Patisserie Holdings: who dropped the cake?

Tuesday, Jan 22 2019 by
Patisserie Holdings who dropped the cake

It was a winding up order that started it, presented to The Gazette on a quiet September’s day, where it sat for a month like a ticking time bomb. Not even the board of the company in question knew a countdown had started.

This was not Act One of the Patisserie Holdings (LON:CAKE) fraud saga. Nobody knows how deep the rot goes, apart from the perpetrators. The fictitious accounts that propped this fraud up like a house of cards could even pre-date the May 2014 initial public offering. No-one has yet indicated otherwise.

The gig’s up. A few bad actors have dented a lot of people’s wallets. When good investors fail, they learn and move on - after all, experience is what you get when you don’t get what you want. Patisserie Holdings has been dishing out quite a lot of experience, recently.

It’s a curious feeling, revisiting the group’s half-year update from 2018, less than five months before that announcement in October. Can any of the figures be trusted or was it all a desperate work of fiction? I’m squinting at the screen, looking for hints of what was to come.

Surely, the diligent investor can’t be so easily duped? And yet nothing jumps out. The numbers are great but not stratospheric. They have been well-judged by a competent liar. Perhaps, in retrospect, they are too neat, too tidy. Easy to say, with hindsight.

Like the rest of the market, I didn’t have a clue about Patisserie Holdings. People want to trust other people. An unfortunate corollary of this is that smart, committed fraudsters can create a surprisingly large mess.

It’s a sad state of affairs. As Paul Scott notes, other frauds “such as Quindell, Globo, and Carillion, were easy to spot a mile off - indeed we warned investors of all 3 here, long before they blew up. Patisserie Valerie however, appeared to be a wonderful, cash generative business…”

Investment post-mortem: such a grim phrase to apply to a purveyor of cakes...

Following the crumbs - a brief timeline of events

Before the storm

  • 14 May 2014: CAKE raised £32.8m (before expenses) through the Placing, the net proceeds of which were used “to repay the Group's existing outstanding senior debt and shareholder loans.

    • Selling shareholders also received gross proceeds of £46.5m pursuant to the Placing

  • 27 June 2014: Options…

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Patisserie Holdings PLC is a United Kingdom-based cafe and casual dining company. The Company offers cakes, pastries, snacks, meals, and hot and cold drinks across the United Kingdom. The Company's segments include Druckers, Flour Power and Philpotts. It offers products, such as coffee, dairy, fruit, packaging, cocoa and wheat items. It offers cakes in various categories, including celebration cakes, gluten free cakes and wedding cakes. The Company operates under various brands, including Druckers-Vienna Patisserie, Philpotts and Flour Power City Bakery. The Company offers a range of cakes, such as Gluten Free Flapjack, Gluten Free Chocolate Chip Muffin, Cortina, Chocolate Box, Carrot Cake, Cheesecake, Blackforest, Exotic Fruit Tart, Pecan Tart, Citron Tart, Choc Mousse, Mixed Berry Mousse, Raspberry Tart, Madame Valerie Slice, Mille-Feuille, Gluten Free Chocolate Brownie and Gluten Free Marble Cake. more »

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79 Comments on this Article show/hide all

whitmad 28th Jan 60 of 79

Teacher Stern are looking at a group action on behalf of shareholders. I've no idea what they might achieve but they have a web page to register interest:

I received an email from them today saying: "We are considering the position and we will be in contact with you further."

I have low expectations but am curious to see what they might come up with.

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Laughton 30th Jan 61 of 79

David Dunckley, chief executive of Grant Thornton, told MPs that ordinary audits look solely to the past and are not set up to detect fraud.

and he added: “We’re not looking for fraud or the future or giving a statement that the accounts are correct.

So there you have it.

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shipoffrogs 30th Jan 62 of 79

In reply to post #442053

Well that's an over-simplification:

1. "An auditor conducting an audit in accordance with ISAs is responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error". ISA 240

2. An auditor needs to determine whether the company is a going concern - ie. will not go bust in the foreseeable future.

3. They are stating that the accounts are "true and fair" rather than "correct". I've always taken that to mean that any mis-statement is not sufficiently material to give a reader a different view of the company's financial state.

4. Auditors have to review post balance sheet events - i.e. events occurring between the balance sheet date and the date the accounts are signed. It has been reported that multi-million pound cheques bounced during this period - something that should have also been picked up when performing cut-off tests (testing transactions affecting year end balances).

What's the context behind his comment?

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tony akram 31st Jan 65 of 79

In reply to post #441178

What they have come up with , is they have just emailed me and asked me for £600 , they are going to send me their bank details (that's nice of them !!!)

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whitmad 31st Jan 66 of 79

In reply to post #442583

Likewise. I shall decline their kind offer.

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Damian Cannon 31st Jan 67 of 79

In reply to post #442583

Quite although it seems to be phrased as a request rather than a requirement. So I don't think that you have to contribute in order to be part of the class action. However IANAL.

Blog: Ambling Randomly
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bestace 1st Feb 68 of 79

In reply to post #442083

On your first point, that's a selective quoting of ISA240. The next sentence is also relevant:

Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed in accordance with the ISAs.

No doubt a lot more information will come out in due course, but based on what has come out thus far, I don't think I have yet seen any evidence, let alone persuasive proof, that Grant Thornton have fallen short in their professional responsibilities.

That's depressing and is rather damning of the audit industry as a whole, but investors (and MPs) really should have a better idea of what an audit actually involves. That "expectation gap" Mr Dunckley referred to is a long standing thing and it's unlikely to disappear as a result of frauds like this one.

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Flackwell 1st Feb 69 of 79

Little point in having an audit then, isn't there?

Or a body like the FCA which prosecutes neither the auditor, nor the fraudulent board/directors involved

Like being back in the wild west

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shipoffrogs 1st Feb 70 of 79

In reply to post #442893

Bestace - I don't think it's selective at all. It clearly highlights that an audit is to ensure that financial statements are free from material misstatement and takes the legs out of anyone arguing - "except when it arises from fraud".

Non fraud mis-statements may be easier to spot because management, finance team and auditors want to find what are essentially mistakes. Whereas with frauds one party at least wants to hide the facts.

We don't know what happened behind the scenes at PV but if some of the reported rumours are true (multi million cheques bouncing across the year end) then it is truly gobsmacking that this got through (and for how long had it been going on)?

The sad truth is that audit quality has declined significantly over the last 20 to 30 years.

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bestace 1st Feb 71 of 79

In reply to post #442913

I have no problem with the point you originally highlighted from ISA240, that an audit aims to obtain assurance that the accounts are free from misstatements caused by fraud and error, but Mr Dunckley would probably make the point that he is trying to "take the legs out of" anyone arguing that it is the auditors' responsibility to identify fraud, or that the auditors must be at fault because a fraud occurred on their watch.

There are several posts on this very thread which appear to be arguing exactly that, as do some of the comments by MPs at the select committee hearing, hence why that second sentence I quoted is just as relevant.

I would also quibble with your paraphrasing of ISA240 in your last post. An audit does not "ensure that financial statements are free from material misstatement". The word "ensure" does not appear in ISA240 and auditors are not in a position to "ensure" anything when it comes to fraud, which is the very point that second sentence tries to make.

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Carcosa 2nd Feb 72 of 79

"Grant Thornton has been ordered to pay an audit firm record of £21m in damages to former client AssetCo after a High Court judge branded its auditing of the company, which nearly collapsed as a result of an accounting scandal, to be a ‘flagrant breach of professional standards’, exhibiting failures ‘of the utmost gravity’"


The Judgement: Https://

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hayashi22 3rd Feb 73 of 79

This audit firm is a disgrace. Punishment must be meted out to all those responsible and not missing out those who have since left because many of the issues relate to decisions made by previous senior people. Were they motivated by profit to undercut rivals but do shoddy audit work.? Let's hope answers will be forthcoming.

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mark eyre 6th Feb 74 of 79

Perhaps it is no accident that Messrs May, Marsh and J/son chose Grant Thornton ….. reassuringly cheap and ineffective?

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JakNife 6th Feb 75 of 79

Note that Grant Thornton is paying the money to AssetCo and NOT directly to shareholders. The concern with a so called "shareholder action" is that this would normally be a "derivative action" and the proceeds would go to the company first, in which case they then potentially go to creditors rather than shareholders.

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Laughton 14th Feb 76 of 79

"Scandal-hit British cafe chain owner Patisserie Holdings has been bought out of administration by its management with help from Los Angeles-based investment management firm Causeway Capital, the Financial Times reported."

Given the job that "management" did leading up to the company's demise - is it too much to ask "how is this possible"?

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dmjram 14th Feb 77 of 79

In reply to post #447478

It's Mr Johnson and co looking after their interests having presided over the collapse of the company.

Thankfully I never went near after his treatment of shareholders at Interquest made any company connected with him a bargepole job for me. Sadly many weren't so fortunate.

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extrader 14th Feb 78 of 79

Hi all,

Shurely shome mishtake that the £ 13 m paid will neatly match Mr Johnson's £ 10m loan and £ 3 m advance re staff dues...?


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