Patisserie flops on disclosure of wonky accounts

London’s less regulated Alternative Investment Market has had more than its fair share of corporate scandals over the years. But rarely one as surprising as what has befallen Patisserie Holdings.

Known for its Patisserie Valerie cake shops, the British company part-owned by entrepreneur Luke Johnson revealed on Wednesday that it had suspended its CFO. This was after uncovering “significant, and potentially fraudulent, accounting irregularities”.

Its financial year ended on September 30.

Patisserie Holdings may have exaggerated its cash position. It is probable the £446m market cap the stock exchange ticker is CAKE will go very soggy when trading resumes.

Johnson, who is also chair of Patisserie Holdings, has a decent track record in buying and selling companies and he comments frequently on business matters in British newspapers, including on how to spot corporate frauds. His 37% stake, plus the 4% stake held by CEO Paul May, will at least assure investors that management has skin in the game.

The odd thing is that there does not seem to be anything out of the ordinary about the structure and accounting of Patisserie Holdings and the business model is quite simple.

While the accounts must obviously now be treated with caution, they are refreshingly free of funky stuff such as questionable earnings adjustments. Sales have been growing at quite a clip but that growth has been producing decent free cash flow. Or at least we thought it had.

The balance sheet appeared to be in good shape too. The company claimed to have £28.8m of net cash at the end of March. Its roughly £65m of store lease obligations were pretty much the extent of its liabilities.

There was an argument that the shares were too richly valued the stock was priced at 23 times estimated earnings but not ridiculously so. Hence, bearish investors were not queuing up to short the stock.

This is all very embarrassing for Johnson, who might think twice about lecturing others on how to run a business in future. But if wonky accounting can go unnoticed at a vanilla business like Patisserie Holdings, investors really have nowhere to feel safe.