Investigations unsettle management structure

Continuing investigations into the £250m overstatement of Tesco’s first half profits appear to have caused turmoil at the top, with news of two more directors set to quit.  The Company Secretary will leave early next year, having handed in his resignation shortly before the massive hole in the profits was discovered, while the audit committee chair is expected to stand down later this year.

However, theirs may not be the only departures, as all of the non-executive directors are being scrutinised by the major investors, particularly since they were warned by their accountants earlier this year that the supermarket’s commercial income was at “risk of manipulation”.  Interestingly, however, the chair of the audit committee wrote in this year’s annual report that the ‘management operates an appropriate control environment, which minimises risks in this area’, adding that it was not a ‘significant issue’.
 
Forensic investigators don’t take this sort of statement at face value, however. They look at the figures, search for anomalies and look under every stone to assure themselves and whoever has hired them, that the accounts really are an accurate reflection of the year’s trading. They investigate anything that might be concealing the truth and will find exactly where the cracks have merely been papered over.
 
These investigators, or forensic accountants, routinely investigate financial statements for irregularities. Usually, they are called in to find proof of illegal or suspected illegal activities either for internal purposes, employees are suspected of untoward activity.  In this case, the shortfall in profits was found in Tesco’s commercial income, where buyers had booked income from deals with suppliers earlier than it should, while at the same time pushing back costs.
 
The investigators will update the investors and City regulators of their findings next month but, at the moment, the retailer is remaining tight-lipped.

Author: Roger Isaacs, 20 October 2014

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