cpd types

The Tesco Accounting Scandal

by Juan Carlos Venegas

Christopher Bush, Tesco UK's former managing director, Carl Rogberg, the company's former UK finance director, and John Scouler, its former UK food commercial director, have been accused of abusing their positions to falsely inflate the grocer's profits in 2014.

The three men have been charged by the Serious Fraud Office (SFO) with one count of fraud by false accounting and one count of fraud by abuse of position, which can lead to prison sentences of up to seven and 10 years, respectively.[1]

The three former Tesco executives were "generals" who manipulated accounts, bullied and coerced subordinates to falsify figures and lied to auditors in an effort to massage the profits of the struggling supermarket.[2]

The men are alleged to have inflated Tesco's 2014 interim profit forecast by "pulling forward" or improperly recognising income from suppliers.

They are also accused of falsifying accounting records and concealing information from auditors between February and September 2014.

This is the Tesco scandal in 2014.

However, when the Enron scandal came to light there was a great expectation that this type of scandals would not be repeated, and Sarbanes-Oxley, or SOX, came to life in 2002. Enron was one of the biggest and, it was thought, one of the most financially sound companies in the U.S.

In 2003 Parmalat, "Europe's Enron", a dairy company that is a household name in Italy and was one of the country's few international businesses, discovered that it had a €14bn ($20bn) black hole in its books. It collapsed virtually overnight.

Mr Tanzi and some of his fellow executives had enmeshed Parmalat in a bewildering array of borrowings, false accounting, and misleading reports to investors and regulators. These were created to hide accumulating losses that were the result of a series of expensive acquisitions.

The common element of these cases is false accounting, confirming once more how alive the myth of the amoral business is. What this myth claims is simply that business is concerned with a highly pragmatic search for profits and individual careers, and that moral concern is and should be left out of the reflection around practical business problems. If fraud and corruption exist in business, that is no cause for alarm or action.

Tesco's case is not different and that it is illustrated by the former Tesco executives' actions and behaviour. They not only had "massaged" Tesco's profits to make them appear better than they were but also had "pressured others to conduct themselves in such a way that the stock market was ultimately misled."

Ms Sasha Wass, QC, said that Tesco had set aggressive and unrealistic profit targets despite falling sales, resulting in an environment where "unorthodox" practices took place. The motivation of the three men was not clear, but she said that they may have wanted to keep their jobs and lucrative compensation packages, which were worth more than £1m a year.

The myth of the amoral business does not explicitly say that business is immoral, rather that business leaders sometimes act without concern for moral aspects, thus creating scandals along the way.

On the other hand, silent and cynical bystanders remain passive because they believe that corrupt behaviour is the norm among managers and, accordingly, nothing to be too upset about.

In the Tesco's case there were no bystanders, some employees left because they could not bear the idea of what was happening and were not prepared to be part of it, and two employees took action. It came after a document, called the "legacy paper", was "prepared secretly" by two employees in Tesco's commercial finance department.

An important lesson to be learnt is how important is to be aware and stay alert of actions and red flags of fraud and corruption.

And I will leave it with a question to reflect on: should the quality and standard of audit be raised in order to be able to detect this level of irregularities which could lead to fraud?


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