Every little matters: Tesco financial scandal in 2014

Diana Vyshnevska

September 2017

Tesco is the largest British supermarket chain and general merchandize retailer who was created in 1919 by Jack Cohen. However, in 2014 they had one of the biggest scandals in recent business history. The scandal involved an overvaluation of the company’s profits, a huge debt and the risk of losing the best assets for its coverage. This paper looks at why this all happened, what actions would prevent it from happening and what kind of punishment was (or should be) given for the fraud.

First of all, it should be said that Tesco experienced a high drop in profits in 2014 – 92% less than in the previous year. As a result, its share price fell by more than 50% (Farrell, 2017). The main reason behind that situation was increased competition in the industry from many new growing companies such as Lidl, Waitrose and ALDI. Despite this fact, Tesco had the largest market share in 2014, but there it decreased. Another reason of that financial situation was the fact that Tesco lost their focus on UK market and started expanding abroad, for example, in the US, where they lost £1.2 billion, and China – £540 million (Farrell, 2017). Moreover, they entered other markets such as technological, digital (Tesco mobile) and hospitality market (by purchasing restaurant and café chains Harris + Hoole, and Giraffe). It is clear that, most likely as a result of those activities, Tesco lost focus on its main activity, quality and customer service. This situation caused great disappointment to its investors, who aimed to improve the financial position of the company. Executives were put under pressure in order to start achieving higher financial objectives again.

In 2014, the Financial Conduct Authority (FCA) discovered the black whole in the company’s revenue. In addition, Chris Bush (Tesco’s previous managing director) asked Amit Soni (current commercial director and responsible for collecting documents) “to go back and make plans to hit the numbers rather than come out with gaps” (Calson, 2017). At half year estimations, Tesco overstated their revenue by as much as £263 million. But they were still 20% below the level before the disclosure of the accounts. Tesco asked Deloitte to investigate the case and the fraud was confirmed. Tesco become the center of a huge financial scandal and have been suspected in major fraud about how profit was inflated.

As a result of the scandal, the executive board was dismissed – Chris Bush (the managing director), as well as Carl Rogber and John Scouler executives were suspended. Dave Lewis was hired as a new director. The previous executive trio had been involved for some time in this kind of plot in which they failed (Colson, 2017). “We are clear there is an issue here. We will let the investigation determine whether any rules were broken and what I need to do to address that”, said Dave Lewis (2014 ). He also mentioned that their new method will underpin stronger long-term relationships with their suppliers and benefiting clients. At the same time, warranting that revenue recognition would be transparent and appropriate.

In my opinion, the court decision was a fair one. Charged by the Serious Fraud Office in 2016, they might face to 10 years in jail. However, they have already pleaded not guilty (Ruddick, 2017). The fine that Tesco needs to cover is £235 million. Tesco also agreed with the FCA to pay £85 million compensation to investors. The company decided to sell Tesco mobile and other activities in order to cover this. It seems that Tesco has implemented the right steps to improve their activities (and reputation). Since the crisis, Tesco has concentrated more on reducing prices of their products and improving their financial position.

In conclusion, due to high competition among other supermarkets, Tesco tried to increase their income by opening stores in China and the USA. However, because of too many activities such as Tesco mobile, hospitality and too large a number of stores, they have lost their main focus. As a result, Tesco ended up being involved in criminal activities, misrepresenting their financial situation. The managing director and two other executives were suspended, and the company was fined for its crime; it also had to pay a compensation for market abuse. The new executive has promised to turn the company around, the right way.