The Accounting Crisis in the Tesco - Essay Example

ABSTRACT

The paper looks at a multinational grocery and general merchandise retailer known as the Tesco PLC whose headquarters is in Garden City in England, United Kingdom. Worldwide is the third largest retailer on the basis of profits and second largest as per as revenue is put into consideration. It is the leading in the grocery market in the UK as it is global as it also has stores in other twelve countries across the Europe and Asia. The paper is concerned with looking for the accounting crisis in the Tesco, what led to the same, areas that could have signaled about the crisis, cultural factors that could have led to the same as well as if there were any ways the emergence of the crisis could be avoided.

Introduction

The Tesco accounting scandal can be of great threat to the company, its suppliers, customers and the UK country as a whole. The drop in the prices of 50 percent then leads to a significant drop in profits which have to pay the suppliers as well as reducing the government tax since the Tesco is among the largest Britain corporate taxpayers (Kutsh, 2015). The same will also lead to a lack of trust from the shareholders, suppliers as well as its customers. According to the Tesco scandal, it responds to the crisis as it has been caused by Deloitte and Fresh fields due to aggressive accounting. This mismanagement in accounting resulted to discrepancies as between when costs paid to the suppliers and profits were accounted which led to a notion that there could be someone trying to cover something up. This scandal of accounting resulted in a big problem for the company.

From the past, Tesco which is a UK grocery sector was the only dominant sector until there come threat from other sectors with more than £10bn wiped off its market value in 2014 making it have its first drop in the profits annually since its dominance two decades ago. Due to this threat, the Tesco may have developed the aggressive accounting heart which has resulted to the scandal. According to Kutsh (2015), the aggressiveness made the company instead of fixing the problems to become more competitive than their competitors; it pushed up its figures so as to make things look as they are okay when they were actually the opposite. The Tesco also was involved in booking the contributions of suppliers that was conditionally made so as to hit the target that in the reality was not going to be met. On realization that the target was impossible to be hit some few employees made deals with suppliers so as to make these payments on return they could be offered benefits come the next financial year. The employees kept the issue of benefit a secret, and this made Tesco pay the money back to the suppliers in the next financial period which was the worst scenario to the Tesco Company (BBC News, 2013). It can be a wise idea to move profit forward since it can easily be disguised later but only when the sales are rising, and there is increasing the amount of money flowing, but Tesco did the same but on the contrary, their sales were falling thus moving the profits forward started to cause problems to the Tesco.

The decision of the company to cover the fact that it was facing a problem but instead showing things were alright when actually we do not become the major problem for the company (BBC News, 2013). Earlier, the company had a prediction that its profit for the half year would be approximately £1.1bn, but that prediction was as inflated as it was cut back by £263m. Answering on the same inconsistency, Tesco said that it realized its figures were overstated which were made as part of profit warning in its final preparation for the interim results (Richard, 2001 and Bernstein, 1996). The company seemed to involve in all these discrepancies so as to boost profits and out win its competitors which in turn led to big threats to the company.

There were signals that showed in one way or other that the Tesco could face a crisis if immediate solutions were not employed. One of the signals was the first drop in its profit over a period of two decades which was a clear signal that something was not okay somewhere. The emergence of new competitors, to be more specific Aldi and Lidl , which were discount chains and had become more popular, signified that they needed to employ new ideas, innovation, and technology so as to complete them effectively. The new chief executive Dave Lewis and the chairman Sir Richard knew about the problem earlier as they given a file Morris Adrian, who was the Tesco’s general counsel who was handed by a lawyer given by a member of the finance team (Craven, 2014). The two highest ranked officials instead of going direct to the board or executives to solve the same they used the file raise concerns rather than using it to know the truth and curb the problem as quickly as possible. The above signals could have been taken seriously, and amicable solutions as well as decision be made and could have if to curb reduced the intensity of the accounting scandal.

There were also cultural factors as witnessed in the Tesco that inhibited tackling of the accounting scandal earlier or reporting the problem of the accounting that greatly affected the company negatively. There was a cultural change on the side of Tesco since earlier there was a good relationship between a retailer who is the Tesco and suppliers and their relation was long term and it involved a kind of a marriage which involved giving and taking. Everything and each activity carried between the two groups were good and this encouraged suppliers to work with Tesco and Tesco was willing to ask for things back. The three years of profits that were not encouraging to Tesco led to pressure on the Tesco side, and this made Tesco to be more unfair to suppliers by pulling a lot to its side which made the relationship more unbalanced (Reason, 2008). This has led to the loss of integrity by the Tesco, which is a key of everything business does and is a key culture in every business each side to show integrity. This lack of integrity by Tesco has led to the deterioration of its trading position as well as desperate and more desperate actions.

Business cultural factor such as lack of transparency also led to a lack of prevention of the scandal. This was evident when some few employees made deals with suppliers so as to make the payments whereby on return they could be offered benefits come the next financial year. The employees kept the issue of benefit a secret, and this made Tesco pay the money back to the suppliers in the next financial period which was the worst scenario to the Tesco Company and showed a lack of transparency and honesty by the employees. It was also lack of trust and ethics for the Tesco to have developed the aggressive accounting heart which has resulted to the scandal due to the fact that instead of Tesco fixing the problems to become more competitive than their competitors, it pushed up its figures so as to make things look as they are okay when they were actually the opposite (Alam, 2006). The Tesco also was involved in booking the contributions of suppliers that was conditionally made so as to hit the target that in the reality was not going to be met. This was a clear sign of lack of business ethics and integrity which inhibited the curbing of the accounting scandal.

This change of culture by the Tesco has damaged its reputation immensely, and it also dents its sales, and it may take time for the damage done by the Tesco to last. This is because it will have to take the time to clean itself again as it has done by suspending four senior executives and investigations need to be done to come clear if there may be other accounting scandals hidden away (Paul, 2013). There is also fine as a punishment from the FCA for the misconduct. If Tesco could have enhanced health business cultures such as ethics such transparency, integrity and honesty the all the above could be avoided.

The emergency of the accounting scandal in Tesco was not inevitable since using the theory and concepts of resilience as per Elmar Kutsch (2015) could have in one way or other minimized or curbed the crisis. According to the Kutsch (2015) book, Resilience plays a key and important role in ensuring an emphasis on the achievement of goals by ensuring success chances are increased over diversity. It proposes that through noticing, interpreting, preparing, containing and recovering, and then diversity can be handled (Andrew, 2007). This helps in project risk management as long as someone is able to notice what is happening beyond the horizon of risk, someone is capable of interpreting entities that through confidence cannot be qualified or quantified, be readily prepared and effectively to the rise of effects that one is not aware of, and in a timely manner contain that unknown in a more effective and appropriate manner (Andrew, 2007). Through the practices above regardless of being not perfect but are resilient and can be used as a good tool to encounter uncertainty, risk as well as complexity in more convenient and effective way.

Tesco according to the Kutsch (2015) seemed to lack to apply the first practice which is the art of noticing. It did not make people aware of what was happening which required a leadership approach that could result in openness, transparency, and honesty about the risks and uncertainties it had been facing. Tesco instead chooses to play games by hiding the truth but instead pretending everything was okay when actually was not. The risks that resulted in accounting scandal could be forecasted and accounted for while its impact was small but unfortunately, Tesco failed to embrace the art of noticing which required honesty. The company needed to move from its onus of proof since it had experienced a long period of success, then it had that notion and perception that failure was not trouble to them. Most of their projects were a routine exercise with continued success expectations, and this state of normality made it difficult for Tesco to persuade any project of the contrary (Andrew, 2007). This made the top officials and also most of the employees ignore any information or evidence that was contrary to their positive state if affairs. This lack of noticing and assumption that things were okay led to a serious problem to Tesco thus it is a call according to Kutsch (2015) for any successful enterprises to move from that state of normality or move the onus of the roof with the assumption that the project is uncertain, risky and complex unless proven otherwise. If there is any issue with the audit as was evident in Tesco, which showed doubt, then an investigation needs to be done to create awareness of how things actually have to be (Rankin, 2014). Thus the important key on noticing is transparency as well as making the working team at ease but with a feeling of unease about their project.

The interpretation which is the second practice as per Kutsch (2015) need to be embraced thus stakeholders should not be made to have that illusion that there is no uncertainty in the project but should constantly be reminded of the project risks and the capability of the team to encounter the uncertainty. Tesco’s case was the opposite as they made stakeholders believe there was no risk and everything moved on smoothly as always which resulted in a great mess (Rankin, 2014). Tesco expectation and doing everything to achieve that was over-optimistic forecast that was based on the underestimating complexity of projects and the likelihood reality of risks. According to Kutsch (2015) on resilient, over-optimization on project assessment makes the ability of workers to deal with uncertainty and risks a major drawback for making a sound project decision. This tendency of over-optimism which made Tesco engage in aggressive accounting to meet their expectations need to be dealt with by instead looking at the project plan with more realistic and dispassionate eyes and emphasizing on reality in the planning and forecasting process (Pagano, 1987). Questions such as, is what happened an indication of risk or uncertainty? May it influence the critical function of the project? How quickly can it result in a major threat? The questions Lead to a sound and effective decision-making. With regard to Kutsch (2015), then a leader in any organization needs to shape forecasts in a more realistic manner and ensure no over simplification of uncertainty and risk that may result in project delivering.

The project team needs to be prepared to encounter the unexpected that can happen anytime since risk and uncertainty are prone to happen at any time. Any weak signal emerging need to be noticed as well as be alert to any threat and have a standard risk procedure. The employees need freedom and empower as well as act quickly with an efficient culture of communication ensuring no instances that prevent this communication which in turn enhances flexibility. Tesco lacked this efficient communication thus making some of the employees do some of the critical roles of Tesco secretly and in a dishonest manner (Paul, 2013). The art of preparing thus calls for trust and integrity by both the employees and leaders as this plays an important role in enhancing growth, learning and buildup of confidence by the both teams (Steve, 2012). Everyone playing his or her role in an honest and integrity manner than most cases of discrepancy as was evident in Tesco could be avoided.

Appropriate action needs to be done in cases of risk and uncertainty when time is sufficient to prevent the happening of the crisis. The whole organization needs to embrace readiness and put their preparedness into action and willingly execute what they have prepared for. They have to be committed to acting immediately when adversity strikes them but to enhance the same then, transparency is a key to all members as well as report the same to public as this acts as a drive that is powerful for improvement (Rebecca, 2015). Tesco could have contained the problem, but the lack of transparency turned everything upside down. Otherwise, they could have curbed the risk and enhance improvement.

The last step of resilient strategy is recovery, and this involves stopping the wrong things first and ensuring they don’t go wrong any further, then afterward start making the wrong things right. The enterprise should avoid looking at ways of solving the problem for a short term aimed just to solve the immediate problem. This is because the solution can result in a negative impact on the remainder of the project as well as make the stakeholders lose confidence on the same (Rebecca, 2015). The action of solving the immediate problem was evident in Tesco as they needed to show that they were all right with an amazing forecast of profits without regard to the problem this could cause later wards, thus instead causing a major problem (Webster, 2004). Resilient could have encountered the problem as it ensures that people are uncomfortable about uncertainty which solves the complacency issue and equips people with awareness, freedom, and knowledge to have a comfortable feeling in responding to adversity with better approaches than those employed before and this makes recovery successful.

Conclusion

From the above it is evident that the Tesco committed mistakes that affected them negatively and intensely due to lack of integrity, transparency and honesty leading to the accounting scandal. Using the theory and resilience concepts as discussed above then most of the drawbacks of Tesco could have been resolved.