Don't Let Fraud Cost You Your Business
Following the reports in the press about Patisserie Valerie and their sad drawn out demise in the public eye from what appears to be a significant fraud. Consequently, thousands of jobs are at risk and it’s likely the shareholders will have nothing to show for their investment in a company now in administration.
Dated: 23 January 2019 Author: Allan Maund, Head of Compliance and Risk
What happened to Patisserie Valerie?
Patisserie Valerie bucks the trend some what in that most companies who are subject to fraud manage to continue trading, but consequently they then suffer significant reputational damage. Patisserie Valerie had the indignation of increasing reputational damage since October 2018 when the forensic accountants finally landed, and from that time, the media interest increased. The accounts are said to be so bad that there is no timescale for when a reliable trading outlook can be provided and consequently the business has gone into administration.
The company stated ‘The work carried out by the company's forensic accountants since (October) has 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. The initial indications from the work carried out to date is that the cashflow and profitability of the business has been overstated in the past and is materially below that announced in the trading update on 12 October 2018, which was based on limited work carried out over a 48-hour period."
It’s worth highlighting a few words or phrases used in the press release on 22 January. ‘The misstatement of accounts was extensive’, ‘very significant manipulation of the balance sheet and profit and loss accounts’, ‘thousands of false entries into company’s ledgers’, ‘cashflow and profitability overstated’.
The actual detail of the alleged fraud(s) is not yet known and will not be for some time to come. We also won’t know for some time how or why a perceived successfully trading company found itself in a position where the company accounts were misstated, not by negligence but by alleged fraud. The quote of ‘thousands of false entries into company ledgers’ doesn’t bode well for any optimist, particularly when ‘very significant manipulation of the balance sheet’ was included in the same sentence. These words are significant and implies a co-ordinated and premeditated course of action by those involved.
Who is to blame?
It’s too early to point and apportion blame, but someone very soon will be berating in the media why these initial significant findings weren’t picked up earlier, and the fingers will be pointed at any one time to the following (a) the Board (b) Chief Executive (c) former Finance Director (d) Accountants (e) Auditors (f) combination of all the above.
Pointing fingers post event, with the ‘benefit of hindsight’ is standard practice. But there is much a company, be it an SME or a large corporate can do to protect itself, but all too often it neglects to do even the basics. If you left your doors or windows open at home and you were burgled, you’d get a standard response from the Police and your insurers. The finger, or at least a large portion of the blame would be pointed at you, you’d probably be out of pocket and the sympathy level somewhere near zero. Transfer this analogy to the business you own or work for. If you leave the door open to those who wish you financial harm, would you experience any difference?
Shut the door on financial harm
Evaluating fraud risk in a business, as with any risk program you undertake must be proportionate. A methodical approach to fraud risk doesn’t need to be complex, but a business must understand where its potential exposures are in order to shut the door. A business exposure may well be in the finance, sales, procurement departments, all have a financial element to them. Often overlooked is the recruitment process, have the gatekeepers in the business let in employees who wish you harm? When was the last time you evaluated where you risk was?
Investigating financial crime is sometimes complex, sometimes straightforward; in no order these are ten common themes I’ve encountered in the previous 25 years of investigating fraud and corruption. My guess is a number of these will resonate with the investigation findings at Patisserie Valerie:
- Lack of awareness/red flags/warning signs of fraud and corruption
- Failure of senior management/board/trustee to provide leadership, oversight and scrutiny
- Absence of ethical values
- Absence of management challenge
- Reliance on ‘trust’ as a control
- No internal control(s) framework, including policies and procedures
- Lack of segregation of duties
- Lack of accountability
- Bullying culture/individuals
- Poor recruitment process
Fraud should be treated as part of compliance so that you manage your risk and make sure your business is secure. Find out what your risk score is today but taking our 5-minute survey. Can you afford not to take 5 minutes out of your day when this is a serious matter for you and your business?
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