The Financial Reporting Council (FRC) said Grant Thornton's audits of the company between 2015 and 2017 'failed in their principal objectives of providing reasonable assurance that the financial statements were free from material misstatement, whether caused by fraud or error'.
Grant Thornton had acted as statutory auditor for Patisserie Holdings - Patisserie Valerie's parent company - since 2007, and signed off clean audit opinions for its 2015, 2016 and 2017 financial statements.
In October 2018, Patisserie Holdings announced that its board had been notified of potentially fraudulent accounting irregularities and the company subsequently entered into administration, leading to the closure of 70 stores and more than 900 job losses.
The auditor was originally in line for a £4m fine, but it was adjusted for aggravating and mitigating factors and discounted to £2.34m.
Grant Thornton audit director David Newstead was also fined £87,750, and banned from carrying out statutory audits and signing statutory audit reports for three years.
The FRC has also imposed a suite of non-financial sanctions on Grant Thornton including reporting to the FRC annually for three years on the impact of the firm's remedial actions (including a root cause analysis) on audit quality; a review of the audit practice’s culture relating to challenge; and additional monitoring in relation to bank and cash audit work.
Grant Thornton will also pay the FRC's costs of the investigation.
Claudia Mortimore, deputy executive counsel to the FRC, said: “This decision notice sets out numerous breaches of relevant requirements across three separate audit years, evidencing a serious lack of competence in conducting the audit work.
"The audit of Patisserie Holdings Plc’s revenue and cash in particular involved missed red flags, a failure to obtain sufficient audit evidence and a failure to stand back and question information provided by management.
"As a result of this investigation, Grant Thornton has taken remedial actions to improve its processes and to prevent a recurrence of these types of breaches. The package of financial and non-financial sanctions should also help to improve the quality of future audits.”
Grant Thornton and Newstead accepted failures in their audit work relating to revenue, cash, journals, and fixed asset additions.
A spokesperson for Grant Thornton said: “We regret the quality of our work fell short of what was expected of us in this instance. Since the period in question, we have invested significantly in our audit practice to better ensure consistent quality and have started to see the material outcome of this investment."
Earlier this year it was reported that liquidator FRP Advisory had launched a claim against Grant Thornton, alleging it was 'negligent' in the preparation and conduct of Patisserie Valerie's financial statements between 2014 to 2017.
Regarding the suit, the accountancy firm's spokesperson said: “We will continue to rigorously defend the civil claim brought by Patisserie Valerie's liquidators, which ignores the board’s and management’s own failings in detecting the sustained and collusive fraud which took place. We recognise that there were shortcomings in our audit work; however, our work did not cause the failure of the business.”
Following its collapse, Patisserie Valerie was acquired by Irish private equity firm Causeway Capital Partners, and continues to operate around 40 sites across the UK.