Analysis of Risky Areas in Tesco PLC - Coursework Example

Name: Tutor: Subject: Date: A REPORT ANALYSING THE RISKY AREAS OF TESCO PLC INTRODUCTION Tesco PLC is a retail company of groceries in Britain. The firm was started in the year 1919 by Jack Cohen. The company was launched as a market stall. In the year 2014 the company generated revenue of £63.557 billion. It is the largest industry in retailing groceries in the United Kingdom. For instance in the year 2014, Tesco company has been supplying 30% around of groceries all over England according to researches. Recent surveys showed the company at position two in the groceries-retailing sector with an approximate value of $2.6 billion in its profit. Wal-Mart from US was in the first position in the sector. in terms of profits earned the retail company ranks third in the groceries sector. However, there have been recent challenges that have negatively affected the Tesco Company lowering the company’s profit. This problems lead to resignation of Sir Terry Leahly as the Chief Executive of the company. Dave Lewis was then appointed to take his position. This report will discuss the highest risky areas that in relation to the recent problems facing the company. ASDA grocery trading perspectives will be used to analysis the key areas which are very risky. OBJECTIVE The main aim of this report is to analysis the risky areas of Tesco PLC. The report will also offer recommendations on how to minimize risk in the areas discussed. It will be of much interest to discuss this retail industry with various superstores and the many express stores. It will be of much interest to determine how Tesco operates in express prices. MAIN BODY The risky areas in Tesco PLC There was an overcast value of the profit forecast of the profit of the company in the period ending in the first half of the 2014. This left the company’s directors and the leadership team under scrutiny. This majorly contributed to the problems currently affecting Tesco Company (McNeil, Alexander J., Frey, Rüdiger; Embrechts, Paul, 2015). Since then, there have been many discussions on the risky areas in the company that leave the firm prone to more loses. This section will discuss the various risky areas in Tesco Perspective: 1. Commercial-income generated Area According to the basic accounting principles, revenue and cost should be matched to avoid discrepancies. This helps prevent a financial crisis in organizations because of over or under statements of profits or losses incurred. This area proves to be very risky in the Tesco Plc. Company. There have been overstated profits in the company that have resulted to the recent crisis in Tesco. This area is very risky since it involves matching revenues gained against the cost incurred from activities such as promotions, advertisements and many others. Auditors need to be very keen in verification of the commercial incomes generated as revenue and then ascertain whether the costs incurred from expenditures are deducted appropriately to avoid over or under casting (McNeil, Alexander J., Frey, Rüdiger; Embrechts, Paul, 2015). Overstatements or understatements usually lead to share price and company’s stock price falling. A considerable example is in the case of Tesco Company where its stock has lowered by around 27%. This in turn lowers the share price of the entity and this is evident in the company where the share price significantly reduced by 39%. The audit Committee of the company made a significant error in the accounting of the company. This accounting error has led to tension among the audit executives and five of its executives have been reported on the verge of leaving the organization. Even the chairman of the audit committee has reportedly been on the verge of leaving the company. External auditors have assessed the margin of the error committed by the company’s board of directors and their audit team. The committee employed to investigate the recent financial crises have made the following recommendations as way of minimizing risk associated with this area. First, the company’s directors should close the stores which are performing poorly. This step has been taken by Lewis. He has recently announced the need for closure of the Cheshunt’s office. Stores which have been making losses (around 43) are on the verge for closure. This will provide a good opportunity for expansion of the other stores that will reduce cost incurred for maintenance of the stores. Finally, the committee has recommended that the company increase its levels of scrutinises to check the levels of performance within the entity. This will scare the employees from performing malpractices thus maintaining accuracy in their accounting procedures. However the company has purchased more vehicles to increase supplies. The need to cust cost of around £250 million have been raised as a way of reduce expenditure to increase the commercial profits generated. A graph of Tesco indicating the fleet size of their vehicles 2. Auditing This is another area that provides high risk when it comes to retail industries (McNeil, Alexander J., Frey, Rüdiger; Embrechts, Paul, 2015). The accounting errors made in the Tesco Company was as a result of the biased internal audit committee in the company. Independent External auditors should be given the opportunity to evaluate the commercial incomes of retailing companies to prevent errors due to fraud and corruption. The auditors should also be given an opportunity to assess the risks in the firm’s investment. The increasing pressure on the company’s financial teams should be minimized as way of reducing errors possible from an accounting perspective by auditors. 3. Valuation of current and non- current assets This area is involved in the evaluation of the assets of a company. In our case the Tesco company financial executives evaluated wrongly the value of their assets. This was also a reason for the big margin in the revenues generated from sales. There are various methods which can be used to evaluate the stock of Tesco Company. First In First out (FIFO), Last in First out (LIFO) and the weighted method are the methods used to evaluate stock within Tesco Company. An appropriate valuation and measuring method should be chosen depending on the important factors which may influence the company to avoid accounting errors. An error was committed by the accounting department of the company when it was estimating its real estate asset values. A large margin of error was noted in the evaluation of the asset using different methods. Computation of graphs portrayed a book value of $40 billion of the real estate assets of the retail firm. This was viewed as an exaggeration by other audit scrutiny committees which estimated the value of the asset as around $22 billion. This disparity caused lowered stock and sales value due to the reduced customer confidence. Customers started viewing the company as corrupt entity and claims of tax eviction were raised. 4. Share and stock prices Profit is always the main objective of every firm. Profits earned yearly come from share and stock sales. This makes the sector very risky since it involves determining the amounts of revenue generated by a firm (Bartram, Gregory w, Waller, august 2013). Profits increase depends on the amount of sales of both shares and stocks made by a firm. In our case, income statement prepared by board of directors always needs to consider the share and stock prices of the firm. A graph portraying turnover of Tesco from 2001-2005. The following graph shows the market value of Tesco Shares; with the falling share prices as attributed in the graph profits definitely fall. This downfall has raised concerns in the company. Investors have been reluctant in investing in the company as recently stated by the current Chief Executive Lewis. Liquidity ratios have also been used to determine whether the company is in the right track. Liquidity ratios have been used to assess the financial risk in share and stock price. The following table portrays the liquidity ratios of Tesco recently 2015 2014 2013 2012 0.42 0.44 0.49 0.49 This ratio table clearly portrays recently the company is having problems when paying debts. The above liquidity ratio clearly shows a downfall depicting the risk involved in the share and stock price area. The decrease in the liquidity ratio has been attributed with the decreasing share selling to investors. Investors have been hesitant in investing in the company thus reducing the amount of shares sold by the company. The following debt ratio supports the allegations. Recent study showed the Tesco company making a significant loss of £6.38 billion. This has been regarded as the most regretfull loss in the history of the firm. This has been attributed by the reduced share and products sales. A table showing recent debt ratios of Tesco Company 2015 2014 2013 2012 0.65 0.50 0.56 0.52 5. Technology The rapid technological advances have revolutionised how business is done recently (Markowitz, H.M., March 2012). This area offers a high risk since employees are at the verge of leaving memory errors in the company’s systems when they decide to leave the organization. For instance, Tesco Company has been at risk of losing their “institutional memory” due the increasing number of their executives and employees who are in the verge of quitting the company. This may result to errors caused by omissions by the workers who feel unsatisfied by the recent financial crisis. The company’s system maintains records and data related to the incomes and expenditures of the company. Therefore any malpractices or even malfunctions within the companies systems leave the company in the verge of losing very important data and records. Thus there is a need to incorporate their systems with more complex technology systems. 6. Financial closing process This area is very risky since it constitutes of balancing the closing balances of the firm (Markowitz, H.M., and March 2012). It requires a keen evaluation to ensure credibility when closing the specific accounts within the business. The communication gaps of this area create a considerable amount of risk that may vary the closing balances of the corporation. For instance closing balances of Tesco company where noted to vary when scrutinized by the external auditors employed. The initial balances as calculated by the company’s accountants were biased (Bartram, Gregory w, Waller, august 2013). This reduced the trust of investors to the entity. A financial closing process for balances should offer a comprehensive approach in order to ensure credibility in the activities within the company. CONCLUSION The recent financial crisis in Tesco Company depicts the need by board of directors and leadership teams in all enterprises to ensure credibility and accuracy in evaluation and calculation of profits (Markowitz, H.M., and March 2012). In order to attract more investors to their firm entitles need to minimize accounting errors. From this report ASDA grocery stores are able to evaluate high risky areas in order to streamline their activities. There is a need to ensure accuracy in accounting calculations to avoid errors which may result to a financial crisis as discussed in this report in Tesco Company. RECOMMENDATION The company’s executives need to take measures to manage the risky areas of the Tesco firm. After identifying the risky areas the executives of the company need to assess the potential impact such as losses and damages possible. They should also determine the probability of the risk happening and thus formulate policies to counter attack the effects of the risk. Assessment process of risky areas should be used to make critical reasonable decisions in the Tesco firm. They should implement a risk management plan which will enable them to manage risky areas as discussed in this report. The executives should come up with short-term positive improvement plans which should be incorporated in their long-term improvements. The company can also transfer the risky areas to an external agency such as an insurance company. References Horcher, Karen A. (2005). “Essentials of financial risk management”. John Wiley and Sons. pp. 1–3. ISBN 978-0-471-70616-8. Markowitz, H.M. (March 2012). "Portfolio Selection". The Journal of Finance 7 (1): 77–91. Do: 10.2307/2975974. Crawley, John (16 May 2014). “The merits of high-risk investment" U.S C Vithessonthi J Tongurai- “journal of multinational financial management on operating and financial risk (2015)”-Elsevier. Weston, j. Fred and Eugene F (2013), “Fundamentals of Financial Management”. Bartram, Gregory w, Waller (august 2013). “How important is financial risk?” Journal of Financial and Quantitative Analysis. MN Abdullah, K. Pervez, T Karim (2015) “the impact of financial and operating leverages”. NAA Salman, Aft Shamshi-Research Journal of Finance and accounting (2015). New edition. McNeil, Alexander J.; Frey, Rüdiger; Embrechts, Paul (2015).” Quantitative risk management: concepts, techniques and tools”. Princeton University Press. pp. 2–3. "Tesco risks being famous for being broken" . Marketing Week . Retrieved 18 October 2014. 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