Financial Accounting Discussion: The Tesco Accounting Scandal Analysis

This discussion board post examines the accounting scandal at Tesco, focusing on the misrepresentation of financial performance and the manipulation of profits. The posts analyze the role of subjectivity in accounting, the importance of both profits and cash flow, and the agency problem between shareholders and management. The contributors discuss the incentives that led to the fraud, the impact on investors, and the need for prudent financial skills to identify potential issues. The discussion references the Tesco case and highlights the significance of cash flow statements, the dangers of short-term goals, and the importance of long-term shareholder wealth creation. The discussion also considers the role of incentives, performance measures, and the need for investors to be vigilant in their analysis of financial statements, drawing on the provided references from accounting and finance texts.

DISCUSSION
TESCO
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Post 1
The above post highlights the accounting scandal at Tesco. It clearly indicates that the
flexibility available to the management with regards to financial accounting can be
potentially abused on account of underlying subjectivity. However, if the accounting
standards are made too rigid, then it would not be fruitful as relevant information would not
be able to reach the external users (McLaney & Atrill, 2014). Thus, while requisite flexibility
in the financial accounting ought to be maintained, simultaneously stringent punishments for
the managements that engage in fraudulent accounting practices need to be practised
(Heisinger,2014).
Another pivotal aspect indicated in your post is the need to focus on both profits and cash
flow. This is quite significant since focus on one of the above would not present a reliable
analysis of the financial performance of the underlying entity. This has already been indicated
in earlier scandals such as Enron where high profits were reported in order to pump the share
price but it was not supported by the cash flows which were quite minimal. It is essential that
investors need to possess requisite financial skills in order to raise suitable suspicions when
one of the two (i.e. cash flow and profits is not supporting the other (Petty et. al., 2015).
References
Heisinger, K.(2014) Essentials of Managerial Accounting 4th ed. London: Cengage Learning.
McLaney, E. & Atrill, P. (2014) Accounting and Finance: An Introduction, 7th ed. Harlow:
Pearson Education Limited
Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin J.D. and Burrow, M.(2015),
Financial Management: Principles and Applications 6th ed. Sydney: Pearson Australia

Post 2
The accounting scandal at Tesco clearly outlines that shareholder wealth creation in the long
run cannot be built through financial frauds which are essentially done so as to serve the short
term objectives of the management as their incentives are typically linked to profit. This
scandal also highlights the agency problem existing between the shareholders and
management whereby the management can potentially become self-serving to the detriment
of long term wealth creation for the shareholders (Drury, 2016). As a result, it is essential that
suitable actions ought to be taken in a manner which reduces the incentive for management to
engage in fraudulent practices (Deegan, 2014).
It is essential for the investors to understand that they must look beyond profits which is
basically an accrual concept and thereby easy to misrepresent. Any fraud with regards to cash
flow is quite difficult as it would have to result in final cash which can be easily verified by
the auditor. After various corporate scandals in the last two decades, the awareness of the
investors in this regards has enhanced especially if there is a continuous trend of high
profitability and low cash without any valid reason (McLaney & Atrill, 2014).
References
Deegan, C.M. (2014). Financial Accounting Theory, 4th ed. Sydney: McGraw-Hill Education
Australia,
Drury, C. (2016) Cost and Management Accounting: An Introduction. 6thed. New York:
Cengage Learning
McLaney, E. & Atrill, P. (2014) Accounting and Finance: An Introduction, 7th ed. Harlow:
Pearson Education Limited

Post 3
Moh, as you rightly indicated, the primary cause of the accounting scandal at Tesco is
essentially the poor performance of the company in 2014. The management is increasingly
becoming short sighted and sensitive to the expectations of the analyst and shareholders.
Further, the incentive structure for these executives is designed in such a manner that profit
and share price are considered to be pivotal (Bhimani et.al., 2016). As a result, the executives
have sufficient incentive to misrepresent the financial performance of the company so as to
maximise their compensation at the cost of the incorrect decision making by the various
external users. In such a scenario, it is imperative that the investors need to be prudent
enough to sense such possibilities (Heisinger, 2014).
One of the key measures to accomplish the same is by studying the cash flow statement. This
is because unlike the income statement, the cash flow statement is more difficult to
manipulate. It makes sense that some of the performance measures should also be linked to
cash flow from operations which provides a crucial reflection of the business. Further, an
investor and other external users should be watchful especially if the cash flows generated by
the business are not sufficient to meet the expenses (McLaney & Atrill, 2014).
References
Bhimani, A., Horngren, C.T., Datar, S.M. and Foster, G.(2016), Management and Cost
Accounting, 4th ed. Harlow: Prentice Hall/Financial Times
Heisinger, K.(2014) Essentials of Managerial Accounting 4th ed. London: Cengage Learning.
McLaney, E. & Atrill, P. (2014) Accounting and Finance: An Introduction, 7th ed. Harlow:
Pearson Education Limited