Earnings Management of Patisserie Valerie Case Study 2022

Running head: EARNINGS MANAGEMENT OF PATISSERIE VALERIE
EARNINGS MANAGEMENT OF PATISSERIE VALERIE
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EARNINGS MANAGEMENT OF PATISSERIE VALERIE1
Executive summary
The primary purpose of the study is to observe the earnings management of Patisserie
Valerie. Patisserie Valerie is a chain of cafés that are being operated from the United
Kingdom. The business was going well until the black hole in their accounts has been
discovered. From the observation, it has been found that the managers of Patisserie Valerie
were overstating their revenue by providing unethical financial statements. The accounting
blackhole ceased most of their trades. As per the agency theory and signal theory, the primary
purpose of the statement is to boost the revenue of the firm by lowering the expenses and
removing sales entries from the ledgers as they were going through the financial downtime.
The managers habituated this practice to increase their incentives and job security. Based on
the study, it has been perceived that there are several issues of earnings management which
includes financial statement manipulation and overstatement of revenue. It has been found
that managers engages themselves in earnings management to improve their job security and
incentives. UK corporate governance structure can assist the organization to eliminate the
unethical earnings management. It can be stated that the board should identify and self
evaluate their performance to strengthen their corporate governance structure.

EARNINGS MANAGEMENT OF PATISSERIE VALERIE2
Table of Contents
Introduction................................................................................................................................3
Earnings management................................................................................................................3
Factors driving managers towards earning management...........................................................4
Incentive bonus and job security............................................................................................4
Lowering the earnings............................................................................................................5
Issues of earning management of Patisserie Valerie..................................................................5
Financial statement manipulation..........................................................................................5
Overstated revenue.................................................................................................................5
Role of UK corporate governance..........................................................................................6
Conclusion..................................................................................................................................7
References..................................................................................................................................8

EARNINGS MANAGEMENT OF PATISSERIE VALERIE3
Introduction
Patisserie Valerie is a chain of cafés that are being operated from the United
Kingdom. They supply cakes, continental breakfast to their customers. The business was
going well until the black hole in their accounts has been discovered. That resulted in
Patisserie Valerie to almost cease their trades. In the year 2018, it has been found that
Patisserie Valerie has been overstating its earnings for an extended period of time. This
resulted in gaining a huge revenue boost for their firm illegally (Bhaskar and Flower 2019).
Later on, they stated that there were thousands of false entries in the ledger of the company
related to earnings. After the scandal in 2018, the accounting black hole swelled
approximately £ 94 million in their account, which is almost double than the previous
estimate according to report by its administrator. In the month of January, the café chain
overstated their cash position by £ 30 million and failed to disclose their bank overdraft nearly
of£ 10 million. The company had been claimed approximately £ 54 million in cash according
to the report from KPMG (Breslin, and Reczek 2019).
Earnings management
Earnings management is one of the most critical tools, which manipulates the
financial record of a company. This tool is being used by the management of the company
over a long period of time to artificially boost the financial results of an organization (Lo,
Ramos, and Rogo 2017). It is an accounting technique to produce a financial statement that
presents an overly positive view of the organization. The primary purpose of earning
management is to create a financial statement, which will provide a smooth earning of the
organization. In addition, unethical earnings management alter financial reports of a
company showing the excellent position of the firm to its investors (Fang, Huang, and
Karpoff 2016). Earnings management is a legal approach but can also be used as an illegal