Accounting Scandal at Tesco |
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EXCERPTS |
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Sir Terry Leahy (Terry), CEO of Tesco who played a crucial role in Tesco becoming the fourth largest retailer in the world, retired in 2011. It was under his leadership that Tesco had achieved £62.5 billion global sales with a pre-tax profit of £3.4 billion in 2009-10 . Terry was instrumental in initiating several measures that made Tesco a retail behemoth with a wide presence across the UK and in more than 14 countries across the globe. . |
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| OVERSTATEMENT OF PROFITS |
| The accusation was mainly with respect to the recognition of commercial income. Normally for a grocery store, the primary source of revenue was in the form of the margins gained by selling groceries. Tesco sourced and produced the groceries on its own and sold through its stores. The present allegation was against the Tesco stores operating in the UK markets. In addition to the margins gained on the groceries, Tesco also got additional revenue in the form of in-store promotions . |
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| INVESTORS’ OUTBURST |
| The management of Tesco faced severe criticism from the investors’ group that had a large stake in the company. The investors accused the retailer for encouraging such practices despite several warnings from analysts about its aggressive accounting practices. They quoted several reports that had been published highlighting the aggressive accounting practices at Tesco. |
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| INVESTIGATION |
| Immediately after the accounting irregularities were announced, Tesco appointed Deloitte, a leading auditing firm, to carry on an independent audit and also reported the incident to the Financial Conduct Authority (FCA), the British financial markets regulator... |
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| AUDITORS’ ROLE |
| PwC had been auditors for Tesco since 1983. Once the accounting breaches became public, fingers were pointed at the auditing firm as well. Many, however, pointed out that the reporting of PwC with regard to rebates, which had been mentioned in Tesco’s Annual Report was accurate. Two out of the ten directors of Tesco’s board were from PwC and one person from PwC was the chair of the Audit committee. |
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| RESTRUCTURING SUPPLIERS’ RELATIONS |
| PwC had been auditors for Tesco since 1983. Once the accounting breaches became public, fingers were pointed at the auditing firm as well. Many, however, pointed out that the reporting of PwC with regard to rebates, which had been mentioned in Tesco’s Annual Report was accurate. Two out of the ten directors of Tesco’s board were from PwC and one person from PwC was the chair of the Audit committee. |
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| RESTRUCTURING SUPPLIERS’ RELATIONS |
| Lewis initiated a major restructuring process to improve Tesco’s performance, rebuild relations with the suppliers, and regain shareholders’ confidence. He primarily focussed on restructuring the relationship with suppliers, which according him, was at the center of Tesco’s success. As the first step toward improving supplier relations, Lewis transferred Jason Tarry (Tarry) who was working as the head of Tesco’s clothing business, to the position of commercial director. |
| BUILDING A BETTER TESCO |
| After making all attempts to recover from the impact of the accounting irregularities, the management of Tesco finally came to an understanding with the SFO and the FCA. The management signed a deferred prosecution agreement for the payment of fines. This meant that the Tesco stores in the UK would be temporarily out of legal problems. With the SFO, Tesco signed a deal agreeing to pay £129 million in lieu of being prosecuted. |
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| EXHIBITS |
Exhibit I:Tesco’s Stock Performance
Exhibit II: Tesco Group Income Statement
Exhibit III: Tesco Group Balance Sheet
Exhibit IV: Revised Payment Dates
Exhibit V: List of Supplier-Related Initiatives Implemented by Tesco since 2014
Exhibit VI: Market Share of Tesco and its Competitors
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