The Lemon Fool

If there are thousands of false entries, did we have a single very busy fraudster?

If profits were, say, £6 million instead of the revised £12 million then they were roughly a quarter of that expected to be reported for the full year 2018. That implies they were barely covering the dividend!

If pre-tax profit of £24 million was going to be c. 19p a share then that probably gives less than 5p a share (and we'd need to factor in dilution).

Best wishes

Mark.

If there are thousands of false entries in the ledgers I would guess these must be false cash sales postings as surely no other items of income or expenditure would run to thousands, hence revenue and cash balances would have been overstated. That must imply the same thing happening across many branches. Which begs the question why would someone falsely inflate the takings? And yes standard accounts preparation and audit procedures ought to pick this up through bank reconciliations.

Good morning,

dspp wrote:...... Luke Johnson, the multimillionaire chairman of the business, was forced to pump £20m of his own cash into the stricken firm to keep it afloat. Other shareholders put up £15m. ....... dspp

That is very sloppy journalism, technically you could argue that it is correct, but I suspect that most people would read the above as meaning the company has had £35m injected.

In fact Luke put up £20, £10m as a loan and £10m as a bridging loan.

As soon as the £15m from the share issue was received the £10m bridging loan was repaid.

So the company has had an injection of £15m and two thirds of this was a loan, hardly the same number as the journalist implied!

Bye

Ian

langley59 wrote:If there are thousands of false entries in the ledgers I would guess these must be false cash sales postings as surely no other items of income or expenditure would run to thousands, hence revenue and cash balances would have been overstated. That must imply the same thing happening across many branches. Which begs the question why would someone falsely inflate the takings? And yes standard accounts preparation and audit procedures ought to pick this up through bank reconciliations.

Whilst there does seem to have been extensive fraudulent activity taking place, it does also suggest a complete lack of management and accountability in the organisation. In what is essentially a branch operation, I'd have expected there to be decentralisation of profit accountability; store accounts, weekly/daily reporting of takings, monthly store/margin reviews, which would have exposed such a widespread manipulation of information. It looks like this was run as a top down operation and as long as the numbers looked good, no one pried too much. It has 204 stores and yet appears (as far as I can see) to have no internal audit function. It's accounts are full of boiler plate disclosures about audit committee meetings and yet they appeared to exercised no influence over the internal control environment. Whilst it's chairman, Lee Ginsberg, has stepped down from this role he remains deputy Chairman. Frankly, if he had any shame he'd have fallen on his sword. At least the CEO, Paul May, who was clearly not up to the role, did the honourable thing.

SteMiS wrote:Whilst there does seem to have been extensive fraudulent activity taking place, it does also suggest a complete lack of management and accountability in the organisation. In what is essentially a branch operation, I'd have expected there to be decentralisation of profit accountability; store accounts, weekly/daily reporting of takings, monthly store/margin reviews, which would have exposed such a widespread manipulation of information. It looks like this was run as a top down operation and as long as the numbers looked good, no one pried too much. It has 204 stores and yet appears (as far as I can see) to have no internal audit function. It's accounts are full of boiler plate disclosures about audit committee meetings and yet they appeared to exercised no influence over the internal control environment. Whilst it's chairman, Lee Ginsberg, has stepped down from this role he remains deputy Chairman. Frankly, if he had any shame he'd have fallen on his sword. At least the CEO, Paul May, who was clearly not up to the role, did the honourable thing.

So much for Lee Ginsburg...

https://www.investegate.co.uk/patisseri ... LC%20Alert

langley59 wrote:

SteMiS wrote:Whilst there does seem to have been extensive fraudulent activity taking place, it does also suggest a complete lack of management and accountability in the organisation. In what is essentially a branch operation, I'd have expected there to be decentralisation of profit accountability; store accounts, weekly/daily reporting of takings, monthly store/margin reviews, which would have exposed such a widespread manipulation of information. It looks like this was run as a top down operation and as long as the numbers looked good, no one pried too much. It has 204 stores and yet appears (as far as I can see) to have no internal audit function. It's accounts are full of boiler plate disclosures about audit committee meetings and yet they appeared to exercised no influence over the internal control environment. Whilst it's chairman, Lee Ginsberg, has stepped down from this role he remains deputy Chairman. Frankly, if he had any shame he'd have fallen on his sword. At least the CEO, Paul May, who was clearly not up to the role, did the honourable thing.

So much for Lee Ginsburg...

https://www.investegate.co.uk/patisseri ... LC%20Alert

Ha, ha. He must read this board!!!

But Lee Ginsberg has resigned not because he was thoroughly neglectful or maybe just incompetent but to 'focus on his other commitments'. This sort of comment is ridiculous seeing what is being revealed at a company where he was apparently Chairman.

I cannot now find it but there was an article in a publication by UKSA comparing the figures for Patisserie Holdings with another couple of similar operations in London. The Patisserie numbers were miles better in terms of gross profit than the others and if the Auditors were doing an old fashioned job they would have immediately seen that as a red flag. I get the impression that nowadays they scarcely look at this sort of thing, and they seem to have become more like a ticker of boxes than an auditor in the original sense of the term.

Dod

SteMiS wrote:At least the CEO, Paul May, who was clearly not up to the role, did the honourable thing.

Well, we'll have to wait and see about that. Given that he and the CFO both sold large tranches of shares only a short while before the fraud came to light, I will not be surprised if he also has his collar felt at some point. So the jury is out on whether he is honourable or not. At the very least he is completely incompetent and should never be allowed to serve on the board of a company again.

All the best, Si

langley59 wrote:If there are thousands of false entries in the ledgers I would guess these must be false cash sales postings as surely no other items of income or expenditure would run to thousands, hence revenue and cash balances would have been overstated. That must imply the same thing happening across many branches. Which begs the question why would someone falsely inflate the takings? And yes standard accounts preparation and audit procedures ought to pick this up through bank reconciliations.

It gets weirder and weirder!

When did it start? They had an IPO in 2014, which must have involved pre-2014 audits and account preparation.

Best wishes

Mark.

ADrunkenMarcus wrote:

langley59 wrote:If there are thousands of false entries in the ledgers I would guess these must be false cash sales postings as surely no other items of income or expenditure would run to thousands, hence revenue and cash balances would have been overstated. That must imply the same thing happening across many branches. Which begs the question why would someone falsely inflate the takings? And yes standard accounts preparation and audit procedures ought to pick this up through bank reconciliations.

It gets weirder and weirder!

When did it start? They had an IPO in 2014, which must have involved pre-2014 audits and account preparation.

Best wishes

Mark.

Exactly. The key point is when did all this start.

That is the only reason I can think of for there not yet being a class action lawsuit opened, because they don't yet know who to aim it at. Knowing when will almost certainly tell us who(s).

regards,
dspp

These sort of frauds can start because of weak management struggling to meet each quarters targets. It begins with a bit of optimistic accounting and builds up bit by bit as ever more manipulation is needed to keep up with expectations. Perhaps not unlike the Tesco scandal though that may have been limited to unreasonable accruals accounting rather than getting to the stage of thousands of false accounting entries.

The only obvious apparent beneficiaries are the finance director and others selling shares at inflated prices. they must have realised it was bound to come out eventually?

scrumpyjack wrote:These sort of frauds can start because of weak management struggling to meet each quarters targets.

I wonder if they had a small, profitable store estate in 2014 and then the expanded estate has simply not been up to scratch?

As for being caught, you'd think they'd be aware of the pitfalls.

Best wishes

Mark.

ADrunkenMarcus wrote:As for being caught, you'd think they'd be aware of the pitfalls.

Perhaps there was a certain amount of "window-dressing" for the IPO and it continued from there.

On the face of it, it's a serious audit failure, but ever longer lists of "audit procedures" will not be the answer. It's that elusive quality of feel perhaps accompanied by a bit of whistle blowing on dubious or fraudulent accounting that's needed.

I too suspect this has been going on a long time, and snowballed out of hand. If it started pre-IPO then a class action will take aim at one group of people/organisations. If post-IPO then another.

However, as to catching it via external audits, surely it doesn't take that much of an audit to check actual cash in bank vs predicted cash in bank. With internal audits separation of powers and interlocking checks are surely the normal way.

regards, dspp

FWIW I held CAKE but sold out in Sept 2017 as the rating was very high and I assumed they would suffer from the slow down made clear in the commentary of other companies in the sector e.g. Whitbread, Greggs. On a PE north of 20 the price fall would have been large. However, they just kept on sailing along with strong numbers and bullish commentary in the face of all high street evidence to the contrary.

In hindsight this was a red flag as was the working capital position i.e. it is very unusual for a company in the food and beverage sector to have positive working capital. Take a look at most food and beverage companies (Greggs etc.) and you will see they run quite happily, year after year, with negative working capital because they are effectively funded by their suppliers. Why was CAKE different?

In future, before investing one of my checks will be to look for anomalies like this.

All the best, Si

I am not an investor in Patisserie, or an accountant, or even a customer. But I had a look at the 2017 annual report. Total stated income was £114m from 198 shops plus a single bakery supplying other similar businesses. So excluding the bakery, that was an annual income of £575,758 per shop, or £11,072 per week. Was that credible, from selling coffee and cakes? I don't think so. Assuming an average spend of £7.50 per customer (an expensive cake and a coffee), that suggested each outlet served 1,476 customers per week or 211 per day. In my view, those figures would have been literally unbelievable.

Alaric wrote:

ADrunkenMarcus wrote:As for being caught, you'd think they'd be aware of the pitfalls.

Perhaps there was a certain amount of "window-dressing" for the IPO and it continued from there.

On the face of it, it's a serious audit failure, but ever longer lists of "audit procedures" will not be the answer. It's that elusive quality of feel perhaps accompanied by a bit of whistle blowing on dubious or fraudulent accounting that's needed.

There has, potentially, been a false market in these shares for years. The exact, ultimate disparity between what was reported and the true situation may not be known yet, but is already enormous. What was reported as 17% profit margin may be barely 3%.

Best wishes

Mark.

ADrunkenMarcus wrote:What was reported as 17% profit margin may be barely 3%.

I wonder if they were making a profit.

johnhemming wrote:

ADrunkenMarcus wrote:What was reported as 17% profit margin may be barely 3%.

I wonder if they were making a profit.

They were paying a strongly growing dividend (maybe financed by debt?) Profit on what level? It may be the older store estate was profitable but expansion proved costly and therefore the group as a whole was breaking even?

Best wishes

Mark.

Avantegarde wrote: In my view, those figures would have been literally unbelievable.

Before:

https://www.sharescope.co.uk/philoakley_article32.jsp

and after:

https://knowledge.sharescope.co.uk/2018 ... e-valerie/

No announcement today on agreement with the banks.

Götterdämmerung?

Best wishes

Mark.