Introduction
Tesco dishonored its fiduciary obligations to the creditors and shareholders after giving false financial information. Ideally, the company overstated its profit by £250 million after manipulating the deals it had struck with a number of its suppliers. The accounting fraud resulted in the deterioration of the company’s reputation and a drop in its share price. As a result of this fraud, Tesco’s Chairman, Mr. Richard Broadbent resigned. In addition, eight senior executives were suspended. The company invited an external auditor, the UK Financial Conduct Authority to initiate an official investigation into the fraud. Apart from the external auditor, Tesco conducted its internal review with Freshfields and Deloitte. Deloitte was able to establish that the estimate that Tesco gave to the city bank on August on the first half profit was exaggerated by £263 million, with £118 million resulting from the first six months of that financial year, and the rest £145m accruing from the previous year (Butler par. 5). What’s more, Deloitte concluded that the supplier payments had been deferred or pulled forward in a manner that was contrary to the company’s accounting practices.
The Serious Fraud Office later launched an official investigation into this fraud. Tesco admitted that the profit overestimation was due to the delayed accrual of costs and early recognition of commercial income in the United Kingdom food business (Tesco Par. 5). As of the first half year, Tesco managers did not have the exact sales figures. As a result, the figure was subjected to estimation, creating an opportunity for them to exaggerate the values and make them look more pleasing to the shareholders and creditors. PwC having been the external auditor for Tesco for over 30 years is seen to have contributed substantially to this fraud. PwC contributed to the fraud by the fact that it had altered Tesco manipulation of risks in the commercial income accounts. PwC failed in its responsibility of monitoring Tesco financial health, and this contributed largely to the fraud. Even though PwC was able to point out the financial risks in Tesco, It is seen to have put the insufficient effort in terms of the protection of the shareholders’ rights.
The fraud that occurred in Tesco could have been avoided if the government had tightened control measures on recognition of retailers in commercial income. The government could have, for instance, established the guidelines on how the commercial revenues ought to have been recorded. On the other hand, the retailers could have outlined the basis that they followed when it came to the estimations of the commercial income in the financial statements. If PwC was keen when it was doing its external auditing, the fraud in Tesco could have been avoided. As a result, PwC could have protected Tesco's shareholders and creditors. The accounting firms that conduct external auditing to large corporations should ensure they are more responsible when it comes to monitoring of the financial health their organizations to succeed in prevent cases of fraud.
The External auditing company should always be in the forefront in pointing out the wrongdoing relating to the financial position of a corporation. The auditors should challenge the decision that business management adopt toward the financial irregularity. It is not easy to achieve this when the external auditor is an employee of the company. Pointing out inconsistencies, as well as, challenging management on decision toward the irregularity may affect the employment relationship.
Works Cited
Butler, Sarah. "Criminal investigation launched into Tesco’s accounting." The Guardian 29 Oct. 2014:n.pag.Web.26 Apr. 2015. <http://www.theguardian.com/business/2014/oct/29/serious-fraud-office-investigate-tesco>.
"Tesco PLC - Media - News Releases - Interim Results 2014/15 (23 October, 2014)."Tesco Plc. Web.26 Apr. 2015. <http://www.tescoplc.com/index.asp?pageid=17&newsid=1074>.
