to sign off accounts at the stroke of a pen and bag a lucrative consultancy contract at the same time?

A PwC auditor signed off BHS’s accounts days before it was sold by Sir Philip Green after spending just two hours looking at files. An internal note suggests the worker backdated his audit and failed to gather evidence on “whether BHS was a going concern”.

Then there is Lehman Brothers, Northern Rock, HBOS – all deemed going concerns by auditors shortly before their collapse.

In 2007, PwC’s audit of Northern Rock concluded “that in our opinion there were no matters relating to the going concern … that were required to be reported to shareholders”.

The bank’s ­collapse a few months later cost the taxpayer £2billion.

PwC later said it was not the “job of the auditor to look at the business model of a business”.

The Big Four also stand accused of advising big firms and high net worth individuals on how to stash cash away in tax havens.

The Paradise Papers showed Ernst & Young helped F1 champ Lewis Ham-ilton set up an offshore structure to avoid paying tax on his private jet.

Members of the Big Four have also faced accusations of misselling, turning a blind eye to bribery and collusion in corporate fraud.

Instead of questioning such behaviour, the Government rewards them with lucrative deals. Since 2015, the four firms have bagged Government contracts worth £1billion.

The Commons Business select committee has now launched an investigation into the Big Four and whether they should be broken up.

Chair Rachel Reeves said: “The audit market is broken. The Big Four’s overwhelming market domination has failed to deliver audits which are fit for purpose.”

Regulation is so lax we have no idea how much an auditor charges or how long they spend looking at the books.

Prem Sikka, emeritus professor of accounting at the University of Essex, says reforms are needed.

“The quality is low, competition is non-existent and the regulation is poor. It is almost impossible to sue negligent regulators in this country. To this date not a single accountancy firm has been investigated, prosecuted, fined or disciplined for selling tax avoidance schemes even though some of those schemes are unlawful.”

Will the accountancy firms finally be held to account?”

https://www.mirror.co.uk/news/politics/how-big-four-accountancy-firms-13581124

Finally a way to publicly scrutinise Local Enterprise Partnerships and other quangos?

Owl says; But will the likes of Diviani (LEP) and Randall-Johnson (CCG) be in favour of more (or rather, any) scrutiny?

“Meg Hillier has told Public Finance that audit of local government spending needs to be more “transparent” for an increasingly “savvy” British public.

“I think the British public are much more savvy about things – they don’t trust the authority to spend things well,” she said to PF.

Since the Audit Commission was formally dissolved in 2015 “there isn’t the same level of transparency locally”, Hillier said.

Local authority finances “used to be well demonstrated,” she said, “so I think [making them more transparent again] is just something that we need to keep pushing on.”

Although she said it was “early days” and did not wish to say who she had been speaking to, she said she saw devolution as an opportunity to improve closer examination of how public money was spent.

“At metro mayor level or at a bigger regional level there is an opportunity for value for money audit and analysis because there are certain discreet pots of money coming down for very particular projects, so it’s easier to track it through from the day to day budget value for money,” she said.

Hillier was speaking to PF after the shadow communities secretary Andrew Gwynne told the Labour Party conference last month: “We will give local authorities public accounts committees to improve local government spending decisions.”

Local PACs was one of the Labour Party’s pledges in its 2015 manifesto so that “every pound spend by local bodies creates value for money for local taxpayers”.

Hillier said she was not able to give a clear view on what her vision for the extra layer of scrutiny of local government finances would be but did not believe local PACs were necessarily the answer as they would require “huge infrastructure”.

“I am not advocating we go out and set up lots of mini NAOs [National Audit Offices] – there is a bit of realism in this,” she added.

But Ed Hammond, director of Centre for Public Scrutiny, which has long been an advocate of local PACs, told PF that there is an “urgent need” for such bodies.

“Local PACs will be bodies led by elected councillors, empowered to follow the public pound across a local area, cutting across different organisations to get a real picture of the value for money of public services,” he suggested.

“In a world of increasingly complex decision making, and with greater pressure on finances, there is an urgent need for these bodies to give the public the assurance they need on the services they rely on.”

An Institute for Government report, out on Monday,

https://www.instituteforgovernment.org.uk/sites/default/files/publications/Accountability_modern_government_WEB.pdf

said that government should “review the case for setting up local Public Accounts Committees” to “provide new capacity to local government to scrutinise performance across the breadth of services offered in a region”.

These could initially be trialed in mayoral combined authorities, the IfG suggested.

Local PACs were discusssed in an IfG-led Twitter discussion on the report.

@ben_guerin
We also need to scrutinise links between local public services like health and social care: review case for setting up local PACs, initially in mayoral combined authorities #IfGaccountability

The Conservative mayor of Cambridgeshire and Peterborough Combined Authority James Palmer believed there was already enough local authority financial scrutiny in place.

Although, he suggested if more fiscal devolution was handed down to metro mayors then “that of course must come with the necessary level of local governance and scrutiny”.

“Whether that comes in the form of a local public accounts committee is of course a discussion that would need to be had as part of further devolved powers.”

Northern metro mayors recently called for post-Brexit EU replacement funding to go straight to the regions, bypassing Whitehall.

Chief executive of the Localis think-tank Jonathan Werran recently wrote a blog for PF on the future of fiscal devolution – see here:

https://www.publicfinance.co.uk/opinion/2018/10/running-out-road-time-change

https://www.publicfinance.co.uk/news/2018/10/pac-chair-seeking-ways-beef-local-government-spending-scrutinyq

EDDC’s current external auditors face probe over Patisserie Valerie

“The auditor of crisis-hit cafe chain Patisserie Valerie is facing an investigation by the industry watchdog.

Work by Grant Thornton has been called into question after bosses at Patisserie discovered a £28.8million black hole in the accounts, an unpaid tax bill and two ‘secret’ overdrafts totalling nearly £10million.

The auditor has worked for the company since 2006 and most recently signed off the books for the year to September 30, which said the balance sheet was strong and contained no borrowing.

… The Serious Fraud Office is already understood to be investigating and last night the Financial Reporting Council (FRC) confirmed it was reviewing the situation.

An FRC spokesman said: ‘We are looking into this matter carefully and will give full consideration to further action as more facts become available.’

… overdrafts with HSBC and Barclays had been run up by the company totalling £9.7million but directors only learned of them on Tuesday.

Likewise, around £28.8million that had previously been in the bank was unaccounted for and they learned tax officials were seeking to have the company wound up over unpaid bills.

… Grant Thornton declined to comment last night.”

… Cliff Weight, director of investor group Sharesoc, said: ‘I find it absolutely extraordinary that a company with revenues of £114million could ever lose track of £20million.’

https://www.thisismoney.co.uk/money/markets/article-6275371/Auditors-face-probe-Patisserie-Valerie-crisis-following-discovery-28-8m-black-hole.html

EDDC’s auditors (Grant Thornton) in the bad news spotlight again

“… In May, Patisserie Valerie said that it had £28.8m in cash reserves, while half-year profits were 14.2% up on the previous year at £11.1m.

On Thursday, the firm announced that its board had found “a material shortfall between the reported financial status and the current financial status of the business”.

Grant Thornton, which has audited the firm’s accounts since 2010, said it would not comment on Mr Johnson’s revelations to the Sunday Times.” …

https://www.bbc.co.uk/news/business-45854817

“Audit watchdog vows to restore public trust in sector”

Owl says: too late for us. EDDC’s then (and now) external auditor was given a consultancy contract to investigate the ramifications of the Graham Brown scandal:

https://eastdevonwatch.org/2016/03/06/external-auditors-watchdogs-or-bloodhounds/

https://eastdevonwatch.org/2017/11/08/so-guess-who-eddcs-new-external-auditors-will-be/

Maybe the Financial Reporting Council would be interested in this seeming conflict of interest?

“The UK’s audit watchdog has announced a reform programme to restore the public’s “falling trust in business and the effectiveness of audit” after its work showed that high-quality auditing was not being “delivered consistently”.

The Financial Reporting Council will implement a series of measures including increased monitoring and assessment of risks, and scrutiny of the future needs of investors and audit quality.

It will also address auditor independence, including banning accounting firms from providing consultancy work to companies they already audit.

The watchdog plans to work closely with the Competition and Markets Authority (CMA) on this issue.”

https://www.telegraph.co.uk/business/2018/10/08/audit-watchdog-vows-restore-public-trust-sector/

“Audit sector faces inquiry as minister points to deficiencies”

Interesting to note that a large number of people in East Devon have been pointing out deficiencies in internal and external audit foy YEARS!

https://eastdevonwatch.org/2014/09/17/please-dont-take-our-external-auditor-away-why-we-like-him-and-our-ceo-wants-the-same-auditor-at-both-councils-where-he-works/

https://eastdevonwatch.org/2015/01/15/a-question-for-the-swap-internal-auditor/

https://eastdevonwatch.org/2016/11/19/external-auditors-not-best-placed-to-review-local-plan-duh/

“The government has called for a comprehensive review of Britain’s auditing industry in what could herald huge changes to a sector dominated by the firms known as the big four.

Calls for reform have grown after the collapse of the construction giant Carillion and the former high street stalwart BHS revealed serious inadequacies in the auditing process.

The business secretary, Greg Clark, said it was “right to learn the lessons and apply them without delay” as he ordered the inquiry into competition within the industry where Deloitte, PwC, Ernst & Young and KPMG audit 98% of the UK’s largest listed companies.

“The collapse of Carillion exposed deficiencies in an audit process, where the market is dominated by just four large firms,” Clark said, in an interview with the Financial Times.

He added: “We know competition is one of the key drivers for maintaining and improving standards, so I have asked the Competition and Markets Authority to consider looking again at what can be done to improve the audit sector.”

Thousands of jobs were lost following Carillion’s collapse in January, with a subsequent parliamentary report finding that Deloitte – which received £10m to be the outsourcing company’s internal auditor – had been either “unable or unwilling” to identify failings in financial controls, or “too readily ignored them”.

Ernst & Young was paid £10.8m for “six months of failed turnaround advice”. Elsewhere, PwC was fined £10m by the Financial Reporting Council (FRC) for signing off on the accounts of BHS, before its sale for £1. The retailer collapsed in 2016, prompting the loss of 11,000 jobs.

Frank Field, the chairman of the work and pensions committee, said poor business practices were “waved through by a cosy club of auditors, conflicted at every turn”.

The FRC has previously called for an inquiry into whether the big four should be broken up, with their audit divisions spun off. This year, Deloitte warned that such a measure could affect the UK’s standing as a global financial centre.

Labour welcomed the announcement, but claimed the Conservatives were “playing catch-up”. …”

https://www.theguardian.com/business/2018/sep/29/uk-mulls-audit-sector-reform-after-minister-admits-deficiencies