International Pathways and Language Centre

Research Project

Critically analyse a recent accounting scandal in the UK. What can be done

to prevent unethical behaviour in the accounting world in the future?

Word Count: 1880

Table of Contents
1. Introduction......................................................................................................................1
2. Issues................................................................................................................................2
2.1 Aggressive Accounting...................................................................................................2
2.2 Overstated Profits............................................................................................................3

3. Consequences.................................................................................................................4
3.1 The damage to Tesco`s reputation.................................................................................4
3.2 The Biggest loss in the UK Corporate History...............................................................6

4. Possible solutions..........................................................................................................6
4.1 Changes in the different factors.....................................................................................7
4.1.1 Changing in executives.7
4.1.2 Cultural changing8

5. Conclusion.......................................................................................................................9
6. References:....................................................................................................................10

1. Introduction
Over the past several years, accounting scandals have become a usual
incident in the UK business field, which may continue throughout the years to come.
Accounting errors are occurring really often, also forcing earnings recalculation, and
most remarkably, in the whole general economy. the number of aggressive
accounting practices, accounting irregularities, or accounting fraud has increased
significantly during the past few years, and it has drawn much attention from
investors, analysts, and regulators (Ardil, 2012).

Certainly, Tesco is the UK`s biggest taxpayer and it has faced a huge
accounting scandal. The UKs financial regulator has launched a comprehensive
inquiry in the 250m accounting scandal that has caused Tesco to be in a financial
crisis. It has been found that Tesco`s profits for its half year report were
exaggerated by 250m in 2014. This is because of the accruing delay of expenses
and acceleration of the sales revenue (Dave Lewis, 2014).
This paper will attempt to discuss the impact and causes of the accounting
scandal to economy of the UK and specific cases of consequences after such huge
scandals as Tesco. In addition, this essay will describe unethical behaviour in the
accounting sphere in the future, the main role of auditors and evaluation of possible
solution of the problem through introduce changes in different factors.

2. Issues
The profits of the UK`s biggest company which is named Tesco were inflated
by 263m, subsequently income recognition violation was observed in Tesco`s half
year report and also the Financial Conduct Authority was including the regulators of
making decision on the appropriate punishment. This huge supermarket`s basic
anticipation was to profit by about 1.1bn in it`s half-year. However, the exception
numbers were decreased up to 263m (BBC, 2014). Tesco afterward immediately
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started rechecking the figures to ascertain over-predicted profits. Espirito Santo's

Rickin Thakrar (2014) stated Tesco's profits could now be wiped out entirely as it
tries to improve its performance. Then the company argued about its overestimated
data, which was created as part of the profit warning in August 29, all along its
latest intermediate results of last run-up, launched in October.

2.1 Aggressive Accounting

Tesco, aware of its dominant position in the UK, did not welcome announcing a
decline of first decade profits which brought supermarket sectors under danger.
Moreover, more than 10bn was obliterated by competitors of Tesco`s market value.
Precisely this situation, which lies in the core of the aggressive accounting scandal.
However, instead of solving this issue, the company pushed up its figures artificially
to show them to be safer and stronger. The illustration reports show that supplier
contributions were reserved by Tesco and also were strike target of sales even it
was not reachable.
It is clear that some employees, meanwhile realising that goal will not be
profitable, still continue to make payments with suppliers by offering advantages in
the coming financial periods. Moreover, these advantages were classified and at
worst and money was refunded by Tesco to suppliers in the following period.
(Telegraph 2014).

The Tesco scandal also stressed the dangers and enforcements of being a
large public company with a fixed focus on the short term. Investors wanted to
improve performance, regardless of any damage this may bring to long-term
business and also for customers. If the rise in profits is much higher, but lower than
expected, investors may react in a way that can bring serious consequences.
Ultimately, many leaders are really focused to avoid this situation and they are
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focusing on investors and analysts, but not on the customers or the longer-term
business requirements. This may create such problems which were faced by Tesco
already.

2.2 Overstated Profits

It might be difficult to define how big is the black hole on the scandal. Tesco
initially warned the City of potential shortage of its profits and the company
estimated that the earnings for half year were overstated by 250m. Also, it was
explained that timing issue meant earnings could be booked in a later period and it
is related to the recognition of takings and costs of deals with suppliers (Telegraph,
2015).
On the other hand, when Tesco published its results for six months, the
company wrote off 263m of their earnings, but only 118m was really associated
with the last half-year with the remaining of the preceding financial year. New
financial director of Tesco Alan Stewart (2014) argues that: the majority of this
related to the recognition of revenues, not costs. Thus, there are several
mysteriousness with the 381m charging of fees from impairment which Tesco
booked in the results.

3. Consequences
3.1 The damage to Tesco`s reputation
The scandal has caused serious damage to Tesco`s reputation. It is supposed
to be clarified about damage to the businesses, especially how big and how long
lasts on it. When the investigation continued, four leaders were fined already by
Tesco, UK`s managing director Chris Bush was also included. It is a bit unclear that
there are other big accounting strikes which are concealed, but Tesco is apparently
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to obtain some essential surcharge from the Financial Conduct Authority. The LongTerm PwC`s Inspector of Tesco is also under strict surveillance from Financial
Reporting Council, which is handed out several million pound surcharge from the
latest cases (ACCA, 2015).
When retailers are confined in development, the competitors are showing high
positive figures. For instance, In the UK, discount supermarket chains such as Aldi
and Lidl`s sales have climbed by 30%, respectively between the 3 months to
September 15th 2013 and exactly the same period of this year. Nevertheless, As
shown in Table 1 the sales of Tesco has declined by 4,5% in the same interim.

Table 1 (Tesco`s sale rate)

Sources: Thomson Reuters; press reports

3.2 The Biggest loss in the UK Corporate History

It is the enormous lesion of Tesco in its 96 year leading history, overall loss of
the company draw up 6.4bn. (Telegraph, 2014) These figures are really huge.
Regardless, The numbers are more related to write-off assets than low productivity
of business. In the last several months, the basic performance of trading for Tesco
was not admirable. In a result, Tesco has made a decision to handle these losses
this instant rather than leave for later. It was strategy of Dave Lewis of General
Director who has experienced a large loss in his first year of management, if he
gets all hidden shame out Tesco would be shown from negative side, however he
will give a set of criteria that is relatively easy to outperform in the coming years
(idib).

4. Possible solutions

Firstly, To prevent unethical behaviour in accounting sphere and commercial

activity cataclysm or crises, corporations need to work on all sides of main value
that does not have gigantic significance on expanding its financial gain at a situation
involving exposure to danger, let say ensuring safety. "Unethical behaviour is really
the result of other behaviours that blind us from seeing what is really happening,"
OBrien (2011) said. In addition, there should occur at least minor changes in the
headings of company

4.1 Changes in the different factors

4.1.1 Changing in executives

Chairperson of Tesco, Sir Richard Broadbent resigned from his position after
the news of the accounting scandal was bankrupt, then the new director was
chosen by eight of its senior executive team in order to eliminate accumulated
problems. Ethical leadership is one of the ways of keeping problems (as) problems
before they become catastrophes (O`Brien, 2011). However, changing at the top
will not have significant impact to regulate this dilemma. Tesco does not seem to be
any closer to identifying why this scandal occurred around Tesco, and it may be
papering over some deep cracks. In such situations, the company must disclose
where the problem come from. Then it is necessary to plan a strategy that would
solve the issues. and firstly regain its large market share. However, before his
resign, Sir Richard(2014) argued: "The issues that have come to light over recent
weeks are a matter of profound regret. We have acted quickly to clarify the financial
performance of the company.

4.1.2 Cultural changing

One of the problem might be in the Tesco`s culture. Moreover, culture does not
only exist in the personnel department`s brain, it also affects on people`s behaviour,
act and how do they operate. Lewis (2014) said: Turning our business around will
require change in our culture We want to work in a business which is open,
transparent, fair and honest. We all expect Tesco to act with integrity and
transparency at all times. Also, Culture Organisation not only controls of people`s
behave, but their attitude to risk. Bruno Monteyne (2014) at Bernstein says: It is an
attempt to "clean up the accounts and change the culture". In the case of Tesco, it
seems that risk taking and accounting creation at the top of all influenced by the

team management, suppliers and shareholders - undermines its reputation,

company price and share price.
Secondly, as it is mentioned previously, the prevention of such issues in
accounting sphere is to find out what went wrong. In this case, the big company`s
first task is demonstrating it and getting mechanisms to prevent any reiterations in
the future. Ben Romney (2014), who is a financial PR specialist says: The key
issue is rebuilding trust with shareholders and stakeholders - this is very much a
gradual process and there will be no quick fix. Moreover, giving confidence to
investors about

exact company

by launching some strong connection on the

company, strategic map and demonstrating its availability of solving current

problems. Romney (2014) continues: "If it is successful in this task then investors
will slowly begin to regain confidence in the business. Thus, these instructions
remains to be best short-term solutions.

5. Conclusion

To sum up, the objective of the essay was to examine a recent accounting scandal in the
UK, how such huge issues can be prevented in the accounting field in the future. From the
main bodies of this essay, the main issues were analysed, such as aggressive accounting and
major overstated profits. Moreover, this essay covered consequences of the scandal,
especially the damage to Tesco`s Reputation and loss of the company. and the role of
auditors and evaluation of possible solutions were discussed.
Generally, there is a rigorous consequence to find any fault which might missed.
Representatives of Tesco want its customers believed that there was no intent to deceive,
that they made accounting errors due to early booked gross profit and delayed recognition
of expenses. In a result, trade was rapid to judge and has shown its ruthlessness, allowing
the stock to fall by 20% of shares of Tesco.
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The next step of Tesco would be establishing interference to insert a new vision of the
company. Management of the market ought to control by examples, precise transmitting and
communicating by showing This is how we make things here. More importantly, these
understandable reports should be confirmed constantly by everyone.

6. References:
ACCA (2015) Tesco scandal the perils of aggressive accounting. Available at:
http://www.accaglobal.com/zm/en/student/sa/features/tesco-scandal.html (Accessed: 25
October 2015).
ARDIL, B. (2012) Available at: http://waset.org/publications/7180/forecasting-fraudulentfinancial-statements-using-data-mining (Accessed: 3 December 2015).
BBC (2014) Tesco suspends execs as inquiry launched into profit overstatement. Available
at: http://www.bbc.co.uk/news/business-29306444 (Accessed: 18 November 2015).
Garca - Ayuso, M. (2012) Factors explaining the inefficient valuation of intangibles,
Accounting, Auditing & Accountability Journal, . doi:
http//dx..org/10.1108/09513570310464282.
Ruddick, G. (2014) Tesco accounting scandal Q&A: what happens next?. Available at:
http://www.telegraph.co.uk/finance/newsbysector/epic/tsco/11113002/Tesco-accountingscandal-QandA-what-happens-next.html (Accessed: 25 October 2015).
Ruddick, G. (2014) The unanswered questions in Tescos accounting scandal. Available at:
http://www.telegraph.co.uk/finance/comment/11214948/Unanswered-questions-in-Tescosaccounting-scandal.html (Accessed: 27 October 2015).
Tesco`s report - Official Page (no date) Available at:
http://www.tescoplc.com/files/pdf/reports/ar15/download_annual_report.pdf (Accessed: 26
October 2015).
Tadeo, M. (2014) Tesco chairman sir Richard Broadbent resigns following accounting
scandal. Available at: http://www.independent.co.uk/news/business/news/tesco-chairman8

sir-richard-broadbent-resigns-following-accounting-scandal-9812877.html (Accessed: 25
November 2015).
Lang, T. K., Hall, D., & Jones, R. C. (2010). Accounting student perceptions of ethical
behavior: insight into future accounting professionals. Academy of Educational Leadership
Journal, 14(2), 1-11. Retrieved from
http://search.proquest.com.ezproxy.brunel.ac.uk/docview/521245074?Accountid=14494
What has gone wrong at Tesco? (2014) Available at: http://www.channel4.com/news/whyhave-four-tesco-executives-been-suspended (Accessed: 16 November 2015).