Accounting Fraud Pushes UK’s Patisserie Valerie into Insolvency

By Ellen Milligan | January 23, 2019

U.K. entrepreneur Luke Johnson’s efforts to save Patisserie Valerie failed as an accounting scandal pushed the bakery chain’s parent into insolvency, threatening as many as 2,800 jobs on Britain’s beleaguered shopping streets.

Patisserie Holdings Plc appointed KPMG as administrator after announcing last week that it had found thousands of false entries in its books. The accounting firm plans to keep 121 of the chain’s roughly 200 stores open as it seeks a possible buyer.

The dramatic failure of Johnson’s most visible enterprise comes after an unsuccessful last-ditch bid to raise new funding from Patisserie’s lenders, which include HSBC Holdings Plc and Barclays Plc. Johnson, the company’s chairman and largest shareholder, has extended an unsecured, interest-free loan of 3 million pounds ($3.9 million) to help pay January wages. HSBC couldn’t be reached for comment and Barclays declined to comment.

Because of the extensive fraud discovered in its accounts, Patisserie “has been unable to renew its bank facilities, and therefore regrettably the business does not have sufficient funding to meet its liabilities as they fall due,” the company said Tuesday in a statement.

The insolvency will wipe out investors in the chain, whose shares haven’t traded since the scandal erupted in October. The loss of at least 70 bakeries adds to the empty storefronts on the U.K.’s shopping streets, where retailers ranging from electronics chain Maplin to the British arm of Toys “R” Us Inc. have already disappeared. Consumers are increasingly turning to online retailers such as Amazon.com Inc., and the Brexit-weakened pound has undermined spending power.

“Hopefully, this will prompt the industry to sharpen up their act, before the loss of yet another high-street company and large number of jobs,” Nick Burchett, head of U.K. equities at Cavendish, said by email. He held shares in the business.

Johnson’s Loans

Former Patisserie Chief Executive Officer Paul May stepped down in November after the baking company reported a surprise deficit that led to the arrest of former finance director Chris Marsh.

Johnson had worked to save the business from insolvency, saying in October that he’d lend it 20 million pounds to stave off collapse. The company also said then that it raised 15.7 million pounds through the issuance of new shares.

After Patisserie hired forensic accountants to comb through its accounts, they discovered “very significant manipulation of the balance sheet and profit-and-loss accounts,” according to a statement last week.

Marsh and former company auditor Grant Thornton LLP are under investigation by U.K. regulators, and the Serious Fraud Office has opened a criminal probe.

“The extraordinary black hole in Patisserie Valerie’s accounts which has led to this administration raises grave corporate-governance concerns and poses serious questions regarding the effectiveness of the auditor and the current arrangements for regulation,” Rachel Reeves, chairwoman of the U.K. Parliament’s Business, Energy and Industrial Strategy Committee, said in a statement.

Johnson’s private equity firm Risk Capital Partners backed the acquisition of Patisserie Valerie 80 years after it opened in London in 1926. The serial entrepreneur, who first made his fortune by investing in the successful restaurant chain Pizza Express, also holds shares in the iconic Brighton Pier on England’s south coast and swimming brand Zoggs International Ltd.

The existing management team, including CEO Steve Francis, will assist in trying to find a buyer, KPMG said.

Related:

Patisserie Holdings’ CFO Arrested as UK Fraud Office Probes Accounting Scandal

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