The demise (and potential rebirth) of Patisserie Valerie

The prominent cafe chain Patisserie Valerie has collapsed into administration after ‘significant fraud’ emerged in its past accounts.

Already, 71 of its nearly 200 cafes have been closed and a further 122 are up for sale, leaving the future of the prominent chain hanging in the balance. Accounting giant KPMG have been appointed as administrators to the company and its various subsidiaries throughout the process.

Thousands of false entries in the company’s ledgers, among other irregularities, led the firm to overstate its profits and cash flow for several years.

Companies have two primary motivations to manipulate their profits. Firstly, the pay of some executives is directly tied to financial performance. And secondly, it’s unlikely that financial manipulation will be detected by investors because of the nature of the relationship between independent auditors and their corporate clients.

The motivations in Patisserie Valerie’s case have not yet been established.

When the accounting ‘black hole’ emerged, the company was valued at £450 million. The company’s finance director was arrested by the police, bailed and resigned. Shares have since been suspended and are yet to restart trading.

An array of investigations have been opened into the company. The Serious Fraud Office are running an investigation of an unnamed individual linked to the company, while the Financial Reporting Council is meanwhile investigating accountancy firm Grant Thornton for its role as auditor to Patisserie Valerie. As it stands, only two members of the original board remain.

By any standards, it could be described as an accounting nightmare.

You might think all looks set for the company to join the likes of Woolworth’s in the cemetery of former British high street chains… However, the company’s story has recently taken a turn for the better.

On the 8th of February, sportswear tycoon Mike Ashley made a surprising bid to add the chain to his empire. The billionaire has been on something of a buying spree over the last year, adding struggling retailers House of Fraser and Evans Cycles to his high street portfolio. There are rumours that Ashley is trying to assemble a portfolio of brands to sell in his House of Fraser stores.

Whether or not his bid is successful remains to be seen. It will also be interesting to see what emerges from the ongoing investigations into accounting malpractice in the firm.