Ethical Performance
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Tesco launches investigation following £250m profit shortfall

October 2014

British supermarket giant Tesco has suspended four executives, including its UK managing director, after the retailer overstated its half-year profit guidance by £250m.

It has launched an investigation - headed by audit company Deloitte - and says it is working to establish the impact of the issue on its full-year results.

“We have uncovered a serious issue and responded accordingly,” Tesco chief executive Dave Lewis said.

Commenting on the reporting error, Professor of Accounting at Warwick Business School Crawford Spence said: “This revelation should be interpreted as a sign of distress. Tesco has essentially tried to recognise revenue too early and delay the recording of costs until a later date. Accounting is not a hard science and some of this behaviour is acceptable, within limits. What Tesco appear to have done is push the boat out a bit too far, ending up with revenue that hadn’t really been earned yet and costs that probably should have been booked earlier.

“It is a classic ‘earnings management’ issue. Firms quite legitimately play around with their revenue and expenses all the time. However, when they do so aggressively, as Tesco appear to have done, this is usually because the firm is under pressure elsewhere. In Tesco’s case, it has been losing market share to its competitors steadily in recent years and losing value quite dramatically in its share price in recent months. Rather than fix the underlying problems, they have been playing around with their numbers to try to make things look better.

“To Tesco’s credit, however, it has flagged this up internally and is doing something about it, which suggests that there are probably no other big accounting shocks hidden away.

“Given it this has been flagged up and dealt with internally it is unlikely any court proceedings will occur. Tesco could be fined by the authorities, but they will most likely wait to hear what the auditors, Deloitte, uncover first.”

A whistleblower in the accounting department of the UK retailer Tesco claims he warned his bosses that profits were being calculated too high – but was ignored.

Questions are now being asked about the culture at Tesco when Philip Clarke was chief executive.

The whistleblower raised the alarm during Clarke’s reign but Tesco nevertheless forecast the original trading profits figure of £1.1bn ($1.79bn, €1.4bn) for the first half of this year. The actual figure, still to be published, is thought to be £250m lower.

There are unattributed suggestions that managers were under pressure to use irregular practices and that there had been a “corruption of virtues” among staff.

One source asked why nobody spoke up sooner and a former executive said the company had to be “seriously off the pace” to be ignorant of the improper practices.

The inflated figure is said to have resulted because Tesco included income from deals with suppliers earlier than it should have.

Clarke departed nine days after the £1.1bn figure was announced. New chief executive Dave Lewis has hired the professional services group Deloitte and the leading London law firm Freshfields to investigate. The Financial Conduct Authority, the official City regulator, has started an independent investigation.

Tesco will announce its half-year results and the findings of the investigations on 23 October 2014.

UK & NI Ireland | corporate reputation

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