How do you mislay £250 million ($408 million)? Not a question that often comes to mind while searching for change down the back of a sofa, but it’s the question facing Tesco’s most senior managers today.
Tesco’s thin statement for its enormous accounting failure blames “accelerated recognition of commercial income and delayed accrual of costs,” but what does that mean?
“Commercial income” includes promotional payments from Tesco’s suppliers. Sometimes these are for promoting their products, for shelf-space positioning, or volume discount rebates because Tesco bought suppliers’ stock up front. In effect, it sounds like the firm may have assigned a number of these payments to the wrong time period.
Tesco’s latest annual report says that the company’s audit committee was warned of precisely this issue. External auditors PwC called commercial income an “area of focus for the external auditors based on their assessment of gross risks.”
PwC added: “We focused on this area because of the judgement required in accounting for the commercial income deals and the risk of manipulation of these balances.”
But the supermarket’s audit committee judged that Tesco “operates an appropriate control environment which minimizes risks in this area,” and that it didn’t consider the issue “a significant issue for disclosure” in its report. With the share price down by more than 12% at the time of writing, they may be reconsidering today.
This isn’t going to help the accountancy giants fend off accusations that they’re too close to the businesses they’re hired to scrutinize. Tesco’s report proudly claims that PwC has served as an auditor for the company since 1983.
There are more dramatic rumours coming out of Tesco, following the suspension of the managing director, finance director, and two other senior executives. Retail consultant Steve Dresser tweeted:
Another source reports that all WL3 (senior category heads) are to hand in company laptops and phones today as part of the investigation.
— Steve Dresser (@dresserman) September 22, 2014