Did someone cook the books at Tesco?

Discussion
Sep 23, 2014

Tesco has suspended four key executives after announcing that the company overstated profits by nearly $409 million over a six-month period.

Tesco’s new CEO, Dave Lewis, who joined the company on Sept. 1, said the company had found some accounting irregularities and was working with Deloitte and the firm Freshfields to conduct a "full and frank investigation" into the matter.

The four executives suspended are: Chris Bush, Tesco’s managing director in the U.K; Carl Rogberg, the company’s U.K. finance director; Matt Simister, responsible for group sourcing; and John Scouler, commercial director.

"The board, my colleagues, our customers and I expect Tesco to operate with integrity and transparency and we will take decisive action as the results of the investigation become clear," Mr. Lewis was quoted by The Telegraph.

An employee of the company is reported to have alerted Tesco’s general counsel about a problem with its accounts last Friday. The overstatement is tied to Tesco booking supplier payments too early while not accounting for some costs on a timely basis.

"Lots of different businesses flex when they choose to put certain checks in the bank to hit quarterly targets," Bryan Roberts, an analyst with Kantar Retail, told The Guardian. "This is mobile money not related to the timing of sales. But it’s robbing Peter to pay Paul because if you bring it forward you would have to compensate in the following period."

What do you make of the accounting irregularities at Tesco described in reports? Is this practice standard procedure in retailing circles?

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9 Comments on "Did someone cook the books at Tesco?"


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Dick Seesel
Guest
7 years 8 months ago

It’s startling that a large, high-profile public company like Tesco would mismanage its quarterly accounting to this degree. I don’t know whether the underlying regulatory policies in the U.K. make it easy or difficult for this to happen, compared to the U.S. where there has been close scrutiny of quarterly reporting for at least a decade. Call me naive, but it’s still surprising today that any company with presumably tight internal controls—and the oversight of an outside auditor—would try to manipulate its way around standard accounting practices, whether it’s in the retail business or not.

Paula Rosenblum
Guest
7 years 8 months ago

Oh, I’ve seen this before, and lived through it at least once. Someone reminded me that Ahold USA got caught in a similar way some years ago.

The truth is, the world of trade promotions has been wild and wooly forever. Contracts can be lost in merchants’ desks, and particularly under the retail accounting method (which Tesco is NOT on, as far as I can tell), almost anything is up for grabs. There is technology to manage trade promotions now, but that doesn’t mean companies actually use it.

I think the expense issue, while also not completely uncommon, is the bigger and more egregious of the two. With automated invoicing, it takes effort to book expenses into a later period.

I’ve also seen companies do some things to manipulate balance sheets and overstate cash before.

The real shocker is that the shift in profits was so large (the equivalent of $400 million USD), in a company that is also so large, and long considered one of retail’s darlings. I just never saw that one coming.

Steve Montgomery
Guest
7 years 8 months ago
Publicly traded companies are under a great deal of pressure to meet quarterly targets. Failure to do so, or to meet expectation, can have a very negative impact on stock prices, etc. Meeting these short-term financial targets can drive people to do dumb things. Tesco’s management is under a lot of pressure because of its results worldwide, including the Fresh & Easy disaster here in the U.S. That is one reason the company has a new CEO. The four members of Tesco’s U.K. management are suspected of booking co-op money early while delaying payments. Forbes reports this practice was noted in Tesco’s last audit in last May. On the cost side, GAP states you can only book income when the goods or services are delivered. Admittedly I am not an accountant, but I am not sure how extending terms impacted the profit. Delaying payment would certainly impact cash flow. Tesco’s U.K. management is accused of doing something others have done and will likely continue to do. The difference is the scale upon which they are… Read more »
Paul Stanton
Guest
Paul Stanton
7 years 8 months ago

Blame the CEO and the accounting firm they are using. Moving money around, yes. Cheating/falsifying signatures, no way!

Ronald Lunde
Guest
Ronald Lunde
7 years 8 months ago
FASB/EITF issues pretty well define the treatment of both revenue and marketing/trade promotion fund recognition and timing. The PCAOB and the SEC/DOJ have been given significant regulatory as well as civil and criminal penalty assessment capabilities under SOX. There are multiple other government and compliance organizations such as the New York Stock Exchange and NASDQ that have instituted rigorous requirements for listed companies. In the U.S., CEOs and CFOs are required to regularly sign attestations that proper systems and rigorous checks and balances are in place and enforced. Regular ethics classes must be scheduled for all listed companies. Interestingly whistleblowing is encouraged and protected under SOX and other regulatory auspices. (A whistleblower alerted regulatory officials in Tesco incident.) Note: Punishments both civil and criminal are pretty harsh for those that wander from generally accepted accounting principles in the U.S. SOX and FASB issues were all promulgated as a result of significant accounting anomalies in the late ’90s which significantly distorted revenue, margins and earnings resulting in misleading financial statements. The incidents were similar to what… Read more »
David Livingston
Guest
7 years 8 months ago

It’s usually standard procedure for marginal retailers. If they are having problems and losing money, they like to lose it on one big shot, not quarter after quarter. Then they can show a break-even or small profit in other quarters. When you see a poorly-run retailer barely breaking even, watch out. That next quarter is usually disappointing.

Craig Sundstrom
Guest
7 years 8 months ago

Based on the small bit of info we’re given, it’s hard to tell if this is fraud or simply negligence—not that’s there’s anything right with that, mind you (and technically speaking, accrual accounting means when you actually pay something is irrelevant to your income, though I doubt any large business is pure in this regard).

But whatever the specifics, it’s another “oh boy!” for Tesco. Montgomery Ward, Circuit City, Sears, Target…the crown of shame gets passed along, and the former holders either go under or breathe a sigh of relief they’re no longer in the spotlight.

George Anderson
Guest
7 years 8 months ago

Tesco’s new finance director, Alan Stewart, has joined the company ahead of schedule. He was supposed to start in December, but Tesco worked out a deal with Marks & Spencer, his former employer, to allow him to dive right into this mess.

Kai Clarke
Guest
7 years 8 months ago

This is a common, problematic issue, where a company continues to shift its perceived value based upon future obligations, yet receiving the monies today. Any forthright company following GAAP principles should not have this issue…ever.

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