Grant Thornton UK fined $3.2M for Patisserie Valerie audit lapses

David Newstead, the firm’s audit engagement partner, was also fined £87,750 (U.S. $120,000) for his role in signing off the accounts and given a three-year ban from further audit work.

The penalties, announced Monday, are the latest in a series of crackdowns by the U.K. Financial Reporting Council (FRC) regarding deficiencies at major audit firms.

Over the course of three years, the FRC found “serious breaches” in Grant Thornton’s work auditing Patisserie Valerie’s revenues, cash, journals, and fixed assets, with mistakes often repeated year on year and across several legal entities.

The FRC said, “The breaches reveal a pattern of serious lapses in professional judgment, failures to exercise professional skepticism, failures to obtain sufficient appropriate audit evidence, and/or to prepare sufficient audit documentation.”

Patisserie Valerie entered administration in January 2019 after the board was notified of potentially fraudulent accounting irregularities. The company was forced to close 70 stores and lay off more than 900 employees.

Grant Thornton admitted to not following audit rules and must report to the FRC annually for the next three years about what steps it is taking to improve the quality of its audits. Additionally, the firm will review its culture relating to challenge, as well as undertake additional monitoring in relation to bank and cash audit work.

The firm must also pay the costs of the FRC’s investigation.

FRC Deputy Executive Counsel Claudia Mortimore said there was evidence of “a serious lack of competence in conducting the audit work” that “involved missed red flags, a failure to obtain sufficient audit evidence, and a failure to stand back and question information provided by management.”

Red flags included Patisserie Holdings receiving 73 percent of its total revenues in just one payment from voucher receipts; management reactivating dormant bank accounts; and suspicious invoices from companies with logos missing, spelling errors, and wrong address details.

In an emailed statement, Grant Thornton said: “We have cooperated fully with the FRC and acknowledge the investigation’s findings relating to our audits in 2015-2017. We regret the quality of our work fell short of what was expected of us in this instance. Since the period in question, we have invested significantly in our audit practice to better ensure consistent quality and have started to see the material outcome of this investment.”

In part due to cooperation, fines were reduced from £4 million (U.S. $5.5 million) and £150,000 (U.S. $205,000) for Grant Thornton and Newstead, respectively.

The fines are “another example of the FRC baring its teeth in its death throes,” said Paul Brehony, partner at law firm Signature Litigation, of the regulator that will soon become the Audit, Reporting and Governance Authority (ARGA).

A civil case was launched against Grant Thornton in January by liquidators at FRP Advisory, claiming the auditor was negligent. The firm said it will continue to “rigorously defend” the claim, which “ignores the board’s and management’s own failings in detecting the sustained and collusive fraud which took place.” Grant Thornton added its work “did not cause the failure of the business.”

In 2020, Grant Thornton was fined £1.95 million (then-U.S. $2.4 million) for firmwide ethical and independence failures concerning its audit of alcohol retailer Conviviality Retail before the latter collapsed in 2018.