Page 7 - Patisserie Valerie Teaching Note

that management are in a financially strong position

certainly capable for sustaining future growth. Gearing

varies between industries but as a rule will lie somewhere

between 40% and 70%. Patisserie Valerie is a cash-based

business and could expect to sustain a gearing ratio at the

higher level. Moreover, such a low gearing, 7.14%, could

mean that the company is missing the opportunity to

increased investment and debt.

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However, by the 11 October 2018, the company was
insolvent and requiring a cash injection on to keep going. In

addition, the cash and assets shown in the accounts were

fictitious.

At this point the company’s auditor comes under scrutiny as

the, Grant Thornton had given the company accounts a

clean bill of health.

The Group’s stores stayed open as Johnson, injected funds

into the business. But with little to no cash, that situation

could not last, as suppliers would simply stop delivering.

It rapidly became clear to KPMG, who had been brought in

to handle the preservation of the company and its

administration, found that the misstatement of the accounts

was extensive, involving very significant manipulation of the

balance sheet and profit and loss accounts. The financial

blackhole was more than double at £94m than the £40m

initially suspected on the 10 October 2018.
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Mike Ashley of Sports Direct offered £15m for the company
but this was rejected by KPMG as being some £2m short of

what was being sought. Ashley did not increase his bid.