Accountancy firm Grant Thornton has been fined £2.34m after an investigation found “serious lack of competence” in its audits of cake chain Patisserie Valerie.

The audits carried out in 2015, 2016, and 2017 gave the company a clean bill of health – before it disclosed potential fraud in 2018 and subsequently collapsed, resulting in the loss of 70 stores and more than 900 jobs.

Grant Thornton “missed red flags” and failed to question information provided by management, according to findings by the Financial Reporting Council (FRC), the accounting watchdog.

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The FRC decided on a sanction of £4m for Grant Thornton – confirming a previous report by Sky News – but reduced the sum after the firm admitted its behaviour and cooperated with the probe.

It also issued a “severe reprimand”, ordered the firm to pay legal costs and ordered annual updates on how it is working to fix the problems behind the failure.

David Newstead, audit engagement partner at the Grant Thornton, has been fined £87,750 and banned for three years from carrying out statutory audits.

The FRC found that in each of the three audits there were “serious breaches… often repeated year on year”.

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“The breaches reveal a pattern of serious lapses in professional judgement, failures to exercise professional scepticism, failures to obtain sufficient appropriate audit evidence and/or to prepare sufficient audit documentation,” it said.

Each of the annual checks “failed in their principal objectives of providing reasonable assurance that the financial statements were free from material misstatement, whether caused by fraud or error”.

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Claudia Mortimore, deputy executive counsel to the FRC, said the investigation had found “a serious lack of competence in conducting the audit work”.

She said the audits “involved missed red flags, a failure to obtain sufficient audit evidence and a failure to stand back and question information provided by management”.

A spokesperson for Grant Thornton said the company has invested significantly in audit practice since the scandal and that it had cooperated fully with the FRC.

“We regret the quality of our work fell short of what was expected of us in this instance,” he added.

Grant Thornton added that it would continue to defend a legal claim against it by Patisserie Valerie’s liquidators.

“We recognise that there were shortcomings in our audit work; however, our work did not cause the failure of the business,” the spokesperson said.

Grant Thornton, which is the sixth-largest accountancy firm in the UK, has been hit with several previous FRC fines, including in relation to its audit of Conviviality, the drinks retailer.

The FRC probe into the firm follows recent large fines imposed on EY for failings in its audit of transport operator Stagecoach, KPMG and one of its former partners for their work on Silentnight, a bed manufacturer.

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