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11 December 2014

Initial reports of a £250M hole in Tesco’s finances have now been revised to £263M. The Serious Fraud Office (SFO) is now investigating the company’s activities and evidence of fraud is high on its shopping list. What does this mean for senior staff, the auditors and the accountants?

It isn’t shaping up to be the Christmas that Tesco had planned.

Last month, we commented on how the supermarket giant had announced a £250M black hole in its accounts and that five senior executives had been ordered out while accountants Deloitte and law firm Freshfields investigated just what had happened. We raised the question of whether slick business practice had crossed the line into illegality and wondered what would happen next. Now we know.

The SFO has now announced that it is carrying out a criminal investigation into accounting irregularities at the supermarket giant. Tesco, for its part, has announced that it is co-operating fully with the SFO and that the £250M black hole is now officially a £263M one. This figure is now accepted as the amount by which the true profitability of the business was inflated by Tesco bringing forward rebates from suppliers.

Tesco Logo

On the bright side for Tesco, the Financial Conduct Authority (FCA) has now ended its investigation into the affair. On a less bright note, the FCA has handed over all its evidence to SFO investigators. So Tesco is no longer being investigated by the City regulator, it is now being scrutinised by the agency that examines the most serious financial crime.

So what will this mean for Tesco? There is no doubt that the SFO will be looking very closely at the company’s accounting practices. It is these practices that are being blamed for the £263M discrepancy (if that is not understating it) caused by Tesco appearing to log prematurely income from suppliers. Senior Tesco figures will not be massively surprised by the SFO taking over from the FCA. The two organisations work together closely and it was always possible that the investigation could take on a criminal rather than corporate slant. What may be concerning Tesco top brass is exactly what may be uncovered and how long the investigation will take. The SFO is having to make headway with Tesco’s new management personnel and examine what the company’s internal investigation has achieved so far.

Supermarket Checkout

One obvious starting point for the SFO is the supermarket giant’s accountants. But it appears logical that they will want to question the auditors to see how they can explain Deloitte’s findings that profits were overstated by £118M in the first half of this financial year, by £70M in 2013-14 and by £75M prior to that. Being the “money men’’, the accountants are best placed to explain what has happened. They may well have been involved knowingly or unknowingly – willingly or unwillingly – in what has been orchestrated at Tesco, according to many of those with an opinion on the matter. What needs to be established beyond doubt is who was giving the orders, who was involved in carrying them out and who else knew what was being done.

The issue is clearly one of accounting. But, as Business Secretary Vince Cable’s actions have indicated, Tesco’ activities may encompass more than accounting irregularities. He has written to the Groceries Code Adjudicator (GCA), to express his concern about Tesco’s relationships with suppliers and ask to what extent these affected the huge misreporting of profits that has brought such trouble upon the supermarket giant. Given that Mr Cable has expressed concern over Tesco’s negotiating tactics with its suppliers and that it is payments from suppliers that are being blamed for the over-reporting of profits, the £263M black hole may be one that sucks in far more than accountants, auditors and supply managers. The issue of incorrect profits reporting affects the financial markets, making what has happened a very obvious example of market manipulation.

At Rahman Ravelli, we work diligently to help companies, organisations and individuals devise, manage and review systems that can not only minimise the scope for wrongdoing – they can help facilitate the flagging up of suspicions. We know from experience that it is rare for there to be no potential for illegal behaviour if the firm has not taken a planned, methodical approach to help design out any such wrongdoing. Any organisation that wants to prevent illegality among its staff – either against the firm, its clients or rivals or even fellow staff members – can very rarely do it on its own. Legal expertise can help such a body create and introduce appropriate compliance measures, devise a whistleblowing policy and examine all other possible ways of preventing illegal activity.

The full extent of Tesco’s problem will take a long time to determine and even longer to bring to book those responsible. At this precise moment, we understand what has happened and when it happened. The SFO has still to determine the important questions of who, how and exactly why. It would be hugely surprising if the SFO did not find out those answers. Tesco is often seen as a special case because of its size and the fact that it plays a part in so many people’s weekly or even daily routine. Its special status has been reflected in the acres of news coverage given to its current problems. But while it may have a standing that few other companies can only dream about, it faces the same compliance obligations as the smallest street corner retail operation.

Hoping that everyone who works for you behaves themselves is no recipe for success. Turning a blind eye to, or even encouraging wrongdoing, for whatever reason, almost guarantees trouble in this day and age. Being able to state that you did everything possible to be legally compliant is a strong defence against allegations that business crime has been carried out in your company’s name. And everything possible means just that – not a few minor measures or token gestures for appearance’s sake.

In the past two decades, Tesco has become a bigger and slicker outfit than anyone could ever have imagined. The fact that it has encountered such massive problems should serve as a reminder that nobody becomes too big to need compliance. We live in an era when the investigation and enforcement agencies have also increased their effectiveness and efficiency. Anyone at the top of any organisation of any size would do well to take note.


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