Tesco PLC is a multinational company whose headquarters is located in the United Kingdom, and deals with consumer products such as groceries and general merchandise, with retail outlets in different parts of Asia and Europe (Ahmed, 2014). The company has enjoyed a perfect reputation and a larger command of the market until the emergence of a scandal that hit the company, affecting its performance in the market. This paper uses Tesco PLC as a case study to analyze the whole topic of financial reporting fraud.
The paper aims to provide an insight into forms of fraudulent behaviors by corporations, parties to the fraud, stakeholders affected, investigation and actions taken by relevant authorities and the aftermaths of such fraudulent behaviors. To fulfill this purpose, the paper uses the Tesco Company as a case study to provide a practical instance of the fraudulent behaviors that corporations may engage on, as well as the consequences of such actions. The Tesco Scandal is an appropriate example to use in the case study since it presents a recent happening along with complete happenings of both the background of the scandal, the main individuals and groups involved in the scandal, and how the company was exposed. The case also highlights the actions taken by relevant authorities to punish guilty offenders and the actions taken by the company to repair the damage that was caused by the scandal.
Background of the scandal
The challenges faced by Tesco which is arguably the biggest retailer in the United Kingdom all started when the company began to overstate their profits during the first half of their financial year. Tesco’s managers aimed at inflating its profits so as to pull forward the payments made to them by suppliers for selling their products in the retailer’s numerous stores in and outside the UK. It was discovered that Tesco overstated its profits by 263 million pounds and according to Deloitte, a leading company auditor across the globe; the company had been overstating its profits for a number of years (Ahmed, 2014). The overstatement of profits amounted to fraudulent actions against the suppliers which further worsened the company’s situation despite the high financial standing which it claimed to be in.
Main players of the fraudulent activity
The main players involved in the financial fraud made by Tesco, although not fully established by investigating agencies, are the company’s eight executives. Upon discovery of the scandal, all the eight executives were asked to step down from their posts in the company so that investigations could be conducted (Butler, 2014). There is also a chance that PwC, an auditing company like Deloitte who had been auditing Tesco’s financial statements for more than ten years despite the law limiting the contract between external auditing companies and client corporations, was aware of the scandal. It was reported that although PwC noted something peculiar, it only warned about the numbers but did not do anything about it (Ahmed, 2014).
Exposure of the fraudulent scandal
The fraudulent acts by the companies were exposed by a whistleblower who managed to note that there was a queer activity that was going on in the company which involved acts which were illegal. It is reported that the whistleblower of the Tesco accounting fraud began to notice that there was something wrong when the company started to send limited information to the suppliers regarding the sales and profits made by the company from selling products provided to them by the suppliers (Ahmed, 2014). The whistleblower noted that the company had moved forward the receipts from the suppliers to the first half of the financial year, but fewer documents had been submitted to account for the sales which the receipts were attributed to (Ahmed, 2014).
Actions taken by authorities
Upon exposure of the company’s fraudulent activities, relevant authorities in the UK such as government auditors came in so as to look into the issue, find the masterminds and ensure that the individuals found guilty of steering the fraud were punished. Relevant authorities such as the Financial Conduct Authority (FCA) and the Financial Reporting Council (FRC) have been invited to investigate the fraudulent scandal (Butler, 2014). Moreover, a more intense government agency, the Serious Fraud Office (SFO) has also intervened as part of the investigation process on the individuals behind the fraud, the extent of fraud and provision of a set of recommendations which will be aimed at repairing the damage and compensating the affected stakeholders (Butler, 2014). The authorities, through the courts, have convicted executives and imposed heavy fines on the retailer for its fraudulent actions, while also providing a remedy for the retailer’s suppliers notwithstanding the fines that the company paid to the SFO, which amounted to close to 129 million pounds (Cox, 2017).
Post-scandal actions taken by the company to repair the damages
The exposure of the company’s fraudulent actions has caused the company to suffer huge amounts of losses as the company’s market share, and share price continues to drop tremendously. Owing to these effects, the company has made a number of efforts including hiring new executives with track records, paying fines issued by courts and compensating stockholders for their shares bought within the period that was affected by the financial scandals (Cox, 2017). The company has made several efforts to compensate the stockholders for their investments amounting close to 85 million pounds (Cox, 2017).
- Ahmed , K. (2014). Tesco, What went wrong? The BBC. Retrieved October 14, 2017, from http://www.bbc.co.uk/news/business-29716885
- Butler, S. (2014). Criminal investigation launched into Tesco’s accounting. The Guardian. Retrieved October 14, 2017, from https://www.theguardian.com/business/2014/oct/29/serious-fraud-office-investigate-tesco
- Cox, J. (2017). Tesco opens multi-million pound compensation scheme after massive accounting scandal. The Independent. Retrieved October 14, 2017, from http://www.independent.co.uk/news/business/news/tesco-accounting-compensation-scheme-customers-millions-fca-sfo-a7907811.html