‘Bandit capitalism’ strikes again

What Unite has dubbed ‘bandit capitalism’ has struck again this week, when on Tuesday (January 22) the café chain Patisserie Valerie collapsed into administration, precipitated by potentially fraudulent “accounting irregularities”.

After Patisserie Valerie failed to reach a rescue deal with banks, more than a third of the chain’s 200 stores were immediately shut this week, with about 900 people, some of whom were Unite members, losing their jobs. A total of 3,000 jobs are at risk.

More than £4m is owed to suppliers and £222,000 owed to HMRC for PAYE and national insurance contributions – little of which is likely to be paid out if the company, which is now trying to find a new buyer, goes bankrupt.

Patisserie Valerie’s financial woes first came to light in October, when a £40m black hole was found in its accounts. The chain’s finance director Chris Marsh was arrested on suspicion of fraud but later released on bail without charge and he subsequently resigned.

The Financial Reporting Council has launched an investigation into both Marsh and Patisserie Valerie’s auditor Grant Thornton, which has come under fire for giving the green light to the accounts of a company that was later found to be financially insolvent — much like accountancy firm KPMG which oversaw Carillion’s accounts.

Cashing out

It has now been revealed that multimillionaire Patisserie Valerie chairman Luke Johnson extracted ÂŁ40m from the company over the last five years when the company was first floated on the stock market in 2014. It is not thought that Johnson has been involved in fraudulent activity.

After revelations of the company’s serious financial problems came to light last year, Johnson loaned the chain £13m over the last several months, which he is now unlikely to get back.

Former chief executive Paul May cashed in on about ÂŁ11m in share sales, pay and dividends, including more than ÂŁ2m on share options last year, while former finance director Marsh has walked away with ÂŁ4.4m, including ÂŁ2m in share options last year as well.

‘Broken auditing sector’

A statement from the company issued on Tuesday (January 22) read, “as a direct result of the significant fraud … it 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”.

Just a week before on January 16, the company said that its own fraud investigation “revealed that the misstatement of its accounts was extensive, involving very significant manipulation of the balance sheet and profit and loss accounts. Among other manipulations, this involved thousands of false entries into the Company’s ledgers”.

Critics such as accounting professor Prem Sikka said Patisserie Valerie is yet another example of what he called ‘a broken auditing sector’.

Sikka argued in a Left Foot Forward blog post this week that the “internal controls” via Patisserie Valerie’s auditing committee failed, “as evidenced by the acknowledgement of fraud”.

“It is worth noting that Carillion, BHS and all distressed banks rescued during the 2007-2008 crash boasted audit committees populated by part-time non-executive directors too to manage risks, and they all failed,” he wrote.

He added that Patisserie Valerie’s external auditors Grant Thornton had also spectacularly failed.

“An application of fairly standard auditing procedures should have enabled the auditor to detect false accounting entries and manipulations of cash flow, profits and balance sheet of the company,” Sikka noted.

Unite report

Unite has long been a critic of failed auditing practices and lax financial regulations that allow such practices to flourish, especially since Carillion’s collapse last year.

Unite assistant general secretary Gail Cartmail said that it was “workers at Patisserie Valerie who are the innocent victims of bandit capitalism”.

“They have been failed by the government which has failed to take action to end these practices,” she added. “This latest corporate collapse demonstrates why the financial regulators are not fit for purpose — they need to be able to take action before a company collapses, rather than after jobs are lost.”

Unite last month published a comprehensive report into Carillion’s failure and outlined a series of recommendations to stop the ‘bandit capitalism’ that’s become increasingly common in the corporate world.

Among these recommendations is a call to break up the big four accountants with auditing being spun off into separate specific companies.

Unite also wants the creation of additional rules to ensure that auditors have a duty of care to employees, rather than as it is now, where auditors only have a duty of care to the company – a legally distinct entity from workers.

Unite has moreover recommended that the regulatory system governing the entire financial sector be radically reformed.  Possible reforms include reducing the number of regulators and clarifying their roles, as well as giving regulators real enforcement powers so that they can intervene before companies collapse.

“If companies do collapse the regulator must have the ability to undertake quick inquiries to identify if laws and regulations had been broken or manipulated,” Unite’s report read. “The belated launching of never completed inquiries must be eradicated.”

Cartmail urged the government to heed Unite’s warnings.

“Since Carillion’s collapse the government has continued as though it is business as normal and has ignored all suggestions to initiate vitally needed reforms,” she said. “If the government does not take swift action then inevitably there will be further innocent victims of bandit capitalism in the future.”

Pic: Tony Monblat