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“To Tesco’s credit, however,
“To Tesco’s credit, however, it has flagged this up internally and is doing something about it, which suggests that there are probably no other big accounting shocks hidden away."
T.his reminds me of Morrissons' five profit warnings shortly after taking over Safeways.
Sir Ken's integrity cost him his job.
If only the directors of our major banks were as honest as the directors of our major grocery shops!
But really the problem is double entry book keeping: it is so open to relatively simple abuse.
The Accruals Process
But really the problem is double entry book keeping: it is so open to relatively simple abuse.
Double entry bookkeeping has lasted 500 years, it's fine.
How is there an accounting issue here? Tesco is essentially a cash retailer. It doesn't get any simpler than that. I enter the shop, I buy and pay for the goods there and then. Tesco take my cash, it has made a sale. It bought the goods some days or weeks earlier. They were in a warehouse or on or on the shelf, either way in stock. How can there possibly be any issue which allows revenue to be recognised any earlier or purchases to be recognised any later. It's all just b*llocks. But as that appears to be the common language of accountants we'll just have to wait and see if the FCA speak a similar language.
The opening article clearly states "it ... involved the accelerated recognition of commercial income and delayed accrual of costs. ie. not retail.
The issue is with the accruals process, which allows some judgement, estimates and calculations, applying this or that percentage of probability.
Hard to audit and question.
We all have to live with it, but the basics are basic, recognise income when it is earned and costs as soon as they are known, subject to matching, or have things moved on since the '80's?
teenies
or have things moved on since the 1980's,? Yes! now the matching concept, expenses to be matched with revenue, in the period the revenue was earned.
I know SSAP 2
or have things moved on since the 1980's,? Yes! now the matching concept, expenses to be matched with revenue, in the period the revenue was earned.
I know - that was the '80s, well actually the '70s SSAP2.
IAS 37 supports that.
So nothing's changed?
Gone Sailing asks: "recognise income when it is earned and costs as soon as they are known, subject to matching, or have things moved on since the '80's?"
There is no accruals/matching concept under IFRS. More's the pity. That together with prudence as properly defined helped to ensure stability in the wider public interest as generally understood.
The profession has redefined "public interest" to meet IFRS and US methodology. The public interest the profession is required to serve has long been forgotten. The focus now is on short-term decision taking by a raft of stakeholders, not long-term economic stability.
Auditors?
Is this connected with the (new) auditing process of putting management justifications on file and ticking a box compared with the (old way) of looking at management's case and challenging it?
added value concept
perhaps the FD was advised that compliance work isn't as important as value added services or indeed maybe he was given value added advice!
only joking? but does highlight that compliance work is important and sometimes there is cost £20 of non compliance.
Strap Line
Has the outgoing FD taken Tesco's strap line too seriously - "Every Little Helps"?
What's the problem?
Is the issue only about accounting, or is it also about the way large supermarkets and other big retailers bully their suppliers? I hope we get to learn a little more in due course.
Bullying suppliers
I always thought issuing debit notes just before the year end then cancelling them after was tantamount to fraud but the auditors never seemed to think so. Too big a fee to rock the boat I assume. Also not paying your suppliers in the run up to the year end is an easy way to improve your accounts cash flow statement which is why I always think these are worthless.
Tesco Gaffe???
How is there an accounting issue here?
Tesco is essentially a cash retailer. It doesn't get any simpler than that. I enter the shop, I buy and pay for the goods there and then. Tesco take my cash, it has made a sale.
It bought the goods some days or weeks earlier. They were in a warehouse or on or on the shelf, either way in stock.
How can there possibly be any issue which allows revenue to be recognised any earlier or purchases to be recognised any later.
It's all just b*llocks. But as that appears to be the common language of accountants we'll just have to wait and see if the FCA speak a similar language.
Tesco isnt just a cash retailer there are many strands, What about Tesco Bank, Tesco Mobile
Not entirely cash business ...
@Hayter
Shelf space pricing paid by suppliers raises a huge amount of revenue - as do 'claw-backs' from suppliers
One would guess that these are the repeat revenues booked early
@Myshkin
'.. issuing debit notes just before the year end then cancelling them after was tantamount to fraud ..'
If Greece can do this to gain entry to EU then Tesco is 'small beer'
Greece with the help of Goldman Sachs 'cooked the books' in masking the true extent of Greek debt by the use of derivatives to 'legally' circumvent the EU Maastricht rules. Thereby deferring the cross-currency swaps maturity until after Greece had entered the EU and then bringing the problem back on Greece's books to increase the countries already bloated deficit
As a well known meerkat said - simples ......
Well they had no FD
One left in April the new one to start in December...
bit odd...I would have done it for 6 months :)
fraud employee claims
I wonder whether Tesco employees who took bonuses in shares rather than cash could have a claim.! MIs representation. Aggressive accounting is a euphemism, the man on the street or shareholder should see it as a fraud. Did senior managers take shares or cash when collecting performance bonuses?
The PWC audit report makes reference to income recognition riks as an issue
Once again those in the know would have understood the underlying reason behind those risks.
Did the internal audit team read and digest the PWC risk report?
Or did they trust senior finance management?
Or did internal audit fail to comprehend the risk?
Once again lessons learned from the history of financial misdeamours have been ignored.
No end of questions?
There are losers in this mess, not just reputational damage ,another point highlighted in the Tesco annual report
The hedge fund s will take full advantage _to the detriment of 500,000 employees.
The social impact of this behaviour at Tesco must not be side stepped, powerful companies do have very wide responsibilities. Tesco state this in their annual report,! Well they would!
Tesco have been found out, rather they have been outed. Along with other 'trusted' brands .
New labour may have another scapegoat to load public disfavour upon, then seek to levy taxes. At least the bankers will be given a break.
mind you...
...they made 2,400,000,000 profit even with the hit
wouldnt mind owning 10% of that...even if the accounts are out by 250m
The share price will bounce back and some dealers will make a few bob...but there will still be food on the shelves...
Dont worry too much mes amies
Basics
While Tesco's business is undoubtedly more complex than Hayter says, it is hard not to agree with his sentiment - this is not rocket science (and b*llocks seems a pretty good description). We should wait to get more information before judging but on first glance it does look like a case of dressing the figures and that's pretty worrying in a company of Tesco's stature.
Here's one accountant that isn't buying the "deal with it internally" narrative. Tesco shares are owned by a lot of pensions and public and they will have been hurt, so this should not be shrugged off with a fine. If there is wrongdoing the relevant authorities need to nail the individuals involved - unlike what we have repeatedly seen in the banking crisis.
Hey Tom 7000, if you owned 10% of that then you would have lost over £1bn in your share investment over the last year... I reckon you would be spitting tacks, not shrugging gallic shoulders!
Spitting Tacks
Hey Tom 7000, if you owned 10% of that then you would have lost over £1bn in your share investment over the last year... I reckon you would be spitting tacks, not shrugging gallic shoulders!
If he owned 10% he'd employ someone to spit tacks for him and be the proud owner of the Auto 2000 Gallic Shoulder Shrugger Deluxe.
Brilliant, plummy1
plummy1, that is just my sense of humour. Made me laugh out loud in a room by myself.
Thanks - it had been a pretty dismal day until just now.
Malcolm
Yet Another !!!
Who mentioned Auditors? Don't be stupid we know from the action taken by the ICAEW against the Auditors of the Banks and Buiding Societies (oops sorry no action) that they can do no wrong!! And as we all know when they do the ICAEW are complicit unless of course it's a small firm of accountants.
Having worked in a few multinationals, pressure to perform and maintain standing (on executives) is immense and strengthened with large bonus.
Not sure how there finance team is structured but perhaps a bigger divide between financial accounting and management control is required, i.e. make it much harder for the exec team of Tescos UK division to actually effect the prep of the financial accounts. Where was internal audit in this? Has it been going on for years?
Auditors
A while ago now but late on in my auditing career (in a big 6) a new technique came in that you didn't actually do any work but reviewed the figures "analytically". This meant for example, that if there was a steady increase in profit in line with previous years the figures would be ok etc. When pointed out at training courses that this was more likely because management was fiddling the cut-off and the figures were wrong - well that meant an end to your promotion prospects. Those who played the game made it to partner and so a self perpetuating cycle began.
The overall aim was achieved of course - that of enormously increasing the partners profits.
Lack of anyone knowing whats going on
If they can mis-state £250M then how accurate are the rest of the numbers? What are directors using to assess performance?
MDs resigning suddenly always causes massive disruption - as clearly illustrated here.
Rudderless ship going off course.
A share price fall of 42% is hugely disconcerting to institutional investors.
When you are at the top the only way is down!
Peter Lashmar
Lashmars Tax Accountants
Deloitte fit to Investigate Revenue Recognition?
Is Deloitte the right firm to be investigating revenue recognition? I have heard it said that until recently their own financial statements recognised revenue as work was performed regardless of whether value was delivered to the client. More recently they are said to recognise audit income more traditionally when audit reports are signed instead of as the work is undertaken. Even so, their methodology remains tainted by US thinking which has of course infiltrated much of IFRS.
To their credit
Quite rightly they took corrective action internally and swiftly.
No better man to take this on board than Dave Lewis, with 30 years' experience with Tesco's largest supplier, Unilever I'm sure he has his finger on the pulse. He also ensured 20 quarters of consecutive growth at the FMCG giant during the toughest economic period in modern history.
I think this will have a happy ending.
False declarations
If an engineering company did something a lot less serious than the Tesco fraud the Secretary of State for Business Innovation and Skills would wind up the company automatically, no questions asked, no excuses accepted.
I'll Wait and see ...
... until Deloittes have done the full investigation - hopefully we will at least get a summary as to what has been found.
I'll wait and see because I do wonder when a new broom comes in as to what their agenda may be - why not get rid of all the [possible] bad news and stick it on the old guard? Revenue recognition is often a matter of opinion - this may simply be a legitimate difference of opinion rather than near fraud.
I say this because I have numerous examples of new MDs clearing the decks from old MDs - routinely all possible bad debts are written off/provided against - which of course means that they will have relatively few bad debts in their first year and may even have a postive hit when the debts they provided against have the provision cleared due to not being necessary.
Short-term stock market movements will have no long lasting effect.
What I find amazing about this...
...is that there is any debate about the justification of what appears to have gone on here.
Having worked in Corporate Finance - and in Internal Audit - for large corporations, I am aware of the pressures sometimes on Operational Managers to show positive results. But that is why we have auditors, and it is also why we have professional standards for accountants. The job of the accounting profession is to ensure that published figures show an accurate, fair and true picture of the financial results and status of the company...
..And, yes it does matter about the short-term share price. Accurate information is a fundamental basis on which investment decisions are made by those who fuel our economy - including those responsible for millions of people's pensions. If we cannot rely on the information published then the whole system comes into question and any erosion of trust in the accounting profession will have serious consequences in the future.
Perhaps we need to re-establish a clear ethical and moral compass for all those involved in the accounting profession which transcends short-term expediency.
On their uppers
I feel a bit sorry for Tesco as they will only manage to produce profits of £2.4 billion this year. How will they cope?
Tesco and IFRS
As I understand it one of the underlying areas in the overstatement of profits revolves around the recognition of supplier rebates dependent on a particular level of sales being achieved. It seems to me that until the rebate has been triggered what you have is a contingent asset and IAS 37 says that contingent assets should not be recognised, unless they are virtually certain, when they cease to be contingent.
Not sure how much wriggle room there is there, but probably not £250m's worth.
I am not sure if any of you guys really understand how the "rebate" system really works with a major retailer:
Before Heritage was plundered by Scott Barnes of Grant Thornton (see HoC debate 7th May 1999)
it was a major supplier of Housewares to Tesco. Although my experience may be out of date, I do comprehend some of the principles behind rebates.
1 The object of giving a rebate is to increase sales.
2 Some rebates increase the percentage rebate on reaching sales volumes (or sales volumes increases from a previous period)
3 So if you achieve £1m sales you receive a 20% rebate.
5 If you acheive £2m sales you receive a 40% rebate.These rebates may be acheivable on a product which has a very low cost to the supplier---like Coca-Cola say where much of the cost is in the brand, rather than the liquid and the bottle.
6 But you are approaching the end of period and your sales are £1.8m.
7 Do you accrue your current sales (£1.8m) at 20% £360k or at 40% (cos you believe you are going to reach £2m) £720k?
8 Too much "belief" can cause over-statement of profits by very signicant amounts, frequently you may discount so that your projected increase in rebate is your only gross profit.
IAS 37
I still would like to wait and see what the investigations determine - we are all speculating on what the new guys think about what the old guys did: perhaps the old guys main reasonable assumptions etc. based on what information they had at the time, but that hindsight has put pay to this and the new guys do not want to get saddled with valid at the time, but with hindsight incorrect, assumptions.
As regards the comment on IR37 and the rebate: my understanding is that the profit overstatement is related to half-year profits. These are not full year accounts and therefore any comments about contingent assets and not including them in profits till the triggers have been reached are irrelevant. It may be a fair argument when you are discussing full year profits, and the rebate period ran for a year - let's say, but it you could only include rebates that had been triggered at the half-way stage, then no rebates would have been triggered and your half-year profits would not be a fair reflection on 50% of the whole year. You have to take a fair guestimate as to what you believe your sales of the particular products will be at the year-end and take the appropriate percentage of your half-year sales.
Now as I have said, it will be far more apparent now, to the new guys, as to whether the rebates will be triggered than it was when the half-year accounts were prrepared. I am not saying that profit fixing did not take place, only that it can be argued that the new team have an incentive to blame the old guard for overstated, however they happened, profits rather than get saddled with the blame themselves.
Rebates
It is becoming clearer what has been going on but one thing that confuses me is calling these payments "rebates". Would not "bribe" be more accurate or could someone explain the difference?
rebate not a bribe
The high street has become a very confused market.
The retailers with major clout no longer buy and sell goods on a conventional basis.
suppliers are effectively renting space on shop floors, staffed by outsiders
with a premium price for location
but this simple pricing and renting model itself gets confused , by targets and incentives set by both the supplier and the retailer.
Both parties are dependent each other, but are like to bucks fighting , close to death to get the best outcome.
The retailer does well if volumes can be shifted , at a good or excellent profit.
Likewise the supplier needs to shift volume , to keep factory operating to capacity .
It is an unwholly alliance , that ends up with convuluted accounting , cost sharing and profit sharing based on volumes etc
and disagreements on the terms of the deals , which frequently change like shifting sands, as each buck gets the measure of the other--- are part of the tussle to make a profit
that is why the financial outcome if often decided sometime after the sale, or should i say fight................ then the whole cycle recommences before the scars have even healed!
so it is not a bribe! It is warfare, where anything goes.
aldi
Don't go to Tescos go to Aldi,as they don't blight accountants image(except whilst your in there).
Accounting systems or deliberate act and materiality
As a small supplier to supermarkets we suffer from not being able talk to anyone to rectify debit notes incorrectly taken monthly as Purchasing haven't updated their system for 2012 agreed/documented price increases. We have this as a collectable debtor on our sales ledger whereas the supermarket has a reduced cost of sale - or an un-recognised liability. Multiple our £5k by ten's of thousands of suppliers.........
I would assume that individual supplier retrospective rebates are programmed into supermarket's accounting software, rather than have a massive team looking at this commercial income; so it's a question of whether that programming is flawed or whether the finance team has deliberately intervened ?
And so to materiality - £250M is significant in terms of 1.1 billion or even £2.4 billion profit; but is it material in terms of commercial income/retail income or cost of sales. - probably not - so must there have been a failure of process for it to be picked up ?
End of Double entry?
The last 3 or 4 posts make the arguement for dropping double entry bookkeeping more eloquently than I can.
A system that was invented 500 years ago is not capable of recording how modern business works!
Accounts need to move into the 21st Century and start to recognise reality.
Never mind the supermarkets, which are big enough, would some "luddite" acountant please explain to me how the accounts for the EU are sensibly recorded using double entry?
Yet does anyone believe in the forseeable future Brussels will become insolvent?
double entendre
What has double entry got to do with gaming the results controls of the performance system of Tescos? The problem is governance and audit, etc not double entry
It's all part of a managed strategy shift. The new ceo is clearing out old skeletons and management to drop the share price and expectations. That way he can realign the company to meet the challenges of internet/aldi etc whilst starting from a low base. He probably agreed with consultants and the chairman to release the 'bad news', remember this bad news had been floating around for ages, im not sure that the chairman has played a blinder though because it looks like he might be falling on his sword although he may have decided upon self sacrifice for the greater good, he's getting on a bit...
MDK45
At least someone appears to have a similar thought to me!
As discussed above, new chairmen/MDs etc do like to get rid of anything that can go bad, or even possibly, in my experience, things that may not yet be bad.
My comments may have made me look like an apologist for the former regime, but my point is currently largely neutral on the matter - I'm simply waiting for more information.
Rather than this being a dispute between the old andthe new directors over income recognition, it may be more a dispute how the old and the new advisors to those directors view income/cost recognition.
Terry Leahy ...
A number are of the opinion that the rot set in when Terry Leahy had the reins and that he managed to distance himself by a well-timed exit
Therefore the question is - when is his time in office going to be scrutinised, or perhaps this is already underway?
Tesco's appear to be in panic mode
Its been a drip drip of bad news for Tesco, however now they are compounding their woes by fiddling the books, this is probably the biggest mistake they have made to date, the City wont like it.
Son/daughter of double entry book keeping?
1. Would be very interested to hear of proposals to replace double-entry book keeping from those ringing its death knell.
2. As with any system, it works fine as long as you follow the rules/principles by which it is meant to be operated.
Tesco
We do not know how this arose so are impotent to comment objectively.
As has been said supermarkets are not simple "pile it high - sell it cheap" operations any more. The price of goods to the supermarket is dependent on complex sales performance calculations which can only be finally determined after quite lengthy periods of trading. Long-term construction contracts are capable of having an objective profit assessment at a point in time during the term of the contract so determining the profit on selling baked beans part way through a promotion should be a doddle.
I cannot help thinking that there was deliberate subterfuge here and negligence by directors in knowing what was going on. The amount involved is £250M not £250k! That represents approx. 1 months total group profits. Tesco must have very sophisticated computerised accounting systems to produce massive amounts of data that are right up to date. It is the interpretations put on that which has been flawed. It is beyond comprehension that the directors do not know the level of profits to within an overall error rate of some 20%
Deloites seem to have enough financial problems of their own with their exposure to the Icebreaker tax fraud scams. Interesting that they have senior enough personnel to pass an opinion on Tesco's financial sheenanigans.
It will be interesting to see if FRC, ICAEW or any other regulatory body has anything but praise for Tesco and PWc.