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Taking the cake

01 November 2018 by Peter Swabey

Taking the cake

Fraud allegations and audit oversight have been thrust into the spotlight

On the anniversary of the Battle of Agincourt, I am going all Henry V about Patisserie Valerie (which does, after all, have a French name). Like a gift that keeps on giving for those interested in corporate governance, each day seems to bring new revelations, none of them good.

To begin with, I simply do not understand how a company can ‘suddenly’ find a cash shortfall in its accounts – in this case £28m in cash turning into a net debt of nearly £10m. Surely you either have the money or you don’t, but even allowing for error, or for the potential fraud being mentioned in the press, this should surely be identified by the audit. So what has been going on? I expect that the FRC will be asking the auditor, Grant Thornton in this case, some fairly intensive questions.

One thing that does seem clear is that the chairman, Luke Johnson, is facing up to his responsibilities to fellow shareholders by ploughing in more funding, but the latest revelations do rather beg the question as to how firmly his hand was on the corporate tiller. As chairman of the remuneration committee he should surely have been aware of the financial position of the company and of director share awards.

The fact that he seems to be ‘overboarded,’ being director of approaching 100 companies, may have diverted his attention. Certainly he might have expected to have been better served by the auditor and, I am sorry to say, by the company secretary had that office been discharged by someone who was not also an executive director.

“Wherever the governance role is combined with another management one, on whom can the board rely for an independent view?”

I can’t help thinking that one of the exacerbating issues has been that the company secretary was also the finance director. I know that this is not unusual in smaller companies, but it has always seemed to me to be a recipe for confusion if not disaster. The QCA corporate governance code, rightly in my view, requires that ‘companies where an executive director is also the company secretary should have plans in place to separate the role at the appropriate time.’ Wherever the governance role is combined with another management one, on whom can the board rely for an independent view?

That seems to be a particular issue in this case, where it is reported that the board of Patisserie Holdings only became aware on 10 October of a petition, since dismissed by the court, by HM Revenue & Customs to wind up its main trading company, Stonebeach Limited, which generated nine-tenths of the parent company’s revenue and profits in the year to September 2017. This petition was filed on 14 September and advertised in the Gazette on 5 October. Given that the CFO and company secretary of Patisserie Holdings was also a director and the company secretary of Stonebeach, this seems surprising unless he has been particularly diligent in maintaining the ‘corporate veil.’

This might also explain the reported failure to notify shareholders of share awards made to the chief executive and the finance director (and company secretary). It is hard to understand why these awards were not reported or why the failure to report them was not picked up in the audit.

The Financial Times recently made reference to the role of the ‘nominated adviser’ or NOMAD, Canaccord Genuity. In order to become a NOMAD, an organisation must be a firm which has practised corporate finance for at least the last two years, acting on at least three takeovers or other transactions requiring the issue of a prospectus, during that period, and must employ at least four ‘qualified executives.’

There is a complicated definition of the latter in the AIM rules, but fundamentally it is an individual who has taken a lead corporate finance role in at least three IPOs, takeovers or other transactions requiring the issue of a prospectus. We have recommended to the Exchange that the AIM Rules should be amended to require separate qualifications for these separate NOMAD responsibilities.

There is plenty of opportunity for governance oversight in companies. The tools are all there; but frustratingly they do not seem to be consistently used. Given the continued governance issues that we seem to be experiencing across all sectors, I believe the time has come to stop assuming that others are behaving as they should; to be a little more sceptical and, to get back to Henry V: ‘imitate the action of the tiger; stiffen the sinews, summon up the blood, disguise fair nature with hard-favoured rage.’

Peter Swabey FCIS is policy and research director at ICSA: The Governance Institute

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