The Blog

Tesco: Reputation Now Being Rattled More Than its Tills

Eight executives have been suspended whilst lawyers and accountants pore over the books. Some details we now know, but why, and culpability lie in the future...

Black holes. Not just in space, apparently. Supermarket giant Tesco has just admitted an 'accounting black hole' which caused a £263 million overstatement in its profits.

Eight executives have been suspended whilst lawyers and accountants pore over the books. Some details we now know, but why, and culpability lie in the future.

For now, we must just scratch our heads in wonder as the UK's largest retailer, a company alluring enough to attract Warren Buffett as an investor, squirms under a very unwelcome spotlight, with shares slumping and corporate confidence in freefall.

Accountancy firm Deloitte, which has been investigating the misreported profits, found a mismatch of costs, income and accounting periods. We should be alarmed that such an enormous, recognisable brand is having its corporate reputation (at least) sullied in such a way.

Accounting sleight of hand, which appears to be at the heart of what happened at Tesco, is a perilous game to play. Businesses live in a highly regulated environment, and they know it. And yet.

This unfolding financial scandal shows that regulation is not always enough. Even if this turns out to be an innocent error, however loosely innocent ends up being defined, the key question remains: How can such poor judgement ever have happened at all in such a large, listed company?

One answer may be the absence of enough 'professional scepticism' amongst people responsible for the accounts. It is a key requirement for accountants to exercise 'professional scepticism', but not for any other professions or grades of executive. In my experience, it is often the lack of it that causes problems for firms.

The whole episode is a troubling reminder that we should be demanding more scepticism from our professional classes, not rely on the rule of regulation to protect truth and reputations. Management must apply as much scrutiny to glowing good results as to poor ones. The trouble is, they often do not.

The key is corporate governance and the culture of an organisation from the top down; and a simple truth is that the most effective way of preventing fraud is by increasing the perception of detection.

Whistle blowers, for example, need channels to report concerns without fear of reprisal, a painful lesson the National Health Service is taking on board. Was the whistle-blower at Tesco initially ignored? Possibly. Had the basic accounting manipulation been going on for years? Nobody is saying.

The senior management at Tesco has been at pains to have itself examined independently over the 'black hole', so we might expect a full explanation for shareholders. But a wider unease about UK Plc must remain

Offering sanctuary for whistleblowers is just part of the solution, of course. The reason accounting errors arise - and even large auditing firms have been mortally wounded by them - range from the innocent to the fraudulent, with somewhere in the middle a management element sometimes under pressure to report good results. Unfortunately, accountancy is not based on a set of hard and fast rules. Accountants know there can always be more than one right answer, which is why the profession works to a 'true and fair' standard. This is deliberately vague, a catch-all: Hard to define, but you know it when you see it.

A firm the size and visibility Tesco is more than what it stacks on the shelves, it is part of the reputation of UK business. If there is one lesson that comes out of this for others it must be to increase professional scepticism. A sceptic doubts the truth of something and, as Tesco is learning painfully, that may actually be the one truth above all others.