Tesco and PwC: Auditor Independence, Brand Image and Financial Fraud

This report investigates the long-term relationship between Tesco and Pricewaterhousecoopers (PwC) and its impact on auditor independence and brand image. The analysis focuses on the financial fraud that occurred in 2014, examining how the extended association between Tesco and PwC may have compromised the auditor's objectivity. The report explores the reasons behind auditor independence deficiencies, potential threats to independence such as self-interest, familiarity, and social bonding, and how corporate governance codes could be amended to mitigate these risks. The research utilizes primary and secondary sources to assess the negative effects on Tesco's brand image and profitability, concluding that the prolonged relationship between the two firms potentially contributed to the scandal. The report also covers the literature review, research methodology, data analysis, and a questionnaire, all of which contribute to understanding the implications of compromised auditor independence in the context of corporate governance and financial reporting.

Long-term relationship between
Tesco and Pricewaterhousecoopers
impair auditors independence

ABSTRACT
Employees are the faced of organization as they have direct interaction with customers.
They are the one who deliver the products and services to customers. It is important o make sure
that firm understand their customers and deliver them services accordingly. Further management
of the firm need to develop strong relationship with customers wand employees and their
business operations should be performed in an effective manner so that organization may not
face losses. The present report is about Tesco which faced serious issues due to fraud that
occurred in the year 2014. The research is conducted to understand the relationship between
Tesco and Pricewaterhousecoopers impair auditors independence on reducing brand image. For
this purpose, primary and secondary sources were used to gather information. As per the result it
is identified that brand image negatively affected and the profitability also reduced due to the
fraud done buy Tesco.

Table of Contents
ABSTRACT.....................................................................................................................................2
INTRODUCTION...........................................................................................................................1
LITERATURE REVIEW................................................................................................................2
RESEARCH METHODOLOGY.....................................................................................................5
QUESTIONNAIRE.....................................................................................................................7
DATA ANALYSIS..........................................................................................................................8
Conclusion.....................................................................................................................................19
REFERENCES..............................................................................................................................21

INTRODUCTION
Ultimate aim of aim firm to gain maximum profit. This is only possible when they are
able to understand their customers and deliver them services and products that satisfy them. With
this respect, it is important for the firm to develop strong relationship with their customers
(Dooley, 2015). With time there are many changes that has taken place and there are customers
have wide range of firms that deliver their customers with similar products and services. In this
context, organizations make sure that they follow all the effective strategies that will enable to
develop positive perceptive within the mind of customers. When the perception of customers get
negative, then the type of services and the products that are delivered by the firm is not able to
achieve the desired goals and objectives. Customers get loyal to the services and products of firm
when they develop a trust that the company is following all type of requirements that are being
set up by government. Loyalty and brand image is developed as per the type of relationship that
they have with their customers. When all the needs and requirements are satisfied, then it
becomes helpful to make sure that management of the firm has strong relationship with their
customers (Berg and Moré, 2016). This way the rate of sales and profitability increases and
organization get to achieve their desired goal;s. Present report is on Tesco which is well known
firm which is a retail firm and aim at delivering their customers with high quality services.
However, there are different set of scandals that ahas raised within the firm and it has negatively
affected the business performance and it profitability. There are different type of considerations
made and to overcome this negative impact, there were various type of steps taken in which
many of the employees were fired because of the act that was done by them. In order to conduct
the research in an effective manner, there are aim, objectives and research questions that are
developed. Below given are the aim, objectives and research questions for the current
investigation:
Aim: “To investigate on the long term relationship between Tesco and Pricewaterhousecoopers
compromise auditors independence on reducing brand image”
Objectives:
 What are the reasons behind the deficiency of auditor independence
 What are the threats relating to the independence and how they can be reduced? In order
to achieve this aim my objective is to study the corporate governance codes to understand
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the rules on how long can an auditor stay with one company and comment on if it needs
to be amended for the benefit of auditor independence.
 Is the time spent with the firm actually effect auditor independence or is it just public
perception
LITERATURE REVIEW
This is an important part that will cover all the important aspect that enable to understand
different causes that are negatively affected the business and that is for Tesco. With this respect,
below given are the different aspects that will be covered and they are as follows:
It is important for the firm to make their external audit at the end of every financial year.
As per the case Tesco was founded in the year 1919 and it is headquartered in London. Every
year, it is important to conduct auditing so that the part of tax can be provided to the government
(Christopher, 2016). With this respect, it is identified that since 1983 auditing for Tesco is done
by Pricewaterhousecoopers. This is a type of firm that delivers multinational professional
services network that is headquartered in London. Further, it is the second largest professional
services around the world. Further, cited firm focuses on assurance, audit, consulting and tax
services. As per the type of services that are being delivered by Pricewaterhousecoopers, it
shows that there is a strong relationship that exist between Tesco and Pricewaterhousecoopers
(Thomson, Laurent and Lloyd, 2015). There are certain set of relationship in which both the firm
has to consider and in business personal relationship should not be considered.
As per the scandal that occurred in the year 2014 at Tesco, they have dumped their
relationship with their auditors for £263m. Further, the scandal occurred since three years and
there are different reasons that has been identified due to which Tesco conducted this type of
activity (Jones, Comfort and Hillier, 2016). One of the main reason is to increase the number of
shareholders. Shareholders tent to make investment or they make purchases for those shares in
which they will get high return. In this context, to increase the number of shareholders, Tesco
performed this type of activity. According to the chief executive of Tesco, Dave Lewis, it was
discovered that the profit of 6 months for the end of August, it is overstated by £250m (Jones,
Bown and Comfort, 2015). In this context, the main reason behind that was identified was due to
accelerated recognition of delayed accrual of cost and due to commercial income (Prange, 2016).
Further, this can be described in other words that cited firm was paying their suppliers later and
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they were taking monies at first place. With this respect, the amount of £250m is a rough
estimate for quarter of profits. This type of practice is widely spread around UK business. As per
the data it shows that most of the organizations in UK or other parts of the world does exploit
their suppliers but Tesco has taken it to extremes. Further, Tesco that boosted their profit by
£200m by deducting the cash from suppliers.
As per the policies and regulations that are made by government, this act is a type of
breach on the Groceries Supply Code of Practice (Jones, 2015). Further, an external audit is
selected on the basis of contract that is made by the firm with the auditing firm. Further, as per
the corporate governance code, it is important every year to renew the contract. Further, during
the time of annual report meeting, the stakeholders have the right to make select new auditor as
per the preference of stakeholders. However, in Tesco won the basis of relationship that was
developed with Pricewaterhousecoopers there was no renewal of contract that took place. There
are different type of benefits that firms get with the help of internal auditing. With this respect,
management of the firm is able to convince internal auditor to make necessary changes in the
financial statement with the help of which they can raise their profitability. As per the
constitution of UK, an external auditor is required by law. More specifically, as per the European
Union, it is important that annual accounts to be audited by one or more persons (Jones, Comfort
and Hillier, 2017). For this purpose, firm has to spend highly over the work that is performed by
these external auditors. When the auditing that is done by internal auditor is not checked, then it
enables to take up the opportunity to mislead the in order to generate private gains (Gandhi,
Gandhi and Sheorey, 2017). In this context, managers get the benefit to show false impression
for the financial position with an aim to get rewards and higher bonuses for themselves. On the
other hand, there are different type of threats that also affects the firm in negative manner. In this
context, below given are the threats to external auditor independence:
Appointment and termination processes: Main benefit is to shareholders through external
auditor as they are able to identify the dismissal processes. It is important for the management to
suggest external auditor and they are not even offered a choice to shareholders. Further, the type
of periodic rotation is not required by law (Eide, Hargreaves and Cunningham, 2016). Further, it
can be stated that appointment and nomination mechanism to bring up directly before
stakeholders. In addition to this, there are no channels between shareholders and auditors. As per
the case, external auditor of Tesco have to right to identify the issues that are faced within the
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firm in relation with financial management. External auditor is for the benefit for the stakeholder
involved. All the external auditors are employed for the benefit for the stakeholder of any firm.
During the time of annual general meeting all the terms and conditions that are involved in the
selection of auditor is considered. In this context, as per the case, after the scandal that happened
in Tesco the stakeholder commented that “how they work for us and not the company. It’s easy
for them to get close and fall asleep”. From this it shows that stakeholder are not in favour of the
relationship that Tesco and pricewaterhousecooper had for 32 years.
Self interest: In order to impair objective, interest of the auditor play vital role. For
example, when an auditor is also a shareholder, then to get higher returns, he/she will tent to
raise the profitability (Hassan, Rahman and Sade, 2015). This way the rate of shares that he/she
holds will get higher rate of return. With this resect, the threat of self interest affects the auditor
to conduct scandals. In accordance with the scandal the external auditors had shares of Tesco and
as per the responsibility of the auditor, it is important to make sure that there is proper recording
made even if the performance of firm is poor. This act was not performed in Tesco due to which
the 263m was shown profit. In addition to this, there is another threat that occurs when auditor
carries out non audit work for the client. This is a type of condition that occurred in Tesco as the
auditor holds on non audit work for Tesco. This way of activity was performed by auditor of
pricewaterhousecooper in order gain huge profit. More specifically, Tesco paid about of £10.4
million for audit fee and a further £3.6 million for non-audit related work.
Complacency and familiarity: The familiarity, it can blunt the skepticism which is
expected from an auditor. There was about 32 years of relationship with pricewaterhousecooper
and they have proper information about the different type of operations and the financial
condition that was undertaken in Tesco. Due to the familiarity that the firm has enabled them to
show the false profitability of the firm. And with time the type of work that have been negatively
affected. This type of issue arises due to the rate of overconfidence that auditor has over the firm
he/she is auditing (Sadler and Evans, 2016). Further, because of the repetitive nature, auditor
does not expect any type of changes that happen in the books and this type of condition leads to
complacency.
Social bonding: Within Tesco, there are different type of department that work together
within an aim to achieve the goals and objectives of the firm. In this context, when the firm has
external audit takes place by a particular company and in case of Tesco, they had 32 years of
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long relationship with pricewaterhousecooper. In such condition, all the member from both side
had strong bond. Further, as per the corporate relationship, it is not effective to have friendship
(Bingham, 2016). Further, in the situations when the client for auditing is selected form the side
of their own friend circle will not lead to have the effectiveness to reach out the objectives. With
this respect, there is a self-serving bias that is grounded in the theory of psychology and this
happens when there is close relationship. As per the case, with the long term relationship of 32
years had developed close relation due to which the book were maintained as per the preference
of the managers in order to show the profit high.
Economic bound: Income or the livelihood is generated form the non audit and audit
services. In this context, auditors have an inherent incentive in order to keep the client. In case
auditors do not perform their part of role as per the preference of client, then this will have
negative impact over the income. Thus, economic bond can be determined as the greatest threat
for independence to auditors (Rundgren, 2015). With this respect, in auditors of Tesco were able
to earn highly for the audit that they were performing or towards the services that were provided
by them to clients. Further, fee that auditors get from non audit is termed to be lucrative source
of income. To get the income, auditors compromise as per the requirements of client and this was
what happened in Tesco.
In order to reduce the rate of threats, there are different type of consideration that can be
made. In this context, below given are the thwart the threats to auditor independence:
Limiting non-audit services: After the law passed that was SOX 2002, all the fees that
were taken auditors were opposed and stated to be the most serious threats to independence.
Further, it is also important to consider the internal control system and the procedures that are
followed for the organizations (Jones, Comfort and Hillier, 2017). With the decrease in non audit
fee has raised the audit fees. This can be determined as the fee that is paid for the audit that is
conducted for internal system control.
Modifying the selection process: Management of the client firm are the one who select
auditors. When this power is provided to shareholders, then it is possible them to direct nominate
and appoint. This can be determined as an effective way with the help of which auditor
independence is possible.
Different people have diver set of perception, when time is spent by the auditors, then it
does affects independence and public perception (Shelman, McLoughlin and Pagell, 2016).
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They develop strong relationship with the auditor and management will also provide with extra
pay for the type of services that are delivered by them.
There are different type of issues that are faced by Tesco due to that scandal that
happened in the year 2014. In this context, below given are the consequence that were faced by
Tesco:
Fall in profit: All the people who had bought their shares started selling them as the rate
of profit that were shown were very high which was actually not. In this context, the due to
selling up of shares the rate of profit came down by 92 pc (Jones, Bown and Comfort, 2014).
Customers loyalty: When customers think of an organization, then they develop a type of
image as per the type of services that are delivered by them. In this context, the due to the
scandal, people developed negative image over the business and the rate of customers loyalty
reduced.
Reduction in demand: There are many companies that deliver their customers with
similar products and services (Lukic, 2013). When the scandal occurred, then the rate of demand
decreased and majority of people shifted to other companies that deliver similar products and
services.
RESEARCH METHODOLOGY
This is an important part of research that enables to present the research in an effective
manner. With this respect, below given are the steps that are involved in research methodology:
Research philosophy: It is an effective way through which different ways identified with
the help of which data is analysed, evaluated and examined (Gast and Ledford, 2014). These are
of two type, which are interpretivism and positivism. Among these two, investigator has made
use of interpretivism has been selected that helps researcher to attain desired aims and objectives.
Research approach: It enables to conduct the research from general to specific or specific
to general. These are of two type which are inductive ad deductive. Among these two research
has used inductive research approach as it helps in developing a theory based upon the results of
data analysis (Tarone, Gass and Cohen, 2013).
Research design: This can be determined as the blue print for the research. There are of
three type which are descriptive, exploratory and experimental research design (Marais and
Pienaar-Marais, 2016). Among these, investigator has made use of descriptive research design as
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it helps in collecting crucial factual information and thus aids in describing the present
phenomenon.
Data collection: This is an important aspect that enables to collect the information that
will help to conduct the research in an effective manner. With this respect, there are two different
type of methods that can be implemented (Billig and Waterman, 2014). Research will make use
of secondary information in order to come up with an appropriate outcome. More specifically,
secondary data can be determined as the information that is already being collected by someone
else. All the information will be taken up by investigator as reference. For this purpose, tool like
books, journals, articles, online website, etc. will be considered to gather information.
Data analysis: When information is collected firm different sources, it is important to
present in an effective manner. For this purpose, it is essential to make sure that proper methods
are used so that the appropriate outcome can be determined. Further, it can also be determined as
the process of interpretation that is helpful to collect appropriate outcome for the current research
(Gast and Ledford, 2014). As per the findings, it determined that quantitative research strategy is
being used. Among these aspects, themes is used by the research so that each and every aspect of
research objective can be achieved.
Ethical consideration: This can be determined as an important aspect that enables the
scholar to identify what is wrong and what is right. In order to conduct the research efficiently, it
is important to make sure that ethics are being followed. With this respect, all the respondent
should be provided with proper with reason for collecting the research before questionnaire is
being provided to them. Further, proper permission needs to be taken for accessing the literatures
as they are not directly accessible (Tarone, Gass and Cohen, 2013). Further, all the personal
information should not be disclosed to anyone. Further, investigator should be have proper
system in which the personal information can be stored.
DATA ANALYSIS
Theme 1: Scandals does affects the customer's perception towards the firm
Interpretation: According to PHILLIPS and CLEWS, (2013) ultimate aim of any firm is
to gain maximum profit, this is only possible when firm follow all the needs and requirement of
customers and the policies that are given by the firm. If these are not followed, then it has
negative impact over the firm and towards the perception of people. Further, it can be interpreted
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that scandals affects the customer's perception towards the firm. As per the research conducted
by Bingham, (2016) majority of respondent agreed that scandal of accounting done by Tesco
affects the customer perception toward the firm due to which they develop negative perception
towards the services and products that are delivered by them. Moreover, it impacts brand image
in market of the organizations. Further trust of customer also impacted due to this scandal and its
many customer switch to other brand products.
Theme 2: Auditing is important for the Tesco company
Interpretation; As per Rundgren, (2015) auditing enables to analyse the performance of
the firm when compared with its competitors. Hence, it shows that conducting auditing help
organization in maintaining its financial records. Further it assists organization in making proper
decision of carrying out different organizational operations. Through the auditing it makes sure
that financial statement of an organization is accurate or not, Further it helps Tesco in for
ensuring the compliance with tax laws. The fraud that was performed has affected the financial
position of the firm and management of the firm should have followed the right policies in which
they need to renew the contract that is made with the external auditor. Further, auditing also
helps to develop strategies for the future and also enables to know the areas in which
improvement is required (Kurien, Sleet, Sanders and Cave, 2017). By implementing a strategy
the sales for a month increases when compared with last month, then improvement can be made
and this is possible with the help of auditing.
Theme 3: Fraud or manipulation in data affects the brand image
Interpretation: As per Bodhani, (2013) brand can be determined as the perception that
people develop in their mind when they see or listen about a company. This is developed with
the increase in information about the firm that individual has. However, the type of information
that one get to know about the organization is negative, then it affects the brand in negative
manner. If company came under some fraud or manipulation cases, then it impacts organization
image as well as impact its sale and profit. Further, trust of different shareholder also breach due
to fraud. Many shareholders avoid investing in their organization for making profit. Company
loss its image because people not life to buy products and services from those companies who
caught under frauds cases. To develop brand image, firm need to make sure that they do not
conduct any type of illegal activity.
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Theme 4: Auditing affects the working condition of Tesco company
Interpretation: As per the scandal of Tesco, cited firm had strong relationship with
external audit and because of this the representation of profit was shown too high. Due to wrong
interpretation was done in order to develop positive perception among the mind of people so that
they will invest more on the share. The data shown presents that people should invest in the
shares as the profit is high and so that returns that they will get will also be high ( Morschett and
Wepfer, 2014). Therefore, it shows that at the time when external audit conducted it impacts
working condition of Tesco company. It is so because auditing is time consuming process. All
type of financial statement which is made by an organization deeply checked all its statement
which consume lots of time. When the auditing is done properly, then it has positive impact over
the firm as they get to determined the areas in which improvement needs to be made.
Theme 5: The main reason behind Tesco to get involved in fraud activity is Developing
positive perception among customers.
Interpretation: As per Prenzler, Beckley and Bronitt, (2013) developing positive
perception among customers is one of the main reason which encourage Tesco to get involved in
fraud activity. Hence, it shows that Tesco company enter into fraud activity for developing
positive perception among the customer. It has been analysed that if company create good image
in front of market, then it can easily increase sale and profit of business because customer mainly
prefer to buy product and services of those companies whose image is good in market. There are
different set of reasons that can be determined in which it includes developing positive
perception, raising shareholder, and attaining competitive advantages. Among all these the main
reason for Tesco was related with develop positive perception within the mind of customers.
However, it had negative impact that was faced by Tesco and thus their rate of sales also
reduced.
Theme 6: Self interest is the major threats for auditing independence
Interpretation: Interest of the auditor play vital role and in the Tesco scandal, there was
threat of self interest for the auditor's independence. In this context, there were shares that were
held by external auditors and to get huge profit they make the changes in the profit of Tesco. In
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