The Collapse of Patisserie Holdings

REPORT

The Collapse of Patisserie Holdings

Introduction

Patisserie Holdings is one of the reputed bakery chains of the United Kingdom and it owned about 170 stores across UK that specialised in bakery, pastry, continental lunches. However, the chain of stores mostly dealt with cake. In the month of October, 2018, the whole of the AIM market was shaken with news of the suspension of shares in Patisserie Holdings and the collapse of Patisserie Holdings into administration by the month of January, 2019. From winning the IPO of the year in 2015 to the sudden collapse of business reportedly valued at around £450M, the incident of Patisserie Holdings demands to be an discussed issue in today’s market situation and it also discloses various aspects of the key corporate legal consequences in the form of corporate governance, the negligence of independent assurance and serious accounting fraud. In this report, we shall discuss the main aspects of corporate law regarding Patisserie Holdings collapse, the corporate governance issues pertaining to the collapse of the Patisserie Holdings and conclude with a certain picture with all the pitfalls in the dealings of Patisserie Holdings

Patisserie Holdings and the Code of Corporate Governance, 2016 in the United Kingdom

The Code of Corporate Governance, 2016 entails the smooth functioning of a business enterprises and the basics of Corporate Governance in UK stand on a podium of five key principles as have been established by the Code of 2016 herein – a) Leadership b) Effectiveness c) Accountability d) Remuneration and e) Respective relationship with the stakeholders. These five key corporate principles set out by the Code of Corporate Governance, 2016, uphold the structure of business enterprises and a framework of responsibility, liability and accountability can be confirmed with the establishment of these five principles.

Patisserie Holdings collapse after being the IPO of the year in 2015 has raised questions into adherence of these five principles of Corporate Governance and business ethics. Apart from

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1. ‘The UK Corporate Governance Code’, FRC < https://www.frc.org.uk/getattachment/ca7e94c4-b9a9-49e2-a824-ad76a322873c/UK-Corporate-Governance-Code-April-2016.pdf > accessed on 8th May, 2021
2. ibid

the breach of the code of Corporate Governance, Patisserie Holdings collapse also directs towards the possibility of lack of external audit which has been set out under the Companies Act, 2006, Part 16, chapter 1 to 7 and internal audit, set out as per Audit Charter of the company herein. However, the collapse of the company into administration does not indicate towards its failure to comply with all the codes of Corporate Governance but it essentially establishes how the non-compliance outruns the compliance with the principles.

Compliance and non-compliance of principles

How Patisserie Holdings complied with the Code of Corporate Governance, 2016?

Among the five principles as have been set out by the Code herein, Patisserie Holdings succeeded in complying with two of the principles – the principle of remuneration and the principle of upholding relationship with stakeholders. At the time of crisis, the Chairman of Patisserie Holdings, Mr Like Johnson, injected cash into the crashing business to ensure the salaries of all the employees till the month of January, 2019. The principle of remuneration of Corporate Governance states that remuneration of the executive director shall be structure in a way that it shall contribute in the continuity of the business. This essentially adheres to the principles of remuneration which sanctions the continuity status of the business enterprise. Again, the relationship with principle stakeholders has been well upheld by Patisserie Holdings which confirms to the fifth principle of the Corporate Governance. This can be perceived from the efforts put up by the stakeholders of Patisserie Holdings into bringing back Patisserie Holdings to their initial glory. Also, Paul Mumford of Cavendish Asset Management extended cash to the tune of £1, 00,000 into the company.

A critical evaluation of the key ways in which Patisserie Holding failed to meet the Corporate Governance principles and how it was influenced by their corporate structure

According to the Guardian, the information as has been collected that Patisserie Holdings had faced with an accounting irregularity to the tune of £40M. As per the principle of

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3. Wood, Z. (2019, October 18). Patisserie Valerie falls into administration as bank talks fail < https://www.theguardian.com/business/2019/jan/22/patisserie-valerie-administration-cafe-chain > accessed on 8th May, 2021
4. Elgharbawy, A. and Abdel-Kader, M., 2016. Does compliance with corporate governance code hinder corporate entrepreneurship? Evidence from the UK. Corporate Governance, 16(4), pp.765-784.
5. ibid

Corporate Governance, this misstatement clearly indicates a grave lack of accountability in the finance department of the company. According to the principle of accountability, the liability of upholding the nature and standards of operation of a company fall under the duty of the board. Thus, the abovementioned irregularity of about £40M cash indicates the failure of the internal and external audit control of the company which violates the principle of accountability gravely. Further, the record-keeping of forged transcriptions which went unscreened by the accountants of the company violates the principle of effectiveness as set out by the Corporate Governance ethics. The collapse of the company and closing of the 72 stores completely indicates a huge loss of job opportunity for more than 3,000 employees that again contradict the dictates of Corporate Governance and it proves to a negative dictation of the economic state of the society.

The role of external and the lack of internal audit

On 16th January of 2018, the forensic accountants of Patisserie Holdings showed that a huge disparity between the reported revenue and the actual revenue which is a result of the gross manipulation of the balance sheet and profit and loss accounts. The thousands of false entry into the Company’s ledger eventually caused the collapse of Patisserie Holdings herein. The lack of external and internal audit is what led to the death of Patisserie Holdings. The sole reliance on the management assurance greatly exposed the Company and its stakeholders to greater peril. If independence assurance along with proper internal audit had been established, Patisserie Holdings might have avoided the great fall in the month of January, 2019. Internal audit works as a great source of deterrent. Thus, the frauds that took place in Patisserie Holdings could have been detected under the radar of the internal audit if the internal audit had been greatly supported by the Audit Committee and the Board. The existence of an internal audit would have checked the collusions caused by the external audit system and the disparity in their balance sheet would have been detected earlier.

The violation of ethical behaviour – Three examples on how Patisserie Holdings failed to uphold the principles of Corporate Governance

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6. Garrow, N., Somerset, N., Awolowo, I. and Clark, M., 2019. Trust: The critical factor in theory and practice, from banks to cakes.
7. Veldman, J. and Willmott, H., 2016. The cultural grammar of governance: The UK Code of Corporate Governance, reflexivity, and the limits of ‘soft' regulation. human relations, 69(3), pp.581-603.
8. ‘Case study: Did Patisserie Valerie try to have its cake and eat it too?’ < https://www.eqs.com/compliance-blog/case-study-patisserie-valerie/ > accessed on 8th May, 2021

The collapse of Patisserie Holdings indicates the grave consequence of non-compliance with the attributes of the Code of Corporate Governance. Code of Corporate Governance keeps a company well aligned to ensure its legal sanctity along with financial sanctity. The case of Patisserie Holdings provides us with insights as to the significance of adhering to the basic ethical principles and how religiously the stakeholders and the directors should monitor the violation of the same. The directors should scrutiny more during the time of recruitment. As this case shows how registration of false transcriptions leads to fraudulent account irregularities, the companies should rely and establish external networks to keep the balance. Proper governance means the finance department of the company shall have the knowledge of all the transactions and verify the same to make it authentic. The lack of proper address to the loan the company owes to the institution goes strictly against the resource dependency theory. Further, the directors should and must have a mechanism that would back them up during the time of addressing the creditors to see into retaining the state of the company. Again, Patisserie Holdings has a serious lacking in the section of the external audit and internal audit. It is clear from their case that their audit team was incapable and thus the registration of false transcripts that created the big black hole in their finance overstatement. It not only shows incapability but also shows the lack of accountability on the part of the Directors of the company when Patisserie Holdings won the title of the IPO of the year in 2015. Accountability, effectiveness and leadership – Patisserie Holdings severely failed to stick to these three principles of corporate governance. All these actions and non-compliance to principles and lack of proper plans and backup mechanism to uphold the company during the time of a crisis shows how Patisserie Holdings fall prey in the hands of the Corporate Governance failure.



Conclusion

From the abovementioned detailed discussion herein, it can be well established that the collapse of Patisserie Holdings was greatly caused by the failure of the auditing sector and the accounts department. Thus, to conclude herein, the lack of adherence to the principles of Corporate Governance can be fatal. The downfall of Patisserie Holdings was entirely caused by breaching of the Corporate Governance and violence of the company’s ethics of whatsoever nature. Although it is true no company can absolutely adhere to the principles of

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9. Chan, M.C., Watson, J., and Woodliff, D., 2014. Corporate governance quality and CSR disclosures. Journal of Business Ethics, 125(1), pp.59-73

Corporate Governance, all the business enterprise should always realise the maximum extent of the non-compliance.

Hence, the fraud related to the accounts department and audit sector of Patisserie Holdings provides another in-depth insight as to why companies should not only reply on their internal management assurance, the need of independent assurance is of utmost importance. Also, it can be derived from the report that every business enterprise shall also pay more attention towards forming an internal audit sector along with complying absolutely with the code of corporate governance.

BIBLIOGRAPH

Statues

The UK Corporate Governance Code’, FRC < https://www.frc.org.uk/getattachment/ca7e94c4-b9a9-49e2-a824-ad76a322873c/UK-Corporate-Governance-Code-April-2016.pdf > accessed on 8th May, 2021

Article

Wood, Z. (2019, October 18). Patisserie Valerie falls into administration as bank talks fail < https://www.theguardian.com/business/2019/jan/22/patisserie-valerie-administration-cafe-chain > accessed on 8th May, 2021

‘Case study: Did Patisserie Valerie try to have its cake and eat it too?’ < https://www.eqs.com/compliance-blog/case-study-patisserie-valerie/ > accessed on 8th May, 2021

Book

Garrow, N., Somerset, N., Awolowo, I. and Clark, M., 2019. Trust: The critical factor in theory and practice, from banks to cakes

Veldman, J. and Willmott, H., 2016. The cultural grammar of governance: The UK Code of Corporate Governance, reflexivity, and the limits of ‘soft' regulation. human relations, 69(3), pp.581-603.

Chan, M.C., Watson, J., and Woodliff, D., 2014. Corporate governance quality and CSR disclosures. Journal of Business Ethics, 125(1), pp.59-73

Elgharbawy, A. and Abdel-Kader, M., 2016. Does compliance with corporate governance code hinder corporate entrepreneurship? Evidence from the UK. Corporate Governance, 16(4), pp.765-784.

Journal

Pugliese, A., Minichilli, A. and Zattoni, A., 2014. Integrating agency and resource dependence theory: Firm profitability, industry regulation, and board task performance. Journal of Business Research

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