FCA investigate Tesco over accounting black hole

What is the issue faced by Tesco?

Tesco have announced that they may have overstated their profits by £250m due to an “overstatement of its expected profit…..principally due to the accelerated recognition of commercial income and delayed accrual of costs”. They had drafted in Deloitte and Freshfields to undertake a review of the cause of the potential black hole.

In simple terms, Tesco is believed to have accounted for future income too early and delayed accounting for costs, thereby inflating their profits in the short to medium term.
Tesco’s recent troubles

The Serious Fraud Office (“SFO”) had said they were “following developments at Tesco with interest”. But now the Financial Conduct Authority (FCA) has decided to investigate the under fire supermarket chain. This will be unwelcome news for Tesco as they have been through turbulent times recently with 5 profit warnings in 2 years.

US law firm Glancy Binkow & Goldberg is also said to be investigating potential breaches of federal security laws and Tesco’s South Korean business, Homeplus, is being investigated for the sale of customers’ private information.

An investigation by the FCA could compound Tesco’s troubles and bring unwelcome attention to supplier relations and accounting practices in the supermarket industry as a whole.
What lessons should organisations take from this?

Accounting is not an exact science, yet incorrect accounts can have serious civil and criminal ramifications. Investors and shareholders can bring legal claims for losses suffered as a result of misleading accounts. Regulatory and criminal bodies can initiate investigations and impose sanctions. In the most severe cases individuals and organisations can be prosecuted for criminal acts such as fraud.

Even small privately owned organisations are not immune to liability for overstated accounts. Often private companies will need to provide their accounts to third parties and potential stakeholders who will rely on the validity of those accounts, such as:

Banks
Private investors
Shareholders
Suppliers
Distributors

All organisations need to ensure that they take action now to ensure that their accounting practices can stand up to future scrutiny.

If you wish to discuss anything in this article or any specific needs your organisation may have please do not hesitate to contact Makbool Javaid or David Phillips.