Tesco: how confrontation could have prevented a giant mess
Last week, when I confronted Tesco’s chairman over the company’s £263m overstatement of its profits (see video below), there was a sharp intake of breath among the supermarket journalism fraternity. “That won’t go down well,” someone whispered.
It had been a genteel affair until then, with Tesco calmly stating that there had been “no fraud” and no personal gain involved in the practices that led to this colossal accounting mistake. Today the Serious Fraud Office confirmed it has launched a criminal investigation into Tesco.
Let’s retrace the steps: Tesco conducted its own internal inquiry and quickly brought in Deloitte to do an independent one. This, they said today, found no evidence of fraud or personal gain.
When the FCA – the company reporting watchdog – launched its own inquiry that meant Deloitte’s one ended. And today’s SFO move means in turn the FCA probe is on hold. So five weeks into the crisis there is no public explanation of what went wrong. No charges have been made and we have no evidence of wrongdoing.
But in this context the question for Tesco’s incoming CEO David Lewis is: why did he state categorically that there was no fraud involved? Mr Lewis gave the clear impression last week that he was not party to the “how and why” findings of Deloitte, only the “how much?”
Either new facts have emerged or the SFO has placed a different interpretation on them to Mr Lewis. Today’s developments must be of concern to every shareholder and 330,000 Tesco employees.
In the audit profession it is common parlance: auditors rarely catch serious fraud – the police do. To give one’s company a clean bill of health, only to see it investigated for fraud one week later might be thought unfortunate – because the “no fraud” line was the keynote of the reassurances given in last week’s briefing .
As it stands tonight, Tesco has eight senior managers suspended on full pay over practices that have led to a fraud investigation; an auditor who flagged a “supplier payments” risk and then signed off the payments – and a non-executive board led by a man who is standing down.
Tesco’s underlying business is strong – its share price weak; it has halved in a year. That may at some point make Tesco a takeover target.
The longer this goes on without answers, the resilience of hundreds of thousands of employees, who thought they were working for an iconic, stable British institution, will be tested.
And it may go on for some time: the layer cake of company regulation involves two bodies – the FCA and the FRA, which oversees auditors. They can’t now investigate until the SFO inquiry is complete. And the SFO will be faced with 18 million invoices to wade through.
What we know is that for several years – at least three – Tesco’s shares were being traded on completely wrong information. Bonuses were paid out on targets met that may not have been met. It took a whistleblower to do what no auditor, director or regulator had done – raise the risk that Tesco’s profits were being inflated by accounting practices that did not reflect reality.
Maybe if a few more people had been confrontational, at an early stage, instead of conforming to the polite insider culture that dominates British corporate culture, this might look less like the giant mess it has become.
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