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The Guardian view on Tesco’s auditing debacle: a systemic shambles? The Guardian view on Tesco’s auditing debacle: a systemic shambles?
(6 days later)
Strip out the deadening term “audit”. Ignore for a moment all those hundreds of millions dotted about the headlines. The accounting scandal unfolding at Tesco is not your common or value-range business gaffe: it is crystallising into a debacle right at the top of Britain’s corporate establishment.Strip out the deadening term “audit”. Ignore for a moment all those hundreds of millions dotted about the headlines. The accounting scandal unfolding at Tesco is not your common or value-range business gaffe: it is crystallising into a debacle right at the top of Britain’s corporate establishment.
Consider the cast. Tesco is the UK’s largest retailer, one of its few remaining world-class businesses and the shop that over the past two decades has been the single biggest shaper of our high streets. Its auditor, PwC, is high up the premier league of global financial-services firms auditing and advising vast tranches of the UK’s private and public sectors, and its employees are regularly seconded to the offices of Ed Balls and Chuka Umunna. These are the companies David Cameron wants to take on trade delegations; these are the executives who usually go on to get the knighthoods and great-and-good boondoggles. Fish don’t get much bigger.Consider the cast. Tesco is the UK’s largest retailer, one of its few remaining world-class businesses and the shop that over the past two decades has been the single biggest shaper of our high streets. Its auditor, PwC, is high up the premier league of global financial-services firms auditing and advising vast tranches of the UK’s private and public sectors, and its employees are regularly seconded to the offices of Ed Balls and Chuka Umunna. These are the companies David Cameron wants to take on trade delegations; these are the executives who usually go on to get the knighthoods and great-and-good boondoggles. Fish don’t get much bigger.
To understand what’s gone wrong at Tesco, you need to simply walk into one of its stores. On the plinths at the corner of the aisles will be stacked certain products with special offers and discounts. Those manufacturers will have paid over the odds for their prime positions. Tesco appears to have “booked” early its profits from such deals with suppliers, while moving back the spending associated with those contracts. It counted its good news happily early and its bad news conveniently late. And the retailer did that at such scale that it admitted last month to overstating its profit forecasts by £250m.To understand what’s gone wrong at Tesco, you need to simply walk into one of its stores. On the plinths at the corner of the aisles will be stacked certain products with special offers and discounts. Those manufacturers will have paid over the odds for their prime positions. Tesco appears to have “booked” early its profits from such deals with suppliers, while moving back the spending associated with those contracts. It counted its good news happily early and its bad news conveniently late. And the retailer did that at such scale that it admitted last month to overstating its profit forecasts by £250m.
All this is bad enough, but on Thursday the chain confessed that the problem ran even deeper: that the exaggeration of its profits had been even greater, and dated back even further. Let us emphasise here that we do not have the full details: the affair is now the subject of two separate investigations. But what has already come out raises profound questions about how one of Britain’s biggest companies allowed itself to be run questionably – and about the role of its auditor. The making up of the profits figures was not in a report signed off by PwC. That happened in August – three months after PwC had given the supermarket chain’s figures a clean bill of health. Even then, it noted that there was something potentially funny with the numbers, and expressly warned about “the risk of manipulation” – but allowed them to pass anyway. All this is bad enough, but on Thursday the chain confessed that the problem ran even deeper: that the exaggeration of its profits had been even greater, and dated back even further. Let us emphasise here that we do not have the full details: the affair is now the subject of two separate investigations. But what has already come out raises profound questions about how one of Britain’s biggest companies allowed itself to be run questionably – and about the role of its auditor. The making up of the profits figures was not in a report signed off by PwC. That happened in August – three months after PwC had given the supermarket chain’s figures a clean bill of health. Even then, it noted that there was something potentially funny with the numbers, and expressly warned about “the risk of manipulation” – but allowed them to pass anyway.
This may sound technical – it is anything but. The audit is a key part of the scaffolding of shareholder capitalism. It is one of the primary ways in which investors, business partners and regulators can tell the true state of the company they are dealing with. If you can’t trust the audited accounts, you can’t really trust anything. This is why the vast bulk of limited companies – and hospitals and charities – are legally obliged to submit audited accounts. And the vast bulk of those are done by PwC or one of the other Big Four auditing firms. This may sound technical – it is anything but. The audit is a key part of the scaffolding of shareholder capitalism. It is one of the primary ways in which investors, business partners and regulators can tell the true state of the company they are dealing with. If you can’t trust the audited accounts, you can’t really trust anything. This is why the vast bulk of public limited companies – and hospitals and charities – are legally obliged to submit audited accounts. And the vast bulk of those are done by PwC or one of the other Big Four auditing firms.
PwC was Tesco’s auditor for more than three decades. Of the 10 directors on the Tesco board (leaving aside the relatively new chief executive and chief financial officer), two are formerly of PwC. One of those is chair of Tesco’s audit committee. Now weigh this up: last year, PwC was paid £10.4m by Tesco for its auditing services and a further £3.6m for other consultancy work. At the very least, this is a very cosy and lucrative relationship.PwC was Tesco’s auditor for more than three decades. Of the 10 directors on the Tesco board (leaving aside the relatively new chief executive and chief financial officer), two are formerly of PwC. One of those is chair of Tesco’s audit committee. Now weigh this up: last year, PwC was paid £10.4m by Tesco for its auditing services and a further £3.6m for other consultancy work. At the very least, this is a very cosy and lucrative relationship.
It may be that the investigation Tesco has commissioned into itself – led by another of the Big Four auditors – finds that the scandal was not systematic at all, but more the fault of a few rotten apples. If so, they are pretty big apples: on Thursday, Tesco’s chairman confirmed he was standing down. Sir Richard Broadbent follows some of its most senior executives. We must hope that the other investigation carried out by the Financial Conduct Authority scrutinises the relationship between PwC and Tesco.It may be that the investigation Tesco has commissioned into itself – led by another of the Big Four auditors – finds that the scandal was not systematic at all, but more the fault of a few rotten apples. If so, they are pretty big apples: on Thursday, Tesco’s chairman confirmed he was standing down. Sir Richard Broadbent follows some of its most senior executives. We must hope that the other investigation carried out by the Financial Conduct Authority scrutinises the relationship between PwC and Tesco.
In a sense, this latest scandal shows how little the world has changed since the banking crash of 2008. Then, too, a number of giant institutions admitted that the audited accounts they had been publishing at regular intervals were little more than fiction (a one-word reminder: Enron). The result is still being paid for by people from Athens to Alabama. Yet the world of auditors, like the credit-ratings industry, continues to be ruled by a worryingly small number of names.In a sense, this latest scandal shows how little the world has changed since the banking crash of 2008. Then, too, a number of giant institutions admitted that the audited accounts they had been publishing at regular intervals were little more than fiction (a one-word reminder: Enron). The result is still being paid for by people from Athens to Alabama. Yet the world of auditors, like the credit-ratings industry, continues to be ruled by a worryingly small number of names.
• This article was amended on 28 October 2014. An earlier version said the vast bulk of limited companies were legally obliged to submit audited accounts. That is true of public limited companies.