Head of Grant Thornton tussles with select committee over collapse of cafe and cake chain

This article is more than 1 year old

This article is more than 1 year old

The former auditor of the collapsed cake chain Patisserie Valerie has argued that it is not the role of accountants to uncover fraud.

Grant Thornton is under investigation for its audits of the chain that collapsed into administration earlier this month following the discovery of a £40m black hole in its accounts. Patisserie Valerie’s former finance director has been arrested on suspicion of fraud.

David Dunckley, chief executive of Grant Thornton, which was replaced by RSM as the chain’s auditor in mid-January, told MPs on the business, energy and industrial strategy committee that there was an “expectation gap” that “needs to be fixed”.

“We’re not looking for fraud, we’re not looking at the future, we’re not giving a statement that the accounts are correct,” he said, adding that his firm audits 7,000 companies. “We are saying [the accounts are] reasonable, we are looking in the past and we are not set up to look for fraud.”

In a heated exchange with Rachel Reeves, the Labour MP and committee chair, Dunckley reiterated: “If people are colluding and there is a sophisticated fraud that may not be caught by normal audit procedures.”

He said in an ideal world it would be spotted. Reeves replied: “But in a shop that sells tea and cakes, you’d sort of think that might be spotted. It’s not a multinational complex organisation.”

Reeves also noted that according to the Financial Reporting Council’s ISA (international standard on auditing) rules, auditors must pick up material misstatements where they are due to fraud or error.

More than 30 Patisserie Valerie shareholders have expressed interest in joining legal action against the chain.

Legal firm Teacher Stern, which has contacted shareholders about a group action, said any claim was likely to focus on any misleading statements made to the City ahead of the suspension of the company’s shares in October.

Patisserie Valerie has been in crisis since then, when it uncovered a £40m black hole in its finances, which it blamed on “potentially fraudulent” accounting irregularities.

About 70 of the group’s nearly 200 outlets and concessions have closed with the loss of about 900 jobs. More than 2,800 further jobs are at risk.

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Potential bidders, including former Little Chef owner RCapital and Birmingham-based entrepreneur David Scott, are lining up to put forward offers on Friday.

But documents sent to potential buyers earlier this week indicate that store sales information going back to January 2013 and cash position data going back to September 2014 could be unreliable.

Analysis by administrators at KPMG, who are handling the sale process, indicate the company is on track to make a £2.6m loss this year while sales at established stores have been falling for more than a year.

Teacher Stern is trying to obtain a copy of a report by forensic accountants at PricewaterhouseCoopers into potential fraudulent activity at Patisserie Valerie which reportedly includes the provision of fake invoices.

Philip Rubens, a partner at the law firm, said it was “clearly important” to establish if there had been inaccuracies in documents sent to investors when the firm listed on the junior Aim stock market in May 2014.

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He said the issue mattered because, under Aim rules, company directors assume personal liability for the accuracy of information contained in stock market admission documents.

One top five shareholder told the Guardian it was not prepared to join any action while others suggested there was no point in doing so unless it was found that Patisserie Valerie had insurance in place which would pay out in the case of negligence.

“If this is just a case against individuals, even Luke Johnson being extremely wealthy, you are only likely to get no more than £30m. If there is no insurance capable of paying a substantial sum out then [a class action] is just straws in the wind,” a shareholder said.