October 30, 2018

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Patisserie Valerie

October 30, 2018

Last weekend I hired a carpet cleaner. (I lead a glamorous life). I rang the local hardware store to pre-book the machine and spoke to the owner of this family run business. She stated very clearly that in order to hire the machine, I would need to show her a utility bill (original only) and my passport or Driving Licence. Fair enough, I thought. 


When I went to pick up the machine and show her my documents, I noted that she recorded the details on my Driving Licence (name, number, date of birth, address) in a book and repeated the process with the Utility bill, including noting the electricity account number. 


Her professionalism, zero tolerance of unnecessary risk and attention to detail got me thinking about Patisserie Valerie (again). Whenever a major corporate disaster occurs (Carillion, Conviviality, Quindell etc.), there are normally clues contained in historic audited accounts as to what may lie ahead. In the case of PatVal, however, there is little that that could be picked up. Admittedly, gross profit margins for the 4 years to September 2017 were exceptionally high and constant (77.3%, 77.3%, 78.1% and 78.2%) which may have prompted questions, but PatVal is a high margin product offering. Similarly, the smoothe progression of pre-tax margins over the last 4 years (13.6%, 15.8%, 16.5% and 17.6%) may look suspicious in hindsight, but could be reasonably interpreted before the event as being the result of increased operating efficiencies or economies of scale benefits.


Given the size of the hole in PatVal's accounts and the significantly reduced revenue and profit projections, it seems reasonable to conjecture that PatVal had been overstating revenues and profits for several years. In order to maintain the illusion, funds would have to be transferred from secret overdraft facilities to the company's main bank account so that the Auditors could verify the seemingly healthy cash balance at the accounting year end. 


This brings me back to the family owned hardware store which would be appalled by the astonishing absence of corporate governance at PatVal, the lack of questioning by the Board, and absence of any attention to detail. 


Did the Auditors scrutinise movements of cash into the company's main bank account ? If so, what were the explanations for presumably large transfers to cover the shortfall ?


At Board meetings, did any of the Directors demand to see bank statements verifying the company's actual cash position, or did they just accept what was presented to them in the management accounts ?


Why was the CFO present at all 3 Audit Committee meetings during the last reported year ? The purpose of the Audit Committee is to monitor the quality of internal controls and ensure that the financial performance of the Group is properly measured and reported on. It would be difficult, to say the least, for the Audit Committee to do its job objectively and effectively if the CFO were present at these meetings.


PatVal's controls system includes daily review of revenue and staffing at store level along with cash at the Group level by senior management  (2017 Accounts). How could they not notice unusual movements in cash ? 

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