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Tescos - Bit Of An Accounting Faux Pas



Beach Hut

Brighton Bhuna Boy
Jul 5, 2003
71,903
Living In a Box
http://www.bbc.co.uk/news/business-29306444

Looks like some of the Tescos Exec overstated their accounts perhaps to ensure they got their bonuses ?

Pretty serious if true and no doubt a prison sentence beckons.
 


BensGrandad

New member
Jul 13, 2003
72,015
Haywards Heath
Caught a bit of this in car on Radio 2 and I thought the person explaining it said it was quite a common practice for large companies and perfectly legal. I must admit I didnt hear all of the interveiw
 


Beach Hut

Brighton Bhuna Boy
Jul 5, 2003
71,903
Living In a Box
Caught a bit of this in car on Radio 2 and I thought the person explaining it said it was quite a common practice for large companies and perfectly legal. I must admit I didnt hear all of the interveiw

Really depends what you state in your accounts. For instance if you are delivering a contact and have bought what you needed to deliver it you can state that as revenue providing your customer provides proof of acceptance.
 


beorhthelm

A. Virgo, Football Genius
Jul 21, 2003
35,264
Looks like some of the Tescos Exec overstated their accounts perhaps to ensure they got their bonuses ?

its concerning guidence on future earnings, not reported earnings, so its unlikely anyone would have their bonus based on this.
 


Beach Hut

Brighton Bhuna Boy
Jul 5, 2003
71,903
Living In a Box
its concerning guidence on future earnings, not reported earnings, so its unlikely anyone would their bonus based on this.

Ah right, we are talking pipeline ?
 






tinycowboy

Well-known member
Aug 9, 2008
4,002
Canterbury
We haven't been given enough information really, except that they've over forecast income and under forecast expenses. Sounds like basic stuff, but accounting standards on the measurement and recognition of revenue are not black and white - they are subject to estimation and judgement. My guess is that either they've been unacceptably aggressive or the new guy doesn't like the accounting policies and has ordered them to change them. Or both. Either way, the new CEO is using this to flex his muscles.
 


vegster

Sanity Clause
May 5, 2008
27,866
I hope they figure out where the cash has gone, after all, every little helps.
 












Weststander

Well-known member
NSC Patreon
Aug 25, 2011
63,381
Withdean area
Heard a lot of this today, with one 'expert' telling Radio5 that there is scope to allow differing accounting treatments in the timing of recognition of costs (i.e. to be in one year or another).

My understanding is completely different:
Mandatory accounting practice is that costs (and the corresponding liability owed to the trade creditor) must be included in the earlier period, so in the example given on 5Live where a supplier has provided goods to Tesco's, if the goods had been delivered to Tesco's in that accounting period, they must be included as a cost and a liability (trade creditor accrual) then and not later.

The so-called clever move of paying suppliers late, has no bearing on profit. That's all balance sheet.


We'll find out more after their in-house investigation - being listed, they will have to be open.
 




Pintos

Well-known member
Jul 28, 2005
560
Oxted
I think they've been squeezing the accounting metrics for some time now and it's finally caught up with them.
A stat I read yesterday:
Under 14 of the last 18 years (start of Terry Leahy's reign) their free cash flow less their dividend was a negative number.
 




Jul 24, 2003
2,289
Newbury, Berkshire.
But if that accounting faux pas can affect the value of your share options and your personal net worth as a director, it's all a bit suspect. I thought Company Directors were supposed to be conducting themselves according to Company Law, as however they've done it, mis-reporting of accounts is enough to get you disqualified:

‘Unfit conduct’ includes:
allowing a company to continue trading when it can’t pay its debts
not keeping proper company accounting records
not sending accounts and returns to Companies House
not paying tax owed by the company
using company money or assets for personal benefit
 


Bedsex

not my real name
Jan 29, 2009
1,855
Flitwick
No comment from the auditors. I'm not surprised.

But these were only interims weren't they? So no requirement for a full audit and I'd be surprised if the auditors did more than a high-level review. Like someone else said above, I think this is potentially a result of the new CEO flexing his muscles. I wonder whether he'd contemplated just how much of an impact it would have on their share price though.
 


El Presidente

The ONLY Gay in Brighton
Helpful Moderator
Jul 5, 2003
39,689
Pattknull med Haksprut
Serves them right for SACKING me in 1978.

I am confident that:

1: No one will go to prison, despite the scale of the management judgement/creativity/fraud/lack of governance in question.
2: The auditors will get off relatively unscathed, at most an insignificant fine. The only question that auditors make in reality is 'will you reappoint us as auditors next year'.
3: Tesco's will buy a large broom and carpet.
4: Trebles all round.
 


tinycowboy

Well-known member
Aug 9, 2008
4,002
Canterbury
But these were only interims weren't they? So no requirement for a full audit and I'd be surprised if the auditors did more than a high-level review. Like someone else said above, I think this is potentially a result of the new CEO flexing his muscles. I wonder whether he'd contemplated just how much of an impact it would have on their share price though.

Agreed, but PwC's first thought must be whether the historic accounts are fairly stated or not. It's unclear whether this overestimation arises from a new or existing accounting policy. If the latter, they may have to restate their accounts, depending on whether they can dress it up as a change of accounting estimate, or whether they'll have to put their hands up for an error. Not good for Tesco, not good for the auditor
 




Buzzer

Languidly Clinical
Oct 1, 2006
26,121
Serves them right for SACKING me in 1978.

I am confident that:

1: No one will go to prison, despite the scale of the management judgement/creativity/fraud/lack of governance in question.
2: The auditors will get off relatively unscathed, at most an insignificant fine. The only question that auditors make in reality is 'will you reappoint us as auditors next year'.
3: Tesco's will buy a large broom and carpet.
4: Trebles all round.

Point 1 assumes there's fraud. Isn't it a little too early to say? I see from a Reuters report this morning that there have been disagreements between PwC (the auditors) and Tesco's over commercial income, something that PwC duly reported in the last annual report and Tesco's audit committee responded saying there were appropriate management controls. We both know that accounting at this level isn't an exact science and the rules can appear ambiguous. And senior managers under pressure to report profits may have been less than rigorous in making sure that income stated falls within the accounting rules. I know it sounds like I'm arguing semantics but I think that scenario more likely than blatant fraud.

Point 2. Should the auditors resign? I guess it depends on their remit for overseeing interim results. We both know that interim audits aren't statutory and although they are expected to apply the same standard of scrutiny, the areas under review and the purpose of the audit can differ significantly from an annual audit. In their defence, they had already highlighted this issue in the annual audit and received assurances that proper management controls were in place placing the onus on Tesco's board. Against that is the glaringly obvious fact that items of concern in an annual audit should really become part of any review taken by auditors in interim audits. Once again though, we don't know if Tesco's own internal audit team agreed to undertake that work and report to the Audit Committee directly. The internal audit team should be separate from the senior managers and report direct to the Board anyway.

Point 3. Heads will roll. Share value has almost halved since this point last year. Market share is down and there's no Chief Financial Officer in place. Tesco's don't have a lot of goodwill with the public after decades of aggressive growth at the expense of smaller retailers and its own suppliers. They need to prove themselves to a very sceptical audience. And simply put I really can't see any benefit to Tesco's in trying to bury this when it has become so public. Better to come clean and be seen to do things properly rather than fudge the issue with the worry that this scandal will re-surface in the future. I can't see the Chairman surviving this. The Chief Exec can reasonably claim that he's only just started and wants to get this right.

Point 4. Has Jeff been in*?




*old school Private Eye joke. Cont'd p94
 


El Presidente

The ONLY Gay in Brighton
Helpful Moderator
Jul 5, 2003
39,689
Pattknull med Haksprut
Point 1 assumes there's fraud. Isn't it a little too early to say? I see from a Reuters report this morning that there have been disagreements between PwC (the auditors) and Tesco's over commercial income, something that PwC duly reported in the last annual report and Tesco's audit committee responded saying there were appropriate management controls. We both know that accounting at this level isn't an exact science and the rules can appear ambiguous. And senior managers under pressure to report profits may have been less than rigorous in making sure that income stated falls within the accounting rules. I know it sounds like I'm arguing semantics but I think that scenario more likely than blatant fraud.

Point 2. Should the auditors resign? I guess it depends on their remit for overseeing interim results. We both know that interim audits aren't statutory and although they are expected to apply the same standard of scrutiny, the areas under review and the purpose of the audit can differ significantly from an annual audit. In their defence, they had already highlighted this issue in the annual audit and received assurances that proper management controls were in place placing the onus on Tesco's board. Against that is the glaringly obvious fact that items of concern in an annual audit should really become part of any review taken by auditors in interim audits. Once again though, we don't know if Tesco's own internal audit team agreed to undertake that work and report to the Audit Committee directly. The internal audit team should be separate from the senior managers and report direct to the Board anyway.

Point 3. Heads will roll. Share value has almost halved since this point last year. Market share is down and there's no Chief Financial Officer in place. Tesco's don't have a lot of goodwill with the public after decades of aggressive growth at the expense of smaller retailers and its own suppliers. They need to prove themselves to a very sceptical audience. And simply put I really can't see any benefit to Tesco's in trying to bury this when it has become so public. Better to come clean and be seen to do things properly rather than fudge the issue with the worry that this scandal will re-surface in the future. I can't see the Chairman surviving this. The Chief Exec can reasonably claim that he's only just started and wants to get this right.

Point 4. Has Jeff been in*?




*old school Private Eye joke. Cont'd p94

True, one man's freedom fighter is another man's terrorist! £250 million of profit is quite a lot to be arguing over in terms of semantics though.

What we need is a letter to The Telegraph from Sir Tufton Bufton.

Private Eye have been laying into PwC in recent issues (and the rest of the auditing cartel TBH).
 



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