1. Tesco Cooks the Books

Extracted from Ethics Unwrapped - McCombs School of Business The University of Texas at Austin (2019)

As of 2014, British supermarket chain Tesco held approximately 29 percent of Britains grocery market, with more than 3,500 stores and over 310,000 employees. Tesco was Britains largest grocery chain and the third-largest retailer by sales in the world. But with shifts in the industry, changes in company management, and growing competition from rivals and discount chains, Tesco saw a decline in sales. From 2013 to 2014, the company saw its stock price fall by more than 50 percent. By October 2014, chairman Richard Broadbent announced his resignation.

Broadbents resignation came in the wake of an internal investigation into the companys profit reporting. Tesco reported that it had overstated its profits by 263 million (approximately $423 million at the time), of which 118 million related to reports from the first half of 2014 and 145 million from the previous two years. The company stated that the discrepancy came from booking income from suppliers too quickly. Several other executives were asked to step aside, and the Serious Fraud Office (SFO) in Britain soon launched a criminal investigation into accounting irregularities. Britains financial regulator, the Financial Conduct Authority, also began an investigation into company profits.

Tescos finance director Carl Rogberg, managing director Chris Bush, and food commercial director John Scouler were charged with fraud by abuse of power and false accounting. According to prosecutor Sasha Wass, the three executives encouraged the manipulation of profits and indeed pressurised others working under their control to misconduct themselves in such a way that the stock market was ultimately misled. Wass continued, Each of these three defendants used their managerial authority and actively encouraged those working beneath them to falsify the figures.

Amit Soni, a whistleblower in the case and senior accountant at Tesco, said he alerted senior management to a profits misstatement in 2014. He reported that accounting teams were told to pull forward future income from suppliers by placing it on the books in advance of actually earning the money. This created a growing gap between budgets and the companys actual performance. He said his team was falling apart under pressure, stating, It was to the point that even [my team] could see that the future was not looking any better.

ANALYSIS

The officers of public companies have an obligation to report financial information fairly and accurately to the companys owners, the shareholders. In the face of declining profits, leaders at British grocery chain Tesco instructed accounting employees to pull forward future income from suppliers, which created misstatements in the companys accounting that went unreported. These illegitimate accounting practices, including illicitly recognizing income before it had truly been earned, and consequent financial misreporting created a major scandal for the company. Soon, Tesco became the subject of a criminal investigation for fraud; it had misrepresented the companys value to shareholders and the public at large.

Questions

1. As the shareholder of a public company, would you want your companys officers to fudge the numbers in order to avoid damage to the companys share price?
2. If you were one of the accountants who faced pressure by managers to pull forward future income, what would you have done and why?
3. What are the principles of ethical behaviour listed in APES 110, and how did accountants at Tescos breach these?