Tesco Accounting Scandal, Research Paper Example

Financial accounting scandal at Tesco

Tesco is a famous multinational supermarket chain that is based in the UK whose retail operations are highly diversified in 14 countries across Europe, America as well as Asia. On international scale, Tesco has been ranked the third position in terms of size having registered a total sale of £ 62.5 billion in the year 2009. Tesco has employed 472, 000 workers in their 4811 stores that are spread across the globe. The major business undertaken at Tesco involves sale of grocery items and the United Kingdom is the major market that contributes to over 70 percent of the total sales for Tesco annually. The different formats at Tesco are used to supply over 700, 000 food products, non-food products as well as services (Elliot & Elliot, 78).

Thesis

The financial scandal at Tesco was associated with grave implications to the stock value, the shareholders, the management as well as the general running of the business. The company also anticipated

Tesco engaged in accounting activities that were excessively aggressive in boosting the profits of the company. The beginning of the issue was documented on 22^nd September 2014 when the company made announcements about the issues it faced with regard to their profits. The specifications had some discrepancy in addition to the overstated amounts of profits which was the cause of the much publicized flurry in as far as the markets were concerned leading to the fall in the stock value of the company.

Since the past 95 years that Tesco had been in the business operations, this was considered as the worst crisis that had happened in the company. The accounting records at Tesco were surrounded by a high profile suspicion which was attributed to the uncertainty surrounding the future fate of the stock prices of the company. In addition, main suspicion was also attributed to firing as well as suspension of the top executives in the organization who were linked with the accounting scandal of a magnitude of £250 million. The accounting scandal became the center for investigation Conduct Authority, FCA whose findings were anticipated at the close of the year 2014.

The revelation of the accounting scandal at Tesco marked the beginning of a substantial decline in the share stock of the company, a trend that continued for a period of two weeks. The news broke on 22^nd September where an immediate 3 percent drop was experienced in the shares. On the 29^th day of September, a 5^th of the stoke value in the shares of Tesco was already depleted. Following the trend, the financial experts made predictions of a continued downward trend on the stoke value of the company because this was also associated with a declining sales on the basis of the plummeting stock (Holmes, Sugden & Gee, 79).

Tesco had already documented a fall in their profits by 92 percent, a situation that was worse as per the expectations. The results of the retailers had accounted for the information on the problems as well as the accounting scandal that confronted Tesco. This was not taken lightly by the shareholders who never hesitated to express their fury due to the collapse of proper governance at Tesco. The overstatement of the profits was done after Tesco detected some irregularities in the half year results thus prompting the regulators such as FCA to design an appropriate punishment to Tesco. Tesco had given the investors a warning concerning theie uncertainties regarding the extent of the impact of the financial scandal after the investigations were done. The issue of misleading the investors is commonly taken seriously which was the prevailing situation in Tesco. The financial implications therefore associated with the scandal were expected to be enormous.

Tesco had already declared that they were unsure in estimating the cost they were to face after the investigation conducted by Serious Fraud Office released their findings in the accounting scandal, but one thing remained to be waiting, the situation was going to be extremely bad. There were also anticipated further risks that were considered as less material to the management but all the same with some adverse implications on the business at Tesco (Binham & Scheherazade, 15).  The scandal also damaged the reputation of Tesco as well as denting the sales in the business.

According the prediction of Tesco, the profit during the first half year period of trading was anticipated to be £1.1 billion; however, the figure was first cut back by £250 million and later to £263 million (Holmes, Sugden & Gee, 43 – 54).This was the basis for initiating investigations on the high inflation in the predicted profits for the half year trading period. After discovery of the anomaly, Deloitte was called upon to conduct independent as well as comprehensive review of the situation, a process that further revealed accelerated discovery of delayed accrual expenses as well as commercial income. The conventional auditors who work for Tesco are the PwC. The projections done at Tesco after the discovery of the scandal was that, the trading profits for the whole year could decline up to £2.4 billion which translates to a £ 400 million decline than the anticipation that was attributed to the challenging conditions for trade (Holmes, Sugden & Gee, 113). In the recent past, Tesco had suffered a setback in terms of declining share market as a result of the rising popularity of rival companies, Lidl and Aldi. After the uncovering of the accounting scandal, Tesco had expressed their determination to respond in the most suitable manner and enhance their integrity as well as transparency through consideration of decisive actions that will be guided by the results of investigations. The accounting scandal had already put Tesco in disadvantageous position against their rivals due to the loss in market share and an extreme decline in their annual profits (Holmes, Sugden & Gee, 63).

Pushing the numbers in attempts of fixing the escalating problems was not the best solution for Tesco because it made the scandal more aggressive. Booking of the contribution of the suppliers to try and achieve the targets of sales which were untenable was also not the best solution for Tesco. Several employees realized the impossibilities of achieving the targeted sale and the option was to offer financial incentives during the preceding financial term for the payments to be made. High secrecy was maintained in regard of the promised benefits but eventually translated to the worst scenario that involved money payback to suppliers when the next financial term came.

In some situations, aggressive accounting has been acceptable but sticking to some limits is recommended. The bankruptcy of Enron prompted the enactment of Sarbanes-Oxley Act by the Senate and the Congress in the United States that set some accounting standards for public corporations and Tesco had to abide by the Sarbanes-Oxley Act.

Works cited

Binham, Caroline, & Scheherazade Daneshkhu. ‘Serious Fraud Office Launches Tesco Accounts Probe – FT.Com’. Financial Times. N.p., 2014. Web. 13 Jan. 2015.

Elliot, B. & Elliot J., Financial Accounting and Reporting. Prentice Hall. Latest Edition, pp.78, 2002.

Holmes G., Sugden A. & Gee P., Interpreting Company Reports and Accounts. Prentice Hall: London, pp.63, 2003