Tesco Accounting Scandal – A corporate governance failure?

 

This morning, Tesco shocked the markets with an announcement acknowledging their profits for the previous six months were at least £250 million pounds lower than they announced a month ago.

They also announced that several people had been suspended, including 4 senior executives, and that Deliottes (an auditing company) was being brought in to review this serious accounting issue.

It seems the issue relates to the way Tesco accounts for supplier promotional rebates or income.  This is a way that suppliers fund a promotion that is run by the supermarket.  In essence the “costs” of the promotion are shared with the supplier and the retailer.

This is normal practice in the industry, but it is important to recognise or account for this income at the correct time.  You cannot account for it before you have received the sales from the promotions.

Time will explain what has happened, but the big issue here is the corporate governance of Tesco.  The company is the UK’s biggest retailer and the 3rd biggest retailer in the world.  They should have water tight accounting policies and procedures, which ensure that all accounting is correct, and in line with the accounting rules.  They even have external auditors who check that all is well and in line.

There has been a massive failure of this process at Tesco.  The CFO resigned in April and left over a week ago, leaving a large company with no CFO.  This is poor corporate governance, and this is coupled with the fact the CEO is only 2 months into his new role and has many issues to understand.

Tesco’s value has nearly halved in the last few months and the business is in crisis.  There has been warning signs over the last few months – Many great senior executives have left and the trading has been falling.

The Chairman and the board of Non-Executive Directors should have reacted to this sooner, and they should have been closer to the numbers.

The Finance of a business and the numbers are critical.  All directors should understand these numbers and should be interested in them.  A Director who follows the numbers closely will know instantly if there is an issue.

We call it “sense checking”, which is as it sounds – over time the Directors should have a “sense” for the business and automatically know what the figures are likely to be.  A good CEO and CFO, would in essence “know the figures” before they are accurately accounted.  This way they can “sense” any issues and ask for checks if they are not happy.

Tesco have a long standing Non-Executive broad, and these are the people who should be questioned about what happened and, more importantly, what they intend to do about this.

There is a new CEO who is making big and decisive decisions, and he will be joined by the CFO from Marks & Spencer.  Marks & Spencer have extremely strong controls and checks, and I believe that the new CFO will bring Tesco the clarity and control they need.