ACC3017 Case Study: Analyzing Corporate Governance Failures at Tesco

This case study examines the corporate governance failures at Tesco, focusing on factors that led institutional investors to intervene in management, examples of bad corporate governance and its consequences, and weaknesses in Tesco's internal control system. The analysis covers concerns about strategy and its implications, poorly structured boards, window dressing, ignoring problems, not complying with statutory requirements, and irresponsible board members. The weaknesses in the internal control system include ineffective management, lack of risk assessment, ineffective security and compliance, ineffective information and communication, and irregular monitoring. The assignment explores the violations of internal control components like the control environment, risk assessment, control activities, information and communication, and monitoring activities. The reflection emphasizes the importance of effective revenue recognition, materiality, timely review of reports, and proper management of key employees. The study highlights the importance of corporate governance in maintaining ethical standards and preventing fraud within a company. It analyzes the COSO framework and its implications for Tesco's internal control system and its overall governance structure.

Cooperate Governance

TABLE OF CONTENTS
1.Factors that might lead institutional investors to attempt to intervene directly in the
management...........................................................................................................................3
2. Examples of bad corporate governance and its consequences on Tesco...........................5
3. Weaknesses of Tesco’s internal control system and its implication..................................7
Critical reflection...................................................................................................................8

1.Factors that might lead institutional investors to attempt to intervene directly in the
management

Case for institutional
investors intervention
Explanations Justifications and
implications for TESCO
Concerns about strategy In this, institutional
investors are concerned
about their investment in
long term investor value.
In cases when the
strategy is likely to be
very or excessively risky
and is unambitious in
nature, investors get
worried about their
investment and future
prospects. The strategy
used by the companies
determines the long-term
value of the investment
which is very essential
for the shareholders to
know about it. Thus,
investors intervene in the
management of the
company.
Principle 2 is applied.
The board should ensure
that necessary resources
are put in place to
achieve its objectives in
accordance with
stewardship strategy.
After the revelation of
over estimation of profits
by Tesco, it has increased
the concerns of investors
with respect to the other
malpractices among other
retailers as well. Also,
Tesco has been having the
tough time as it was
battling for the sales
because of the
competition faced from
Aldi and Lidl. Thus, all
these lead increase in
concern of investors over
the management of the
business.
Poor or deteriorating
performance
If the performance of the
business is not good over
a certain period of time
then such situation
triggers the intervention
of institutional investors.
It also arises when the
company is not able to
provide answers or
Tesco has overstated the
profits of first half to be
£1.1 billion but
afterwards it was revealed
that the company has
experienced the profit of
£263 million which has
attracted the shareholders
to increase their

2.
Examples of bad corporate governance and its consequences on Tesco
Examples of Bad
Corporate Governance
Practice
Consequences for
TESCO
Recommendation
– Poorly structured
board
The board members of
the Tesco do not have
anyone who have
experience in running the
shops which is the
biggest odd choice made
by the retailer. This has
affected the decision-
making process of the
company and may lead to
wrong actions. This
breaches the
effectiveness principle of
code where board
members are required to
have effective experience
and skills to manage their
responsibilities.
Tesco should come up
with the new idea and
redesign its board
members who have
relevant expertise in field
domain which will be
helpful in dealing with
the changes.
– Window dressing The three directors of the
company are accused of
fault and dishonestly
falsifying the accounting
records of the company
in order to present the
better financial position
of the business (WINDOW
DRESSING. 2014). As a
Based on the negative
impact of window
dressing has over the
business, the best way
Tesco can nullify or
reduce the impact and go
towards the good and
positive corporate
governance practices is

result, the investors of
the company get the
wrong indication about
the performance of the
company and leads to
more investment in the
business with the purpose
of better return. After the
disclosure of all these
tactics has led to the
negative impact on the
business. It has affected
the reputation of the
business and created a
sense of concern among
the investors. This
violates the
accountability principle
of code in board should
present true and fair
position of the business.
that it should conduct
timely check of the
accuracy of the
accounting records. It
should also implement
rules and regulations
which are required to be
followed strictly in order
to reduce the
commencement of fraud
and other malpractices.
– Ignoring problems There were many times
when the management of
Tesco did not focus or
paid attention to the
sensitivity of the matter
and ignored it. It can into
light when an employee
exposed it. Because of
this, Tesco has to face
any problems in terms
monetary and non-
monetary aspects. In
monetary, it has to pay a
In order to overcome such
situation, it is the
responsibility of the
management to be more
carefully to even a very
thing as it may cause a
future problem which
may have a direct impact
over the business.

fine and on non-
monetary part it has face
the lashes and lack of
trust from its investors,
employee and other
stakeholders. In this,
effectiveness principle of
code is violated which
states that every board
member should discharge
their responsibility and
duties effectively.
– Not complying with the
corporate requirements
Not complying with the
statutory requirements
and regulations lead to
the very serious
consequences. Tesco
needs to provide proper
explanation for the not
complying with the
business. This may lead
to negative public image,
lack of funding from
investors, government
intervention as well if
situation goes out of
control. In this
accountability principle
of code is violated where
it is the responsibility of
the business to comply
with the corporate
requirements.
Tesco should create the
team of highly efficient
legal advisors who can
provide proper guidance
to the company in respect
of rules and regulations to
be followed. It will also
continuously monitor the
changing regulations and
whether company is
following the same or
not.
– Irresponsible board The board members of The company should set

members the company should
responsible enough to
carry out their roles
effectively. Otherwise, it
will result into facing
negative consequences
that may not be fruitful
for the business. It
includes discrepancy in
the functioning of
business operation. This
breaches the leadership
principle of code which
requires that every
company should be
headed by an effective
board.
out proper standards and
rules to be followed by
each and every member
of the board and timely
evaluation of the same
should be carried out to
maintain transparency.
3. Weaknesses of Tesco’s internal control system and its implication
Weakness in TESCO
Company’s internal
Control systems
Violation of COSO
Component
Implications of
weakness on TESCO
continuity
Ineffective management This weakness has violated
the control environment
component of COSO
(King, 2016).
If Tesco continues to
violate this component
then it will affect the
integrity and ethical
values of the company.
It will also influence the
organizational structure,
authority and
responsibility. Apart
from this, Tesco may

not be able to achieve
its commitments which
will affect its
competency, also it
adversely affects the its
audit committee and
ineffective utilization of
human resources
policies and procedures
Lack of risk
management
It has violated risk
assessment component
(Five Components of the
COSO Framework You
Need to Know. 2020).
Tesco will not be able
to identify the potential
risk that may have a
negative influence over
the business. Also, it
may find it difficult to
effectively manage the
risk affecting its
operation.
Lack of security and
compliance
It has violated control
activities as a component
of COSO framework.
Ineffective security and
compliance system will
lead to the threat of
breach of important
data, affects the
activities that are
outsourced by the
business and may not
present the true and fair
view of the business.
Ineffective
communication system
Information and
communication component
are violated (Rae, Sands
and Subramaniam, 2017).
Violation of this
component will lead to
tampering of critical
business-related
information. Also, the
communication channel

of the company will
also be affected
resulting into lack of
credibility and
reliability of the
information.
Irregular monitoring This has violated
monitoring activities
components.
If Tesco continues to
have irregular
monitoring system then
it will lead to various
types of issues such as
deficiency in achieving
the targets, inability to
identify the factors that
may affect the business
and its operation. It will
result into increase in
losses and increase in
expenses.
Critical reflection
Based on the complete evaluation of the case study, I can state that I have learned a
lot from it. The weaker corporate governance of the Tesco and the overstatement of profit can
result in such a huge fraud which caused penalties to be paid by the company along with
reputation loss. I learned that effective revenue recognition should be used, materiality has
the key role to play in this situation with respect to proper disclosure. Also, timely review of
the reports is very essential and PwC has been auditing the account of Tesco for more than 30
years, which may result in lack of little professionalism and at last the proper management of
the key employee and implementation of corporate governance should be done carefully for
successfully running the business. This has helped me in developing my interpersonal skills
as talked about it this case of many people for taking their views on the same which has
sharpened my skills. Initially it was little difficult to understand the case but after researching

more about it I got the idea what it is all about which has helped me in answering the above
case study-based questions more efficiently.

REFERENCES
Books and Journals
King, A. M., 2016. A guide to COSO's framework: an important, practical resource to help
your transition to the updated COSO internal control framework. Strategic
Finance. 97(10). pp.12-13.
Rae, K., Sands, J. and Subramaniam, N., 2017. Associations among the five components
within COSO internal control-integrated framework as the underpinning of quality
corporate governance. Australasian Accounting, Business and Finance Journal. 11(1).
pp.28-54.
Online
Five Components of the COSO Framework You Need to Know. 2020. [Online]. Available
Through:< https://info.knowledgeleader.com/bid/161685/what-are-the-five-
components-of-the-coso-framework >.
WINDOW DRESSING. 2014. [Online]. Available Through:<
https://www.cpaireland.ie/CPAIreland/media/Education-Training/Study%20Support
%20Resources/P1%20Auditing/Relevant%20Articles/windowdressing.pdf >.