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By Professor Mak Yuen Teen

Start of the butter magic

“A woman who ran her business on her own from 1947 to 1965 – I never remember her complaining. She did it well, people liked it and that was her life,”

Helene Vermeirsch, niece of Madame Valerie

Patisserie Valerie was founded in 1926 when a couple – Belgian-born Esther van Gyseghem (Madame Valerie) and her husband, Theophile Vermeirsch – opened a café on the corner of Dean Street and Old Compton Street in London’s Soho district. Vermeirsch had visited London before their marriage and loved the city so much that the couple decided to start a cake and pastry business to introduce high-quality pastries to the English. It was an instant success.

Unfortunately, the Second World War resulted in the couple’s original café being destroyed. However, it did not deter them from reopening their shop on Old Compton Street soon after. Madame Valerie was very passionate about her pastry business which remained popular throughout London, even attracting top celebrities to patronise her humble shop.


From 1 to 200 real quick

Madam Valerie was left solely in charge of running Patisserie Valerie after the passing of her husband in 1947. She eventually retired 18 years later and sold the business in 1965, moving to South London where she spent her last decade with her sister and brother-in-law. It was then bought over by the Scalzo brothers in 1987. The Scalzo brothers took Patisserie Valerie to greater heights by expanding the single store to eight outlets in London.

In 2006, Luke Johnson’s Risk Capital Partners bought a controlling stake in Patisserie Valerie. Patisserie Valerie then saw phenomenal growth from eight stores in 2006 to over 200 stores in 2018, stretching across the United Kingdom. Patisserie Holdings plc (Patisserie Holdings), the parent company of Patisserie Valerie, was then listed on the AIM Exchange, London Stock Exchange’s junior market. In 2014, its shares were floated at 170 pence a share, and they were trading at 429 pence before trading was suspended in 2018.


The melting butter

“We are determined to understand the full details of what has happened and will communicate these to investors and stakeholders as soon as possible.”

Luke Johnson, Executive Chairman of Patisserie Valerie, 2018

One morning in early October 2018, Executive Chairman Luke Johnson came into his office and was briefed by Patisserie Valerie’s Chief Executive Officer (CEO) Paul May that the U.K. tax authorities had filed for a motion to wind up the company after multiple failed attempts to pursue its overdue amount of £1 million in corporate taxes. Internal investigations subsequently revealed potentially fraudulent accounting irregularities amounting to an estimated £40 million. This led to Patisserie Holdings’ decision to suspend trading of its shares on 10 October 2018 to allow for a full investigation. There was a possibility that past misstatements of accounts were extensive, with thousands of bogus entries being added into its ledgers, as well as the involvement of key finance staff and suppliers in the scandal.


Wrong ingredients

Further investigations uncovered significant irregularities and discrepancies in Patisserie Valerie’s financial statements. The company’s profitability was estimated to be much lower than reported and the accounting scandal much worse than initial findings suggested. Without the immediate injection of capital, Patisserie Valerie was not expected to be able to sustain its normal business operations. The survival of Patisserie Valerie’s 206 stores and 2,000 jobs was in serious doubt.


Bad apple

To further aggravate matters, on 12 October 2018, Chris Marsh – Patisserie Valerie’s finance director – was arrested by the police for suspicion of fraud by false representation.19 Marsh had joined the company as finance director in 2006 and had worked with CEO May since 1998. He has a background in finance and consulting, having over 15 years of experience advising a number of companies before Patisserie Valerie appointed him as finance director and board member of the company.

The criminal investigation into Marsh, led by the Serious Fraud Office (SFO), shone the spotlight on the inadequacies in the finance function in Patisserie Valerie, as well as increased public scrutiny of its corporate governance. Although Marsh was subsequently released on bail, criminal investigations continued. There were also questions about possible failure of the directors in discharging their duties.


Fresh ingredients

“The most harrowing week of my life. I felt a moral obligation to rescue the business…There were 2,800 jobs at stake, there were 12 years of effort that I and colleagues had put into the business, and the board were determined not to allow the business to go into administration.”

Luke Johnson, Executive Chairman of Patisserie Valerie

Due to the massive accounting black hole, Patisserie Valerie was faced with the imminent danger of bankruptcy. The Group was nearly £10 million in debt instead of having £28 million in cash as reported in its books.

Johnson was the Executive Chairman of Patisserie Holdings, which owns Patisserie Valerie, Druckers, Philpotts, Baker & Spice and Flour Power City. He owned 37% of Patisserie Holdings27 and his wealth in 2018 was estimated to be around £260 million.

On the day of Marsh’s arrest, Johnson personally funded a £20 million emergency loan to pay for overheads and staff costs for over 200 stores and 2,800 staff. This comprised a £10 million three-year interest-free loan and a £10 million bridging facility. The latter was eventually paid off from the proceeds of approximately £15.7 million raised through a new share placement at 50 pence a share to other shareholders in November 2018. Johnson’s £10 million loan was not secured against Patisserie Valerie’s assets and hence fell in line with other unsecured creditors such as suppliers and main financial lenders, HSBC and Barclays.

Although the rescue plan had allowed Patisserie Valerie to escape bankruptcy for the time being, it was also criticised for being against the interests of smaller shareholders. This was because new investors were getting shares at a massive discount. It significantly diluted the shareholdings of the original smaller investors but they did not have any other option – the rejection of the rescue plan would result in the immediate collapse of the company.


New chefs

Two unauthorised and unreported overdrafts amounting to £9.7 million set up with HSBC and Barclays were discovered on 14 October 2018, two days after emergency loans were made by Johnson. This escaped the attention of the board, external auditors and Johnson himself. Despite regular statements being submitted to the board and clearance by the company’s external auditors, Grant Thornton U.K. LLP (Grant Thornton), the major discrepancy between the declared cash position and the actual cash position, as well as the significant understatement of the company’s debt, was left undetected.

As part of Patisserie Valerie’s attempt to manage the crisis, the board was replaced and several changes in appointments were made the following month. Marsh was replaced by Nick Perrin as Chief Financial Officer; Jeremy Jenson was appointed to the board and would replace director Lee Ginsberg as Chairman of the Audit Committee; while May stepped down and was succeeded by ‘turnaround specialist’ Stephen Francis as CEO. Non-executive director James Horler also resigned.

The company also replaced its external auditor, Grant Thornton, with RSM.

Despite the efforts to save Patisserie Valerie, it fell into administration on 22 January 2019 when it failed to secure extensions for its lending facilities and approvals for new bank finances. In a statement to the stock market, Patisserie Holdings said that this was a “direct result of the significant fraud”, and thus, “the business does not have sufficient funding to meet its liabilities”. Seventy of the nearly 200 stores closed immediately, and about 900 jobs were lost as a result. Johnson’s and all other shareholders’ investments in Patisserie Holdings were wiped out.


Cleaning team

Following the uncovering of the accounting fraud, Blair Nimmo and David Costley-Wood from KPMG LLP (KPMG) were appointed as joint administrators. Manipulation of accounts and fraud was soon discovered with overstatements of almost £94 million, more than double the initial estimates of £40 million. Based on the KPMG report, the misstatements were as follows:

  • Intangible assets overstated by £18 million;
  • Tangible assets overstated by £5 million;
  • Cash position overstated by £54 million;
  • Prepayments and debtors overstated by £7 million; and
  • Creditors understated by £10 million.


Over-baked cakes

PricewaterhouseCoopers (PwC) was also appointed to conduct a forensic investigation by the company’s board. In its report, it was discovered that the suspected fraud involved the collusion of certain finance staff members as well as a supplier. The supplier allegedly abetted the fraud through the submission of fake invoices for refurbishment work while the four finance staff involved discussed adjustments of fake ledgers via email. The report also alleged the double-counting of voucher sales to artificially inflate revenues, cost manipulation, tax avoidance and as many as 15 secret bank accounts to hide the cash-flow deficits.


Messy kitchen

KPMG stated that it might have sufficient grounds to pursue legal claims against different parties, including Patisserie Valerie’s external auditor Grant Thornton. However, it was faced with a conflict of interest as Grant Thornton was also coincidentally the external auditor of KPMG’s books. Consequently, KPMG had to step down as administrator and another restructuring firm, FRP Advisory, was engaged by Patisserie Valerie’s creditors. Two of FRP’s senior partners, Geoff Rowley and Paul Allen, replaced KPMG’s original administrators and resumed the task of looking into the potential legal claims against the parties involved, including former directors and advisors, as well as Grant Thornton.


First layer of the cake – Board of directors

“If I was arrogant at times before, my ego has taken quite a battering since. A very public disaster such as this shatters your self-belief.”

Luke Johnson, Executive Chairman of Patisserie Valerie

The board of directors comprised of Executive Chairman Johnson, CEO May, finance director Marsh, Ginsberg and Horler before the changes following the accounting scandal.

Johnson was also the Chairman of the Remuneration Committee and a majority shareholder of Patisserie Holdings. He insisted he was not dishonest in the discharge of his duties and was completely unaware of the fraud despite being the Executive Chairman. He had received “solid weekly numbers, [and] comprehensive monthly management accounts” that reflected the good financial health of Patisserie Valerie, which led him to believe that it was doing well.

Johnson felt that, as a “part-time Chairman”, it was not necessary to be involved excessively in the day to day management of the business except for major issues such as agreeing new sites, capital expenditure, raising capital and acquisitions. However, some critics argued that for a Chairman to have an “executive” function would imply having full participation in the management of the business. In fact, Johnson was involved in many such “executive” positions among the 30 companies such as Brighton-based Small Batch Coffee Holdings, Elegant Hotels, and Brighton Pier Group where he was on the board.

Johnson also pointed fingers at Patisserie Valerie’s external auditors for having “the wool pulled very comprehensively over its eyes”. Grant Thornton had not raised any material issues about the financial accounts and gave a “clean bill of health” without qualifications year on year.

Apart from his position as finance director, Marsh took on the roles of director in Patisserie Holdings and company secretary of Stonebeach Limited, the main trading subsidiary of Patisserie Holdings. He was also involved with FishWorks and Healthy Living Centres, two other AIM-quoted companies which Johnson had invested in. However, FishWorks had gone into administration in 2009, while Healthy Living Centres was delisted in 2006. The former finance director is also a chartered accountant and was previously a tax accountant in a Big Four accounting firm.

May, the former CEO, was with Patisserie Valerie for 12 years, and was Johnson’s long-time business partner. Along with Marsh, he was issued share options worth several million pounds as part of a bonus scheme between 2014 and 2016, allowing them to earn a combined amount of £4.6 million. In October 2018, Patisserie Valerie admitted that it had awarded significant amounts of share bonuses to both May and Marsh without notifying shareholders in 2015 and 2016. Patisserie Valerie defended itself, saying that it did not know why the share options of those years had not been “appropriately disclosed and accounted for in its financial statements”.

Ginsberg, the non-executive director, Deputy Chairman and Chairman of the Audit Committee, was the only independent director of Patisserie Valerie. Prior to joining Patisserie Valerie, he was CFO at Domino’s Pizza between 2004 and 2014. Ginsberg holds board positions at a number of other companies, including Mothercare plc, a British retailer listed on the London Stock Exchange.

Horler is known to be a frequent business partner of Johnson. In addition to his directorship in Patisserie Valerie before his resignation, he is also Chairman of restaurant group Ping Pong and coffee chain Notes.


Second layer of the cake – Audit and Remuneration Committees

Within the board, there were two committees, the Audit Committee (AC) and the Remuneration Committee (RC).

The AC’s primary responsibility is to supervise internal controls and ensure accurate reporting of the company’s financial performance. The committee reviews reports from management and auditors relating to annual accounts as well as the accounting and internal control procedures used. It has unrestricted access to the internal audit function and would meet at least three times annually to conduct reviews. Before the accounting scandal broke, the AC was made up of Ginsberg as Chairman and Horler and Johnson as members.

The RC’s primary function is to review the performance of the executive directors and make remuneration recommendations to the board. This includes the granting of share options and other equity incentives. The RC was made up of the same three directors as the AC, with Johnson as Chairman.


Internal audit

Some analysts have commented on the lack of an internal audit function in Patisserie Valerie, and speculated whether the fraud could have been uncovered earlier or even be prevented should there be stronger internal controls and an internal audit function in place. In the U.K., under the Corporate Governance Code for publicly listed companies and based on the comply-or-explain approach, the reasons for the absence of an internal audit function should be explained in the annual report.


Third layer of the cake – External auditors

“We are not doing what the market thinks. We are not looking for fraud and we are not looking at the future and we are not giving a statement that the accounts are correct. We are saying they are reasonable, we are looking at the past, and we are not set up to look for fraud.”

David Dunckley, Chief Executive of Grant Thornton

Following the discovery of the fraud, external auditor Grant Thornton came under fire for allowing the fraud to occur undiscovered despite having audited the Group for 12 years. In response, its Chief Executive, David Dunckley, said that there was an “expectation gap” that “needed to be fixed”, arguing that it was not the role of the auditor to uncover fraud. In a heated exchange with Member of Parliament and Chairman of a business, energy and industrial strategy (BEIS) committee, Rachel Reeves, Reeves noted that the Financial Reporting Council’s (FRC) international standards of auditing rules require auditors to detect material misstatements where they are due to fraud or error. The BEIS committee had organised a meeting with the U.K.’s seven largest accounting firms on 30 January 2019.

Dunckley’s response to the committee was not supported by representatives from BDO and Mazars, two other mid-tier audit firms. They argued that auditors are expected to be able to uncover fraud material to the financial statements and of relevance to the shareholders.

In July 2019, the FRC placed the work of Grant Thornton under increased scrutiny, calling the quality of its work “unacceptable”. Grant Thornton announced an independent review and a revamp of its operations to improve its standards. The company also said that it would create an ‘audit quality board’ with the authority to hold top officers to account if audit quality was not receiving appropriate investment.


The fourth layer of the cake – Administrators

The administrators KPMG also came under heavy criticism and scrutiny as there were obvious conflicts of interests when Patisserie Valerie fell into administration.

When the appointment of KPMG was first announced, concerns were raised because Grant Thornton was the auditor of both Patisserie Valerie and KPMG, giving rise to a clear conflict of interest. Following its report on its investigations of Patisserie Valerie, KPMG announced that it would not be able to pursue any legal action against Grant Thornton. It became clear that KPMG was aware of the conflict of interest but still took on the role as administrator, earning roughly £1.5 million in fees. However, KPMG rebutted the criticisms, stating that prior to its appointment, the directors were made aware of the conflict of interest and that an additional administrator would be required to pursue any legal claims against Grant Thornton. Despite this, the board still agreed to KPMG’s appointment.

KPMG was also the auditor of Bread Holdings, the parent company to two bakery chains where Johnson was a director. KPMG was also engaged by Johnson in 2018 to provide advice on a sale of Bread Holdings. However, the company denied claims of a conflict, insisting that the two companies, Bread Holdings and Patisserie Valerie, are separate with no relationship connecting the two.


Icing on the cake – Financial Reporting Council

“This level of audit quality is unacceptable. The quality of the audits inspected in the year, and indeed the overall lack of improvement in quality over the past five years, is a matter of deep concern.”

– Financial Reporting Council, on Grant Thornton’s audit quality

The FRC in the U.K. is an independent regulator responsible for regulating auditors, accountants and actuaries. The FRC also sets the U.K.’s corporate governance and stewardship codes. It aims to promote transparency and integrity in businesses.

Following the saga, the FRC’s audit quality team conducted an investigation of Grant Thornton’s audits of Patisserie Valerie for the years 2015 to 2017, and reported the company’s audit quality as “unacceptable”. However, earlier in April 2018, Grant Thornton’s 2017 audits were given a “clean bill of health” when reviewed by the FRC. Further, a spokesperson for the FRC said that the regulator’s routine monitoring of audits is only devised to verify that a company’s audit is conducted in a satisfactory way.

Following an independent review of the FRC led by Sir John Kingman in December 2018, it was announced that the FRC would be replaced by the Audit, Reporting and Governance Authority (ARGA). This new independent body will be granted a “new mandate, new leadership and stronger powers set down in law,” in the hope of changing the current culture of the accounting sector in the U.K., and ensuring that the U.K. remains as the place with the highest standards in audit.


The cherry on top – Causeway Capital Partner

In early February 2019, Sports Direct issued a surprise bid of £15 million to acquire the business comprising the trade and assets of Patisserie Holdings and its group of companies. However, it was not the only contender to acquire the beleaguered café chain. The auction had attracted a combination of private equity and trade buyers. However, two days later, Sports Direct withdrew its bid, explaining that it was rejected by the KPMG administrators due to its low offer. KPMG allegedly informed Sports Direct that it would need to increase that offer by as much as £2 million. Sports Direct further added that it was not given any opportunity to gather crucial financial information which would allow for a revision of its bid.

Meanwhile, it was unclear whether other potential bidders such as coffee chain Costa Coffee were still keen on buying out Patisserie Valerie as a going concern. On 14 February 2019, Causeway Capital Partners (Causeway Capital), an Irish private equity firm, bought over the Group for £13 million, a fraction of the £450 million it was once worth. Causeway Capital said that it wanted to “refresh and renew” the Patisserie Valerie brand, and it was announced that Johnson would no longer be involved in the business.

KPMG also sold the 21 stores of Philpotts sandwich eateries owned by Patisserie Valerie to A.F. Blakemore & Son, a food retailer. Together, the two transactions successfully saved 117 shops and preserved 2,000 jobs.


Present-day Patisserie Valerie

“We are delighted with the progress we have made. We found a lot of problems but we also inherited some great staff who really care about what they do. There’s been a lot of hard work but it’s very much back on track,” 

Matt Scaife, partner at Causeway Capital Partners

With only 96 shops left after the buyout, Patisserie Valerie was still struggling to keep its head above water. Investigations by the SFO continued after the successful buyout by Causeway Capital. On 18 June 2019, five unnamed people in connection with Patisserie Valerie’s accounting scandal were arrested by the SFO in a joint operation with Hertfordshire Leicestershire and Metropolitan Police Services.

Ten months after the buyout, the newly revamped Patisserie Valerie is on the road to recovery, with plans to upgrade the cafés and to introduce more premium tea and coffee offerings, as well as a potential online cake ordering system. On the born again café chain, Causeway Capital said, “We are committed to restoring the business to long-term sustainable growth… by focusing on three simple values: quality, creativity and – crucially – integrity”.



  1. Comment on the composition of the board and board committees in Patisserie Valerie. Critically evaluate whether board and board committee composition may have played a role in the scandal.
  2. Luke Johnson, the Executive Chairman of Patisserie Valerie, was holding many directorships on different boards at the time when the scandal happened. What are the pros and cons of an Executive Chairman versus Non-Executive Chairman? Do you think his Executive Chairman role and multiple directorships could have affected the discharge of his duties?
  3. What were the failures in internal controls that resulted in Patisserie Valerie’s accounting misstatements? How could the board of directors have ensured that internal controls were adequate and effective?
  4. To what extent is the external auditor responsible for the detection of accounting fraud? What are the considerations when appointing an external auditor? What is the role of the Audit Committee in overseeing the external auditor?
  5. What is the role of an administrator such as KPMG in the case? What are the duties of an administrator and its powers? Why is the conflict of interest an issue?
  6. What do you think could have been done to avoid this scandal? Who in your view is or
    are ultimately responsible?


The content was originally published on CPA Australia

Photo by TYLER COLEMAN on Unsplash.