Tesco’s overstatement of profits was ‘acceptable’

By Laurence Gibbons contact

- Last updated on GMT

Some of Tesco's behaviour was acceptable, within limits, says Spence
Some of Tesco's behaviour was acceptable, within limits, says Spence

Related tags: Stock market

Tesco’s overstatement of its half-year profits by £250M was an “acceptable” way to deal with the pressure of losing market share to other retailers, according to an accounting expert.

The beleaguered retailer had essentially tried to recognise revenue too early and delay the recording of costs until a later date, said Crawford Spence, professor of accounting at Warwick Business School.

‘Behaviour is acceptable’

“Accounting is not a hard science and some of this behaviour is acceptable, within limits,”​ he added.

“What Tesco appears to have done is push the boat out a bit too far, ending up with revenue that hadn’t really been earned yet and costs that probably should have been booked earlier.”

The mistake Tesco made​ was a“classic earnings management issue​ as firms quite legitimately play around with their revenue and expenses all the time, Spence claimed.

“However, when they do so aggressively, as Tesco appears to have done, this is usually because the firm is under pressure elsewhere,”​ he said.

In Tesco’s case, it has been losing market share to its competitors steadily in recent years and losing value quite dramatically in its share price in recent months.

“Rather than fix the underlying problems, they have been playing around with their numbers to try to make things look better.

Spence credited the retailer for flagging up its error internally and doing something about it.

This suggested there are probably no other big accounting shocks hidden away, he added.

However, Spence predicted Tesco’s auditor – PricewaterhouseCoopers (PwC) – could suffer some repercussions from the situation.

‘Implicit indictment’

“Dave Lewis, the ceo of Tesco, stated that he called in Deloitte because he wanted an ‘independent’ auditor,”​ he said.

“This implies that PwC have not been acting independently and that is a massive implicit indictment of what they have been doing.” 

The Financial Conduct Authority (FCA) notified Tesco that it had commenced a full investigation​, which is currently the subject of an independent review by Deloitte.

“Tesco will continue to co-operate fully with the FCA and other relevant authorities considering this matter,”​ the retailer said.

City analysts described the situation as “another black mark”​ for Tesco.

Meanwhile, the Groceries Code Adjudicator Christine Tacon asked Tesco to review its supplier policy​ earlier this week.

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