The fiasco at Tesco, and value of accountants and independent interim limited scope engagements
Wednesday, 24 September 2014 00:00
A colleague in the profession, now working in the UK, alerted me on Monday (22) morning, to a news item which she said was in the public domain. She did so because of its relevance to what I had discussed with her, more than a decade ago, articulating the value of inviting independent professionals/external auditors to perform reviews of interim financial statements, before they are released to the public.
These are ordinarily undertaken as limited scope engagements, to add strength to, even a perceived to be robust, in house accounting and reporting infrastructure.
Limited scope – non-opinion – engagements
Having functioned as a Manager of Deloitte overseas while in my audit years, I had been exposed to a number of limited scope – non-opinion – engagements, which have their own international standards of scope, approach, methodology and reporting and I learned that there clearly is a value addition to any organisation.
On my return to the country, I articulated the merits of these services and the need to market such services, when I served as a Partner of PricewaterhouseCoopers in Sri Lanka.
A win-win for multiple stakeholders
Given that I am not in the external audit profession now, but in the consulting/advisory profession, and hence without any conflict of interest, I have mentioned in many fora even recently that this is a respectable source of additional income for professional services firms, which they can re-invest in more substantive and firm wide, regional or international staff training, in information and communications technology, hardware and software and even incremental remuneration.
I maintain of course that it is a win-win for both the client and the professional services firm for the reason that the client receives a higher degree of professional assurance on its interim financials and simultaneously on its in-house, accounting, reporting and disclosure infrastructure. Clearly the shareholder and the regulators, whether the SEC, CSE or in our jurisdiction, the Sri Lanka Accounting and Auditing Standards Monitoring Board, as well as investment advisors and analysts are also winners.
Putting thoughts into practice
Almost eight to nine years ago, I put this thought into practice as Chairman of the Audit Committee of a sector of a large and diversified public quoted company. As I articulated the rationale for and the merits of a six or nine month external review, despite the fact that then neither the holding company nor any company within the Group had engaged external auditors to undertake such limited scope-non opinion work on interim financials and hence it would have created precedent, this proposal was nevertheless readily agreed to by the Chairman and the entire Board.
We thus proceeded to engage a Big 4 firm to undertake the review of the interim financial statements, under terms of a limited scope engagement, at the middle of each year, and sometimes shifting to a nine month review, prior to release of the quarterly statements to the public. This practice, I gathered, was subsequently followed by many other sectors in the group.
The relevance for the UK: The fiasco at Tesco
Rather than elaborate on the merits of this move, which is reasonably well-received in the country today, I thought I will share, for the benefit of all readers, details of the news that my colleague in London alerted me to. I have of course “audit verified” my source, via BBC online and find that the news item indeed is in the public domain. I have re-titled the news item for this article as ‘The fiasco at Tesco’.
Here is the original news item from BBC UK reproduced in full. I will leave it to the members of my profession and sister accountancy professions, whether they are in-house accountants, in-house internal auditors, independent outsourced internal auditors or external auditors, to identify the several learning outcomes from this embarrassment that Tesco – a FTSE 100 organisation – has experienced.
Tesco suspends execs as inquiry launched into profit overstatement
Tesco has suspended four executives, including its UK Managing Director, after the supermarket overstated its half-year profit guidance by £ 250 m. The amount equates to almost a quarter of its expected profit for the period. It has launched an investigation headed by Deloitte, and says it is now working to establish the impact of the issue on its full-year results.
“We have uncovered a serious issue and responded accordingly,” said Tesco Chief Executive Dave Lewis. Shares fell 8% in early trading. Mr. Lewis said “a number of people” had been suspended from duty “to facilitate the fullest and deepest investigation possible”. UK Managing Director Chris Bush is one of those suspended, according to Radio 5 Live presenter Adam Parsons.
Mr. Lewis said Robin Terrell, Tesco’s multi-channel director, would be “stepping in and running and leading the UK leadership team”, but he refused to confirm that Mr. Bush had been suspended. Mr. Lewis, who took the helm at Tesco on 1 September, said the issue was “something completely out of the ordinary” and his priority was to carry out “a full and frank investigation.” “We will take decisive action as the results of the investigation become clear,” he added.
Tesco also confirmed that there had been no Chief Financial Officer (CFO) at the group over the past week, after its current CFO Laurie McIlwee left just over a week ago following his resignation in April. Marks and Spencer’s Chief Financial Officer (CFO) Alan Stewart was announced as Mr. McIlwee’s replacement in July, but is not due to join Tesco until December. Analyst, Robert Gregory: “Investors are really uncertain about Tesco at the moment and its future direction.”
On 29 August, Tesco had said it expected its trading profit for the six months to 23 August to be about £ 1.1 b, lower than management had expected. In its latest statement, Tesco said the profits overstatement was “principally due to the accelerated recognition of commercial income and delayed accrual of costs”.
It also said some of the error – which referred to its expected profits for the six months to 23 August – was due to the timing of the accounting of payments between suppliers and Tesco. Mr. Lewis said this meant “an element of” expected revenue from its suppliers had been “reported in the wrong time period”.”It’s about revenue received versus when the activity took place,” he added. Tesco said “an informed employee” had alerted the Board to the issue on Friday, and added it had already informed the UK’s financial regulator, the Financial Conduct Authority.
Tesco has been battling falling sales and a decline in its market share. As a result of the problem, Tesco has pushed back the release of its interim results to 23 October, from 1 October. Deloitte will carry out its investigation with Freshfields, the group’s external legal advisers. Tesco’s usual auditors are PricewaterhouseCoopers. The accountancy firm declined to comment.
Shares in Tesco reached an 11-year low in August after the firm cut its full-year profit forecast to £ 2.4 b from £ 2.8 b. The supermarket group has been battling falling sales and a decline in its market share as discount chains such as Aldi and Lidl have gained in popularity. Previous chief executive Philip Clarke stood down in July after his attempts to revive Tesco’s fortunes through a £ 1 b turnaround plan failed.
Analysts widely criticised Tesco following the announcement. AvaTrade Chief Market Analyst Naeem Aslam said Tesco had been “extremely slow” to respond to market changes.
“Today’s news is another disaster for the company,” he added. And Shore Capital analyst Clive Black said he was “flabbergasted” by Tesco’s announcement.
“Such an announcement is not the stuff of a well operated FTSE-100 organisation. This development may raise, indeed must raise, much more fundamental questions over the chairman’s (Richard Broadbent) position and the nature, composition and extent of the Board.”
Post Script – 23 September: Tesco Fast Tracks its CFO start date: When I emailed this article to the Daily FT Editor, I was surprised that this FTSE 100 Company was going to operate without a CFO for two months and therefore included the words “the value of accountants” in the title. I was however pleased to see a follow up news item the next day, to say that troubled Tesco was fast-tracking the new Chief Financial Officer Alan Stewart’s start date. Stewart will now join immediately – more than two months earlier than originally planned. The start date was brought forward after negotiations with Marks and Spencer. BBC Business Editor Kamal Ahmed says he has been told that the move came after a direct appeal from Tesco Chief Executive Dave Lewis to his counterpart at Marks and Spencer, Marc Bolland, who “graciously” allowed Stewart to leave early. A business facing an accounting crisis with no chief financial officer was not exactly comfortable he says and that Sir Richard Broadbent, the Chairman, will hope that the move will quieten those who believe that he should consider his position. Thus the phrase “The Value of Accountants” and Chief Financial Officers in the title, perhaps makes the message in the article even clearer to CEOs and Chairmen and the drama that has unfolded will trigger memories for CFOs and headhunters!
[Ranel T. Wijesinha, FCA (Sri Lanka), MBA (USA), is a Fellow and Past President of CA Sri Lanka, a Past President of the Confederation of Asian and Pacific Accountants a Regional Organisation representing 31 national accountancy organisations in 23 jurisdictions in the Asia-Pacific region. He is a former member of the Securities and Exchange Commission and the Sri Lanka Accounting and Auditing Standards Monitoring Board. He is the Founder of The Thought Leadership Forum, an awareness enhancement initiative, and has contributed to print and electronic media over the years.]