Christopher Bush, Tesco UK's former managing director, Carl Rogberg, the company's former UK finance director, and John Scouler, its former UK food commercial director, have been accused of abusing their positions to falsely inflate the grocer's profits in 2014.
The three men have been charged by the Serious Fraud Office (SFO) with one count of fraud by false accounting and one count of fraud by abuse of position, which can lead to prison sentences of up to seven and 10 years, respectively.[1]
The three former Tesco executives were "generals" who manipulated accounts, bullied and coerced subordinates to falsify figures and lied to auditors in an effort to massage the profits of the struggling supermarket.[2]
The men are alleged to have inflated Tesco's 2014 interim profit forecast by "pulling forward" or improperly recognising income from suppliers.
They are also accused of falsifying accounting records and concealing information from auditors between February and September 2014.
This is the Tesco scandal in 2014.
However, when the Enron scandal came to light there was a great expectation that this type of scandals would not be repeated, and Sarbanes-Oxley, or SOX, came to life in 2002. Enron was one of the biggest and, it was thought, one of the most financially sound companies in the U.S.
In 2003 Parmalat, "Europe's Enron", a dairy company that is a household name in Italy and was one of the country's few international businesses, discovered that it had a €14bn ($20bn) black hole in its books. It collapsed virtually overnight.
Mr Tanzi and some of his fellow executives had enmeshed Parmalat in a bewildering array of borrowings, false accounting, and misleading reports to investors and regulators. These were created to hide accumulating losses that were the result of a series of expensive acquisitions.
The common element of these cases is false accounting, confirming once more how alive the myth of the amoral business is. What this myth claims is simply that business is concerned with a highly pragmatic search for profits and individual careers, and that moral concern is and should be left out of the reflection around practical business problems. If fraud and corruption exist in business, that is no cause for alarm or action.
Tesco's case is not different and that it is illustrated by the former Tesco executives' actions and behaviour. They not only had "massaged" Tesco's profits to make them appear better than they were but also had "pressured others to conduct themselves in such a way that the stock market was ultimately misled."
Ms Sasha Wass, QC, said that Tesco had set aggressive and unrealistic profit targets despite falling sales, resulting in an environment where "unorthodox" practices took place. The motivation of the three men was not clear, but she said that they may have wanted to keep their jobs and lucrative compensation packages, which were worth more than £1m a year.
The myth of the amoral business does not explicitly say that business is immoral, rather that business leaders sometimes act without concern for moral aspects, thus creating scandals along the way.
On the other hand, silent and cynical bystanders remain passive because they believe that corrupt behaviour is the norm among managers and, accordingly, nothing to be too upset about.
In the Tesco's case there were no bystanders, some employees left because they could not bear the idea of what was happening and were not prepared to be part of it, and two employees took action. It came after a document, called the "legacy paper", was "prepared secretly" by two employees in Tesco's commercial finance department.
An important lesson to be learnt is how important is to be aware and stay alert of actions and red flags of fraud and corruption.
And I will leave it with a question to reflect on: should the quality and standard of audit be raised in order to be able to detect this level of irregularities which could lead to fraud?
[1] http://www.telegraph.co.uk/business/2017/09/03/former-tesco-directors-face-trial-accounting-scandal
[2] https://www.thetimes.co.uk/past-six-days/2017-09-30/business/tesco-chiefs-bullied-staff-to-massage-the-figures
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FAQs
Tesco suspended eight directors and the Serious Fraud Office (SFO) charged three former executives – Carl Rogberg, Chris Bush and John Scouler – with fraud after the black hole was discovered. To compound matters, the scandal contributed to Tesco's £6.4 billion loss in 2015, one of the largest in corporate history.
What were the main factors which led to the Tesco accounting scandal? ›
The company stated that the discrepancy came from booking income from suppliers too quickly. Several other executives were asked to step aside, and the Serious Fraud Office (SFO) in Britain soon launched a criminal investigation into accounting irregularities.
Why is Tesco under investigation for unethical accounting practices? ›
The £263 million profit overstatement that created the eye of Tesco's current financial storm surrounded these supplier payments, and sparked an investigation from the Financial Conduct Authority that has since escalated to a matter for the Serious Fraud Office.
What is the fine for Tesco accounting scandal? ›
“Tesco Stores Limited dishonestly created a false account of its financial position by overstating its profits. “The DPA clearly outlines the extent of this criminal conduct for which the company has accepted full responsibility.” Under the DPA, Tesco agreed to pay a £129m fine and £3m investigation costs.
How was the Tesco scandal discovered? ›
This case describes the accounting fraud at Tesco Stores Limited (TSL), which was discovered by a senior accountant in TSL's finance department. The accountant was concerned about TSL's handling of commercial income, which, according to the accountant, overstated Tesco's profit by an estimated £246 million.
Why Tesco failed in the US? ›
At its peak, the company operated 208 stores in the market; however, due to its small store formats, skewed customer research, poor store locations, and food packaging concerns, the company was forced to exit the market in 2013 when it sold its remaining stores.
What is the biggest accounting scandal in the world? ›
1. Lehman Brothers. Enron might be the best-known accounting scandals of all time, but the collapse of Lehman Brothers dwarfs the losses at Enron. It remains the largest bankruptcy in history, an unmitigated disaster.
What country did Tesco fail in? ›
Politics played a part in Tesco's failure in China, too. Government campaigns, such as the “Made in China” drive to encourage consumers to use local businesses at the expense of foreign firms, made marketing more difficult.
What was the Tesco 2013 scandal? ›
Tesco – whose own brand burgers were found to contain 29% horsemeat – promised to tighten up their supply chain, source British meat and be more transparent about the supply of their products. Using British meat and local suppliers where possible is part of the manifesto for many UK supermarkets.
Why did Tesco overstate their profits? ›
In the second, on Sept. 22, Tesco said it had found a 250 million pound overstatement of its expected profit, mainly due to booking commercial deals with suppliers too early. In the following days and weeks, Tesco suspended eight senior members of staff, including Bush and Scouler.
Tesco, one of the UK's biggest supermarket brands and meets the ethical benchmark within The Good Shopping Guide's Ethical Supermarkets sector. As a result, it has a high score on The Good Shopping Guide's Supermarkets Ethical Ratings Table and is eligible for Ethical Accreditation.
Why large corporations such as Tesco decide to manipulate their financial statements? ›
A very common motivation for manipulating financial statements is to meet sales/revenue goals that trigger a big bonus for upper-level management. The structure of such incentive bonuses has often been criticized as being, in effect, an incentive for an executive to “cheat.”
What did PwC do in the Tesco scandal? ›
PwC was Tesco's auditor when the supermarket overstated profits in August 2014 - by a margin that was eventually put at £326m. The FRC launched an inquiry later that year into the preparation, approval and audit of Tesco's accounts over the previous four years, including the role of external auditor PwC.
What law did Tesco break? ›
It said that Tesco's decision not to display unit pricing on its Clubcard offers could be a "misleading practice" under the Consumer Protection From Unfair Trading Regulations 2008 (CPRs). A statement added: "Under the CPRs, retailers must also avoid 'unfair commercial practices'.
What happened in the 2014 Tesco accounting scandal? ›
Tesco had incorrectly booked supplier income by £250 million, although the error reportedly grew to £326 million. As a result, shareholders had been seeking compensation for the share price fall, claiming that their losses resulted from Tesco's inaccurate reporting.
What is the reason of accounting scandals? ›
These scandals often involve the manipulation of financial statements, concealing liabilities, inflating revenues, or misrepresenting the financial health of a business. Such misconduct can have severe consequences, including misleading investors, creditors, and regulatory authorities.
What economic factors have affected Tesco? ›
Factors such as inflation, unemployment rates, consumer confidence, and exchange rates can all play a role in shaping Tesco's profitability. A robust economy often translates into more disposable income, which can lead to increased spending at Tesco stores.
What is the Tesco slavery scandal? ›
Tesco and social audit firm Intertek are facing a lawsuit brought by 130 Burmese workers who made F&F jeans for Tesco in Thailand [1]. VK Garment workers say they were trapped in forced labour conditions, working 99-hour weeks for illegally low pay, while auditors failed to report abuses workers flagged.
When did the Tesco accounting scandal happen? ›
Christopher Bush, Tesco UK's former managing director, Carl Rogberg, the company's former UK finance director, and John Scouler, its former UK food commercial director, have been accused of abusing their positions to falsely inflate the grocer's profits in 2014.
