Accounting Fraud At Tesco Stores (A) Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Accounting Fraud At Tesco Stores (A) Case Study Analysis

A PwC audit does not help. The auditors looked back on the long history and did not ignore the large-scale fraud. In addition, Tesco is in situations where auditors are generally unaware of the frauds, for example: Tesco paid £ 5.5 million to PricewaterhouseCoopers during the 2013/14 audit and then £ 5.7 million for non-audit work - all in coordination with Tesco (Tesco). "Non - Audit Services Policy". Tesco is offering a revolving door to PwC College students - members of Tesco’s two boards are PricewaterhouseCoopers (PwC) and a number of former CFOs, including the defendant McIlwee. Since 1983, PricewaterhouseCoopers has been the auditor of Tesco.

According to Tesco’s financial report; PricewaterhouseCoopers faced accounting problems and drew the company’s attention. PricewaterhouseCoopers provided the following explanation for “recognized operating income” in Tesco’s 2014 Annual Report “Independent Auditor’s Report of Tesco Members”:

Revenues recognized during the year (promotional payments, rebates and supplier rebates) are essential to the income statement, and the value accumulated at the end of the year is assessed. We focus on this area because we have to make decisions when reviewing the business income transactions and there is a risk that we will process these balances.

In PwC's 2013 annual report, PwC's independent auditor's report did not include a language on the company's income. This shows that PricewaterhouseCoopers has strongly proposed a trade revenue adjustment in 2013/14, and PricewaterhouseCoopers has given an ultimatum to Tesco: explain the trade revenue adjustment, otherwise we will include it in a note to focus on this area for risk management. Tesco’s management obviously chose the latter.

Recommendation:

Tesco’s current financial scandal is a symptom of a potential problem that has occurred as a result of a company whose deeper issues are still visible at a boarder level. Leaders shouldn’t just develop good leadership standards, but should also ensure a strong corporate governance culture. This type of crisis could be avoided by fair accounting firms that apply good accounting practices rather than internal reporting structures, which are subject to high levels of pressure. For outsourced accountants; high levels of pressure do not improve the matters, because their livelihood does not depend on the manager’s good aspect. Third-party auditors are more likely to issue fair reports and adhere to the strict accounting practices.

As the company’s 2014 annual report states, “At least 70% of the bonus is based on the financial performance. Typically, about 30% of the bonus is used to limit performance. Once the desired level of performance is achieved; all bonuses would be based on performance. Therefore, Tesco officers and directors are encouraged to increase the company’s income, in order to meet the financial objectives, i.e. bonus, standards and internal control measure.Toincrease its profits; the company's short-term compensation policy should be reviewed, reducing the share of financial performance bonuses or by making them more expensive.

In addition, Tesco can only report revenue and sales growth if it incorrectly recognizes the business’s income generated by bonuses, rebates and rebates from UK suppliers and by applying British accounting standards that do not explicitly separate the disclosure of vendor-based information. We recommend that the seller’s trading revenues should be disclosed separately to avoid the replication of the plan used by Tesco.

Conclusion:

Tesco, the UK’s largest retailer, has agreed to pay $ 162 million in fines and damages to the conduction of 2014 fraud investigation, the biggest crisis in the company’s nearly 100-year history.

The supermarket group has entered into a so-called deferred fee (DPA) in the UK, with the Serious Fraud Office (SFO), which allows it to avoid the criminal convictions, provided they meet certain conditions and pay fines. The company will pay an approximate total of £ 85 million in compensation to some of the investors.

The retailer has also entered into an agreement with the UK’s Financial Conduct Authority (FCA) in which it accepts an abusive market conduct in its commercial report issued on 29^thAugust, 2014. The FCA did not impose a fine on Tesco. As part of the transaction, Tesco will set up a compensation plan for investors who purchased the shares or bonds for cash between 29^th August 2014 and 19^th September 2014, at an interest rate of 24.5 pence per share, and depending on whether or not the investor buys - It depends on different interest rates,institutional or retail business.

In order to delay the accumulation of costs; paper invoices should be transferred from the fixed process itself, which requires an internal control. This means that the management is fully aware of the accounting irregularities. However, the reporter’s warning was highly ignored, and the warning was allegedly withdrawn, deliberately.

PricewaterhouseCoopers had previously expressed concernsover the recording of Tesco’s commercial revenues in the annual report, but the company’s internal reporter warned the board of directors about the severity of the problem. PricewaterhouseCoopers clearly warned the company about the risk of artificial manipulation, but it eventually allowed the company to pass it on, and it also issued an unqualified opinion on the company’s erroneous financial statements.

The conclusion of this study is that the accounting scandal can be attributed to the negligence of internal controls and auditors. Regardless of the control measures taken or the accounting and reporting standards established; if people working in the system choose to circumvent the control system; it would be almost impossible to prevent such fraudulent activities.....................................

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