Wednesday 29 October 2014

IS TESCO THE ULTIMATE “BIG BATH”?



A Problem of Whistle Blowing


WHAT IS A “BIG BATH”?


Investopedia describes a “big bath” as:

“The strategy of manipulating a company's income statement to make poor results look even worse. The big bath is often implemented in a bad year to enhance artificially next year's earnings. The big rise in earnings might result in a larger bonus for executives.

New CEOs sometimes use the big bath so they can blame the company's poor performance on the previous CEO and take credit for the next year's improvements.”

THE TESCO TALE AS ORIGINALLY TOLD

The sad tale of Tesco is still unfolding but the opening narrative was that:
  • The accounts to the February 2014 year end had been approved by PriceWaterHouseCoopers; Tesco’s auditors for the past 30 years and currently on fees of £13 million a year;
  • Prior to the departure of Philip Clarke, CEO, in July 2014, an accountant had –as the media said – “whistle blown” to the then Finance Director that future commissions from vendors had been booked as revenues earned in the half year to August 2014. An inflation of £250,000,000 was suggested;
  • The accountant’s whistling had “not gained traction” and nothing happened;
  • In September 2014, the accountant again raised his concerns with Tesco’s General Counsel who reported to the incoming CEO and all hell broke loose;
Reported half year profits dropped by 91%; Freshfields and Deloitte were retained to investigate; the careers of eight executives bit the dust; the Financial Conduct Authority, Financial Reporting Council and, inevitably, the Serious Fraud Office got cracking; share values plummeted and bleeding hearts everywhere made the most of yet another example of corporate skulduggery.

WHISTLES WITHDRAWN

More importantly to most humans, Tesco Direct’s marketing of “A Small Crystal Blow Whistle Pendant with Silver Tone Snake Chain- 40cm Length”





Figure 1: Essential Equipment for the Whistler: The TESCO WHISTLE

was withdrawn from its website with the explanation:

“Sorry, there are currently no sellers for this product”. 

Hardly surprising in the circumstances: Innit?

EMERGING FACTS

A few more facts are now emerging. Revenues of £145,000,000 were, apparently, anticipated prior to the August 2104 half year and a mere £118,000,000 within it. Not £250,000,000 as originally claimed.

QUESTIONS AND LESSONS

The baying hordes of regulators, accountants, lawyers and others clambering over the Tesco cadaver would be well advised to establish:

  • How come the whistle took so long to blow?
  • Why did the whistler wait: why not report to the Audit Committee or as he chose later, to the General Counsel;
  • Did the Financial Director elevate the original whistling and PWC assure the Tesco board that the accounting treatment was correct?
  • Who benefited from the sudden collapse: any Hedge Funds around?

Although Tesco seems an open and shut case of institutional and individual arrogance well known to its suppliers, the SFO should not forget the doomed 2002 prosecution of Wickes which led to acquittals all round and the start of its own downward credibility spiral.

There are even greater lessons to be learned by companies about reporting – including the badly misunderstood process of whistle blowing. One of two recent reports suggests a benchmark of 9.72 whistle blowing reports per annum per 1,000 employees and continues:

“A greater perspective on a company’s culture and effectiveness of its ethics and compliance program can be seen through analysis of reports alleging misconduct and the questions posed about company policies”.

Nothing could be further from the truth. In fact high rates on a whistle blowing line indicates a lack of trust in senior management.

Whistle blowing should be a pressure release valve of last resort. Problems should be reported and resolved in the management line. This calls for an entirely different approach (including the acknowledgement of ethical performance), clearly defined authorities, monitoring and far better training.

FURTHER INFORMATION

We are finalising a Position Paper on “Integrity Assurance” and whistle blowing. If you are interested in the reality of whistle blowing and the far better and more inspirational option of “Integrity Assurance” please contact us on info@cobasco.com. Subscribers will be given a free:

“Small Crystal Blow Whistle Pendant with Silver Tone Snake Chain- 40cm Length”.