Tesco Plc Accounting Scandal: A Corporate Governance Analysis

This report provides a comprehensive analysis of the Tesco Plc accounting scandal, examining the historical background, overview of the case, and the non-compliance with corporate governance principles. It delves into the specifics of the accounting fraud, the overstatement of profits, and the subsequent impact on the company's share price and reputation. The report explores the roles and responsibilities of the board of directors, the audit committee, and the external auditors, highlighting the failures in corporate governance that contributed to the scandal. It also discusses the lessons learned from the Tesco case, including the need for stronger internal controls, ethical leadership, and independent oversight. The report further examines Tesco's current scenario, including the strategies implemented to recover from the scandal, and concludes with a reflection on the importance of corporate governance in maintaining stakeholder trust and ensuring the long-term sustainability of a business.

Corporate Governance and
Globalization
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Table of Contents
Introduction................................................................................................................................3
Assessment of the case...............................................................................................................3
History / Background.............................................................................................................3
Overview of Case...................................................................................................................4
Non-compliance of corporate governance.............................................................................4
Lesson Learned......................................................................................................................6
Tesco Plc (Current scenario)......................................................................................................7
Restructuring Supplier Relation.............................................................................................9
Role of Auditor......................................................................................................................9
Building a better Tesco........................................................................................................11
Conclusion................................................................................................................................12
Bibliography.............................................................................................................................13
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Introduction
Increasing interest in pressures on national system relating to corporate governance to
congregate which is asserted being developed by the process of globalization1. It has been
assessed that the trend of globalization will lead to the efficient allocation of capital.
However, a significant change has been accessed in national governance system which
eventually led to effective market-driven as well as enhancing procedure. Corporate
governance can be referred to as a set of rules and provision which are applied by a business
organization in order to control the business operations2. The present study emphasizes on
Tesco Plc accounting scandal. Initially,the background of the company has been provided
along with the detailed analysis of the accounting scandal issue of the company. The major
objective of corporate governance is to establish and sustain the balance held among
corporate operations and stakeholder’s interest as well as shareholders of the company. But
even though recent addition to corporate governance scam has been accessed amount which
Tesco –Plc is the most prominent one. Further, the present status of the company and changes
that have been made in the company have been discussed so that a similar conspiracy does
not arise in future. Lastly, the core learning’s from Tesco Plc accounting scandal has been
provided in the form of conclusion.
Assessment of the case
History / Background
Tesco-Plc was formed and introduced in 1919 by Jack Cohen being a group of market stalls.
The company appeared for in the year 1924 when it come up with a tea shipment from Mr T.
E. Stockwell. The expansionary thrust of the company was assessed when it implemented
actions to purchase rival shops. The company initiated its ambitious plans of expansion
1Ruth King and Fitzgerald Lin. "10. Challenges facing the accounting profession: maintaining
relevance in a changing environment." Perspectives on Contemporary Professional Work:
Challenges and Experiences [2016] 176-220.
2Bob Tricker. Corporate governance: Principles, policies, and practices. (Oxford University
Press, USA, 2015).
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through opening outlets in the US with the name ‘Fresh and easy’, and now the company is
operating in almost thirteen countries.
Overview of Case
The voluntary disclosure of falsification of books of accounts by the management of Tesco-
Plc, a UK based retailer affected the market price of the share as well as the investment value
of its shareholder. In the year 2014, Tesco was pitched into deeper crises, and led to
suspending of four senior executives of the company. Further, the reason behind the same
was the outrage of overstatement of the first half profits by £250 million. The management of
the conducted the overstatement of corporate profits to be £1.1 billion. However, it was later
assessed that the company has experience profits of £ 263 million. The overstatement of
profit was made to influence the shareholders and to enhance the value of the investment as
well as funds to the retailer. Though, legal authorities and management of the company took
specified scandal matter under significant concern and reduced the £2 billion of net value
from Tesco –Plc3. Due to the specified accounting scandal, the company was convicted for
fine of £500 million in the year end. Further, a case was filed by approximately 125 investors
in opposition to the company following the reason for accounting fraud and alleged that the
company had been providing incorrect facts in order to gain funds as well as investments.
Thus, the company faced criticism in the form of investor’s outburst for accepting practices
despite several warnings from analyst regarding aggressive accounting practices.
Non-compliance of corporate governance
Tesco Plc has been acknowledged for compliance with the structure of corporate governance
as well as its concern towards promise towards safety and ethics relating to individuals and
the environment. But, the fraud in the year 2014 is one of the events which declined or had a
significant negative affect on the image of the company. Due to the above specified corporate
governance, a lot of individuals of the company were terminated which comprises 4
executives and several other employees of the company. Even the Chief Finance Officer gave
resignation just before the incident of the accounting scandal was known to the general
public. The same was followed with the resignation of other senior management executives
3Al Jihad Okaily, Dixon Roband SalamaAly. "Corporate governance quality and premature
revenue recognition: evidence from the UK." International Journal of Managerial
Finance, 15.1 , [2019] : 79-99.
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which is weak corporate governance. Moreover, board of directors of the company did not
pay any attention along with non-executive directors on the increased profits in order to attain
attention from shareholders.
Board of directors is having an evident role in a company in order to indulge corporate
governance in a vigilant manner. Effective corporate governance practices can be continued
or sustained only through efficient application of corporate governance principals by the key
players of the company4. There is a liability of Board of Directors to develop a core
objectives, mission and vision of organization at the same time setting strategies in order to
attain an adequate market position. The specified responsibilities were not fulfilled by the
management of Tesco as BOD was not complying with the required Code of Ethics and the
audit directives which eventually resulted in fraud of accounting. Even no action was taken
against the irregularities relating to strategic decision and emphasis was made only on
revenue generation. It is necessary for senior executives to establish effective standards of
leadership along with strong culture of corporate governance in order to decrease the
possibility of the shaky internal system , which was available in Tesco Plc.
Organizational audit committee is obligatory for attaining the characteristic of variant
integrity in books of accounts along with procedure relating to the assessment of decision,
business operation and financial control so that fair financial view can be presented to the
stakeholders and shareholders5. Though, in Tesco-Plc scenerio, the books of accounts were
audited by PwC which paid no significant concern to the inflated profits due to which
company had to take the decision to remove the external audit committee’s PwC of Tesco
PLC. Furthermore, the company’s internal as well as external audit committee is liable for
assessing financial activities which comprises internal and external audit procedures. Further,
assessment relating to disclosure and monitoring of financial activities is also accountable in
4Ruth King and Fitzgerald Lin. "10. Challenges facing the accounting profession: maintaining
relevance in a changing environment." Perspectives on Contemporary Professional Work:
Challenges and Experiences [2016] 176-220.
5Barry Evans and Mason Robert. The lean supply chain: managing the challenge at Tesco.
(Kogan Page Publishers, 2018).
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the hands of the audit committee6. In Tesco Plc case, as audit committee has not
accomplished their responsibilities due to which it gave birth to an accounting fraud of the
company. Following to this company’s CFO gave resignation and Tesco was left over with
no control from the side of CFO.
Lesson Learned
The corporate governance framework of Tesco Plc was not strong, and thus no concern was
provided to the inflated profits which resulted in heavy penalties for the company. Along
with same it also had negatively affected the overall image of the company in front of
shareholders and other stakeholders. The decision of Tesco Plcis evident to the fact that
internal as well as external board of director are accountable for making better decisions in
order to evade misstatement in financial reports as well as disclosure in the financial
statement of the company. The lesson can be taken from the fraud of accounting incident of
Tesco Plc that it is necessary for an organization to evolve effectual regulations and
appropriate accounting practices to avoid fraud such as accounting scandal7. Further, it is also
necessary to incorporate adequate governing practices in the corporate governance so that
adequate check on employees can be kept8. It will assist in ascertaining whether the
employees and management in meeting up organizational goals and whether appropriate
importance is given to stakeholder’s right and legal rights or not.
In case the corporate structure and board of directors have provided adequate importance to
stakeholder’s value and would have set aside their personal interest than possibility exist that
6Bradley Rudkin, , et al. "Hide-and-seek in corporate disclosure: evidence from negative
corporate incidents." Corporate Governance: The International Journal of Business in
Society [2019], 19.1, 158-175.
7Francesca Cuomo, Mallin Christine, and Zattoni Alessandro. "Corporate governance codes:
A review and research agenda." Corporate governance: an international review (2016)
24.3 , 222-241.
8LimaVicente Crisóstomo and BrandãoFreitasIsac de. "The ultimate controlling owner and
corporate governance in United States." Corporate Governance: The International Journal of
Business in Society , (2019) 19.1 , 120-140.
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the company would not have faced serious accounting scandal. Recruiting an unbiased third
party for bookkeeping of an organization might assist in assuring non-occurrence of another
mishappening or scandal relating to the recording of accounting transactions. The fact cannot
be denied that internal bookkeepers of Tesco have played around with numbers in order to
provide significant profit in books of accounts. Thus, in the case specified operation relating
to bookkeeping is outsourced that there would be no pressure from higher authorities in order
to present higher profits as their livelihood is not dependable on agreeing on inappropriate
orders of the executives9. Further, books of accounts prepared by third party accountants
would be more appropriate as it would be developed on the basis of impartiality and on the
grounds of closely acceptable accounting practices.
Tesco Plc (Current scenario)
The present time has been very challenging for Tesco. The recent accounting scandal of
Tesco led to a decrease in customer confidence in the food industry and affected the overall
reputation of the company. After considering all initiatives to recover from the effects of
accounting wrongdoings, the Tesco management has now signed an agreement of deferred
prosecution for compensating and paying fines. This states that the stores of Tesco would
now be out of the legal issues on a temporary basis. Similarly, the company signed to an
agreement of making payment of £129 million in lieu of being prosecuted. Currently, the
company has considered various initiatives, strategies, company changes so as to stabilize its
financial position and reputation.
9Rading Erick Outa and Waweru M. Nelson.. "Corporate governance guidelines compliance
and firm financial performance: United States."Managerial Auditing Journal , ,( 2016) , 31,
8/9, 891-914.
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Figure 1: Assessment of trend of the share price of Tesco Plc
(Source: Thomas, 2019)
The news relating to accounting scandal provided shock waves throughout the city in the year
2014 and arose significant queries relating to the performance of the company and its share
prices. Thus, the company suspended eight directors, and three former executives were
alleged as the Serious Fraud Office with fraud after the ascertainment of a black hole10. In the
year 2017, the company made a payout of £85 million relating to compensation payout to the
investor and £ 129 million relating to penalties and related cost. The company has initiated to
take steps in order to improve stores considering the variants such as prices and range of
products11. A three-year turnaround plan has been developed in order to reboot the business,
and a positive impact can be assessed as margins were increased in a significant manner last
year.
The current status of the company is in the middle of challenging and being progressive. This
is a critical time for the company to enhance and repair its position, performance, image and
10Daniel Thomas, ‘Tesco profits rebound as turnaround continues’ (Business, 11 April
2018)<https://www.bbc.com/news/business-43722494> accessed on 19 April 2019
11Francis Awolowo, Ifedapo. "Financial statement fraud: The need for a paradigm shift to
forensic accounting." system 7.10 (Routledge, 2016) : 23.
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reputation. It must involve honesty, integrity, trustworthiness and fairness in all its aspects
and giving less weight to personal interest simultaneously.
It has been stated by Lewis that this year reflected strong progress, with the 9th growth’s
consecutive quarter. Further, Tesco is on the growth again, generating considerable cash and
recovering its profits. Its performance has been improving gradually from 2014 at the time
when it made reporting the most horrible outcomes in history with the amount of losses
subjected to £6.4bn.
Restructuring Supplier Relation
The new Chief executive of Tesco, named Dave Lewis, has promised to overhaul the
relationship of the company with the supplier after sales slump and the detection of a £263m
accounting scandal. Since then, Lewis has worked to simplify the business of Tesco and has
modified its supplier relationship to make sure that there is no repetition of the scandal. It has
declared changes to manner payment are made to a supplier that will lead to smaller suppliers
with quick payment than is normal in the grocery sector. This is considered as the best
alternative for cash flow for these suppliers. As per the investigations for its possibly
fraudulent engagement with main suppliers, this tends to be fairly considerable step by the
company is attempting to reestablish a relationship with the supply chain.
Regaining the trust from shareholder, supplier and public is now should be the topmost
priority of Tesco, alongside repairing the supplier and shareholder relationship. In pursuit of
the same, Tesco is attempting to re-establish its relationship with suppliers by introducing
new online network where the business will be capable of doing better interaction as the
biggest retailer . Further, the supermarket Group has formed the Tesco Supplier Network,
claiming to assist 5000 members in interacting with the related suppliers and retailers
regarding a variety of issues, possibly offering the best of a platform for suppliers to make
complaints, provide feedback or make an enquiry about anything.
In order to improve the performance and position of Tesco, it is essential for the company to
rebuild its relationship with suppliers and regain the trust and confidence from the side of
suppliers. The centre of the success of Tesco lies in restructuring supplier relation.
Role of Auditor
Auditors have a significant role in saving Tesco from such crises as well as scandals. They
are required to form strict as well as transparent rules amd policies in aligned with the
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application of corporate reporting, internal supervision, risk management and preserving
strong relationships with suppliers and shareholders12. In this aspect, the auditors are
responsible for assessing the corporate financial statement, structure and announcement
integrity13. It can be asserted that auditors are considered as the main players to prevent fraud
as a whole. By considering the Tesco case, and the results of not complying to relevant
standards of auditing professional, yet Tesco Plc’s audit committee of was extensively
preventing their duties which further led to the massisve fraud in the year 2014 The internal
as well as external auditors of the company are liable for management of all the financial
activities of company like financial reporting, proper disclosures, regulatory operations
management and check on internal and external audit14. Thus, auditors are primarily needed
to review and check audit and financial aspects, so that fair, true and accurate representation
of financial statements and account is present15.Therefore, the auditors must conduct the
application of ethical standards, supervision over quality and relevant auditing in best
ineterst, and adopt the International Standards on Quality Control, International Standards on
Auditing and ethical standards16.
12Ruth VAguilera, and Crespi-CladeraRafel. "Global corporate governance: On the relevance
of firms’ ownership structure." Journal of World Business (2016), 51.1 , 50-57.
13H. Lars Gulbrandsen, . Globalization, Governance Gaps, and the Emergence of New
Institutions for Political Consumerism. The Oxford Handbook of Political Consumerism,
[2019]. 227.
14GrażynaŚmigielska,."A business case for sustainable development." CES Working Papers
[2018], 10.1, 49-66.
15BradleyRudkin, et al. "Hide-and-seek in corporate disclosure: evidence from negative
corporate incidents." Corporate Governance: The International Journal of Business in
Society (2019), 19.1, 158-175.
16LeBaron, Genevieve, Jane Lister, and Peter Dauvergne."Governing global supply chain
sustainability through the ethical audit regime." Globalizations (2017), 14.6 , 958-975.
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Building a better Tesco
Building a better Tesco strategy has been initiated by Chief Executive of Tesco, wherein they
have made greater investments in services, staff, stores and business format17. This business
strategyincludes the formation of a faster store refresh programme, establishment of effective
promotions and prices, having more customized offers and offerings inclusive of the
relaunching of ‘Tesco brands,i.e. ‘better, clearer, more relevant’ communications with
suppliers and customers.
For building a better Tesco, it is necessary that tesco include startegic regulations and
relevant accounting practices in order to prevent future frauds18. In this way, they should
involve corporate governance practices and leadership to keep the employees on track to
satisfy the mission and vision of the organization and valuing the interests of shareholders at
the same time19. Along with this, initially the company is required to keep its personal gains
and interest aside and consider public and shareholder interest so as to prevent itself from
indulging in these frauds. Thus, it can be stated that the company must take best of corporate
governance structure into account while including proper provisions based of Governance
Code and possible board members to prevent accounting scandals. Hence, the company
should focus on the customer as well as on staff, and come up with fighting from the recent
crises. The company for building a better future must mitigate the controversial crisis by
dealing with the issues quickly20.
17John D Sullivan., et al. "Stress Testing Corporate Governance." (2018).
18Jihad AlOkailyDixonRob, and SalamaAly. "Corporate governance quality and premature
revenue recognition: evidence from the UK." International Journal of Managerial Finance
(2019), 15.1 , 79-99.
19Steve Wood, WrigleyNeil, and CoeNeil M.. "Capital discipline and financial market
relations in retail globalization: insights from the case of Tesco plc." Journal of Economic
Geography (2016) 17.1, 31-57.
20ShrivesPhilip J., and Niamh MBrennan. "Explanations for corporate governance non-
compliance: A rhetorical analysis." Critical Perspectives on Accounting (2017), 49, 31-56.
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Conclusion
With the consideration towards above facts, it can be stated that Tesco Plc has been struggled
long for its profit misstatement in the books of accounts gain false profiting image and
shareholder investment to increase profits. This has taken place due to the poor framework of
corporate governance and unconcern towards the auditors, audit committee and board of
directors21. Thus, the study shows that the company must considered working corporate
governance structure in their accounting and auditing processes and have reflected a true
presentation of financial information. The study reflects that only a mere overstatement of
profits can lead to huge financial crises, and can damage the names of even leading
companies, while it is a serious breach in terms of law and provisions22.
Based on above analysis, It can be concluded that auditors were needed to be well-organized
by the Tesco, with placing experienced and skilled audit committee established to avoid
scandals while upholding appropriate internal control as well as financial statement23. The
efficiency of the auditors are majorily associated with the efficiency of top management and
board of directors. Henceforth, corporate governance is a major aspect to be considered by
any organization to stabilize their financial aspects, while adhering to related provisions and
laws to operate reasonably and fairly24.
21RorySullivan, and GouldsonAndy. "The governance of corporate responses to climate
change: An international comparison." Business Strategy and the Environment [2017], 26.4:
413-425.
22KhondkarKarim,, et al. "Corporate social responsibility: Evidence from the United
Kingdom." Journal of International Business Research [2015], 14.1 , 85.
23Kate JEElliot,."Investor case study." The Business of Farm Animal Welfare in association
with GSE Research., [2018]. 97-101
24GaganKukreja,, and GuptaSanjay. "Tesco Accounting Misstatements: Myopic Ideologies
Overshadowing Larger Organisational Interests." SDMIMD Journal of Management [2016]:
7.1 , 9-18.
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