Black Holes and Blancmanges

The realms of space travel and accounting rarely come into contact with each other. They aren’t the most obvious combination to study together at university and have very little overlap when it comes to the world of work; it’s no real surprise therefore, that very few accountants go on to become astronauts and vice versa. This doesn’t mean, however, that the two professions don’t have their fair share of similarities. Whether they are found in either outer space or on a company’s balance sheet, black holes can be equally as complex and just as dangerous, regardless if you work with spreadsheets or spaceships.

From launch pads to a lunch pad, the suspension of shares in UK cake chain, Patisserie Valerie, after a £40m black hole was found in the company’s accounts, offers investors a vital lesson. With the finance chief having subsequently been dismissed over “significant and potentially fraudulent” accounting irregularities, it shows that fraud can take place anywhere, even at somewhere as innocuous as a high street bakery. Active investors need to understand a company fully; failure to do so could lead to a rocky road.

A “material shortfall” had been noticed between the company’s reported accounts and its true financial health, with almost £10m in unreported loans being found after two credit lines had been utilised without the Board of Directors’ knowledge. The official report also recorded a net debt position of £0.8m, when in fact the figure stood closer to £28m. At the same time, an unpaid tax bill of £1.14m was also discovered.

The fudged numbers also look bad for Patisserie Valerie’s accountants, Grant Thornton, joining a growing list of beleaguered bookkeepers who have overseen a number of high-profile corporate collapses of late. From Carillion to Conviviality, the UK has endured a spate of broken businesses making the news, many of which were seemingly stellar companies.

Although the directors pleaded ignorance towards the whole affair, records show near astronomical amounts of stock being traded in the lead up to the announcement, with 1.5 million shares being bought and sold on a single day, well above the average of 200,000. It seems some investors may have been trying to have their cake and eat it.

 

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This article is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment advice or services. The mention of any specific shares or bonds should not be taken as a recommendation to deal. Any opinions expressed in the Investment newsletter are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed.

 

Tags: Analysis, Other, Economy, Investment, Market, Newsletter, Opinion

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