A large slice of reality – by Philip King FCICM
24 January 2019
So, Patisserie Holdings PLC has finally entered administration which is no surprise given the story that has unfolded since October. And the story has a way to run yet.
How does a business that had reported holding cash of almost £30m earlier in the year suddenly have to reveal two undisclosed overdrafts totalling c£10m and a black hole of £40m? It had auditors, it had an audit committee, the Financial Reporting Council approved the quality of the audit, and yet nobody noticed? Nor did anyone apparently notice the thousands of false entries that were made to company ledgers.
If you look at the accounts signed off on 24 November 2017, there is nothing that would cause alarm. On the contrary, there are words and charts showing an expanding business in rude health. They will even assure you that the Audit Committee monitors the quality of internal controls and ensures that the financial performance of the Group is properly measured and reported on.
I’ve chaired two audit committees in my time, as a Trustee of a charity and as a non-executive director. I’m not a qualified accountant but we took our responsibilities very seriously and I like to think were diligent and thorough in our oversight of both the organisation’s finances and its auditors. The question of culpability will rumble on as serious questions are asked, and rightly so, but I’m interested in the lessons for suppliers.
Credit risk decisions need to be made using the full range of tools available: company accounts, credit reference agency information, personal knowledge and/or investigation, industry reputation, media and web coverage, directors’ history and record, product strategy and potential, information gleaned by sales force and other internal contacts, and so much more.
We know ‘they’re too big to fail’ and ‘they’ve been around for years’ don’t hold water, and the business environment is more challenging with every passing week. Good credit decisions are vital to allowing businesses to survive and thrive. What’s the advice then? I would refer to two sets of initials: KYC and ABC
KYC, or know your customer, means using every available source of information and data to ensure you have the fullest possible picture of who you’re investing money, goods or services in. This has to be proportionate to the level of business, of course, but more is always better.
Credit professionals have to be inherently cynical, suspicious and discerning, and ABC sums it up nicely: Assume nothing; Believe nobody; Challenge everything!