Tesc[r]ooked: What drove people to cook up £250m at Tesco?

by Nathaniel Melican, City, University of London

Brief and disclaimer: Write an analysis piece, with not more than 1,000 words, about the Tesco fraud scandal and trial. The story must answer the questions: 1) what drove officials at Tesco to manipulate the books? 2) how did they do it? This assignment was based on the events surrounding the alleged Tesco accounting scandal of 2014. While the facts in the story were obtained from actual documents and court proceedings, the analyst quotes were repurposed from other sources and provided as additional material for this exercise only. This means that identities of the persons quoted for analyst and expert views may not reflect their real positions or designations. Therefore this story should be read and understood in that context, and as an evaluation exercise for the degree. Submitted for the Reporting Business module at City, University of London.

Pressure. Coercion. Falsification.

Four years after the discovery of accounting anomalies in Tesco’s books, Prosecutor Sasha Wass QC alleged in court that two of the company’s executives, charged with fraud and false accounting, resorted to these tactics in a bid to keep their jobs and make the company look good amid intense competition and shrinking profits.

Chris Bush, Tesco’s former UK managing director, and John Scouler, former UK food commercial director, deny the charges, along with Carl Rogberg, former UK finance head, who was declared unfit for trial after a heart attack last year.

“They were in positions of trust and were paid huge compensation packages in order to safeguard the financial health of the company,” Wass, prosecuting for the Serious Fraud Office, told the Southwark Crown Court, where the trial is being held.

The two accused “pressurised and coerced” hundreds of their “foot soldiers” to record income before it was collected—a practice she described as “false accounting on an industrial scale” resulting in a £250-million “hole” in Tesco’s profits in 2014.

Tesco—still the dominant UK supermarket chain commanding 27 percent of the market, according to Kantar Worldpanel—lost £2 billion in market value as share prices fell 12 percent when the scandal broke in September 2014.

It was the coup de grace in Tesco’s fall from grace, as problems with its international businesses and intense competition from UK discount supermarkets strained the company’s profits.

Changing of the guard
If Tesco has one person to thank for being the top UK supermarket chain, it is Sir Terry Leahy, who, in his 14 years as chief executive, drove the company to heights it had never seen before. On his last full year as CEO in 2010, Tesco netted £57.5 billion in worldwide revenue and £3.5 billion in profit—a six percent margin.

Philip Clarke, who started his career stacking shelves as a teenager in the Tesco store his father managed, succeeded Leahy.

“As the man taking over from Sir Terry Leahy—feted as the most successful retailer in Britain—Clarke had to meet extraordinary expectations,” Andrea Felsted, retail analyst at FT securities, told City & Business.

There were signs that Tesco’s glory days were coming to an end, however. The company’s US acquisition, Fresh & Easy, was still bleeding money, despite Clarke limiting further losses. Back at home, Germany-based discount stores Aldi and Lidl were breathing down the necks of British supermarkets like Tesco. Felsted said Clarke “dithered over the chance to cut prices,” which would have undercut rivals like Sainsburys and shut out the discounters.

Things were getting worse. In January 2012, Tesco came out badly beaten in the Christmas discount wars, forcing it to issue its first profit warning in 20 years, which in turn erased £5 billion from the company’s value as share prices plummeted.

In response, Clarke launched an ambitious £1 billion turnaround plan to improve the UK business. Still, profits and margins continued to sag: in 2012-13 operating profit was £2.4 billion, nearly half of the year before, with a 3.7-percent margin, compared to 6.5 percent in 2011-12.

At Southwark Crown Court, Wass said this was a portent of worse things to come.

“Tesco was experiencing a drastic reduction in both profits and market share,” she said.

‘A car crash waiting to happen’
Amid Tesco’s sliding profitability, Wass told the court that Bush and Scouler, together with Rogberg, took it upon themselves to make the company look good.

“The defendants, together with Mr. Rogberg, were aware that income was being wrongly included in the financial records of the company which were used to inform statements to the stock market,” she said. “They were aware that this was being done in order to meet targets so that the company would look financially healthier than it was.”

Their jobs were on the line, Wass added, and the stakes were high, as Bush had a £2.8-million compensation scheme, while Scouler had a £1.4-million pot.

They did this by recording income not yet due, specifically on dealings with suppliers. All told, “400 to 600 of the buyers—almost everyone across Tesco—had been involved in falsifying their records by improperly recognising income,” the prosecutor said.

The details of these practices were revealed in Groceries Code Adjudicator (GCA) Christine Tacon’s report into the accounting scandal, published in 2016. The 60-page report ruled that Tesco failed to deal lawfully with its suppliers by “unilaterally deduct[ing] money from suppliers’ accounts where invoiced amounts were not agreed.”

Some suppliers who were owed millions of pounds received payments up to two years late. Some just gave up chasing, even if it meant writing the debt off, according to the report.

Another damning finding against Tesco was the confirmation of its obsession with meeting financial targets. “A Tesco list of measures for meeting the half-year target included ‘not paying back money owed,’” the report said, quoting an internal document.

The pressure, in the end, got to Tesco’s buying team, as the GCA said suppliers noticed a high turnover of buyers, which complicated dispute resolution and strained suppliers’ relationships with Tesco.

All of this came to a head when Dave Lewis stepped in earlier than expected as Clarke was forced to step down in July 2014. By September, Lewis ordered an investigation after seeing a paper detailing the accounting inaccuracies.

Jane Fuller, an analyst at City Fund Managers who has studied corporate failures, said the Tesco saga was a textbook example of how far people in power will go to defend their position and their income.

“When you set up a system where there is pressure on targets, people will do what it takes, as they don’t want to take the risk of getting humiliated or missing out on bonuses,” she said.#####