In September 2014, Amit Soni, a senior accountant in Tesco Stores Limited’s (TSL) finance department filed a report with Tesco’s legal team. Soni was concerned about TSL’s handling of commercial income, an income statement item that accounted for differences between inventory’s purchase price and list price—to be used, for example, when a vendor offered TSL a discount for buying inventory in bulk. According to the accountant’s allegations, TSL employees had been inflating commercial income to meet the division’s financial targets, causing Tesco’s projected trading profit for the six months ended August 23, 2014 to be overstated by an estimated £246 million. Tesco’s legal team had quickly referred the issue to CEO Dave Lewis, who had started in the role just a few weeks earlier, on September 1. Lewis had to decide how to respond to these allegations. Did the allegations have merit, and what were the causes for the accounting violations? Should managers be removed if Tesco determined that the allegations had merit? What were the legal consequences for Tesco, and how should Tesco’s organizational structure and culture evolve?

Learning Objective

This case study brings up a broad understanding of corporate leadership, corporate misreporting, financial reporting and control, corporate governance, reasons facilitating accounting fraud, leaders’ responses to such fraud, and regulators’ and courts’ enforcement decisions against firms and individuals. Specifically, this case consists of three separate parts (cases A to C). We will cover Case A, which allow for discussions on the nature as well as reasons for the underlying accounting problem.

The case focuses on Amit Soni, a senior accountant in TSL’s finance department, who filed a report with Tesco’s legal team. Soni claimed that TSL pulled forward commercial income to meet the division’s financial targets, leading to a total overstatement of approximately £246 million for the six months ended August 23, 2014. This potential accounting fraud allows you to understand the accounting mechanics of commercial income and to ultimately debate the merits of the whistleblower’s allegation. Furthermore, it allows for reflection on factors leading to the fraud, and appropriate responses to this fraud from the point of view of the new CEO, Dave Lewis.

This case study aims three main learning objectives:

Understand the mechanics of accounting for commercial income, an important source of income for retailers. 

Understand the drivers of corporate misconduct, and the role of various governance mechanisms within and outside of the firm to curtail misconduct. 

Assess the appropriateness of a firm’s response to accounting fraud, and the firm’s design of new control systems. 

According to Tesco's accounting fraud:

Questions:

1. What factors led to the accounting issue? Who do you think is responsible for the accounting issue?

You may bring up the framework of the fraud triangle: Pressure (Motive), Opportunity, Rationalization.

To answer the second question, you may bring up the responsibilities of each party (if any) to these accounting issue: top management, the board, the auditors, employees in accounting functions, or vendors.

2. What are your recommendations to Dave Lewis on how to respond to these allegations? What would you change at Tesco to avoid such scandals going forward? 

You should discuss on how Tesco’s new CEO should respond to these allegations, and potential changes to Tesco’s corporate governance to avoid similar issues in the future. You may focus on immediate actions, short-term actions (over the next quarter) or next quarters.